MBAX9143 StrategicManagement 2019 CoursePack PDF

Unit 1
Strategy in modern
business organisations
CONTENTS
Introduction 1–1 Summary 1–31
Learning outcomes 1–3 Self-assessment quiz 1–32
Recommended reading 1–3
References 1–35
The need for strategic management 1–4
Self-assessment quiz answers 1–37
But what is strategic management? 1–9
Strategic planning and strategic thinking 1–13
What do managers need to know? 1–15
Some background principles 1–16
The strategy-structure relationship 1–19
Strategic outcomes 1–23
Balanced scorecard 1–24
Triple and quadruple bottom line 1–26
Processes and outcomes of strategic
thinking and planning 1–27
Divergent views on developing strategy 1–29
We welcome ideas to improve these course materials.

Please email suggestions to coursematerials@agsm.edu.au.
Introduction
Perception is strong and sight weak. In strategy, it is important to see
distant things as if they were close and to take a distanced view of
close things.
(Miyamoto Musashi)
Before reading the key concepts and undertaking the detailed activities
that follow, you can get a sense of what this Unit is about from the following
video. It will highlight key learning around:
• why we need to understand strategic management
• core concepts of what strategic management is (and isn’t)
• the differences between planned and reactive strategy, and between
strategic planning and strategic thinking
• the generic basis for competitive advantage and strategic success
• the different levels of strategic management in organisations
• the role of strategy in delivering shared value for the organisation and
its stakeholders.
Please watch the video, and then read on.
Video
Video 1.1 Introduction to Unit 1, Craig Tapper [4:10]
As our opening quotation suggests, strategy is about understanding

both the near term and distant perspectives. It is about being able to
make decisions in the present that will result in the organisation being
successful in the future. You may also have come across the proverb: ‘If
you don’t know where you’re going, any road will get you there’. The key
strategic management lesson we ought to take from this proverb is that
an organisation without a sense of where it wants to go is at the mercy of
events and forces in the environment, and will finish up wherever those
forces dictate. This may sound exciting, but the outcome may well be an
undesirable one, particularly as some of the forces – such as competitor
actions, economic trends, transformational technologies, regulation and
legislation – are frequently disruptive and potentially negative. Imagine
being an investor, supplier or worker for an organisation where managers
changed their minds every day about the purpose of the business, how
its resources ought to be committed and used, and how they propose to
succeed. One of the key purposes of strategy is to provide a focus for the
myriad daily decisions and actions of an organisation and its stakeholders.
That focus ought to be based on a shared understanding of where the
organisation is going.
Unit 1: Strategy in modern business organisations 1–1

As you can imagine, in commercial organisations, the level of confidence
that investors have in the organisation’s strategy greatly influences the
share price – and the willingness of investors and lending institutions
to provide funds. The global credit crisis in 2008–09, and the plunge
and subsequent volatility in share markets that we refer to as the GFC,
were clear examples of what happens when investors and lenders lose
confidence in the future direction of companies. In that period, investors
withdrew their money from companies (sold shares) and sought to put it
somewhere that they perceived was ‘safe’, such as in government bonds
and savings accounts. Lenders like banks demanded higher interest
premiums on borrowings or refused to lend at all. All of this was brought
about by a rapid loss of confidence in the future security of the investments,
and uncertainty about the ability of borrowers to repay debt. In other words,
there was a loss of confidence in the strategic direction and strategy
programs of these companies. This affected not only traditionally high-risk
companies, but well-established and conservatively managed ‘blue-chip’
organisations such as BHP, Rio Tinto, Commonwealth Bank, GE, Toyota
and Sony. Previously high-performing global companies, such as General
Motors and Royal Bank of Scotland, and even Australia’s ABC Learning
and Babcock & Brown – which only a few years prior had been share
market ‘darlings’ celebrated as great strategic success stories – were
brought to their knees.
Board directors’, CEOs’ and other senior leaders’ careers frequently
stand or fall on the extent to which they can develop and ‘sell’, or
effectively communicate, their strategic vision for the future direction of the
organisation or business unit to key stakeholders like investors, lenders,
staff, strategic partners and the media. Skills in strategy development and
strategic management are common key components in job descriptions
and critical selection criteria for leaders at all levels across public
sector, commercial and community sector organisations. Confidence
in the proposed strategy is also a key criterion used by lenders and
investors assessing entrepreneurs and small business operators. You
should, therefore, have no doubt about the need to understand strategic
management, and develop your skills in its practice.
1–2 Strategic Management

Learning outcomes
After you have completed this Unit, you should be able to:
• discuss the role of strategy in organisations
• explain why strategic management is needed
• compare the different views of strategy formulation (strategic competency
development versus strategic planning, emergent and proactive)
• discuss the generic basis for competition or strategic positioning
• explain the concept of shared value
• discuss the range of financial and non-financial measures of strategic
success.
Recommended reading
For more detail to support much of the material in this Unit, you can refer to:
Thompson, A A Jr, Peteraf, M A, Gamble, J E & Strickland, A J 2016,
Crafting & executing strategy: The quest for competitive advantage.
Concepts and readings, 20th edn, McGraw-Hill Education, New York.
Chapter 1: ‘What is strategy and why is it important?’

The need for strategic
management
From our Introduction, you are now aware that directors, senior leaders,
investors, lenders, the media and a vast array of other internal and external
stakeholders pay an enormous amount of attention to an organisation’s
strategy. So, what exactly is strategic management supposed to do for an
organisation?
A company’s strategy is its action plan for outperforming its
competitors and achieving superior profitability. In effect, it represents
a managerial commitment to an integrated array of considered
choices about how to compete. These include choices about:
• How to attract and please customers.
• How to compete against rivals.
• How to position the company in the marketplace and capitalise on

attractive opportunities to grow the business.
• How to respond to changing economic and market conditions.
• How to manage each functional piece of the business (R&D, supply

chain activities, production, sales and marketing, distribution,
finance, and human resources).
• How to achieve the company’s performance targets.
(Thompson et al 2016, p. 4)
In choosing a strategy, management is in effect saying, “Among all

the many different business approaches and ways of competing
we could have chosen, we have decided to employ this particular
combination of competitive and operating approaches in moving the
company in the intended direction, strengthening its market position
and competitiveness, and boosting performance”.
The strategic choices a company makes are seldom easy decisions,

and some of them may turn out to be wrong – but that is not an
excuse for not deciding on a concrete course of action.
(Thompson et al 2010, p. 4)
These quotes make a number of key issues clear. Strategy is about the
choices that an organisation’s leaders make from a range of alternative
possibilities. It sets out or defines how they intend to achieve the
organisation’s purpose and fulfil the organisation’s goals in environments
where changes in competition, customer wants and needs, market
conditions, internal structures and pressures make the future uncertain and
perhaps even risky!
Effective strategic managers look to demonstrate the admonition of the
pioneering computer scientist Alan Kay, who said, ‘The best way to predict
the future is to invent it’.

Business strategy and the business model
Before exploring what strategic management involves more deeply, we
need to be clear about the difference between an organisation’s strategy
and its business model.
At the core of every sound strategy is the company’s business
model. A business model is management’s blueprint for delivering
a valuable product or service to customers in a manner that will
generate revenues sufficient to cover costs and yield an attractive
profit. The two elements of a company’s business model are (1) its
customer value proposition and (2) its profit formula. The customer
value proposition lays out the company’s approach to satisfying buyer
wants and needs at a price that customers will consider good value.
The profit formula describes the company’s approach to determining
a cost structure that will allow for acceptable profits, given the pricing
tied to its customer value proposition.
(Thompson et al 2016, pp. 9–10)
As you can see, the purpose of strategic management in a commercial

enterprise is to develop a business model that allows an organisation to
operate effectively and efficiently and reliably generate profits. In order to
broaden this to incorporate government and not-for-profit organisations, we
could simply modify the quote to say:
At the core of every sound strategy is the organisation’s business
model. A business model is management’s blueprint for delivering a
valuable product or service to customers, clients and stakeholders in a
manner that will attract revenues or funds sufficient to cover costs and
enable continued success over the long-term.
An increasingly popular framework for understanding an organisation’s

business model is known as the business model canvas, produced by the
organisation Strategyzer. A brief video introduction to the nine elements of
the business model canvas can be seen via the link below.
Video
Video 1.2 Strategyzer, ‘The business model canvas’ [2:19]
As you can deduce, the business model canvas is a more detailed way
of describing what Thompson et al (2016, pp. 9–10) describe as ‘its profit
formula’ and includes outlining its customer value proposition. You will
also note from the video that the business model canvas helps describe
how an organisation generates its revenue streams and its cost structure.
Identifying an organisation’s revenue streams is based on answering the
following questions:

• For what value are customers willing to pay?
• For what do they currently pay?
• What is the revenue model?
• What are the pricing tactics?
And to identify an organisation’s cost structures, the framework suggests

that we need to answer:
• Which are the most important costs inherent to our business model?
• Which key resources are most expensive?
• Which key activities are most expensive?
The answers for these two elements of the profit formula are built up by
analysing the other seven elements of the canvas, specifically:
Value propositions
• What value do we deliver for customers?
• Which one of our customers’ problems are we helping to solve?
• What bundle of products and services are we offering to each
segment?
• Which customer needs are we satisfying?
• What is the minimum viable product?
Customer segments
• For whom are we creating value?
• Who are our most important customers?
• What are the customer archetypes?
Customer relationships
• How do we get, keep and attract more customers?
• Which customer relationships have we established?
• How are they integrated with the rest of our business model?
• How costly are they?
Channels
• Through which channels do customers want to be reached?
• How do others reach them?
• Which ones work best?
• Which ones are most cost-efficient?
• How are we integrating them with customer routines?

Key activities
• What key activities do our value propositions require?
• … our distribution channels?
• … our customer relationships?
• … our revenue streams?
Key resources
• What key resources do our value propositions require?
• … our distribution channels?
• … our customer relationships?
• … our revenue streams?
Key partners
• Who are our key partners?
• Who are our key suppliers?
• Which key resources are we acquiring from our partners?
• Which key activities do partners perform?
Activity 1.1
Consider your own organisation. How would you summarise the business
model? To help you, you might like to consider the nine elements of the
business model canvas and capture your insights below.
1. What are your organisation’s revenue streams (and how are they
generated)?
2. What are the organisation’s cost structures (and how are these
structured and managed)?

The business model needs to align to an organisation’s
purpose
Organisations don’t exist in order just to make profits. Organisations exist
to fulfil a purpose and meet community needs. But just as humans must
breathe to live, commercial organisations must generate profit to survive.
Public and not-for-profit organisations must generate successful outcomes
in order to justify their continued existence and the resources they are
given.
Few organisations (commercial and not-for-profit) can continue to exist
for long unless they generate profit, or at least positive net revenue (total
revenue minus total costs). Governments around the world are also
looking to reduce spending, because revenues have declined and debt
has become harder to justify or obtain. So, public-sector departments and
agencies are finding access to funds much harder to obtain if their business
models fail to demonstrate clear financial net benefits.
The way different organisations and their stakeholders measure strategic
success may vary – profits, returns on investment, share price, services
delivered, quality of life improvements, client satisfaction, diseases treated,
impact on the environment. But every organisation must have a business
model that justifies its ongoing existence.
To summarise then, strategy is vital because it helps define how:
• private-sector organisations will compete successfully for customers,
investment funds, skilled employees with scarce talents, media
attention and stakeholder support
• not-for-profit organisations will compete successfully for donors,
government grants, media attention for their issues, stakeholder
support, talented employees, etc.
• public-sector organisations will compete for scarce government funds,
sometimes for investor funding, for talented employees and skills and
media attention.
In all these settings, the same strategic management challenges arise.
Corporations, public, not-for-profit, large and small organisations, head
offices, business units, divisions and functional units all need to identify and
select courses of action that result in desirable and valuable outcomes that
are in accord with their purpose or mandate.

But what is strategic
management?
One of the simplest answers to the question as to what is strategic
management is offered by Nag, Hambrick and Chen (2005, p. H6):
The field of strategic management deals with the major intended and
emergent initiatives taken by general managers on behalf of owners,
involving utilisation of resources to enhance the performance of firms
in their external environments.
If we then adapt and paraphrase this definition slightly to acknowledge the

wider application of strategic management to public sector and not-for-profit
organisations, we can see that:
emergent initiatives taken by managers on behalf of organisations’
key stakeholders, involving utilisation of resources to enhance the
performance of organisations in their external environments.
Another concept that you need to clearly understand is ‘competitive

advantage’. To do this, you should start by considering key insights from
two of the most respected strategy texts of the last 50 years.
Firstly, eminent business strategy author Michael Porter said:
Competitive advantage is at the heart of a firm’s performance in
competitive markets. After several decades of vigorous expansion and
prosperity, however, many firms lost sight of competitive advantage
in their scramble for growth and pursuit of diversification. Today the
importance of competitive advantage could hardly be greater.
(Porter 1985, p. xv)
And more recently, A. G. Lafley and Roger Martin (2013, p. 3) suggested

that:
Really, strategy is about making specific choices to win in the
marketplace. According to Mike Porter, author of Competitive
Strategy, perhaps the most widely respected book on strategy ever
written, a firm creates a sustainable competitive advantage over its
rivals by “deliberately choosing a different set of activities to deliver
unique value.” Strategy therefore requires making explicit choices – to
do some things and not others – and building a business around those
choices. In short, strategy is choice. More specifically, strategy is an
integrated set of choices that uniquely positions the firm in its industry
so as to create sustainable advantage and superior value relative to
the competition.
Further, Lafley and Martin (2013, p. 5) point out that:

What matters is winning. Great organizations – whether companies,
not-for-profits, political organizations, agencies, what have you –
choose to win rather than simply to play.

Therefore, whether you operate in a competitive environment or not,
strategic management is about determining the most effective way to
achieve the highest possible performance (to win) in order to deliver
benefits for key stakeholders.
However, this notion of winning should be tempered right from the start with
an acknowledgement of the importance of purpose and values in guiding an
organisation’s strategy. At this point, it’s appropriate to highlight an article
by Michael Porter and Mark Kramer, in which they discuss the increasing
levels of concern in the wider community with corporate behaviour:
A big part of the problem lies with companies themselves, which
remain trapped in an outdated approach to value creation that has
emerged over the past few decades. They continue to view value
creation narrowly, optimizing short-term financial performance in a
bubble while missing the most important customer needs and ignoring
the broader influences that determine their longer-term success. How
else could companies overlook the well-being of their customers, the
depletion of natural resources vital to their businesses, the viability of
key suppliers, or the economic distress of the communities in which
they produce and sell? How else could companies think that simply
shifting activities to locations with ever lower wages was a sustainable
“solution” to competitive challenges? Government and civil society
have often exacerbated the problem by attempting to address social
weaknesses at the expense of business. The presumed trade-
offs between economic efficiency and social progress have been
institutionalized in decades of policy choices.
Companies must take the lead in bringing business and society back
together. The recognition is there among sophisticated business
and thought leaders, and promising elements of a new model are
emerging. Yet we still lack an overall framework for guiding these
efforts, and most companies remain stuck in a “social responsibility”
mind-set in which societal issues are at the periphery, not the core.
The solution lies in the principle of shared value, which involves

creating economic value in a way that also creates value for society
by addressing its needs and challenges. Businesses must reconnect
company success with social progress. Shared value is not social
responsibility, philanthropy, or even sustainability, but a new way to
achieve economic success. It is not on the margin of what companies
do but at the center. We believe that it can give rise to the next major
transformation of business thinking.
The purpose of the corporation must be redefined as creating shared

value, not just profit per se. This will drive the next wave of innovation
and productivity growth in the global economy. It will also reshape
capitalism and its relationship to society. Perhaps most important
of all, learning how to create shared value is our best chance to
legitimize business again.
(Porter & Kramer 2011, pp. 64–65)

So, it is clear that strategic management can further be defined as:
dealing with the major intended and emergent initiatives taken by
managers on behalf of organisations’ key stakeholders. It involves
utilisation of resources to enhance the performance of organisations in
their external environments to create shared value.
As you can see, our definition now highlights how strategic management
is impacted by the environments in which these outcomes occur, and the
customer/member/client/etc. needs that are being targeted. These change
all the time. Populations age and shift, their wants and needs change,
community attitudes and expectations of government and services change,
economies expand and contract, availability of assets such as capital and
skilled labour change, etc.
So, selecting the best way to achieve these ‘intended and emergent
initiatives’, and to position the organisation to continue to survive and
remain relevant into the future, is a critical activity for every organisation’s
leaders.
To do this, strategic managers need to:
1. understand and evaluate the internal and external forces that may
impact upon the organisation
2. clearly identify those issues critical to the organisation’s current and
future success
3. consider and develop ways to address the strategic challenges or
issues facing the organisation
4. define the preferred path to fulfilling objectives
5. monitor and adapt the strategy as events unfold.
This focus can be summarised as the answers to a set of simple questions:

• Where are we now?
• Where do we want (or need) to be in the future?
• How do we get there?
• How will we know we are on track?
Lafley & Martin (2013, pp. 14–15) also propose that a winning strategy
should set out answers to another set of questions:
1. What is our winning aspiration? (The purpose of the enterprise –
its guiding aspirations.)
2. Where will we play? (Picking the right playing field to compete –
geographies, product categories, segments, channels, vertical stages
of production.)
3. How will we win? (How do we attain the unique right to win –
our value propositions and our competitive advantage?)

4. What capabilities must be in place? (What set of capabilities
is needed to win? What are the reinforcing activities and specific
configurations?)
5. What management systems are required? (What support systems,
structures and measures are required to support our choices?)
Activity 1.2
Consider your own organisation’s strategy. This should be documented
somewhere and you should read it before attempting this activity. As
you can see, if it’s effective, your organisation’s strategy amounts
to the strategic managers’ ‘game plan’ setting out how to win. If it’s
undocumented, discuss it with your organisation’s leaders.
Try to find clear answers to these four strategic management questions.
1. Where is the organisation now? (What strategic situation is it in?)
2. Where do the managers want it to be, or think it needs to be, in three to

five years?
3. How do the managers propose to get it there?
4. How do the managers plan to track progress towards achieving the

outcomes?

5. How clearly does the strategy set out the answers to Lafley and
Martin’s five questions? What do you think could make it better?
Strategic planning and strategic thinking

But what do strategic managers do? What is involved in being an effective
strategic manager? Unit 2 – ‘The Strategic Management Process’ – covers
the processes used to develop strategy in much more detail. However,
before moving on, we need to be clear about exactly what strategic
management involves. How do managers set out to answer the key
strategic management questions? Consider the following quote:
Consider these statements of strategy drawn from actual documents
and announcements of several companies:
“Our strategy is to be the low-cost provider.”
“We’re pursuing a global strategy.”
“The company’s strategy is to integrate a set of regional acquisitions.”
“Our strategy is to provide un-rivalled customer service.”
“Our strategic intent is to always be the first mover.”
“Our strategy is to move from defence to industrial applications.”
What do these grand declarations have in common? Only that none

of them is a strategy. They are strategic threads, mere elements of
strategies. But they are no more strategies than Dell Computer’s
strategy can be summed up as selling direct to customers, or than
Hannibal’s strategy was to use elephants to cross the Alps. And
their use reflects an increasingly common syndrome—the catchall
fragmentation of strategy… This problem of strategic fragmentation
has worsened in recent years, as narrowly specialized academics and
consultants have started plying their tools in the name of strategy.
But strategy is not pricing. It is not capacity decisions. It is not setting
R&D budgets. These are pieces of strategies, and they cannot be
decided—or even considered— in isolation.
(Hambrick & Fredrickson 2005, pp. 51–52)

At this point, we also need to draw a distinction between the practice of
strategic planning (which is very common) and the importance of strategic
thinking (unfortunately, less common). Much has been written on the
importance of strategic planning. Many of the ‘narrowly specialized
academics and consultants [who] have started plying their tools in the name
of strategy’ that Hambrick and Fredrickson referred to, focus on producing
documents called strategic plans.
While that’s important, it’s the thinking that underpins the ‘intended and
emergent initiatives’ that really matters.
The perspective we take in this course is that strategic planning is a
process that, when done well, can trigger and give form (a game plan
or a map if you like) to managers’ strategic thinking (ideas on how they
will play and win). But it’s important to understand that the process and
documentation that emerges from strategic planning is unlikely to achieve
much if the thinking behind it is inadequate or wrong. A brilliantly planned
strategy based on flawed or inadequate strategic thinking is likely to
achieve little, and may even damage or destroy the organisation. On the
other hand, rigorous and insightful strategic thinking is likely to achieve
much, even if the planning processes that lead to it are less than optimal.
Strategic thinking is the result of rigorous consideration and debate about
both the current and future positions of the organisation, in order to identify
a plausible plan to play to win in a foreseeable future.
The methods or processes by which we stimulate this strategic thinking,
and the processes used to discipline and document the strategic thinking
into some sort of useful and manageable road map (or game plan) for
the future, is called strategic planning. We will talk about how you can
document and communicate the strategic thinking as ‘a plan’ in Unit 12.
It is important not to get caught up in following a process unless it
stimulates new thoughts about how the organisation needs to play and
win in the future. Too often, managers ‘fill in the boxes’ of strategic plans
without having done the strategic thinking about ‘Where are we now and
where do we need or want to be? What is our aspiration? How will we win?’
If you come out of this course thinking strategically about your business or
organisation, it will have been worthwhile. If you merely learn to follow a
process to produce a strategic plan document that doesn’t actually advance
the organisation towards a desirable and plausible future, it won’t have
been worthwhile.

What do managers need to know?
There is a set of skills, or competencies, needed in the strategic manager.
Firstly, a strategic manager must be able to identify the critical issues,
both current and emerging, that need to be dealt with (this is called
environmental analysis and we will address this in Unit 3).
Secondly, they must be able to describe outcomes that effectively address
or resolve these critical issues and enhance the organisation’s performance
(Unit 2).
Thirdly, they must be able to describe and implement a set of initiatives that
utilise the organisation’s resources to produce the outcomes (Units 7 to 11).
We will be focusing some attention on the importance of technology (Unit
6). However, turning to Jim Collins’ findings in his best-selling book on what
characterised great organisations (those that consistently out-performed
the market and other merely ‘good’ organisations over a sustained period
despite changes in their leadership), he noted that:
The good to great companies used technology as an accelerator of
momentum, not a creator of it. None of the good-to-great companies
began their transformations with pioneering technology, yet they all
became pioneers in the application of technology once they grasped
how it fit with their three circles (business model) and after they hit
breakthrough.
(Collins 2001, p. 162)

Some background principles
While the teaching of strategy at business schools is a relatively new
phenomenon, the study of strategy has been around for a very long time.
Indeed, military and political strategy has been studied for many centuries,
if not millennia. Consequently, many of the practices and principles on
which strategic management as a business-management discipline is
based are derived from these sources. Key principles of these three
sources are summarised for you below, but you may be interested to further
investigate three of the most commonly quoted sources of the principles of
strategy:
• The Art of War, by Sun Tzu (thought to be written in China
around 400–320 BC) – for more on Sun Tzu, you can visit
http://suntzusaid.com
• The Prince, by Niccolo Machiavelli (1469–1527), Italy – for more on this
work, you can visit http://plato.stanford.edu/entries/machiavelli/
• On War, by Carl von Clausewitz (1780–1831), Prussia (now Germany)
– you can find out more by visiting http://www.clausewitz.com/readings/
Principles/
Each of these authors attempted to summarise the principles of war (or

‘state-craft’ in Machiavelli’s case) for the leaders of armies or states of their
time.
Some highlights of Sun Tzu’s principles that have made their way into
strategic-management teaching are:
• Strategy without tactics is the slowest route to victory. Tactics without
strategy is the noise before defeat.
• Be ‘combat ready’ at all times.
• To win, you must achieve relative superiority at the point of contact.
• Intelligence about the enemy is fundamental to success.
• Success requires innovative tactics to gain and retain the initiative in
the battle.
• There is a need to be on the offensive rather than just the defensive.
• Success usually occurs by winning the battle in the heart, not the mind.
Niccolo Machiavelli was a student of politics rather than a military strategist

and his contributions to the principles of strategy (greatly simplified) are
said to be:
• It is important that leadership inspires people to want the strategy to
succeed.
• Mercenaries are not to be trusted.
• The people should be armed and deployed adequately to respond to
threats.

• Maintain the loyalty and commitment of your people.
• Reward people for their success and loyalty.
• Choose carefully the people who surround and advise you.
In 19th century Prussia, Carl von Clausewitz studied the Napoleonic Wars
and looked to summarise the principles of Bonaparte’s success. von
Clausewitz is perhaps most famous for saying, ‘War is a continuation of
politics by other means’. His theories are complex and difficult, but he is
credited with having developed the following key principles:
• To win, a commander must have strategic reserves, which should be
committed to battle at the crucial time and place to achieve victory.
• The timing of strategy is essential. The same strategy that might
lead to victory at one point in the battle will lead to defeat if undertaken
too early or too late.
• There are strategic and operational ‘centres of gravity’ (similar to
Michael Porter’s later concept about the five environmental forces in an
industry).
• Critical analysis is of absolute importance as the basis for strategy.
• War is unpredictable and occurs in a ‘fog’ where the strategist
is denied all the information needed to make a perfect or risk-free
decision, and where some information is contradictory or confusing.
Of the three, von Clausewitz is said to have most significantly influenced

writing on business strategy – for example, in the works of Henry Mintzberg
and Porter.
While understanding these background principles is important, keep in mind
that if it were simply a matter of applying the principles as immutable rules,
we would have little to study. In practice, in the vast majority of battles, wars
and contests between states since these principles were first published,
leaders on both sides have attempted to apply them, with only one side
usually emerging as the winner. Principles of strategic management,
like the principles of war and statecraft, keep evolving. However, while
understanding and applying the principles as a template does not
guarantee success, neglecting them almost certainly guarantees failure.
Strategy has been taught in business schools since the mid-1930s, but
really started to take off in the 1950s. By the 1960s, strategic management
moved from ‘one best approach’ (also known as ‘the determinist view’) to
a more contingent or adaptive approach, where organisations were seen
as needing to respond to changes in their environments. Authors such as
James Quinn and Henry Mintzberg began in the 1970s to suggest that
strategies emerge from effective strategic management processes, and
Michael Porter began his groundbreaking work. Porter is possibly the most
famous of the authors of this period. He proposed the view that strategies
emerge from understanding the structure and forces at work within

industries. His concepts of the value chain and analysis of five industry
forces will form part of our analysis of external environments in later
Units. But for now, it is certainly worthwhile understanding the important
frameworks and principles that Porter advocated.
Video
Video 1.3 Harvard Business Review, ‘The five competitive forces that
shape strategy’, an interview with Michael Porter [13.11]
By the 1980s, researchers such as Williamson, Hoskisson,

C. K. Prahalad and perhaps the most famous of the more recent authors,
Gary Hamel, began looking at strategy from the perspective of the structure
of organisations, the role of stakeholders and the ability of managers to
make effective use of an organisation’s resources.

The strategy-structure
relationship
In the 1920s, historian Alfred Chandler was famously quoted as suggesting
that ‘Structure follows strategy’. His point was that organisations like
DuPont, GM and Sears Roebuck were successful because their managers
developed the best strategy for the future, and then designed organisational
structures that were suited to enabling the strategy. Nearly a century later,
we continue to advocate that structure ought to follow strategy – that is
to say, that managers should not be blinkered and fall into the trap of
developing strategy based on the organisation’s current structure.
Instead, they ought to be developing the right strategy to secure the
organisation’s future, and then deciding what structure is best suited to
make this strategy work.
However, in practice, many modern managers and staff find that strategy
often follows structure. Numerous commentators, including Tom Peters
(1982, In search of excellence: Lessons from America’s best run
companies), have found that as organisations grow and mature, concerns
for structure and systems begin to dominate managerial practice, and
strategic agility declines – rather like human agility declines as age sets in.
This has resulted in many managers finding that strategy is often
constrained by the existing structure and the vested interests of those
who benefit from the existing structure. But should it be? Is getting
organisational structure right more important than getting strategy right?
How likely is it that the structure we have now is what is required no matter
what the circumstances of the current or future business environment, or
the future direction of the organisation?
To help counter this strategic straightjacket, the management and strategic
consulting firm McKinsey developed the McKinsey 7-S Framework.
This model maintains that strategic success comes from an effective
combination of:
• Shared values – the common values and beliefs employees share;
things beyond profit (similar to Porter and Kramer’s focus on
shared value, or the response to Lafley and Martin’s (2013, p. 15)
question about ‘what is our winning aspiration?’). As Jim Collins
(2001, p. 195) noted:
This was one of the most paradoxical findings from ‘Built To Last’ –
core values are essential for greatness, but it doesn’t seem to matter
what those core values are. The point is not what core values you
have, but that you have core values at all, that you know what they
are, that you build them explicitly into the organisation, and that you
preserve them over time.
• Strategy – the company’s integrated vision and clarity of direction.

This is addressed by the responses to Lafley and Martin’s questions
about where we will play and how we will win.

• Structure – the way the organisation defines and administers internal
power and relationships, including its policies and procedures
(which Lafley and Martin include as part of ‘Management Systems’).
• Systems – decision-making systems, both human and IT-based
(also addressed via ‘Management Systems’).
• Style – the organisational culture and leadership style that typifies the
organisation (which Lafley and Martin include as part of the answer to
‘What capabilities must be in place’).
• Staff – having sufficient numbers of the right people, trained, motivated
and committed to the organisation’s success (also under ‘Capabilities’).
• Skills – the presence (or absence) of competencies needed to make
strategy succeed (also under ‘Capabilities’).
(For more information on the 7-S framework, visit

http://www.valuebasedmanagement.net/methods_7S.html)
It is important even at this early point for us to understand the different
levels of strategy development and strategic management within an
organisation. While the processes should be the same no matter what
level of the organisation you are planning strategy for, the focus and the
outcomes will be different. This can be seen in the following.

Figure 1.1 Strategy and structure
Orchestrated by Corporate Strategy

the CEO and (for the set of businesses
other senior as a whole)
In the case of a
executives. How to gain advantage from
single-business
managing a set of businesses
company, these
two levels of
the strategy-
making hierarchy
Two-Way Influence merge into one
level – Business
Strategy – that is
Orchestrated by the Business orchestrated by
senior executives of Strategy the company’s
each line of business, (one for each business the CEO and other
often with advice from company has diversified into) top executives.
the heads of functional How to gain and sustain a competitive
areas within the advantage for a single line of
business and other business
key people.
Two-Way Influence
Orchestrated by Functional Area

the heads of major Strategies
functional activities (within each business)
within a particular How to manage a particular activity
business, often in within a business in ways that
collaboration with other support the business strategy
key people.
Two-Way Influence
Orchestrated by
brand managers,
plant managers, and Operating
the heads of other Strategies
strategically important (within each functional area)
activities, such as How to manage activities of strategic
distribution, purchasing, significance within each functional
and website operations, area, adding detail and
often with input from completeness
other key people.
Source: adapted from Thompson et al 2016, p. 33.

This diagram shows how the focus and outcomes of different levels of
strategy differ depending on the different level of the organisation for which
we are strategising.
Importantly, all levels of strategy must be aligned, or achieve a strong
‘fit’, with each other. Business-level strategy must fit/be aligned ‘upwards’
with the overall plans established by the CEO and senior executive in the
corporate plan, and ‘downwards’ with the functional strategies that are
created by the people responsible for functional areas such as marketing,
human resources, finance, technology, research, innovation and so on. In
turn, functional-level strategy must fit/be aligned ‘upwards’ with business-
unit strategies and ‘downwards’ to operating-level strategies. You should
get the sense from this that strategic management is an iterative process
in which people at operational and functional levels influence ‘upwards’
in helping shape the business-unit strategy, and managers at business-
unit level influence ‘upwards’ to the corporate plans, ‘downwards’ into
operational and functional plans and potentially even laterally into the plans
and strategies of other business units where coordination may be needed.
Business strategy should add value to help the corporation or organisation
create shared value for its shareholders and stakeholders. Business-unit
plans are therefore subordinate to corporate plans.
Functional area strategy should create or enhance shared value for
the business units or divisions and the key stakeholders at this level,
and operating strategies should focus on helping the functional or
business strategies.
In each case, the outcomes of these strategies ought to be creating shared
value for the corporation and the shareholders/stakeholders. All strategies
within the organisation, therefore, are subordinate to the corporate strategic
direction and outcomes.

Strategic outcomes
Few organisations or strategic leaders any longer think that organisations
exist only to make profit or generate financial returns.
The increasing attention given to corporate social responsibility and
sustainable business practices is undeniable and widespread. Acting
sustainably is increasingly accepted as a necessary ‘best practice’. Indeed,
events like the corporate collapses triggered by the GFC (2007–2009),
the BP Gulf of Mexico Oil Spill (2010) and the LIBOR scandal (2012), are
just a few high-profile examples that have further reinforced the imperative
that modern organisations must be underpinned by sustainable practice –
focusing on much more than financial outcomes.
As the following quote discussing the importance of effective corporate
governance indicates:
The process of making and controlling strategic decisions is called
corporate governance. As the foundation on which the modern
corporation is built, corporate governance is an umbrella term that
includes specific issues arising from the interactions among the
governing board, senior managers, shareholders and other corporate
stakeholders, which are used to determine and control the strategic
direction and performance of organisations… Corporate governance
is about more than protecting the interests of shareholders; a proper
system of corporate governance should go beyond mere profit
maximisation and consider the effect of the company’s operations
on stakeholder groups such as customers, employees, suppliers,
regulatory authorities and society at large.
(Grant et al 2014, pp. 41–42)
This aligns with our earlier discussion of Porter and Kramer’s notion of the
importance of strategies that create shared value:
What is Shared “Value”?
The concept of shared value can be defined as policies and operating

practices that enhance the competitiveness of a company while
simultaneously advancing the economic and social conditions in the
communities in which it operates. Shared value creation focuses
on identifying and expanding the connections between societal and
economic progress.
The concept rests on the premise that both economic and social
progress must be addressed using value principles. Value is defined
as benefits relative to costs, not just benefits alone. Value creation
is an idea that has long been recognized in business, where profit is
revenues earned from customers minus the costs incurred. However,
businesses have rarely approached societal issues from a value
perspective but have treated them as peripheral matters. This has
obscured the connections between economic and social concerns.
In the social sector, thinking in value terms is even less common.

Social organizations and government entities often see success
solely in terms of the benefits achieved or the money expended. As

governments and NGOs begin to think more in value terms, their
interest in collaborating with business will inevitably grow.
(Porter & Kramer 2011, p. 66)
Since the Porter and Kramer article was published, increasingly numerous
examples are emerging that commercial organisations, governments
and NGOs are using this lens to understand strategic outcomes. A few
simple examples to illustrate the point include governments evaluating
infrastructure investments including not just cost-benefit, but environmental
and social consequences. Building of public transport often considers
not only the number of passengers carried, but the number of cars taken
off the road and the volume of pollution and CO2 reduced by the switch.
Investments by government in programs such as childcare and services
often delivered by NGOs to assist people to better access employment,
are not only recognised for the reduction in social-security payments and
increases in individuals’ wellbeing, but the contribution to the productivity
of the economy. From the commercial organisation perspective, an airline
like Qantas often evaluates a new aircraft not only in terms of the reduced
operating costs and revenues that can be generated, but also by the
reduced environmental impacts and the opportunities generated for new
skills and employment. These are just a few examples of how the notion of
shared value is beginning to influence strategic decision-making across all
sectors of the economy and society.
As you can see, shared value and sustainability are much bigger than
simply thinking about corporate social responsibility. We will revisit this
discussion in much more depth in Unit 12 as we draw the study of strategic
management to a close.
From this dialogue, it is important to recognise that strategic managers in
all organisations need to consider how to balance financial or economic
aspects with non-economic value(s) in developing an organisation’s
strategy. They need to understand how the appropriate measures of
strategic ‘success’ should be applied, and what types of success are being
sought – in Lafley and Martin (2013, p. 15) terms, what does winning mean
and how should it be judged?
Note that measuring organisational performance is complex and evolving,
and still open to much debate. What to measure and how to measure it
remains a continuous ‘work in progress’. However, two common and highly
regarded performance measurement frameworks are discussed below.
Balanced scorecard
The balanced scorecard (BSC), developed by Harvard Business School
professor Robert Kaplan and consultant David Norton in the 1990s, has
had a major impact on the way that organisations seek to measure and
understand their strategic performance and outcomes. The number of

Fortune 500 companies using some form of balanced scorecard now
exceeds 70%, making it one of the most widely adopted strategic-
management methodologies worldwide. In 2006, it was identified by
Harvard Business Review as one of the most significant management ideas
of the last 75 years. The reason for this is that the BSC works to convert
strategic goals and objectives into realistic, reportable measurements in a
suite of four complementary measures. Rather than the traditional, singular
focus on an organisation’s financial performance, it looks to ensure that
across the organisation (not necessarily on each individual manager’s
scorecard) there is a balance of strategic outcomes, targeting:
1. finance – to succeed financially, how should we appear to our
shareholders?
2. customers – to achieve our vision, how should we appear to our
customers?
3. internal business processes – to satisfy our customers and
shareholders, what business processes must we excel at?
4. learning and growth – to achieve our vision, how will we sustain our
ability to change and improve?
Having determined what the balance of these four perspectives ought to be,
strategic managers are then challenged to undertake a continuous cycle of:
• translating and clarifying the vision, and gaining consensus within the
organisation and with key stakeholders
• communicating and educating the people who need to know
• setting clear ‘winning aspirations’ to ensure that the objectives are met
• linking reward systems to these performance measures
• developing plans that:
– set targets
– align the strategic initiatives with each other effectively
– allocate appropriate resources
– establish the necessary milestones
• providing feedback and learning opportunities through:

– articulating the shared vision
– supplying relevant strategic feedback
– facilitating strategic reviews and organisational learning.

Here’s an example of the sorts of measures that a simple balanced
scorecard might contain:
Table 1.1 A simple balanced scorecard

Finance Customers
Increase profit by 10% Reduce the rate of customer turnover from 22%
Improve ROI from 9.5 to 15% p.a. to less than 15%
Increase number of clients served by 12% with Increase customer satisfaction from a mean of
a budget increase of only 4% 3.5 to over 4.0 out of 5
Increase revenue from new products by To be rated as preferred supplier by our 50

$250,000 largest customers
Reduce bad debts by 50%

Internal Business Processes Learning and Growth
Reduce energy consumption by 15% Double the number of employees qualified and
Improve efficiency per business unit by 3% this accredited to industry standard
year Increase the number of employees who speak
Reduce lost time injury rates by 40% languages other than English by 30%
Reduce employee turnover by 40%
Triple and quadruple bottom line

Triple and quadruple bottom lines refer to organisations acknowledging
and being accountable for ecological (natural environmental), social and
corporate governance aspects of their business, as well as the traditional
focus on a ‘financial’ bottom line. Triple and quadruple bottom line reporting
advocates that organisations report their performance on three to four
bottom lines, increasing the likelihood that they will behave sustainably
because they hold themselves accountable against outcomes in these
areas.
The increasing shift to greater sustainability and awareness of shared value
via balanced scorecards and triple/quadruple bottom line reporting requires
a number of issues to be considered.
1. How should the non-financial indicators of strategic success
(customers, business processes, environmental and social
performance, etc.) be measured? Accounting standards around the
world are being made more harmonious, comparable and widely
understood. In 2014, the European Union mandated the disclosure
of key non-financial performances against key metrics such as
environmental protection, social responsibility and treatment of
employees, respect for human rights, anti-corruption and bribery,
and diversity on company boards. In addition, many organisations,
including many outside the EU, voluntarily publish sustainability
reports. According to the Global Reporting Initiative (GRI), as many

as 93% of the world’s largest corporations report on their sustainability
performance. The GRI provides a range of Economic, Environmental
and Social Standards. It may be of interest, given where you are
studying, to note that UNSW was a pioneer in the university sector in
Australia in publishing a stand-alone sustainability report in accordance
with the GRI. More information on the GRI and the standards can be
seen at https://www.globalreporting.org/information/about-gri/Pages/
default.aspx.
2. Is it realistic to ask strategic managers to focus on the trade-offs
between multiple alternative (and potentially conflicting) measures of
their performance?
3. Will the financial indicators, in practice, continue to be paramount?
Shareholders are likely to react swiftly to poor financial performance,
but what will be the impact of poor learning and growth, or
environmental or social performance? Organisations don’t exist solely
for profit, but if they don’t make profit or deliver fair financial return for
the moneys used, they don’t survive.
The increasing community, government, employee and media focus on

shared value compels strategic managers to develop sustainable strategic
programs.
Processes and outcomes of strategic thinking

and planning
To date, we have considered the four key questions of strategic
management:
• Where are we now?
• Where are we going?
• How will we get there?
• How will we know we are on track?
You will also recall the framework that a strategic manager can use to
answers the questions (Lafley & Martin 2013, pp. 14–15):
• What is our winning aspiration?
• Where will we play?
• How will we win?
• What capabilities must be in place?
• What management systems are required?

But how do strategic managers actually do this? What activities do they
need to undertake to produce these answers? According to Thompson et al
(2016, p. 20) there are five key tasks for making and implementing strategy:
• developing a strategic vision, mission and core values
• setting objectives
• crafting a strategy to achieve the objectives and company vision
• executing the strategy
• monitoring developments, evaluating performance and initiating
corrective adjustments.
We will use this model throughout the remainder of this course and we
will tease out how strategic managers follow these five steps to produce
effective strategies.
However, this five-step model leaves one aspect unaddressed: strategy is
greatly influenced by context. You will recall that one of von Clausewitz’s
strategic principles was that in strategy, timing matters. And Sun Tzu
highlighted the vital importance of intelligence. Strategies don’t exist in
a vacuum. They exist within corporations, organisations and business
units. They exist within markets (actual and potential customers and
stakeholders) and industries (competitors and suppliers). They exist within
societies, nations and regions, legislative frameworks and economies. All of
these contexts have some kind of impact on an organisation’s capacities,
and its strategic options and choices.
It is impossible to begin to consider Thompson et al’s five points for making
and implementing strategy without first gaining an in-depth understanding
of the dynamics at work in these internal and external environments.
Consider, for example, the impact of the internet, online and mobile-phone
technology on the retail, banking and travel industries (accessing accounts,
conducting transactions such as buying tickets, downloading boarding
passes, etc.). Consider the impact of movements in the Australian dollar on
the manufacturing, tourism and international education industries. Consider
the impact of increasing community concerns about climate change and
carbon pricing on the energy industries, the building industry, steel-making,
air transport, etc.
As you can imagine, these factors are very much on the minds of Australian
companies such as Qantas, Cochlear, Commonwealth Bank, BHP, The
Iconic, BlueScope Steel, Origin Energy, Woodside and UNSW Sydney.
They are of equal concern to Emirates, Citibank, Vale, ArcelorMittal,
Chevron and Stanford and the National University of Singapore. And we
could also list public-sector organisations and agencies, not-for-profit
organisations, small businesses, and so on. Changes in the way that these
forces operate are part of the strategic context in which all organisations’
strategies need to be set.

The importance of context to strategic management is so great that a
significant proportion of the early part of this course will be devoted to
understanding it.
Divergent views on developing strategy

Strategic management is an evolving field. As mentioned above, early
thinking about ‘best practice’ was dominated by a determinist view,
suggesting that there was ‘one best way’. This view emphasised the
importance of following a set of clear strategic thinking processes,
understanding the impacts of industry structure and industry environment,
and focusing on the strategic value of the organisation’s resources and
capabilities.
Globalisation complicated this process by introducing competition in
industries from beyond national boundaries. The adoption of high-speed,
content-rich information and communication technology such as personal
computers and the internet, further complicated the determinist strategy
development processes.
Consequently, by the 1990s, a more reactive view – that strategy was
about building the capability to respond quickly to opportunity or threat –
began to emerge.
Current thinking is that both approaches are valid, depending on conditions
in the strategically important environments. Today, these two formerly
competing approaches to strategy – proactive and reactive – are being
melded, as shown in the accompanying diagram.
Figure 1.2 A company’s actual strategy is partly planned and partly reactive
Abandoned strategy
elements
Deliberate Strategy
(Proactive Strategy Elements)
New planned initiatives plus

ongoing strategy elements A
continued from prior periods Company’s
Current (or
New strategy elements Realized)
that emerge as managers Strategy
react adaptively to changing
circumstances
Emergent Strategy
(Reactive Strategy Elements)

In this model, you can see that strategic managers start by looking at the
existing strategies. Then they proactively identify any strategies that are
no longer relevant or no longer a priority, and discontinue these initiatives.
This leads to resources and management focus being made available
for new planned (proactive) initiatives. However, based on the strategic
managers’ assessment of the likely turbulence and uncertainty of the future
(von Clausewitz’s notion of the ‘fog’ of battle) they may withhold a strategic
reserve of some resources and capabilities to enable them to react to
changes in events as opportunities and threats around the organisation
emerge and change. This is the capability for emergent or reactive strategy.
The planned (proactive) and emerging (reactive) approaches to strategy
have been extensively debated in the literature over recent decades, and
will be explored in more detail in Unit 2. For now, it’s important to know
that the earlier, planned/proactive approaches were based on the idea that
developing strategy proceeds from using analysis to predict a likely future
scenario (or set of scenarios), and then developing strategic responses
based on these plausible futures.
The central idea of reactive or emergent strategy is that instead of trying to
analyse and predict future scenarios, organisations should concentrate on
developing their strategic resources and capabilities, seizing opportunities
and responding to threats quickly and ‘strategically’ by exploiting their
competitive advantages built around these competencies and capabilities.
Consistent with the notion that Thompson et al identified in Figure 1.2,
we take the view that both approaches are important. Strategy is about
proactively planning for a plausible future and retaining resources and
capacity to react to events as they unfold. In the words already cited by Jim
Collins (1994), it’s not about ‘either/or’ but ‘and’.

Summary
Before moving on to the next Unit, it is important to reflect on what we have
covered in this introductory Unit. By now, you should know the following.
• Strategic management deals with the major intended and emergent
initiatives taken by managers on behalf of organisations’ key
stakeholders. It involves utilisation of resources to enhance the
performance of organisations in their external environments to create
shared value.
• Strategic thinking and strategic planning are not the same thing.
Strategic thinking sets out a plausible future by addressing the four key
questions: Where are we now? Where do we want or need to go? How
will we get there? How will we know that we are on track? Strategic
planning is a process that when done well, stimulates and gives
expression to the strategic thinking (but only when done well).
• The role of strategic managers is to build a strategy by setting out
what the organisation’s winning aspiration is, where it will play, how it
will win, what capabilities are needed to win and what management
systems will support all of that (Lafley & Martin 2013, p. 15).
• The organisational hierarchy of strategy involves strategic thinking
moving up and down through corporate, business-unit level, functional
and operational strategy. But ultimately, it is corporate strategy that
forms the overarching guidance about what an organisation should do.
This is where the answers to Lafley and Martin’s five questions need to
be found.
• Ideally, structure follows strategy, but it needs to be acknowledged
that strategy’s goal is to add shared value for key stakeholders – build
organisational and community value.
• An organisation’s strategic outcomes increasingly need to extend
beyond the financial bottom line and acknowledge wider strategic
perspectives in terms of triple or quadruple bottom lines or balanced
scorecards and shared value. You need to be clear about what
outcomes any strategy you are involved in developing must deliver, and
why.
• The five-step process for determining strategy involves developing
a strategic vision, mission and values, setting objectives, crafting a
strategy to achieve them, executing the strategy, and finally evaluating
performance, monitoring new developments and initiating corrective
action. But it must do so bearing in mind the various contextual forces
inside and outside the organisation.
• Consequently, strategies must be based on analyses of internal and
external contexts – the environments that have an impact on an
organisation and enable or limit its strategic choices.
• Ideally, effective strategic managers recognise both main approaches
to strategy: proactive/planned (to create a plausible future) and reactive
or emergent (to create capacity to respond to events).

Self-assessment quiz
To help you review your learning in this Unit, try to answer these
10 multiple-choice questions. You will find the answers listed after the
References section:
1. The definition that we are using for strategic management for this
course says that:
The field of strategic management deals with the major ….. and
….. initiatives taken by managers on behalf of the organisation’s
performance of the organisation in their external environment
Which of the following phrases most correctly completes the missing
section of the definition:
a. proactive, planned
b. intended, emergent
c. reactive, unplanned
d. internal, external
e. short-term, long-term
2. Complete the following statement:

The four key questions that an effective strategy should be able to
answer are – where are we now, where are we going, ….. and how will
we know we are on track?
a. how will we deliver value?
b. how will we get there?
c. how will we monitor?
d. who will lead us?
e. who are out stakeholders?
3. Which of the following is not one of the elements found in a business

model canvas?
a. shareholder returns
b. customer value proposition
c. revenue streams
d. cost structures
e. key partners
f. key resources

4. What did Carl von Clausewitz say about timing of strategy?
a. it occurs in a fog
b. it requires strategic reserves
c. it determines the strategic centre of gravity
d. it requires loyalty and commitment
e. it is essential
5. Which of the following is not one of Michael Porter’s Five Critical

Strategic Environmental Forces:
a. Power of Suppliers
b. Power of Media
c. Competitive Intensity
d. Power of Substitutes
e. Power of Buyers
f. Threat of New Entrants
6. The McKinsey 7-S Framework comprises seven forces – Structure,

Shared Values, Systems, Staff, Skills, Strategy and ….
a. Symbols
b. Safety
c. Style
d. Sequencing
e. Substance
7. Which of the following is not one of the questions that Lafley and
Martin (2013, pp. 14–15) used to describe a strategy for ‘playing to
win’?
a. what management systems are required?
b. how will we win?
c. how will you create shared value?
d. where will we play?
e. what capabilities must be in place?

8. Which of the following are not included in the four quadrants in a
typical or generic balanced scorecard
a. financial performance
b. learning and growth
c. customer outcomes
d. internal business processes
e. societal or community outcomes
9. Which of the following is not one of the five tasks that Thompson et al
identified for strategic managers:
a. developing a strategic vision
b. managing stakeholder involvement
c. setting objectives
d. crafting a strategy to achieve the objectives and vision
e. implementing and executing the strategy
f. monitoring developments, evaluating performance and initiating
corrective adjustments
10. Complete the following statement:
‘The difference between proactive/planned strategy and reactive/
emergent strategy is that proactive strategy is based on analysing the
environment and predicting a ….. future for the organisation, while
reactive strategy is based on developing capabilities and allocating
some strategic resources to allow strategic managers to respond to …..
events.’
a. plausible, unforeseen
b. unlikely, predictable
c. plausible, predictable
d. certain, manageable
e. strategic, tactical

References
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Collins, J 2001, Good to great, Harper-Collins, New York.
Furrer, O, Thomas, H & Goussevskaia, A 2008, ‘The structure and
evolution of the strategic management field: A content analysis of 26 years
of strategic management research’, International Journal of Management
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Grant, R, Butler, B, Hung, H & Orr, S 2014, Contemporary strategic
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Hambrick, D C & Fredrickson, J W 2005, ‘Are you sure you have a
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Porter, M & Kramer, M 2011, ‘Creating shared value’, Harvard Business
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Segal-Horn, S 2004, ‘The modern roots of strategic management’,
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answers
1. b
2. c
3. a
4. e
5. b
6. c
7. c
8. e
9. b
10. a

Unit 2
The strategic management
process
CONTENTS
Introduction 2–1
Learning outcomes 2–4
Recommended reading 2–4
The five stages of strategic management 2–5
1. Developing a strategic vision 2–5
2. Setting objectives 2–12
3. Crafting a strategy 2–17
4. Implementing and executing strategy 2–22
5. Monitoring, evaluating and adjusting 2–24
Who is responsible for the five tasks? 2–27
Summary 2–28
Self-assessment quiz 2–29
References 2–32

Introduction
Strategic management is the process of directing and strengthening
an organisation in its competition with other organisations. Strategic
management theories explain why organisations succeed or fail.
The actions an organisation takes in competing have been found to
be a much more significant factor in determining the organisation’s
performance than the business environment in which it operates.
Strategies vary enormously between companies, even within a
single industry. Within any industry there will be a broad range of
organisations: small, large, public, private, manufacturing, service,
domestic and global. These companies will experience a large
variation in performance and opportunities and will display different
approaches to competing and markets. Understanding these
differences and how they impact on success is fundamental to the
study of strategy.
Contemporary strategic management considers that performance is

affected by the characteristics of the organisation and its environment,
in that order. Strategic management is the process of matching the
organisation’s characteristics (e.g. strengths and weaknesses) to
the external environment (which provides opportunities and threats).
This process of matching the organisation to its environment is
a continuous process of analysis, synthesis, action-taking and
evaluation.
(Grant et al 2014, p. 6)
It is imperative that we redefine strategic management, disabusing

managers and students of the misperception that strategy is simply
long-term planning according to a set of assumptions. Rather,
strategy is thinking of an organisation as a dynamic, changing entity,
in terms of the allocation of its resources and its position relative to
its competition. Strategy is also remembering that all organisations –
whether for profit or not-for-profit or in a capitalist or a socialist society
– have competition. We also must distinguish between strategy
as mere act and strategy as a true reflection of an organisation’s
operations. All organisations have a strategy that they act on, whether
or not they realise it. And they may be incredibly effective in its
execution. But execution means nothing if the strategy does not suit
the organisation and its environment. As Peter Drucker puts it: ‘It’s the
difference between doing things right and doing the right things’.
(Schendel 2005, p. 6)
Once again, before reading the key concepts and undertaking the detailed
activities that follow, you can get a sense of what this Unit is about from the
following video. It will highlight key learning around:
• The five tasks of a strategic manager
• The five key questions that effective strategy must answer.
Unit 2: The strategic management process 2–1

Video
In Unit 1, we developed a definition of strategic management. However, as

the above quote from Schendel highlights, while strategic management is
certainly about building competitive advantage, it is about more than merely
long-term planning – it is about choosing the right things to do in order to be
successful.
However, as the quote from Grant et al highlights for us, strategic
management not only explains why ‘some organisations succeed and
others fail’ but is, at its core, about:
• …the process of matching what an organisation can do
(organisational strengths and weaknesses) and what it might do
(environmental opportunities and threats).
• …a continuous process of analysis, synthesis, action-taking and

evaluation.
Like anything in life, some people, and some organisations, are better,
or at least more disciplined and structured, at strategic management
than others. Strategic managers in successful organisations that we see
being discussed as examples of ‘best practice’ – organisations such as
Apple, CSL, General Electric, Google, Qantas and Microsoft – have often
developed more effective strategic management processes than their
counterparts in other organisations. Small businesses usually have to rely
on the strategy formulation skills and limited time of an entrepreneurial
owner. Thus, if they develop strategy at all, this is often more basic than
that of larger firms. As you will also recall from Unit 1, the outcomes and
focus of strategic management in the public sector differ in some important
ways from what we would see in the private and corporate sectors.
However, the basic processes and practices are similar.
With a multitude of models of how to go about strategy formulation and
management, there is no one ‘right way’. But using a good practice model
or structure helps us quickly understand and appreciate the principles that
underpin effective strategic management. If, after completing your studies,
some other model or view appeals to you more, that’s fine.
As a starting point, we will focus on the good practice model detailed in
Thompson et al (2016), which indicates that effective strategy formulation/
implementation requires attention to be given to five interrelated managerial
tasks:

Figure 2.1 The strategy-making, strategy-executing process
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Monitoring
Developing Setting Crafting a Executing
developments,
a strategic objectives strategy to the strategy
evaluating
vision, achieve the
performance,
mission, and objectives and
and initiating
core values the company
corrective
vision
adjustments
Revise as needed in light of the company’s actual

performance, changing conditions, new opportunities,
and new ideas
The model above clearly illustrates the key tasks of strategic

management. But we also need to rigorously analyse what is happening
in the organisation’s internal and key external environments so that we
understand its existing and required strengths and weaknesses (what Grant
suggests is what an organisation can do), and the conditions of the external
environments and the opportunities and threats that flow from these (what it
might do).
Thus, the strategic management process has two distinct, yet
interdependent, parts: strategy formulation, which is about deciding
what to do (Stages 1 to 3); and strategy implementation, which is about
making it happen (Stages 4 and 5 plus the revisions). Both of these are
underpinned by the insights derived from rigorous analysis. In the rest of
this Unit, we will focus on these phases in some depth.

Learning outcomes
• describe the processes that aid strategic managers in developing an
appropriate strategy
• apply appropriate evaluation criteria to identify an effective strategy for a
particular organisation
• discuss the various responsibilities for strategy development and
management of board, senior management, staff and other strategic ‘actors’
• critique the strategy development process in your own organisation.
Recommended reading
The following readings can provide more detail to support much of the
learning covered in this Unit:
Grant, R, Butler, B, Orr, S & Murray, P 2014, Contemporary strategic
Milton, QLD. Chapter 1 – ‘Strategy: Concepts and perspectives’.
Chapter 2 – ‘Charting a Company’s Direction: Its Vision, Mission,
Objectives, and Strategy’.

The five stages of strategic
management
In this course, we take the view that strategic managers are responsible for
answering the four key strategic questions:
1. Where are we now?
2. Where do we want or need to go?
3. How do we get there?
4. How will we know we are on track?
As shown in Figure 2.1, strategic management involves a dynamic and

iterative cycle based on analyses and insights.
Central to this iterative cycle of Plan – Implement – Review – Adjust is
the need for strategic managers to have a clear sense of ‘where we are
going’. In an effective strategic management process, this comes from
understanding the organisation’s motivating aspiration, as spelled out in the
organisation’s mission, the vision of its leaders about the future, and core
values.
1. Developing a strategic vision

This is where strategic managers determine the answer to Lafley and
Martin’s (2013, p. 14) question about ‘What is your winning aspiration?
The purpose of your enterprise, its motivating aspiration.’
In their groundbreaking book Built to last: Successful habits of visionary
companies, based on research on what distinguishes truly successful
organisations that survive over the long term, Jim Collins and Jerry
Porras identified certain key characteristics of what they term ‘visionary
companies’:
They are more than successful. They are more than enduring. In most
cases they are the best of the best in their industries, and have been
that way for decades. Many of them have served as role models –
icons, really – for the practice of management around the world. Yet
as extraordinary as they are, the visionary companies do not have
perfect unblemished records. We suspect that most, if not all, have
taken a serious tumble at least once during their history, probably
multiple times…. Yet – and this is the key point – visionary companies
display a remarkable resiliency, and ability to bounce back from
adversity. As a result, visionary companies attain extraordinary long-
term performance.
(Collins & Porras 1997, pp. 2–5)

They identified that these long-lasting ‘visionary companies’ have clearly
understood, passionately held and shared future-oriented visions, shared
with their critical stakeholders and backed by core values. These are
typically captured and expressed in vision and mission statements. So, let
us explore these two key concepts.
What is strategic vision and why do we need one? Consider the following
quote from the former Greyhound and Dial CEO, the late John Teets:
‘Management’s job is not to see the company as it is, but as it can become’.
The vision should contain the organisation’s strategic principles and
strategic intent. These guide the plans that follow and should also guide
the multitude of daily decisions that managers and staff throughout an
organisation make every working day. As Grant et al suggest:
The modern approach to strategy formulation can also be supported
by strategic principles, which are distillations of the organisation’s
strategy and are intended to guide staff when making decisions. …
Strategic intent focuses on how the organisation will compete and
what the organisation will become in the future. Strategic intent is a
set of aspirations intended to motivate and inspire the organisation.
Hamel and Prahalad argue that:
strategic intent creates an extreme misfit between resources

and ambitions. Top management then challenges the
organisation to close the gap by building new competitive
advantages.
(Grant et al 2014, pp. 14–15)
So:
• a vision is meant to focus attention on an alternative future for the
organisation, to describe its aspiration
• without an outcome-oriented view of an organisation’s future, actions
and decisions can become undirected
• the vision provides a ‘destination’ before the start of a ‘journey’
• the vision helps managers identify the ‘right things’ that need doing
• the vision also describes the values that guide the actions to give
substance to the vision.
Ideally, the strategic vision is a concise statement capturing the essence

of the organisation’s direction and the focus of its products/markets/
services.
Thompson et al (2016, p. 22) draw heavily on the work of respected
Harvard University change-management guru John Kotter to highlight what
they describe as the do’s and don’ts for wording a vision statement, which
are paraphrased below.

1. Do be graphic – paint a clear picture of where the company is headed
and the market position(s) the company is striving to stake out. Don’t
be vague or incomplete.
2. Do be forward looking and directional – signalling what sorts of
changes are involved in achieving it. Don’t dwell on the present.
3. Do keep it focused – providing decision-makers throughout the
organisation with guidelines to help them make day-to-day decisions
in the context of whether they are consistent with the organisation’s
strategic vision (choosing the ‘right things’ to do). Don’t use overly
broad language.
4. Do have some wriggle room – language that allows some flexibility
enables the directional course to be adjusted as market–customer–
technology circumstances change. Don’t state the vision in bland or
uninspiring terms.
5. Do be sure the journey is feasible – it is possible for the organisation
to achieve the vision, and the key stakeholders can see that. Don’t be
generic.
6. Do indicate why the directional path makes good business sense
– appealing to the long-term aspirations of the stakeholders, with
a particular focus on the key stakeholders: shareholders, owners,
employees and clients or customers. Don’t rely on superlatives.
7. Do make it memorable – to give the organisation a sense of direction
and purpose, the vision needs to be easily communicated. It should be
reducible to a few choice lines or a memorable ‘slogan’. Don’t run on
and on.
Mission statements
The mission should clarify the main intentions and aspirations of the
organisation at that time and should indicate why the organisation
exists, its main activities and its future position within the industry.
It should also reflect the key values and ethical standards of the
organisation.
To make effective strategic choices, staff and managers in organisations

need a clear sense of ‘who we are’, ‘what we do’, ‘who we do it for’ and
‘why we do it’. These are typically captured in a mission statement. Collins
and Porras’s findings on visionary organisations highlight the need to
identify the core ideology of the organisation, described as:
Core Ideology = Core Values + Purpose
Core Values = The organization’s essential and enduring tenets – a

small set of general guiding principles; not to be confused with specific
cultural or operating practices; not to be compromised for financial
gain or short-term expediency.

Purpose = The organization’s fundamental reasons for existence
beyond just making money – a perpetual guiding star on the horizon;
not to be confused with specific goals or business strategies.
(Collins & Porras 1997, p. 73)
Generally, a mission statement:

• sets out what the organisation does
• clarifies what business (or role) the organisation is involved in
(articulating where will we play and with what focus)
• explains why the organisation is needed, or what value it adds
(describing how we will win)
• details the key ethical principles and values that the organisation
expects of its key stakeholders.
So, a good mission statement must be organisation-specific, not generic –

in order to give a clear understanding of the organisation’s identity.
Keep in mind though, as Collins and Porras highlighted, even a commercial
organisation’s mission is about more than making a profit. It’s a statement
answering, ‘What will we do in order to make a profit?’
Consider the following example:
FedEx will produce superior financial returns for shareowners by
providing high value-added supply chain, transportation, business and
related information services through focused operating companies.
Customer requirements will be met in the highest quality manner
appropriate to each market segment served. FedEx will strive to
develop mutually rewarding relationships with its employees, partners
and suppliers. Safety will be the first consideration in all operations.
Corporate activities will be conducted to the highest ethical and
professional standards.
(http://about.van.fedex.com/mission-strategy-values)
As you can see, FedEx not only tries to define its businesses, but
also includes key statements about critical behavioural expectations.
Stakeholders are clearly identified (shareowners, employees, partners and
suppliers), and important ethical and professional standards are defined.
FedEx also lists its corporate values:
• People: We value our people and promote diversity in our
workplace and in our thinking.
• Service: Our ‘absolutely, positively’ spirit puts our customers at the

heart of everything we do.

• Innovation: We invent and inspire the services and technologies
that improve the way we work and live.
• Integrity: We manage our operations, finances, and services with

honesty, efficiency, and reliability.
• Responsibility: We champion safe and healthy environments for the

communities in which we live and work.
• Loyalty: We earn the respect and confidence of our FedEx people,

customers and investors every day, in everything we do.
(http://about.van.fedex.com/our-people/overview/)
And it sets out its broad strategic guidelines:

The unique FedEx operating strategy works seamlessly – and
simultaneously – on three levels.
Operate independently by focusing on our independent networks

•
to meet distinct customer needs.
• Compete collectively by standing as one brand worldwide and

speaking with one voice.
Manage collaboratively by working together to sustain loyal

•
relationships with our workforce, customers and investors.
(http://www.fedex.com/purplepromise/docs/en/fedex_pp_booklet.pdf)
From this, we can see that a FedEx strategic manager can understand
boundaries, context and themes that help develop strategy. Also, we can
see FedEx’s core ideology.
Strategic management does not have a universally agreed set of
‘standards’ about the way things ought to be done. Different authors and
organisations emphasise different approaches and aspects of the strategy
process. However, whatever they are called, the principles and concepts
are widely agreed. Strategy is most effective when based on:
• a clearly articulated and widely understood vision of the future
• a clear and shared understanding of the organisation’s purpose and
values
• strategic intelligence derived from rigorous analysis of the internal and
external environments
• clear statements of a set of outcomes (objectives) that the strategy is
meant to achieve
• a set of strategies or pathways designed to produce the outcomes
• clarity about the means by which the strategy will be implemented,
monitored and managed effectively.

Examples of strategic visions
To help you understand visions and missions, you might like to see, and
perhaps evaluate, examples of strategic visions and mission statements.
Below are a number of websites where you can easily review these:
http://www.hsbc.com/about-hsbc
https://www.bhp.com/our-approach
http://www.cancercouncil.com.au/wp-content/uploads/2014/05/
Strategic-Intent-2014-2018-A5-brochure.pdf
http://www.australiacouncil.gov.au/about
In evaluating these, you might like to consider how well they meet the tests
of being:
1. graphic – does a clear picture emerge of what the organisation aspires
to be like when the vision has been achieved?
2. forward looking and directional – does it signal the sorts of changes
that are involved in achieving it?
3. focused – does it provide decision-makers throughout the organisation
with guidelines to help them make the myriad day-to-day decisions in
context?
4. flexible (wriggle room) – does it allow for the possibility that as
circumstances change, so can the strategy?
5. feasible – is there a reasonable expectation that the organisation can
achieve it?
6. desirable (makes good business sense) – will it appeal to the long-
term aspirations of various stakeholders?
7. memorable – can it be understood and appropriately interpreted by
key stakeholders?
And whether they have a core ideology that captures:

core values = the organisation’s essential and enduring tenets.
purpose = the organisation’s fundamental reasons for existence beyond
just making money.
The topic of vision and mission statements is not short on debate. Its very
nature breeds cynicism. Many people don’t like to be told what to believe
in, even if they agree with what’s being said. Others see the whole issue as
‘new age’ or flaky.
However, increasing community concern and recognition of organisations
as ‘corporate citizens’ with obligations to manage for sustainability and
recognise the rights of key stakeholders (such as employees, strategic

allies, communities and investors) has increased the focus on missions,
visions and core values.
Importantly though, a strategic vision must be honest. It must be
demonstrated by behaviour throughout the organisation and not just be a
series of slogans.
Communicating the strategic vision

An effective strategic vision communicates ‘Where are we going?’ and
should:
• inspire, challenge and motivate the workforce, strategic partners and
stakeholders
• encourage employees’ and key stakeholder buy-in, commitment and
alignment
• provide a focus for decision-making, including helping strategic
managers to choose among competing options.
When combined with the organisation’s statements of mission and values,

the strategic vision can create a sense of purpose, add meaning to people’s
work, and build a strong sense of alignment and drive to succeed.
Communicating the strategic vision is a critical task for the leadership
team. John Kotter (1990, reprinted 2001) described this as one of the key
differences between leaders and managers – that leaders ‘Align people to
the vision’.
Effective communication of the vision, mission and values requires multiple
mechanisms and opportunities to help people understand, question and
explore the content so as to enable real understanding. Simply posting it as
an announcement on the lunchroom wall or intranet site is not enough.
Strategic leaders must invest time, thought and energy and look to create
appropriate opportunities and the right environment for stakeholders to
understand, question, engage with and finally buy into the strategic vision.
This includes allowing for feedback, questions and critique.
Strategic managers must consider how, when and where to deliver the
messages in order to optimise understanding and take-up – to enable
stakeholders to understand the implications and significance for them, and
to recognise their role.
To summarise, people benefit from having something to believe in that
provides clarity of purpose and inspiration, and represents some greater
good to strive for, as well as generating momentum for change. A well-
crafted and communicated strategic vision (together with a clear mission
and set of values) can provide this.

Video
Video 2.2 Sinek, S 2010, ‘How great leaders inspire action’ [18:34]
Activity 2.1
As you watch Video 2.2, consider the role of an effective strategic leader in
expressing and clearly communicating vision and mission and make some
notes in the space below about what you conclude this role might be.
2. Setting objectives
Objectives are the means by which strategic managers set out the
measurable outcomes that the strategy is designed to deliver. They
represent a commitment to achieving specific performance targets within
a specified time frame. They translate the vision statement into a series of
milestones and outcomes. Strategic objectives:
• convert the strategic vision into specific performance areas and
outcomes or targets
• create milestones and yardsticks to guide and track the organisation’s
performance
• push the firm to be inventive, but also to focus on outcomes and results
rather than processes and ‘means’
• help prevent organisational ‘hubris’, complacency and apathy by
focusing attention on the clear ‘promises’ that have been made to
stakeholders.
The purpose of objective-setting is to:

• stimulate results-oriented management
• aid operational decision-making by supplying the filters on which
decisions ought to be judged (will this help us achieve our objectives?)
• provide a set of benchmarks for judging organisational and individual
performance.

You will recall from the discussion in Unit 1 about balanced scorecards
and triple/quadruple bottom lines that typically there are two key types of
objectives:
1. financial objectives: outcomes focused on improving the organisation’s
financial performance.
2. strategic objectives – focused on improving the long-term,
competitive position of the organisation, to help it build a sustainable
culture and deliver on the non-financial aspects of the mission and
vision.
Examples of financial objectives might be:

• increase revenue by 11%
• increase profit by 7%
• grow earnings per share 15% annually
• boost annual return on investment (or EVA or return on shareholders’
equity, etc.) from 15% to 20% within three years
• increase the free cash flows by 30%
• achieve and maintain a AA+ or better bond rating.
Examples of strategic objectives might be:

• increase the organisation’s market share in defined markets
• surpass key rivals on key metrics for innovation, technical performance,
knowledge base, quality, customer satisfaction, product performance,
etc.
• be recognised as a socially and culturally responsible organisation
• achieve industry-leading levels of staff engagement.
Sometimes objectives are both financial and strategic. Look at these

examples from the 3M Corporation:
To achieve long-term sales growth of 5-8% organic plus 2-4% from
acquisitions; annual growth in earnings per share of 10% or better,
on average; a return on stock-holder’s equity of 20-25%; a return on
capital employed of 27% or better; double the number of qualified
new 3M product ideas and triple the value of products that win in the
marketplace; and build the best sales and marketing organization in
the world.
(Thompson, Strickland & Gamble 2008, p. 33)

Strategic or financial objectives – which take
precedence?
Recent decades have been characterised by significant instability in many
markets and economies. This has included events such as long periods
of sub-par economic growth and, in some markets, full-blown recessions
following the GFC, government bail-outs of major banks and corporations
such as GM and Chrysler, environmental scandals such as the Gulf of
Mexico oil spill, major investigations into systemic corporate malpractice
such as money laundering and rate rigging, etc. This has triggered more
and more community concern, media comment and regulator focus on
the lack of corporate attention to sustainable management practices, and
concerns about corporate cultures excessively focused on short-term
financial results at the expense of all other considerations. The need to
satisfy or beat ‘market expectations’, often the need to consistently deliver
better and better short-term (quarterly) results or be punished via the share
price, and lower access to or higher costs of credit, have been seen to
drive leadership teams to engage in greater and greater risk, and financial
engineering, to satisfy these expectations. Executive incentives are often
linked to share-price performance, supposedly to more closely align the
interests of shareholders and management, but often creating perverse
incentives to deliver short-term outcomes at key times when the incentives
were being calculated and paid.
The research on the extent of such behaviours is not definitive, but
there is evidence that it appears to be a minority of often high-profile
examples. Also, there is evidence that many of these examples have other
contributing factors – such as the make-up of the organisation’s share
registry or ownership (i.e. the short-term versus longer-term thinking and
perspective of major shareholders and owners).
Similar short-term pressures can often be found in government and other
public-sector organisations, where the make-up of parliament (the size
of the government’s majority and mandate), the timing of elections, the
interests of key government figures, or the need to accommodate special-
interest and lobby groups, etc., can impact upon willingness to take
longer-term risks and support major strategic initiatives. Understanding the
political process is a key issue for public-sector strategic managers, in the
same way that managing shareholder demands is for commercial strategic
managers.
However, typically, strategic objectives should take priority. A firm that
consistently sacrifices strategic opportunities that might strengthen its long-
term position and the fulfilment of its mission in order to pursue short-term
financial outcomes, risks:
• damaging or diluting its future competitiveness or effectiveness
• losing momentum in its markets

• weakening its ability to fend off rivals’ challenges
• damaging the support of key stakeholders such as employees,
communities and strategic partners
• being marginalised as new technology or new business models are
introduced (by someone else).
A famous illustrative example is the story of the United States and

European railways in the 1890s to early 1900s. Strategic managers in
railways considered and saw, but failed to respond to, the development and
manufacture of the internal combustion engine and automobile. Failing to
understand how the new technology could, and would, come to dominate
the world’s land transport, they sacrificed long-term prospects for short-term
profits. The railroads remained profitable for a few generations, but they
clearly ‘missed the boat’ over the longer term. A similar failure is typified
by long-distance passenger sea transport in the 1960s to 1970s as large
capacity, jet-powered, long-distance travel quickly replaced travel by ship.
Objectives and goals

The difference between an objective and a goal can sometimes cause
confusion.
Many organisations include in their strategic plans statements of their goals
or key result areas. These are generally ‘focus’ statements, setting out the
areas where the organisation is keen to see some outcomes.
Goals give a sense of what the organisation wants to achieve, as we can
see in the following examples from page 6 of the Qantas 2016 Annual
Report1:
Long-Term Sustainable Future

The ultimate goal of our transformation is to secure the sustainability of the Group.
We’re well on the way to doing that. But it’s not just about the actions we take in
the short-term. We also need to think about the long-term – something that Qantas
has done a great deal of over almost a century.
When we scan our environment, we see four global forces that are relevant to the
success of the Group today and will have an even bigger impact in years ahead:
• New centres of customer demand and geopolitical influence, especially Asia;
• Rapid digitalisation and the rise of big data;
continued
1. http://www.qantas.com.au/infodetail/about/corporateGovernance/2016AnnualReport.pdf

• Shifting customer and workforce preferences; and
• The implications of resource constraints and climate change.
All these trends come with challenges, but they also bring new opportunities for
our business.
Clear Strategic Priorities

Preparing to take advantage of the big, global trends shaping aviation means
continuing to deliver against our clear strategic priorities:
• Putting safety and security first at all times;
• Maximising the competitive advantages of the Group by aiming to be the best
in every market we serve;
• Continuing to invest for our customers and strengthening our brands, including
renewing our fleet, lounges, infrastructure and technology;
• Focusing on our people, culture and leadership, because our skilled, engaged
workforce is the key to our success in everything we do; and
• Acting responsibly on energy, emissions and our supply chain, so that we
reduce the costs and emissions of the fuel we burn, and play a positive role in
the communities that support us.
We’re committed to advancing these priorities in 2016/17.
While this gives a sense of ‘where we will play and with what focus’
the problem with goals such as these is that they are open to multiple
interpretations and don’t focus activity on measurable outcomes. How
would a stakeholder reading this know what’s involved in ‘Maximising the
competitive advantages of the Group by aiming to be the best in every
market we serve’ or whether Qantas was successful in ‘Focusing on our
people, culture and leadership, because our skilled, engaged workforce is
the key to our success in everything we do’ or whether they had ‘play[ed] a
positive role in the communities that support us’?
This is not to say that these are not desirable focuses for Qantas’s
attention, and strategically important issues to Qantas Group and its
stakeholders – quite the contrary. But they are goals – general statements
of intent – rather than objectives.
Effective objectives have key characteristics, which can be remembered
with the acronym SMART, as in ‘Objectives are SMART’:
• Stretching or Significant – they should be hard to achieve, and fulfilling
them should lead to a real gain for the organisation.
• Measurable – there must be some way to quantify them and gauge
success.
• Achievable – if people don’t believe it can be done, they won’t try. To
believe it can be done, they need some idea of how to do it and have
the resources to do so, or a plan to get the necessary resources.

• Relevant – they should be about fulfilling the organisation’s ‘aspiration’
as detailed in the mission and strategic vision.
• Timed – there should be a deadline, or it will constantly be put off as
shorter-term issues take precedence.
The final thing about objectives is that they should be relatively few in
number. Most organisations have scarce strategic resources, particularly
when it comes to time and money. Taking on too many objectives tends
to result in a diffusion of resources, and problems with prioritising.
Consequently, strategic managers should try to identify and give priority to
a small number of the most significant outcomes.
Activity 2.2
1. Consider the strategic vision and current objectives of your organisation
or of one that you know well. Where do the vision and objectives seem
to be taking the organisation in the longer term?
2. Do your organisation’s current objectives meet the SMART criteria?

If not, try rewriting some so that they do.
3. Crafting a strategy
You will recall that according to Lafley and Martin (2013, p. 15), to achieve
the organisation’s objectives and strategic vision, strategic managers must
decide on:
• Their winning aspiration. The purpose of your enterprise, its
motivating aspiration. This is about being clear about the organisation’s
purpose and core values, issues that we have discussed at some
length already.

• Where to play. Where will we compete: our geographies, product
categories, consumer segments, channels, vertical stages of
production? Where will we operate, and how much emphasis will we
put into each of these businesses or value propositions within our
portfolio? This also aligns to the decisions that we talked about in Unit
1 concerning the make-up of a business model – in particular, making
choices about in what segments and channels the organisation will
operate.
• How to win. The unique right to win – our value propositions and our
competitive advantage. This is about identifying what differentiators
the organisation will offer that enables it to win in the chosen segments
and channels. In the business strategy canvas that we discussed in
Unit 1, this would typically be expressed as the value propositions and
customer relationships that the strategic managers need to create.
• Capabilities that must be in place. The set of capabilities required
to win: the reinforcing activities, the specific configuration. In order to
deliver the value propositions to the chosen segments as effectively
and efficiently as possible, what capabilities will the organisation
require? In the business model, this involves making choices about
the key resources, key activities, partners and even to some extent
the channels. Different answers to this question mean that different
organisations are able to then create different cost structures and
different revenue streams.
• Management systems that are required. The support systems,
structures and measures required to support our choices. Having
made the decisions about the different segments, value propositions,
channels and activities, etc., what information, structures and measures
will be needed to enable strategic managers to manage the business
model and ensure it is delivering the outcomes?
Crafting a strategy is both critically important and exceedingly difficult. The

very nature of strategy development poses difficulty. It deals with both ends
and means; with which businesses and in which arenas the organisation
wants to compete (and in which arenas it is poorly placed to compete).
Thompson et al (2016, p. 30) suggest:
… the task of stitching a strategy together entails addressing a series
of “hows”: how to attract and please customers, how to compete
against rivals, how to position the company in the marketplace, how to
respond to changing market conditions, how to capitalize on attractive
opportunities to grow the business, and how to achieve strategic and
financial objectives. Astute entrepreneurship is called for in choosing
among the various strategic alternatives and in proactively searching
for opportunities to do new things or to do existing things in new or
better ways.

You might also recall in an earlier quote from Grant et al they noted that:
Strategic management is the process of matching the organisation’s
characteristics (e.g. strengths and weaknesses) to the external
environment (which provides opportunities and threats). This process
of matching the organisation to its environment is a continuous
process of analysis, synthesis, action-taking and evaluation.
Bringing these three streams of thinking together, crafting a strategy

typically involves determining whether to:
• concentrate on a single market/operating area (focus) or several
markets/operating areas (diversification)
• cater to a broad range of customers or stakeholders (mass market)
or focus on a single segment (niche market)
• develop a wide or narrow value proposition
• pursue a competitive or strategic advantage based on:
– lower cost structures or
– product superiority or
– unique organisational capabilities
– or a combination of these.
Characteristics of strategy-making
To be successful, a strategy should be:
• action oriented
• iterative (it evolves over time and continues to evolve as more
information comes to light and experience accumulates)
• a never-ending, ongoing task for most managers at least some
of the time.
As you are already aware from Unit 1, effective strategy should be both
planned (proactive) and emergent (reactive).
As the quote from Grant et al indicates, strategic managers need to be
able to build business models and strategies capable of responding to
environmental factors – matching what the organisation can do (strengths
and weaknesses) and what it might do (environmental opportunities and
threats). They must be able to see the opportunity or threats that come from
factors like the increasing turbulence, uncertainty and ambiguity that typifies
many, perhaps even most, markets and operating environments. Strategic
managers must ensure that their organisations have the strategic capacity
and contingency capabilities to respond to such situations – the reactive
part of strategy.

The proactive or ‘planned part’ is crafted from insight derived from
monitoring and analysis of strategically important environments, and by
rapidly building and adjusting scenarios for what plausible futures may
look like. Naturally, these scenarios and the proactive strategies that they
can stimulate are subject to revision, modification and change during
their implementation and review, as more information and a clearer
understanding of the ‘future’ become apparent.
To remain effective or competitive, the planned and reactive strategies
need to be given equal weight. As indicated earlier, the five tasks of
strategic management form a never-ending dynamic process that requires
a strategic mindset and keen eye for quickly responding and adapting to
changing circumstances.
Figure 2.2 The make-up of organisational strategy

Actions to strengthen the Actions to gain sales and market share via more
firm’s bargaining position performance features, more appealing design, better
with suppliers, distributors, quality or customer service, wider product selection,
and others or other such actions
Actions to gain sales

Actions to upgrade, build, or and market share with
acquire competitively important lower prices based on
resources and capabilities lower costs
Actions and
approaches used THE PATTERN OF Actions to enter new
in managing R&D, ACTIONS AND BUSINESS product or geographic
production, sales and APPROACHES THAT DEFINE markets or to exit
marketing, finance, and A COMPANY’S STRATEGY existing ones
other key activities
Actions to capture
Actions to strengthen emerging market
competitiveness via strategic opportunities and
alliances and collaborative defend against
partnerships external threats to the
Actions to strengthen market standing
company’s business
and competitiveness by acquiring or
prospects
merging with other companies

This figure sums up what to look for when developing a strategy. It
highlights that an organisation’s strategy requires consideration of possible
actions to:
• diversify or enhance revenue streams
• enter new segments or withdraw from those where advantage is harder
to achieve
• create new or improved value propositions
• build deeper and more valuable relationships with customers
• deliver value through new channels or improve the operations of
existing channels
• engage in new or different key activities and/or improve the
effectiveness and efficiency of key activities
• acquire new key resources
• gain new partners or develop deeper and more valuable partnerships
• build better cost structures and maximise the efficiency and
effectiveness of key activities like R&D, production, sales, marketing,
finance and other key functions or value-creating activities.
Figure 2.3 Factors shaping the choice of strategy
STRATEGY-SHAPING FACTORS STRATEGY-SHAPING FACTORS

EXTERNAL TO THE COMPANY INTERNAL TO THE COMPANY
Economic, societal, political, Company resource strengths,

regulatory, and community The mix of weaknesses, competencies, and
citizenship considerations considerations competitive capabilities
that
Personal ambitions, business
Competitive conditions and overall determines philosophies, and ethical principles
industry attractiveness a company’s of key executives
strategic
Company opportunities and threats situation Shared values and company
to the company’s well-being culture
Conclusions concerning how internal and external

factors stack up: their implications for strategy
Identification and evaluation of strategy alternatives
Crafting a strategy that fits the overall situation
Source: adapted from Thompson and Strickland 2001, p. 60.

4. Implementing and executing strategy
Having developed the strategy, it is now time for the strategic managers to
develop and lead the pattern and sequence of actions that will be needed to
make it happen. Many commentators and experienced strategic managers
suggest that the development of the strategy is ‘the easy part!’ The axiom
that ‘a mediocre strategy properly implemented is likely to achieve more
than a brilliant strategy poorly implemented’ suggests that execution/
implementation is where the success of strategy is really determined.
Indeed, research suggests that the number-one reason for strategies failing
is poor implementation, not poor strategic thinking or failure in the strategy-
development processes.
Going back to our five-stage model, strategic management has two distinct
yet interdependent stages: strategy formulation, which is about deciding
what to do (Stages 1 to 3); and strategy implementation, which is
about making it happen (Stages 4 and 5, plus revisions). Therefore, it is
imperative for anyone wanting to be successful as a strategic manager to
devote as much attention and energy as possible to effectively managing
the strategy implementation activities. However, many organisations put
most of their effort into strategy formulation.
Because implementation is so important, in Unit 11 we will focus on how
to ensure strategy is implemented properly and in Unit 12 we will focus
on how to ensure that it is communicated to all key stakeholders in ways
designed to maximise their alignment.
Implementing strategy is about two interconnected tasks: developing
appropriately detailed, but flexible plans (agile project leadership) and
leading effective change and cultural transformation (people leadership).
Resistance to change by key stakeholders often delays and even frustrates
strategy. As eminent change academic and author John Kotter highlights:
Today, more and more managers must deal with new government
regulations, new products, growth, increased competition,
technological developments, and a changing workforce. In response,
most companies or divisions of major corporations find that they must
undertake moderate organizational changes at least once a year, and
major changes every four or five. Few organizational change efforts
tend to be complete failures, but few tend to be entirely successful
either. Most efforts encounter problems; they often take longer than
expected and desired, they sometimes kill morale, and they often
cost a great deal in terms of managerial time or emotional upheaval.
More than a few organizations have not even tried to initiate needed
changes because the managers involved were afraid that they were
simply incapable of successfully implementing them.
(Kotter & Schlesinger 2008, pp. 130–131)

To summarise then, strategic managers must be able to:
• create and communicate a clear path identifying: what needs to
happen (actions), who is accountable for the various actions, when
they need to occur, how many resources (including funds) will be
required, and how success will be judged. Those of you who have
completed the course Project Management will be very familiar with this
– they are the key elements of a project plan.
• develop clear, but flexible and agile initiatives and leadership agendas
that engage the key stakeholders, align them to the success of the
strategy and create the necessary strategy-supportive culture that will
lead to its success.
Research suggests that of these, the most difficult are the people-related
cultural-change management tasks.
In Unit 11 of this course, the issues of implementation will be discussed
more specifically and in much greater depth, but for now we will concentrate
on a broad understanding of the steps needed for implementing strategy.
Having watched Video 2.2, you will be familiar with the approach advocated
by Simon Sinek in the Golden Circle. The first step is to ensure clarity about
three things:
1. why is the strategy needed (why do we need to change)?
2. how are we going to make it happen or how do we need to change?
3. what needs to be done?
Thompson et al (2016, p. 290) identify that strategy implementation and

execution includes:
• developing the resources and organisational capabilities for successful
strategy execution
• establishing a strategy-supportive organisational structure
• allocating sufficient resources (particularly time, money and
management attention) to the strategy execution effort
• instituting policies and procedures that facilitate strategy execution
• adopting best practices and business processes that drive continuous
improvement
• installing information and operating systems that support strategy
execution activities
• tying the organisation’s recognition and reward systems directly to the
achievement of strategic and financial targets
• instilling a corporate culture that promotes good strategy execution
• exercising strong leadership to propel strategy execution forward

• staffing the organisation with the right people for executing the strategy
• communicating, explaining and gaining widespread support for the
importance of the strategy among key stakeholders.
5. Monitoring, evaluating and adjusting

The fifth and final strategic management task is monitoring and evaluating
the implementation. This involves comparing the forecast and the actual
performances, understanding any variances (positive or negative) and
making adjustments in order to remain ‘on track’ and deliver the ‘promises’
set out in the objectives. You will recall from discussion of strategic
outcomes in Unit 1 that this entails monitoring and evaluating performance
against:
• financial outcomes
• customer outcomes
• organisational process outcomes
• learning and growth outcomes
• social and community outcomes
• environmental outcomes
• governance outcomes.
The tasks of crafting, implementing and executing a strategy are not one-
time exercises because:
• stakeholder, customer or client needs and conditions change,
sometimes suddenly and unpredictably
• new opportunities appear; technology changes; and competitors,
suppliers, partners and customers or clients are also implementing
strategies for their own benefit
• key people within the organisation leave and new people with different
skill sets are recruited
• new managers with different ideas take over
• one or more aspects of execution may not conform to the plan and may
need modifying
• organisational learning occurs.

Although evaluation is the final process of strategic management, it can
pinpoint weaknesses in previously implemented plans and stimulate the
entire process to begin again and be more effective.
A key characteristic of sustainable organisations is a commitment to a
continuous cycle of learning and improvement – illustrated by Figure 2.4.
Figure 2.4 The implementation and learning cycle

Plan
Learn Implement
Adjust Evaluate

For this cycle to be effective, strategic managers must conduct variance
analyses – by obtaining clear, prompt, relevant, unbiased information from
the organisation’s systems about issues such as:
• What was forecast, what was intended?
• What was actually done?
• What happened as a result of what was done (and what wasn’t done)?
How did this compare to what was intended?
• What were the likely causes of any variance(s)?
• What adjustments have been tried and how successful were these?
To start you thinking about crafting, implementing and monitoring strategy,

try this activity.

Activity 2.3
1. How well do the strategic programs or initiatives of your organisation’s
strategy align to the objectives? If not well, what might make them align
more effectively?
2. How well does the organisation execute the strategic programs or

initiatives? Using the bullet point list from Thompson et al 2016 p. 290
summarised earlier, what could improve the organisation’s execution
capability?
3. Does your organisation conduct variance analysis as part of its

strategic management? What parts of the variance analysis are well
done/poorly done?
4. What could be done to improve current practice to deliver closer to

‘best practice’?

Who is responsible for the five tasks?
As you now know, modern strategic management is a blend of the planned
(proactive) approach, and the emergent (reactive) approach. But who is
responsible for the five tasks of strategic management? The following quote
sheds light on this:
In practice, however, strategy is normally developed through a
combination of design and emergence. This is called the modern
approach to strategy formulation. At the design level, strategy is
developed in a board meeting by the top management team as part
of a strategic planning process. At the emergent level, strategy is
continually created by the decisions made by every member of the
organisation – especially by middle management…
Combining emergent and design strategy maximises the

responsiveness and adaptability of the strategic management
process. Corporate headquarters set guidelines in the form of mission
statements, business principles and performance targets, while the
individual business units take the lead in formulating strategic plans
at the business-unit level. Within the strategic plans that they design,
divisional and business unit managers usually have considerable
freedom to adjust, adapt and experiment.
(Grant et al 2014, pp. 13–14)
As you can see, just as strategy is both proactive and reactive, the tasks of
strategy formulation (Stages 1 to 3) are usually led by the organisation’s
strategic leadership (board/CEO/C-level executives, executive
management team), while responsibility for strategy implementation is
often delegated or led by middle management.
In smaller organisations, in organisational cultures where execution
or implementation skills may be lacking or unevenly distributed, or in
environments where execution is so time critical it cannot be delegated,
some other approaches include:
• Chief architect: the organisation’s senior manager(s) manage all five
tasks.
• Delegate it to down-the-line managers: senior managers selectively
delegate some (or all) of even the strategy formulation responsibilities
to subordinates in charge of key organisational units.
• Collaborative/team approach: strategic managers enlist the
assistance and advice of key subordinates (or even the whole team)
and involve key internal and external stakeholders.
• Corporate intrapreneur: strategic managers encourage subordinates
to develop and champion proposals for new ventures, which the
strategic managers evaluate and fund if they meet key strategic criteria.

Summary
This Unit was written to create an overview of the activities that strategic
managers must manage effectively in order to formulate and implement
strategy. The five stages in the strategic management process begin
with strategy formulation – determining the strategic vision, aligning it
to the organisation’s mission, and setting objectives within the context
(opportunities and threats) of the organisation’s external environment and
its internal strengths and weaknesses. Strategy implementation requires
that appropriate strategies need to be crafted and implemented, and then
monitored, evaluated and adjusted to ensure that the organisation achieves
the objectives effectively and efficiently.
Determining organisation-wide strategy is typically the direct responsibility
of the corporate leaders (board of directors, CEO and the senior executive
team).
Business-unit strategies are usually the responsibility of business-unit
managers, functional strategies of functional managers, and operational
strategies of operational managers. All of these strategies, however,
should be consistent with each other, and aligned with the overall strategic
direction of the organisation. Two-way communication ensures that the
higher-level plans incorporate information about lower-level issues, and
that the lower-order plans are consistent with the higher level. Effective
communication is vital. As the saying goes, ‘You have two ears and one
mouth – use them in that proportion’.
Strategic management is an evolving and ongoing process. Strategy often
requires modification as organisational or external conditions change.
These insights then inform the next iteration of the strategy, which is then
implemented and monitored, then new learning occurs, and on it goes.
Finally, the purpose of strategic management is to balance the financial and
strategic priorities of the organisation to achieve its mission, adhere to its
values and operate sustainably.

To help you review your learning in this Unit, try these 10 multiple-choice
questions. You will find the answers listed after the References section:
1. Which of the following options best completes the following statement:
‘At its core, strategic management is about finding the match between
what an organisation can do (organisational ……..) and what it might
do (environmental ……) and is a continuous process of analysis,
synthesis, …..’:
a. proactive elements, reactive elements, planning and refinement
b. strengths and weaknesses; opportunities and threat; action-taking
and evaluation
c. strengths and opportunities; weaknesses and threats; engagement
and alignment
d. leadership; forces; learning
e. resources; trends; learning and adjusting
2. Complete the following statement: ‘Strategy formulation includes the
first three tasks of strategic management which are developing a
strategic vision, setting objectives and ….’:
a. engaging key stakeholders
b. implementing and executing the strategy
c. setting goals
d. crafting a strategy
e. monitoring, evaluating and adjusting the strategy
3. Complete the following statement: ‘Strategy implementation involves
the final two tasks of strategic management – implementing and
executing the strategy and …..’
a. engaging key stakeholders
b. implementing and executing the strategy
c. setting goals
d. crafting a strategy
e. monitoring, evaluating and adjusting the strategy
4. Collins and Porras suggest that a Vision should contain the
organisation’s ‘Core Ideology’ – which is composed of:
a. Core Values + Purpose
b. Mission + Strategic Vision
c. Ethics + Principles
d. Goals + Objectives
e. Strategy Formulation + Strategy Implementation

5. When setting objectives, there are typically two key types, financial and
strategic/non-financial. Which of the following is not an example of a
financial objective:
a. increase return on investment by 5% in FY 2015
b. increase total shareholder return by 3% per annum
c. reduce staff turnover by 4% per annum
d. increase free cash flow by 17% in 2014
e. reduce cost per unit by 2% per quarter throughout the life of the
plan
6. Complete the following statement: ‘Effective Objectives are said to

have the characteristic of being S.M.A.R.T an acronym that stands for
……, Measurable, Achievable, Relevant, Time-bound.’
a. Sustainable
b. Specific
c. Supportive
d. Significant
e. Strategic
7. According to Lafley and Martin (2013) effective strategy involves the

answers to five key questions. The second of those is where will we
play and with what focus. In the business model canvas this compares
to strategic managers choosing to focus on particular ……
a. channels
b. customer segments
c. key activities
d. key partners
e. cost structures
8. Finish the following statement: ‘Effective strategic implementation

requires two key types of skills and activities – developing project plans
that detail what, who, by when, with what resources and how will we
monitor progress and..….’
a. develop and lead initiatives to engage key stakeholders and
transform the organisational culture
b. measure, monitor and make adjustments
c. focus attention on the outcomes and benefits of the strategy
d. detail why, how, when and who as well as what
e. manage the competing agendas of investors and staff

9. Complete the following statement: ‘A key characteristic of sustainable
organisations is a commitment to a continuous cycle of learning and
improvement which involves a continuous cycle of five steps – plan –
implement – ……– adjust – learn.’
a. revise
b. analyse
c. amend
d. communicate
e. reform
10. In a typical strategic management process, the responsibility for

strategy formulation lies with the leaders (board, CEO and Executive
Leaders) while the responsibility for strategy implementation is often:
a. tightly controlled by the C-level executives
b. outsourced to consultants
c. delegated to business, functional and operational level managers
d. the responsibility of key external strategic stakeholders
e. developed reactively as events become clearer.

References
Collins, J & Porras, J I 1997, Built to last: Successful habits of visionary
companies, Harper Collins, New York.
Finkelstein, S, Harvey, C & Lawton, T 2008, ‘Vision by design: A reflexive
approach to enterprise regeneration’, Journal of Business Strategy, vol. 29,
issue 2, pp. 4–13.
Milton, QLD.
Kotter, J P 1990, reprinted 2001, ‘What leaders really do’, Harvard
Kotter, J P & Schlesinger, L A 2008, ‘Choosing strategies for change’,
Harvard Business Review, July–August, vol. 86, no. 6, pp. 130–139.
Lafley, A & Martin, R 2013, Playing to win: How strategy really works,
Harvard Business Review Press, Boston.
Schendel, D 2005, ‘Redefining strategy’, European Business Forum,
Spring, issue 21, pp. 6–7.
Thompson, A A & Strickland, A J 2001, Crafting and executing strategy,
12th edn, McGraw-Hill Irwin, Boston.
Thompson, A A, Peteraf, M A, Gamble, J E & Strickland, A J 2016,
Crafting and executing strategy: The quest for competitive advantage,
20th edn, McGraw-Hill Education, New York.

answers
1. b
2. d
3. e
4. a
5. c
6. b
7. b
8. a
9. b
10. c

Unit 3
Generating insights about
the future
CONTENTS
Introduction 3–1 How strong are the industry’s
Learning outcomes 3–3 competitive forces? 3–24
Recommended reading 3–4 What are the driving forces in the
industry, and what impact will they
Overview of external environmental have on competitive intensity and
analysis 3–5 industry profitability? 3–27
What do we mean by an ecosystem? 3–5 What market positions do industry
External analysis rivals occupy – who is strongly
(macro-environmental scanning) 3–14 positioned and who is not? 3–28
Political forces 3–14 Scenario development 3–34
Economic forces 3–15 Scenario planning 3–34
Socio-cultural (and demographic) forces 3–16 Is the industry outlook conducive to
Technological forces 3–17 good profitability? 3–37
Legal forces 3–18 Summary 3–39
Ecological forces – the natural Self-assessment quiz 3–41
environment 3–18
References 3–44
Strategic analysis – generating
insights about your industry(ies) 3–20 Self-assessment quiz answers 3–45
Industry analysis 3–21

The detail of industry and
competitive analysis 3–23

Analysis is the critical starting point of strategic thinking.
(Kenichi Ohmae)
Things are always different – the art is figuring out which differences matter.
(Laszlo Birinyi)
Introduction
Men make history, and not the other way around. In periods where
there is no leadership, society stands still. Progress occurs when
courageous, skilful leaders seize the opportunity to change things for
the better.
(Harry S. Truman, 1884–1972; US President 1945–19531)
If we can forgive for a moment the gender bias in the quote from the
late United States President Harry Truman, we can modify it to suit our
purposes by saying that strategic managers make history, and not the other
way around. In periods where there is no leadership, organisations stand
still. Progress occurs when courageous, skilful leaders seize the opportunity
to change things for the better.
• how to generate strategic insights about the future
• understanding and analysing the critical strategic environments using
key tools like PESTLE and Industry Analysis
• recognising the forces driving opportunity and threat in the
organisation’s strategic ecosystem(s).
Video
Welcome to Unit 3. Why start a Unit about analysis of an organisation’s

external environments with a quote like the one above? Because of the key
words ‘skilful leaders seize the opportunity to change things for the better’.
An equally famous contemporary of Truman said:
A pessimist sees the difficulty in every opportunity; an optimist sees
the opportunity in every difficulty.
(Sir Winston Churchill, 1874–1965;

British Prime Minister 1940–1945, 1951–19552)
1. www.quotationspage.com/search.php3?Search=Opportunity&Author=&page=4
2. www.quotationspage.com/search.php3?Search=Opportunity&Author=&page=4
Unit 3: Generating insights about the future 3–1

The point here is that opportunity is a matter of interpretation. Facts
are facts. It is how we interpret them that results in our seeing them as
opportunities (an optimistic or positive view) or threats (a pessimistic or
negative view).
You might recall that in Unit 2 we considered a quote from Grant et al 2014,
p. 6) that included this observation:
Contemporary strategic management considers that performance is
affected by the characteristics of the organisation and its environment,
in that order. Strategic management is the process of matching what
an organisation can do (organisational strengths and weaknesses)
and what it might do (environmental opportunities and threats).
This process of matching the organisation to its environment is
a continuous process of analysis, synthesis, action-taking and
evaluation.
From this, you can see that strategic managers must be able to
analyse and interpret the internal environment to find the things the firm
can do (strategically important strengths and weaknesses), and the
external environment to identify what it might do (strategically important
opportunities and threats).
Irrespective of whether strategic managers interpret these events, trends
and facts in the external environment as positive or negative, analysing and
interpreting the environment is a key skill and activity in which they must
engage.
Hambrick and Fredrickson (2005) summarised this in the following diagram:
Figure 3.1 The strategic context

Strategic analysis
Industry analysis, customer/marketplace
trends, environmental forecasts, competitor
analysis, assessment of internal strengths and
weaknesses and resources
Strategy Supporting organisational

Mission The central, arrangements
Objectives
Fundamental intergrated, externally Structure, process,
Specific
purpose and oriented concept of symbols, rewards, people,
targets
values how we will achieve activities, functional policies
the objectives and profiles
Source: adapted from Hambrick and Fredrickson 2005, p. 53.
What we can see, then, is that strategic managers formulate strategy

influenced by the mission, strategic vision and values, but also after
conducting thorough strategic analyses. They need to factor in to their
thinking the potential impacts from:

• what is happening for employees and other key stakeholders
• actions by competitors, potential new market entrants, suppliers and
other key actors in the same industry or sector
• legislation, government policy and economic trends
• societal and cultural forces such as changing attitudes to work, gender
roles, family size and structures, ethnic and cultural make-up, and
tension and interaction between groups in the community
• changes among customers and consumers – ageing, learning,
changing views and behaviours
• new technology and innovation, changing the way industries,
economies and markets function.
Typically, strategic management involves three levels of strategic analysis:

1. the organisation itself
2. the sector, industry and market in which the organisation operates
3. the organisation’s macro environment (the wider world outside the
industry).
This Unit focuses on the last two of these. In Unit 4, we will consider
analysis of the organisation itself.
Learning outcomes
• define the critical external environments that have an impact on
organisational success
• apply a range of tools and techniques to generate insight about the macro
environment
• apply a range of tools and techniques to generate insight about the industry
or micro environment
• describe and apply key strategic questions to determine the likely impact of
external forces
• explain how strategic opportunities and threats are identified and prioritised
• outline the role of scenario analysis as a means of describing plausible
future(s) and managing risks.

Recommended reading
The following chapter can provide more detail to support much of the
learning covered in this Unit.
and readings, 20th edn, McGraw-Hill Education, New York. Chapter 3 –
‘Evaluating a company’s external environment’.

Overview of external
environmental analysis
Organisations exist in a complex network of environmental forces. The
key external environment that a strategic manager must consider is the
ecosystem(s) in which the organisation participates. The ecosystem
is composed of the various industries that interact to deliver value
propositions to the customer segments that the organisation is targeting.
It also includes the macro environments (nation states, economies and
societies) in which those different industries/sectors interact.
What do we mean by an ecosystem?

If you type the term ‘ecosystem’ into Google, one of the definitions that you
will be presented with is ‘a complex network or interconnected system’. In
a strategic-management setting what this means is that individual industries
need to interact with a range of related industries. Consequently, strategic
forces that affect an organisation may come from another related industry.
Consider the example of Google’s ecosystem in Figure 3.2 below.
Figure 3.2 Illustration of an ecosystem: Android
app developers
eyeballs media publishers
contributes insights monetisation
mobile platform
and user reach
content, apps
telcos reduce and services
friction for Android
distribution data plans, app technology and
sales rev, share design
handset handsets
subsidies
Android platform
operators handset OEMs
mass-market
eyeballs
product experience
contribution
how value is captured
The mechanics of Google Android ecosystem

drives eyeballs, consumer insights and commoditisation of mobile
Source: adapted from Anderson and Vakulenko 2014, p. 36.

What this illustrates is that Google has created a platform (Android) around
which an ecosystem of various interrelated industries must ‘collaborate’ to
deliver ultimate value to the customers. In this example, you can see telcos
(e.g. telecommunication providers like Telstra and Vodafone) interact with
content providers such as EA Games, Facebook and Netflix and literally
millions of content and app developers, as well as handset or device-
makers (for example, Samsung, HTC and Nokia) plus Google themselves
via their own products such as Google Maps, search, etc. All these different
industries interact to create a ‘complex network or interconnected system’
that generates value through these interactions and interconnections.
From a strategic perspective, this means that the performance and value
propositions of each industry have an impact not only within their own
narrowly defined industry, but on other industries.
For example, in the Android ecosystem illustrated above, the performance
and value propositions of the network operators (how much data is offered,
how fast the system works) impact on what products app developers and
other content providers like Netflix and Facebook can offer. Equally, the
value propositions of the content providers impact on the amounts of data
etc. that customers of networks look to the network operators to provide.
So, too, the quality of graphics and capabilities of handsets and devices
offered by the likes of Samsung, Nokia and HTC impact upon what can be
offered and the quality of the experience of Netflix or Facebook. They also
impact upon the volumes of data that network operators like Telstra must
provide. All these interrelated industries must ‘collaborate’ or ‘complement’
each other effectively for the ecosystem to function.
So, strategic managers need to analyse and derive insights from their
specific industry, and also consider what other industries interact with theirs
to create an ecosystem – and what the strategies and forces of these other
industries might mean for strategic opportunities and threats for their own
industry and organisation.
As research by global technology consulting company Accenture
(Lacy, Hagenmueller & Ising 2016, pp. 3–5) suggests:
In today’s ecosystems, formerly “independent” products and service
suppliers are now part of one large competitive set. This leads to
a new landscape—one where former competitors are now working
closely together, and former collaborators become competitors. The
frenemy-like constellation of vertical industry clusters competing
with captive offerings of horizontal platforms (e.g. Spotify on iOS vs.
iTunes, Netflix on Prime vs. Amazon) is a characteristic of the platform
economy. And while this expanded competitive circle may seem a
threat, it is also an opportunity because the addressable market is
much bigger… New origins of value are emerging in the digital era. No
longer are companies positioning themselves in a discrete segment
of the value chain. As industry lines blur, companies are partnering to
share risk and share resources to create joint mutual value.

Strategic implications of ecosystems
What this means for strategic managers is that they must:
1. first understand the variety of different industries that interact to create
their ecosystem(s)
2. recognise what platform(s) underpin or drive the ecosystem
3. clearly articulate what distinct role and value their organisation plays in
the ecosystem(s)
4. identify what potential opportunities or threats emerge from the existing
and potential interactions of the different ‘players’ in the ecosystem(s).
In terms of understanding the first two issues, consider the following

illustration.
Figure 3.3 Components of an ecosystem
Consumer Customer Interface
e.g. IOS, Android

Mobility Health Entertainment/ Home/Living ...
Shopping
Industry Clusters
BMW Merck Net-a-Porter Nest
DriveNow FitBit Amazon Alarm.com
Amtrak Allianz Spotify HomeKit
FitnessFirst Facebook Toro
Payment
Contract Manufacturing Enabling Platforms
Distribution
Source: adapted from Lacy, Hagenmueller and Ising 2016, p. 2.
From this, we can see that ecosystems are typically composed of:
1. enabling platforms (that make it possible for the ecosystem to operate
effectively)
2. industry clusters that interact in order to create value propositions
3. customer interfaces, which may also include strategically key customer
interface platforms.
In looking to understand what distinct role an organisation plays in the

ecosystem(s) and the value that it offers, research published in Harvard
Business Review (Van Alstyne, Parker & Choudary 2016, p. 56) suggests
that we can understand this by adopting a platform rather than a pipeline
view of how value is created. The research identified that:

• the strategies developed by traditional (pipeline) businesses typically
looked to control or dominate all or part of a linear set of processes
(value chain) – e.g. raw materials acquisition, manufacturing/
production, distribution and logistics, sale and services to end-users.
• the strategies of emerging or platform businesses are based on
bringing together producers and consumers in high-value exchanges.
Their chief assets are information and interactions, which together
also are the source of the value that they create and their competitive
advantage.
• platform businesses connect participants in a two-sided market –
e.g. Apple iTunes connecting millions of app developers (who make
money from selling their apps) to many millions of consumers; at the
same time, the more app developers and competition among their
apps, the greater the value created for consumers.
• platforms are not new – think of shopping malls (connecting retailers
to consumers) and broadcast TV, radio, newspapers (connecting
advertisers to consumers).
• what has changed is that digital disruption has scaled this platform
process up, expanded the reach, enabling frictionless low-cost
participation, strengthening the network effects and generating vast
quantities of data that enable better analysis, targeting, personalisation
and transformation of business models.
• these platform businesses exist in eco-systems where platform
owners (e.g. Apple, Google, Uber, eBay, Airtasker) control the IP and
governance; providers serve as the interface (e.g. Telstra’s network);
producers create the offerings (e.g. Netflix, app developers, Foxtel,
etc.); and consumers buy the offerings.
According to the Accenture research cited earlier (Lacy, Hagenmueller &

Ising 2016, pp. 6–7) in order to participate effectively in an ecosystem, an
organisation and its strategic managers must:
1. reassess customer need: re-examine and use new frames of thinking
to try to understand what the chosen customer segments really need
2. make yourself indispensable: become essential to the integrated
solution and help shape the response to customer demand. Determine
where you will position yourself in the integrated ecosystem
3. question your value proposition: decide whether you are going to
be a platform; a platform across platforms; or a developer of apps and
services on other people’s platforms, etc.
4. prepare for the new normal: high performers connect to a wider
ecosystem by channelling their capabilities in broader ‘market
activities’. Even as industries and technologies change, these activities
are likely to remain relevant.

5. make your ecosystem successful: consider yourself as a key driver
of your ecosystem development, independent of which role you are
playing. Encourage existing and new ecosystem partners to participate.
Further to this, Van Alstyne, Parker and Choudary (2016, pp. 57–58)
highlight that to be successful in an ecosystem, a strategic manager should
shift their thinking:
1. from resource control to resource orchestration. You don’t have to
control scarce, valuable and inimitable assets – you look to create and
optimise communities and networks.
2. from internal optimisation to external interaction. Rather than
optimising value along the value chain, seek to facilitate interactions
between external producers (who often control the assets, but also
bear the costs) and consumers.
3. from a focus on customer value to a focus on ecosystem value.
Rather than focusing on lifetime value of each customer, look to
maximise the value of the ecosystem (to attract more customers and
more producers to offer value to customers). Those that achieve higher
network effects (more participants and more value being exchanged)
will have the greatest opportunities.
However, in terms of threats, a strategic manager must take into account

the following caution:
Blurred industry lines also can turn collaborative situations
competitive. Amazon was depending heavily on logistics partners,
such as DHL, to get products to customers. This led to the idea of
Amazon creating its own logistics network. Now, the company is
building out its infrastructure, registering as a freight forwarder and
forming a fleet of delivery vans, but also significantly investing in
innovative solutions such as drones or autonomous delivery systems.
In instances like this when major market share is at risk, one-time
partners may push harder to be more agile and competitive.
(Lacy, Hagenmueller & Ising 2016, p. 6)
Forces impacting the ecosystem

While understanding ecosystems is an important first step to external
analysis, we also need to recognise that they are subject to influences both
from within and external to the ecosystem itself. Turbulence and change in
the ecosystem and from outside present strategic managers with myriad
opportunities (positive trends) and threats (negative trends) depending on
the way the managers interpret them.

As Van Alstyne, Parker and Choudary (2016, pp. 6–9) point out, a strategic
manager must assess and manage:
1. the risk of competition from within the ecosystem – participants
seeking to ‘poach’ the owner’s value; for example, Amazon and
Samsung attempting to create their own platforms in competition with
Android. Ecosystem participants should be assessed for their net
accretive contribution (adding value) and managed when they are net
depletive.
2. the risk of competition emerging from other ecosystems – new
competitors may expand from adjacent eco-systems; for example,
Google going from search to maps to mobile operating systems to
home automation etc. Apple going from PCs to music players to
phones to TVs to watches.
3. the need to focus – managing the shift from maximising sales of
goods and services to maximising interactions (opportunities for
producers and consumers to exchange value). Platform owners
typically start with a single high-value interaction then expand to
adjacencies (e.g. Facebook goes from just connecting students at
Harvard to facilitating any student-to-student interaction to looking
to enable anyone-to-anyone interactions, and then started adding
additional services, such as Instagram).
4. the need for controlling access and governance – instead of
erecting barriers to protect what’s inside, ecosystem participants must
seek to maximise production and consumption via maximising access
to as many appropriate participants as possible (e.g. open architecture
and open governance).
5. the need to use different metrics – in ecosystems the things that
matter are successful interactions, levels of engagement, the quality of
matches and negative network effects.
In addition, strategic managers need to consider the forces of the

macro environment and how these may affect the whole ecosystem.
All ecosystems are affected, to a greater or lesser degree, by political,
economic, social and technological forces, the natural environment, and
legal forces and trends. We describe these as the forces of the strategic
macro environment.

Figure 3.4 The organisation’s macro environment
O-ENVIRONMENT
MACR
Economic Conditions
try and Competitive

te Indus Env
m edia iron
me
Political Im nt Sociocultural
Factors Forces
Suppliers Substitute
Products
COMPANY
Rival
Buyers
Firms
Legal/ New
Regulatory Entrants Technological
Factors Factors
Environmental
Forces
Effective strategic management involves four levels of analysis: the

organisation, the industry, the ecosystem and the macro or external
environment. Figure 3.4 shows most of the levels (but doesn’t really
address the ecosystem). Since we have already addressed and considered
the ecosystem, let’s move on to address the other major forces.
• At the organisation level, internal analysis provides insights about
available or required strategic resources, capabilities, competencies
and competitive strengths and weaknesses. This will be addressed in
Unit 4.
• At the industry level, strategic managers must seek to understand the
industry’s strategic drivers, including the relative impact of the actions
of suppliers, buyers, substitutes and new entrants, and the nature and
intensity of rivalry among existing competitors. This is often analysed
utilising Michael Porter’s five forces model, which Porter himself
discussed in the video in Unit 1 and about which we will have more to
say later). Then the organisation’s capabilities are compared with the
insights gained about what drives the industry.

• At the macro level, we need to try and understand the strategic
implications of the forces of the wider external environment (political,
economic, socio-cultural, technological, and legal forces and impacts of
the natural environment). The most commonly used tool for analysing
this environment is called PESTLE (an acronym that stands for
examining Political, Economic, Socio-cultural, Technological, Legal and
Environmental forces).
The results of these various analyses are often then summarised into a
SWOT analysis – an acronym for Strengths and Weaknesses, as identified
via internal analyses (Unit 4), and the Opportunities and Threats that the
strategic managers identify via external analyses (the subject of this Unit).
An effective SWOT analysis summarises the organisation’s key strategic
capabilities and the wider strategic context in which a strategy must work.
A major test of the appropriateness and likely success of any strategy is
the strength of its ‘strategic fit’ and ‘internal consistency’. Does the strategy
make sense given the organisation’s strengths and weaknesses? Does
it align with the opportunities and take into account the threats that have
been identified?
Effective strategic thinking combined with strategic analysis leads to
generating insights on a wide a range of strategic options, and then aids
the strategic manager to choose those that the organisation is best placed
to make work. Done well, it shows the iterative process of informing and
assisting the strategic manager to make the five choices posed by Lafley
and Martin (2013, pp. 14–15), i.e.:
1. What is our winning aspiration? The purpose of your enterprise, its
motivating aspiration.
2. Where will you play? A playing field where you can achieve that
aspiration?
3. How will you win? The way in which you will win on the chosen
playing field.
4. What capabilities must be in place? The set and configuration of

capabilities required to win in the chosen way.
5. What management systems are required? The systems and

measures that enable capabilities and support choices.

Activity 3.1
Provide one or two examples of the strategic impact of macro-
environmental forces on your ecosystem. Give one or two examples of the
impacts of industry forces on your organisation. What does this imply about
the answers you might offer to the questions posed by Lafley and Martin?

External analysis
(macro-environmental
scanning)
In order to gain insight about the forces of the wider context and the
environment that impact all ecosystems, firstly we need to look at the
macro-environment forces summarised in PESTLE analysis.
Political forces
Political factors such as the policies and actions of elected governments,
opposition parties and key lobbyists or action groups all have significant
impacts on the costs, infrastructure and growth prospects of industries
and economies. Elected governments at various levels (national, state
and local) have the responsibility and power to establish guidelines
for things such as what is taxed and at what rate; what constitutes
acceptable employment practices and relationships; methods of doing
business and resolving disputes; the obligations of each party in a
transaction or relationship; standards and structures of organisational
control and corporate governance; standards of environmental and safety
performance – essentially the patterns of behaviour for all organisations
and stakeholders. Governments have a major influence on the success or
failure, the competitiveness and sources of competitive advantage of the
organisations that operate within their jurisdictions.
In some jurisdictions, governments may favour policies that make it easier
to do business. In other jurisdictions, they may advocate policies that are
less accommodating. As a result, costs, infrastructure, skill levels and
availability, and the factors that make it attractive to set up an organisation
or operation in one jurisdiction or another, can vary significantly.
Governments (even those of countries such as China that are not liberal
democracies) need to satisfy the majority of the population’s expectations
in order to maintain power. Hence, they typically pursue policies designed
to ‘minimise harm’ to, and promote outcomes acceptable to, their key
constituencies – and these policies frequently impact upon organisations
and their strategies.
Government decisions and the interactions of competing interests in
the political arena greatly affect organisations within their jurisdiction.
Therefore, government strategies and the likely impacts of political debates
need to be assessed constantly by strategic managers seeking to optimise
opportunities and avoid threats.

Economic forces
The four decades from World War II until the 1980s were characterised by
a cycle of economic growth ‘spurts’ with occasional recessions that drove
Western developed economies to independently, but cumulatively, expand
significantly. While individual organisations may have outperformed or
underperformed and even failed, this period saw a long period of wealth
creation and economic growth. In the period 1980 to 2007, many formerly
developing nations, such as Japan, Singapore, South Korea and particularly
China, have joined the ranks of developed and wealthy economies, although
for some like China this process is still in progress. However, from the ‘credit
crunch’, global financial crisis (GFC) and subsequent recessions in the
United States, United Kingdom and Europe over the period 2007 to 2016,
this growth slowed, stalled and in some cases, has remained stagnant or
even declined. All of this clearly demonstrates how economic forces can
impact upon an organisation’s strategy.
Strategic managers need to understand that economic cycles change,
often quickly, and can present either opportunity or threat, based on the
organisation’s strategic position. Every economic cycle – be it ‘boom’ or
‘bust’ – contains the seeds of opportunity and threat, depending on the
strategic positioning of the manager analysing the cycle.
Economic forces that can influence strategy (in each economy in which an
organisation operates) typically include:
• exchange rates, setting the relative purchasing power and value of
different currencies
• interest rates, dictating the price and availability of capital
• commodity prices – the price paid for key ingredients to production
processes (things like oil, raw materials, gas, etc.) which affect the cost
structures
• employment rates and the price and supply of labour
• gross domestic product (GDP) and economic growth rates.
Variations in these make organisations in some locations relatively more
or less competitive on a costs basis. For example, in simple terms, an
organisation in one location with a relatively strong currency or higher
interest rates or more expensive labour or inputs, becomes comparatively
expensive compared to an organisation in a location with lower exchange
or interest rates, labour costs, etc.
With increasing globalisation and many organisations now sourcing
revenue or inputs from multiple economies, this issue is much more
complex strategically. Some of the markets an organisation serves may
be performing well and others poorly. It may be that an organisation will
need to adopt one strategy for one economy (e.g. going offshore), but the
opposite (increasing onshore operations) in another.

Socio-cultural (and demographic) forces
Social and cultural factors, such as the beliefs, values, attitudes, opinions,
demographic make-up and lifestyle aspirations of the people in a particular
community, also affect strategy. These forces manifest themselves in
changing attitudes and behaviours of the organisation’s employees,
customers, suppliers, stakeholders and communities and the demand for
goods and services.
Again, societal trends can present various opportunities and threats or
constraints to organisations. To illustrate this point, consider the
following trends.
• Increased participation of women in paid employment.
• Increased levels of education.
• Greater focus on quality-of-life issues such as ‘work-life balance’.
• Concerns for social justice issues.
• Demographic changes such as diversity in sources of migration, the
ageing of populations, significant increases in life expectancy, smaller
families, etc.
All of these examples create both opportunities and threats. The Australian
Government, for example, markets its well-educated and highly diverse
population internationally as a benefit to global organisations who want to
tap into such diversity.
However, these changes have caused social and cultural difficulties as
some members of these changing societies have felt alienated and ‘left
behind’. Witness the civil disturbance in places such as Paris, London and
Sydney, and the rise of populist politicians espousing anti-globalisation,
anti-immigration and anti-trade agendas as examples.
And this is not simply a problem for developed Western economies. As the
emerging middle class in places such as India, China and Latin America
has sought higher wages (to pay for more consumer-oriented lifestyles)
wages have increased.
In addition, community attitudes to corporate social responsibility
have prompted sustainable organisations to consider issues such as
environmental sustainability, corporate social responsibility, effective
stakeholder management and legal compliance, and achieve strategic
outcomes that result in survival and success.
Again, these issues can be interpreted as either opportunities or threats.

Technological forces
In order to analyse technological forces, strategic managers look at the
impact of existing and emerging technologies and the innovation they
enable. These can be interpreted as providing opportunities for new
business models, new processes and new products or threats to existing
models, processes or products. Consider the following examples.
• The invention of the internal combustion engine was a threat to the
railways, but created the huge automotive companies of today.
• The introduction of the photocopier, fax machine, scanner and email
provided opportunities for companies like Xerox, Konica Minolta and
Canon, but threatened Gestetner, maker of small-scale office printing
machines, and the makers of carbon paper.
• Genetic technology provides opportunities for companies to produce
genetically modified and disease-resistant crops, but it’s a threat to the
makers of agricultural pesticides, herbicides and fertilisers.
• The internet, mobile phones and other communication technology
have created huge opportunities for many new business models and
opportunities for new businesses in industries like retail, travel services,
finance, insurance, location services, information services, education
and many more, while posing threats for already established operators.
The emergence of new technologies and changes in existing technologies
can significantly affect the opportunities and threats in the environment, and
an organisation’s capabilities (its strengths and weaknesses). For example,
Henry Ford’s development of the assembly line sped up manufacturing.
Subsequent developments in industrial robotics replaced people and
accelerated the accuracy and speed of repetitive actions. More recently,
CAD/CAM software and 3D printing enables custom-made individual
products as quickly and cost-efficiently as long production runs that were
previously required to achieve economies of scale. Technology can greatly
enable the development of new ecosystems, industries, business models,
products and processes. Consider the video below and the future it predicts
for a range of uses of nanotechnology.
Video
Video 3.2 Top 3 Nano Technology [7:50]
As you can see from this video, a technological change can have a sudden
and dramatic effect on an industry and on any organisation’s environment.
It may spawn sophisticated new markets and products, or significantly
shorten the anticipated life of an organisation’s existing products, strategic
capabilities, systems or processes.

Legal forces
Legal and political forces overlap considerably. Many of the issues we
considered in the political analysis end up being turned into legislation and
then become the subject of legal action and interpretation. Governments
develop policies in areas like labour relations, taxation, health and safety
at work, environmental protection, corporate governance, trade practices,
consumer protection, contracts, property rights, intellectual property,
corporate structure and ownership and so on. They then enact legislation
to give force to the policies, which have the potential to impact on strategic
opportunities (e.g. creating new revenue streams in offering advice or
locating businesses in environments with ‘friendly’ legislation) and threats
(e.g. increasing compliance costs in one jurisdiction that may disadvantage
firms based there).
In addition to legislation, governments may establish semi-legal bodies to
investigate and regulate key issues and behaviours in the market. Semi-
regulatory bodies are often created to manage issues such as pricing
practice and anti-competitive behaviour, prudential capital structures,
workplace health and safety, environmental protection, rules for listing and
reporting to shareholders, and accounting and reporting standards.
Assessment of the opportunities and threats that come from legal forces
includes not just understanding the impact of laws and regulations, but also
how they are interpreted and administered by the courts. How consistent
and reliable is the ‘rule of law’? How expensive and timely is it to deal with
the legal system? How powerful, unbiased and predictable are the people
(lawyers, judges, police and bureaucrats) who administer the law? What
impact do the bureaucracies administering licensing, regulation, business
behaviours and reporting in markets, etc. have on the operations and
strategies of the organisation?
Environmental forces – the natural

environment
The worldwide debate on the impacts and likely future impacts of climate
change in recent decades highlights the fact that the natural environment
plays a significant role in the strategies available to many industries.
Obvious examples are agriculture (droughts, access to water, land
degradation and loss of productivity) and insurance (increasing incidence
of major damage caused by storms, fires and floods). Ecological forces
are also increasingly a topic that governments legislate about (e.g. carbon
pricing and taxing) and issues about which governments are acting (e.g.
positive supports and incentives for renewable energy technologies).
However, these immediate impacts also have secondary effects. For
example, lower crop and land productivity affects prices for raw materials

that flow on to prices and availability of food products, brewing, furniture-
making, housing construction, bio-fuel production and paper-making. All of
this then flows on to prices charged by retailers, office product suppliers,
furniture stores, supermarkets, liquor stores, restaurants, cafes, fast-food
chains as well as the goods and services consumed by people at work and
at home.
The transport companies that move agricultural and forest products,
accounting and legal firms that advise the producers, and others in the
distribution channels are also impacted. The flow-on continues to banks
and institutions that lend money and manage finances. In poor seasons,
not-for-profit organisations and government agencies may find that more
people working on the land or in industries dependent on agriculture or
forestry seek various forms of government assistance or get sick.
We also need to reflect on the discussions in Unit 1 about the non-
financial responsibilities of organisations – the importance of ethical,
socially appropriate and sustainable management practices. Ecological
sustainability is one of the core issues discussed there, and clearly
understanding how strategies impact on the natural environment, and
seeking, as a minimum, to do little harm (and ideally some good), will be
key issues for strategic managers in all organisations in the 21st century.
Sustainable organisations need to be able to understand and evaluate the
effects of the natural environment, and the impact they have on it, as both
opportunities and threats.
Activity 3.2
1. How might some of the PESTLE forces mentioned here present
strategic opportunities or threats for your organisation?
2. In particular, how do concerns about your organisation’s impact on

the natural environment and your organisation’s desired social and
community outcomes affect it in terms of strategic opportunities or
threats?

Strategic analysis –
generating insights about
your industry(ies)
Following on from seeking insight about the impacts of macro-
environmental and ecosystem forces, strategic managers must regularly
and systematically gather and interpret information about relevant trends
in their industry or industries. They then need to disseminate insights from
both levels of analysis to people in the organisation who have to make
strategic decisions.
Macro-environmental forces influence all organisations in a general fashion.
But there are more specific forces within industries that have direct and
powerful effects on participants in the industry itself. Therefore, industry-
specific analysis is needed.
Strategic thinkers need to address a number of industry-specific questions.
Thompson et al (2014, pp. 48–49) identify six.
1. How strong are the industry’s competitive forces?
2. What are the driving forces in the industry, and what impact will
they have on competitive intensity and industry profitability?
3. What market positions do industry rivals occupy – who is strongly

positioned and who is not?
4. What strategic moves are rivals likely to make next?
5. What are the industry’s key success factors?
6. Is the industry outlook conducive to good profitability?
The authors suggest that these questions are best answered by using
Michael Porter’s five forces model (discussed by Porter in the video we
watched in Unit 1) to analyse competition in the industry.
The discussion that follows is principally for commercial or for-profit
organisations. Some of the following questions will be irrelevant for people
in industries that might be termed non-competitive, such as government
agencies and not-for-profit institutions. However, others – around the power
of suppliers and the potential for substitutes – will be as relevant to them as
to a competitive industry.

Industry analysis
An industry can be defined as a group of companies offering products or
services that are close substitutes for each other and which satisfy the
same basic customer needs. Strategic managers analyse the forces in an
industry’s environment in order to identify any opportunities and threats
impacting their organisation. They identify the major or critical drivers of
industry dynamics – the industry-specific ‘rules of the game’.
You will recall from the video in Unit 1 that in his seminal 1980 work,
Michael Porter concluded that strategic opportunities and threats can be
found via the balance of five forces (see Figure 3.5 below).
To establish a strategic agenda and to be successful, a strategic manager
must understand how these forces interact.
For example, a defence manufacturer such as BAE, Thales or Boeing is
in an industry with large and powerful buyers – government buyers such
as the United States Department of Defence. Qantas and Cathay Pacific
operate in the air-transport industry. For them, the major determinants
of organisational success are the capacity of a few large aircraft
manufacturers (suppliers) and their key component suppliers, such as
engine-makers Rolls-Royce and GE, to design and produce new aircraft
that can fly more passengers at lower costs. They are also affected by
fuel costs and landing fees (suppliers), and the level and intensity of
competition. In computer hardware, the power of Intel and Microsoft
(suppliers) are major determinants of industry strategy.
Taxi fares and the number of taxis operating in an area are partly
determined by the availability, routes and hours of operation of public
transport (substitutes) and the capacity people have to drive where they
want and park near their destination. They are also greatly affected
by the value proposition offered by ride-sharing services such as Uber
(competition).
In an industry with low barriers to entry, such as cafes, restaurants and
fast food, the potential for competitors to quickly enter and ‘set up shop’ in
competition stimulates higher service levels and lower prices than would
otherwise be the case.
Porter’s analytic framework was designed to help link the impact of these
factors to the resulting effects on an organisation’s operating environment.

Figure 3.5 Porter’s five forces model
Firms in Other
Industries Offering
Substitute Products
Competitive pressures
coming from the producers
of substitute products
Competitive Rivalry among Competitive

pressures Competing Sellers pressures
stemming stemming
Suppliers Buyers
from supplier Competitive pressures from buyer
bargaining coming from other firms bargaining
power in the industry power
Competitive pressures coming from the

threat of entry of new rivals
Potential
New Entrants
The relative importance or impact of each of the five forces determines the
ultimate strategic potential of an industry. The strength of the forces may be
apparent to all participants, but to cope with them, strategic managers must
analyse the effect the forces are having, and will have, on the market.
While Porter’s five forces framework is widely regarded as a ‘gold standard’
in industry analysis, more recent discussion and debate suggests that
strategic managers also need to consider a sixth force referred to as
‘Complementors’. Thompson et al (2016, p. 63) describe these as:
Complementors are the producers of complementary products, which
are products that enhance the value of the focal firm’s products when
they are used together. Some examples include snorkels and swim
fins or shoes and shoelaces.

The inclusion of complementors draws particular attention to the fact
that success in the marketplace need not come at the expense of
other industry participants. Interactions among industry participants
may be cooperative in nature rather than competitive.
This is consistent with the notion of interconnected industries in an

ecosystem, an idea that we discussed earlier in this Unit. As we noted in
that discussion, the opportunities here are to grow the overall value of all
participants (focal firm and complementors) rather than seeking only to
build the value for the organisation itself.
To once more connect to the quote from Grant et al (2014, p. 6) that
we have discussed a number of times now, understanding the effect of
the five forces highlights the potential things that an organisation might
do (developing strategies in response to environmental opportunities
and threats) and which a strategic manager compares to what it can do
(organisational strengths and weaknesses).
The detail of industry and competitive

analysis
Before we get into analysing the industry dynamics, we need to start by
understanding what industry we are analysing. As you are aware from our
earlier discussions about ecosystems, the lines of who is a competitor and
who might be a complementor or a collaborator are increasingly blurred.
In a simple example, it is as important for airlines in places such as China
and Europe to consider the offerings and strategies of high-speed point-
to-point train systems as it is to understand the strategies of other airlines.
Equally, technology providers offering vastly improved alternatives in virtual
and video meetings impact upon the demand for business travel. Staying
with the same example, the impact of fluctuations in the price of jet fuel or
the activities of local and provincial governments (to attract tourists and
business visitors) all influence the ‘air travel’ industry. So, the boundaries
of what we mean by an industry are important to understand and get right
before we start to analyse, but they are not necessarily straightforward.
Industries are typically defined as a group of organisations that seek to
meet the needs of a market. A market, on the other hand, is defined as a
collection of similar customer wants and needs. Combining these, we see
that an industry is a group of organisations seeking to satisfy a set of similar
customer wants and needs.
The boundaries of an industry can be geographic (i.e. the education
industry in Australia, the long-distance travel industry in Europe), or they
can be customer determined (i.e. what common customer need is being
satisfied?) or product determined (i.e. what is common about what is being
offered to customers?). There is no rule for how this can best be done, but
there is a caution:

An appropriate definition of the industry (and its boundaries) is
a fundamental requirement for an effective five-forces analysis.
Incorrect conclusions about the industry’s attractiveness and dominant
forces can result if the definition of the industry is too narrow, too
broad or non-representative. An accurate understanding of the true
attractiveness of the industry is an important condition for further
investment, while an accurate understanding of the dominant forces
will inform the focus of the organisation’s strategies.
(Grant et al 2011, p. 122)
How strong are the industry’s competitive

forces?
In answering this question, a strategic manager would need to first consider
the following issues.
• How big is the industry and what is its growth rate?
• How many competitors are there?
• Are the numbers and the range of strategies being employed by
competitors increasing (industry expansion), stable or decreasing
(consolidation)?
• Are the value propositions being deployed by competitors differentiated
or commoditised (generally seen by customers as similar to each
other)?
• Is competition based on differentiation in value propositions, low cost or
competitors focusing on particular market segments?
• To what extent are industry competitors investing in innovation and
research and development?
• What are the characteristics of customer segments?
• How many customers are there, and is demand in the market
increasing (market expansion), stable or decreasing (market decline)?
• Is the power among customers (buyers) fragmented or concentrated?
• Are there any entry/exit barriers, and how significant are they?
• What is the nature and pace of technological change affecting the
industry?
• Are there scale economies or experience curve effects?
• What are the capacity utilisation and resource requirements?
• How profitable is the industry?

Then the strategic manager would move on to try and identify the main
strategic forces in the industry, and their strength. Porter’s five forces model
can be used as the tool for analysing the nature and intensity of strategic
forces. To use it effectively, we must:
• assess the strength of the following five forces (i.e. how strong/
moderate/weak is each of the following):
– rivalry among competitors
– the threat from substitute value propositions
– the threat from potential entrants
– the bargaining power of suppliers and supplier–seller collaboration
– the bargaining power of buyers and buyer–seller collaboration
• explain how each force impacts strategically. Is it an opportunity or a
threat to the organisation?
• decide whether the overall nature of competition (the combined effect
of all five forces) is brutal, fierce, strong, normal/moderate or weak
• identify how the forces affect the various competitors, and the
strategies they empower, hinder or disable.
Activity 3.3
1. From the list of bullet points above, what are the key economic trends
in the industry in which you work – and what is happening to these
(are they becoming stronger, remaining the same or weakening)?
What effect might these have on strategies available to your firm –
think of opportunities (positive impacts) and threats (negative impacts)?
2. Now, also accounting for the role of complementors and the ecosystem,
assess the strength of each of the six strategic forces with reference to
your industry (strong, moderate, weak). Explain how each force acts to
create a strategic dynamic. What factors cause each force to be strong
or weak?
• Rivalry among competitors

• Competition from substitute products or the assistance of
complementors
• Competitive threat from potential entrants
• Bargaining power of suppliers and supplier–seller collaboration
• Bargaining power of buyers and buyer–seller collaboration
3. Is the overall industry environment (the combined effect of all these

forces) positive for your organisation or negative?
4. What do these forces suggest about strategic issues your organisation

needs to consider and account for in its strategy development (what
opportunities and threats arise)?

What are the driving forces in the
industry, and what impact will they have
on competitive intensity and industry
profitability?
As you will now understand, industries change because the forces that
drive the industry and its participants change. The ‘rules of the game’
change. In practice, this means that either the balance of all the forces we
have talked about so far (macro-environmental, ecosystem and industry)
alter in their importance, or something emerges that makes the old strategic
paradigm irrelevant. So, when strategic managers think about ‘driving
forces’, they are really thinking about the assumptions the industry is
making about the critical underlying behaviours and interactions of industry
and competitive conditions, and how these assumptions may suit particular
strategies and help to explain why one strategy works and another doesn’t.
Before looking at the specific driving forces, let’s briefly consider the
competitive changes during an industry’s evolution or across what we refer
to as the industry life cycle. Over time, most industries pass through a
series of cycles of growth, maturity and possibly even decline. During the
different stages of this life cycle, different forces are at work and become
relatively more or less important.
Typically, as industries start out, they are populated by smaller
organisations led by innovators, enthusiasts and entrepreneurs. As they
grow and mature, they often ‘concentrate’; organisations merge and
form larger organisations or are acquired as strategic business units
(SBUs) of larger corporations. Increasingly, they are managed by career/
employed managers rather than entrepreneurs and innovators. Smaller
and entrepreneurial organisations continue to exist, but often struggle to
compete with the strategic power of the larger organisations. Innovation
continues, but is often ‘bought in’ by the major organisations either through
R&D or by copying or simply acquiring smaller organisations that innovate.
As industries start to decline, bigger organisations (with high expectations
of returns) often exit, either by progressively downsizing, selling off their
declining business units or closing them down. Innovation and R&D give
way to cost-cutting to defend profits, and finally, only a few specialists or
enthusiasts remain.
As conditions become more conducive again (i.e. new value propositions
emerge or customers start to once again favour the value propositions
in the industry), the cycle of growth, maturity and decline may occur
once again.
These phases naturally have different implications for the form of
competition and the strategies that will work most effectively in each stage

of the life cycle. The strength and nature of industry’s driving forces typically
change as an industry evolves, giving rise to different opportunities and
threats at each stage.
How to analyse driving forces

The process for analysing these changes is relatively simple. A strategic
manager considers what forces are at work, then evaluates what their likely
impact will be. There are two steps:
1. Identify those forces likely to exert greatest influence over the next one
to three years. Usually, no more than three or four factors qualify as
real drivers of change.
2. Assess the impact. What difference will the forces make? Will they be
favourable or unfavourable?
What market positions do industry rivals

occupy – who is strongly positioned and who
is not?
Strategic power changes over time. Organisations may be in a strong
position for a period and then their power declines, either because their
strategies do not work effectively or because a competitor or new entrant
introduces ‘game-changing’ strategies or business models. One technique
for understanding the strategic positions of organisations in an industry
is strategic group mapping. A strategic group consists of a number of
organisations using similar strategic approaches to operate in the industry.
Not all organisations in an industry compete with each other – for example,
in passenger motor vehicles, Hyundai competes with the likes of Ford,
Toyota, Volkswagen and Renault in a number of mass-market segments,
but does not really compete with Ferrari or Bentley in the high-performance
and luxury automotive segments. Organisations in the same industry
often use different distribution channels and target different market
segments. They can differ in the quality of their products, their technological
leadership, customer service, pricing policy and marketing communications
strategies, etc.
Continuing the car example, Mercedes-Benz could be grouped with Lexus,
BMW and Jaguar into a luxury car ‘strategic group’. Toyota (excluding
Lexus), Ford, VW, Renault, Peugeot, Fiat, Holden/Opel/Chevrolet and
Hyundai may be seen as a mid-priced strategic group, while Great Wall
might join Kia, Suzuki and SEAT in a budget-car strategic group.

In the airline industry, companies such as Qantas, Singapore Airlines,
British Airways and Cathay Pacific are often termed ‘full-service airlines’,
while Jetstar, AirAsia and Tiger are regarded as a low-cost strategic group.
Members of strategic groups have two or more of these characteristics in
common. They typically:
• sell in the same price/quality range
• cover the same geographic areas
• are vertically integrated to a similar degree
• have comparable product or service line breadth
• emphasise the same types of distribution channels
• use similar technological approaches
• innovate regularly or develop new product or service offers as a point of
difference.
Steps for constructing a strategic-group map

Step 1. Identify key strategic characteristics that differentiate organisations
in an industry from one another.
Step 2. Plot organisations on a two-variable map using pairs of these
differentiating characteristics.
Step 3. Align organisations that fall in about the same strategy space
based on these variables to the same strategic group.
Step 4. Draw circles around each group, making circles proportional to the
size of each group’s respective share of total industry coverage.
Consider the following strategic map.

Figure 3.6 C
omparative market positions of producers in the US Beer
industry: a strategic group map example
Microbreweries The U.S. Beer Industry
Boston Beer
Yuengling & Son
Price/ Perceived Quality and Image
High
MillerCoors Anheuser-Busch
Inbev
Low
Narrow Broad Pabst

Geographic Market Scope
Note: Circles are drawn roughly proportional to the sizes of the chains, based on revenues.
Source: adaped from Thompson et al 2016, p. 69.
As you can see from this map, Pabst, Anheuser-Busch and MillerCoors
compete with each other because they occupy a similar strategic space.
But realistically, they don’t compete with Microbreweries. But realistically,
they don’t compete with Microbreweries or Yuengling & Son or Boston
Beer. The Microbreweries not only compete with each other, but
collectively, they also compete with Yuengling & Son and Boston Beer.
The value of strategic grouping is that it allows you to consider competitors
in an industry by the similarity in their strategies, and recognise who is
really competing with whom.
Here are some guidelines for constructing strategic group maps.
• Variables chosen as axes should expose big differences in how rivals
compete – these should be significant strategic differentiators between
participants in the industry.
• Variables do not have to be either quantitative or continuous.
• Drawing sizes of circles proportional to combined sales of organisations
in each strategic group allows the map to reflect relative sizes and
power of each strategic group.

• If more than two competitive variables can be used, several maps can
be drawn.
When we interpret strategic group maps, we find the following.

• Driving forces and competitive pressures often favour some strategic
groups and hurt others.
• Profit potential or the potential for better strategic outcomes varies due
to strengths and weaknesses in each strategic group’s market position.
• The closer strategic groups are to each other on the map, the stronger
the competitive rivalry among member organisations tends to be.
Understanding strategic spaces

Another powerful use of the ‘strategic group maps’ analysis is that it helps
strategic managers to understand and interpret the implications of ‘strategic
spaces’ between groups. You will recall that in mapping our strategic
groups we identified two things about each competitor:
• what strategies they typically rely on
• what market sectors they compete for.
Consider the strategic group map in Figure 3.6.

Now if we try to interpret the strategic options available to Yuengling & Son,
their strategic options appear to be either:
• increase their number of locations and take customers from
MillerCoors, Pabst and Anheuser-Busch Inbev by virtue of superior
perceived quality and image
• increase their quality and take customers from the Microbreweries by
virtue of their greater number of locations
• do both (increase quality and locations) and take customers from
‘above’ and ‘below’.
So, strategic group maps can help us to identify the following.

• Where can each competitor move strategically in order to grow?
(Into the strategic spaces that are vacant.)
• Where will each competitor be strongest?
(In the strategic approaches that they have chosen.)
• Where are they weakest?
(At the margins of the sectors for which they compete – in Figure
3.6 Yuengling & Son are vulnerable to a slight move downmarket by
Boston Beer and upmarket by MillerCoors, Pabst and Anheuser-Busch
Inbev, for example.)

You will note that this is very like the approaches to ‘segmentation’ that you
may have studied in courses such as Marketing Management. You might
like to revisit this marketing concept, as it is very relevant to the way you
look at any industry.
An important point to note, however, is that this approach can really only
be carried out at a business-unit level. Where an organisation competes in
many industries and sectors within each industry, each industry and sector
will need to be mapped.
Activity 3.4
Try this process now on your own industry. Consider your organisation or
business unit and consider:
1. Who are your competitors (or competitor groups)?
2. What are the principal strategies employed?
3. Now map the industry groups on this axis.

4. What conclusions can you now draw about what you see?
a. Where can each competitor move strategically in order to grow?
b. Where is each competitor strongest?
c. Where are they weakest?

Scenario development
You might recall from Unit 1 that one of the key roles of strategy
is to develop ‘a plausible future for the organisation’. This involves
understanding not only the current, but also the future strategic context.
In practice, changes occur in the future that have a great deal to do with
whether a strategy works or not.
• A strategy that works in one organisation can fail in another because
the organisational (company) capabilities (strengths and weaknesses)
are different.
• A strategy that may work when the economy is growing or when
government favours certain actions (context) won’t work in a slowing
or declining economy or when facing a different government policy
framework.
• A strategy that may succeed when competitors respond in one way, or
when strategic partners and allies (collaborators) act in certain ways,
fails with different competitors, different reactions by competitors, or
different levels of support from collaborators.
• A strategy that might work well in a market with certain types of
customer behaviours will fail in a market with different customer
responses, and so on.
Until now, our focus has been on analysing the present, but now we need
to consider a range of possible futures in which any strategy will need
to function effectively. The critical aspects of these possible futures can
be summarised as the 5Cs – Customers, Competitors, Collaborators,
Company (organisation) and Context.
From this discussion, it becomes obvious that the future ‘setting’ in which
the strategy is designed to operate is crucially important. A good strategy
is based on a detailed and explicit understanding of the current and future
conditions or scenarios in which it must operate. The role of analysis is not
only to generate the strategic conclusions that help stimulate or identify
strategic options, but also to identify the settings in which those strategies
must work.
Scenario planning
Generally speaking, there are two possible industry ‘futures’ in which a
strategy may have to work. There is a future where the industry continues,
by and large, to continue to operate under much the same ‘rules of the
game’ as operate at present. This might be termed a ‘business-as-usual
(BAU) scenario’. It is possible even in the BAU scenario that different firms
(including new entrants or substitutes) may develop new and unanticipated
strategic directions. New players (competitors/customers/ collaborators)
may enter, existing players may leave and new strategies may be adopted.
However, mostly these strategies will tend to be based on assumptions

that the existing ‘rules of the game’ will continue to apply, and various
participants will seek to maximise their strategic advantage using these
existing rules. In a BAU scenario, the key skill is identifying the assumptions
on which success is achieved when playing under the existing rules, and
exploiting some of these assumptions and rules to the organisation’s
advantage.
The alternative, referred to as a divergent or disruptive scenario, is based
on the possibility of radical or transformational change to the rules of the
game. In the divergent scenario, a competitor or player emerges who builds
strategies, value propositions and possibly even an entire business model
that is based on new ‘rules of the game’. Often this approach is adopted
by a new entrant to the industry who recognises that they are unable (or
unlikely) to win by playing under the existing rules. So they seek to build a
business model or a strategy that succeeds by redefining the rules.
One way to consider these two approaches (BAU and divergence) is to
consider three possible BAU futures, and a divergent future where the
assumptions that currently drive the industry are radically transformed. To
do this, strategic managers consider the future settings (i.e. assumptions
or expectations about what the 5Cs will look like in the future) under four
possible ‘scenarios’.
1. First there is the optimistic (or best case) BAU scenario. If things went
really well for my organisation or unit assuming that the rules of the
game remain essentially the same, what would the 5Cs look like in the
future?
2. Secondly, the pessimistic (or worst case) BAU scenario. If
future conditions were to be particularly unaccommodating for my
organisation or business unit, what would the 5Cs look like in the
future?
3. Thirdly, the likely scenario. What does the most plausible BAU future
look like, based on what we know at present and what all our external
sources of information are suggesting about future conditions?
4. Finally, a divergent scenario. In almost every environment, there are
occasional events that no-one forecasts and which radically change
the nature of the industry or the ‘way things work’. What might such a
future look like?
We will discuss disruptive innovation (the chief cause of divergence)

in Unit 7. This is where the rules on which the industry operates are
overturned – often through innovation or the adoption of a new technology.
Some recent examples of disruptive innovation are:
• the impact on taxi and limousine providers of ride-sharing services like
Uber

• the impact on the residential property and short-term accommodation
industries of home letting services like Airbnb
• the impact of the internet and email on the market for fax machines and
courier services
• the impact on camera-film makers of digital photography and imagery
• the impact on defence-equipment makers of the collapse of the Soviet
Union and the rise of international terrorist movements rather than
conflict between armed forces of nation states
• the impact on the energy industries (coal, oil, gas, renewables) of
increasing worldwide demand for energy, and concerns about carbon
emissions and climate change.
Divergent scenarios are based on events that radically change the basis on
which the industry operates. They involve imagining a possible future that is
radically different from the current trends and industry ‘rules’.
Using scenarios
In practice, strategic managers typically have a ‘likely’ scenario in their
head while they are developing strategy. However, the future rarely works
out exactly as may have been imagined. Usually it’s somewhere between
the optimistic and pessimistic scenarios, sometimes further out past one
end of the scale (more optimistic or more pessimistic) or, very occasionally,
somewhere out near the divergent scenario.
This reality results in strategies never turning out exactly as imagined;
they’re usually ‘worse’ or ‘better’ by some degree. The point of developing
alternative scenarios is to trigger discussion and thought in the strategic
management team.
• What critical issues need to be monitored so that if events in the
future do turn out to be significantly different from those imagined, the
organisation can respond.
• How do we manage and mitigate risks that the likely scenario doesn’t
happen – by developing capabilities, committing resources or even
developing contingency plans for what we will do if …
Effective strategic managers must consider whether a particular strategy

is viable in optimistic/likely/pessimistic/divergent scenarios, and evaluate
exactly what is the probability of any of the scenarios eventuating.
Naturally, effective strategic managers typically prioritise those strategies
that are ‘best options’ in the likely scenario. However, if alternative
views of the ‘future’ (pessimistic/optimistic) are considered high risk and
highly probable, other strategies may need to be considered, or at least
contingencies prepared (we will discuss contingency planning further in
Unit 5).

Is the industry outlook conducive to good
profitability?
Having conducted these key environmental and industry analyses, strategic
managers must then draw conclusions about whether the industry and
environment are attractive or unattractive, both in the near and long
terms. How suited are conditions to achieving the organisation’s strategic
objectives?
An organisation may be uniquely well suited to an industry that other
organisations consider unattractive. The critical issue is the match of
strategic capabilities with the ‘context’ or environment and the industry’s
key success factors or rules of the game.
Questions to consider in assessing an industry’s attractiveness:
• What is the industry’s size and growth potential?
• Are conditions conducive to rising/falling industry profitability, or to
strategic success in areas important to your organisation?
• Will key strategic forces become stronger or weaker?
• Will changes in the driving forces affect the industry favourably or
unfavourably in the foreseeable future?
• What is the potential for the entry/exit of major organisations?
• What is the stability/dependability of industry demand or customer
needs?
• What is the likelihood of strategic problems arising or persisting in the
industry, and how severe will they be?
• What is the degree of risk and uncertainty in the industry’s future?
Activity 3.5
Try this process now on your own industry. Consider your own organisation
or business unit and consider:
1. What are the assumptions on which the existing players of the industry
operate (the BAU rules of the game)?

2. What are the likely movements in these assumptions over the next one
to three years?
3. What would your organisation have to do if the ‘rules of the game’

changed?
4. How would you rate your current industry? Is it attractive or

unattractive, and why?

Summary
In this Unit, we have detailed a framework that strategic managers can use
to analyse the external environment. Key lessons are summarised below.
• There are six key macro-environmental forces affecting any industry
and the strategies available to any organisation in the industry. They
are: political, economic, socio-cultural, technological, legal forces and
ecological (the natural environment).
• Understanding the current and likely future trends in these external
forces helps strategic managers identify opportunities (favourable
factors for the organisation or particular strategies) and threats
(negative factors) through effective environmental scanning and
scenario development. This helps to understand the ‘settings’ within
which the strategy must make sense, and which settings are likely to
make some strategies feasible and others more difficult.
• An organisation and its strategies operate within an industry (a group
of providers seeking to meet a particular customer want and need) but
increasingly, industries are also affected by other industries, as part of
a much wider and more complex ecosystem.
• The main technique used to understand an industry environment is
Michael Porter’s five forces model. The five forces are: the threat
of new entrants, intensity of rivalry, bargaining power of buyers,
bargaining power of suppliers and effect of substitute products.
Strategists seek a position in the industry from which they can best
harness or exploit the interplay of these forces, or defend against their
negative effects.
• Recent debate about the Porter five forces model has resulted in the
view that as well as the impact of the threat of substitutes, strategic
managers should also consider the potential for complements – where
the actions of another organisation complement the strategies available
to other organisations in an industry. This is consistent with the notion
of the interrelationship of industries in an ecosystem.
• Most industries contain ‘strategic groups’ of companies pursuing the
same or similar strategies. Understanding them helps a strategic
manager identify the most significant competitors.
• Industry analysis can be greatly assisted by understanding the answers
to seven key questions:
1. What are the dominant economic characteristics for the industry?
2. What is competition like and how strong are the competitive forces?
3. What changes are occurring in the industry’s competitive and
strategic environment, and what’s causing the change?
4. Which organisations are in the strongest and weakest position?
5. What strategic moves are other organisations likely to make next?
6. What are the key factors for strategic success?

7. Is the industry attractive and what are the prospects for strategic
success?
• When conducting industry or competitor analysis, keep the following in
mind.
– Evaluating industry and competitive conditions can’t be reduced to
a formula-like exercise. Thoughtful analysis is essential.
– Industry and competitive analysis needs to be current – it should be
updated as things change.
• Finally, the purpose of environmental scanning is to analyse the

macro and industry environments that are the context in which an
organisation’s future strategy must succeed. Strategists are looking
for opportunities and threats, which can best be found by examining
the strategic issues that arise from all the analyses, and asking the
question ‘so what?’
• The answer to this question helps the strategic manager comply with
Birinyi’s advice: ‘Things are always different – the art is figuring out
which differences matter’.
• Having identified the opportunities and threats, a strategic manager
must analyse the organisation’s strategic resources, competencies and
capabilities by conducting rigorous internal analyses. These reveal the
organisation’s strategic strengths and weaknesses.
• In Unit 4, we examine the analyses that help to identify the strategically
relevant capabilities, competencies and resources that amount to these
strengths and weaknesses.

To help you review your learning in this Unit, try these seven multiple-
choice questions. You will find the answers listed after the References
section.
1. The technique used for analysing the macro-environment is referred
to as PESTLE. Which of the following is not a force that would be
assessed using PESTLE analysis?
a. legal forces
b. political forces
c. social and cultural forces
d. competitive forces
e. environmental forces
f. technological forces
g. economic forces
2. Which of the following is an example of an economic force that you

would evaluate in conducting a PESTLE analysis?
a. changing demographic patterns
b. currency exchange rates
c. government industry policies
d. innovation and research and development
e. climate change forecasts
f. recent major court findings
3. Porter’s five forces for industry analysis is a popular means for

understanding the industry or micro-environment. Which of the
following is not one of the forces that Porter suggests determine the
strategic nature of an industry?
a. potential for new entrants
b. bargaining power of suppliers
c. rivalry among competitors
d. threat of substitute products
e. bargaining power of buyers
f. potential government regulation

4. Recent academic discussion indicates that as well as the five forces
that Michael Porter identified in his industry analysis model, there is
potential for organisations to develop strategies that are complements
for other organisations. Complete the following sentence defining
how a ‘complement’ can be defined – ‘Complements are where
one organisation’s strategy adds …… to the strategies of another
organisation as seen through the eyes of the customer.’
a. protection from entry
b. urgency
c. competitive intensity
d. substitutability
e. value
f. bargaining power
5. Strategic mapping is a technique used to assist in assessing

competitive forces and potential moves by competitors in an industry.
Listed below are three of the four steps involved. From the alternatives
that follow, which is the step that is missing:
Steps for constructing a strategic group map:
• Step 1 ….
• Step 2 Plot organisations on a two-variable map using pairs of
these differentiating characteristics.
• Step 3 Align organisations that fall in about the same strategy
space based on these variables to the same strategic
group.
• Step 4 Draw circles around each group, making circles
proportional to the size of each group’s respective share of
total industry coverage.
a. Research their levels of investment in game-changing strategies

such as new technologies, innovation, R&D, strategic alliances and
partnerships
b. Identify competitive characteristics that differentiate organisations
in an industry from one another
c. Understand competitors’ stated intentions
d. Determine which competitors or major players have some flexibility
to make major strategic changes, and who is already committed or
locked into pursuing a particular strategy
e. Analyse competitors’ current competitive positions
f. Gather information from the industry grapevine about competitors’
current activities and potential changes

g. Study competitors’ past actions and the preferred approaches of
their strategic leaders (strategic managers often copy strategies
they have used successfully elsewhere)
6. To identify industry key success factors, we typically ask three

questions – two of those are listed below. From the list that follows,
which alternative is the missing third question?
The answers to three strategic questions usually pinpoint the KSFs:
• On what basis do customers (or clients) choose between
competing brands or sellers?
• What does it take for organisations to achieve a sustainable
competitive advantage?
a. What resources and competitive capabilities does an organisation

need in order to be successful?
b. What is the industry’s size and growth potential?
c. Are conditions conducive to rising/falling industry profitability, or to
strategic success in areas important to your organisation?
d. Will competitive forces become stronger or weaker?
e. Will changes in the driving forces affect the industry favourably or
unfavourably in the foreseeable future?
f. What is the potential for the entry/exit of major organisations?
7. In developing scenarios for the future, which in the list of alternative

scenarios is not one that would commonly be developed by strategic
managers?
a. optimistic
b. historic
c. divergent
d. likely
e. pessimistic

References
Anderson, J & Vakulenko, M 2014, ‘Upwardly mobile’, Business Strategy
Review, London Business School, issue 4, pp. 34-36.
management: An Australasian perspective, John Wiley & Sons, Milton,
QLD.
Milton, QLD.
Hambrick, D C & Fredrickson, J W 2005, ‘Are you sure you have a
strategy?’ Academy of Management Executive, vol. 19, no. 4, pp. 51–62.
Lacy, P, Hagenmueller, M & Ising, J 2016, ‘Platform strategies: How
the rules of competitiveness have changed in the era of ecosystems’,
accenturestrategy
Lafley, A & Martin, R 2013, Playing to win: How strategy really works,
Harvard Business Review Press, Boston.
Porter, M E 1980a, ‘How competitive forces shape strategy’, The McKinsey
Quarterly, Spring, pp. 34–50.
McGraw-Hill/Irwin, New York.
McGraw-Hill Education, New York.
Van Alstyne, M, Parker, G & Choudary, S 2016, ‘Pipelines, platforms, and
the new rules of strategy’, Harvard Business Review, April.

answers
1. d
2. b
3. f
4. e
5. b
6. a
7. b

Unit 4
Building competitive
and strategic advantage
CONTENTS
Introduction 4–1 How do the organisation’s value
Learning outcomes 4–2 chain activities impact upon its cost
structure and customer value proposition? 4–27
Recommended readings 4–3
Is the organisation competitively
The nature of competitive advantage 4–4 stronger or weaker than key rivals? 4–31
Why is internal analysis important? 4–8 What strategic issues and problems
merit front-burner managerial attention? 4–33
Organisation-specific situation
analysis: the key questions 4–9 Generic building blocks of competitive
How well is the company’s present advantage 4–34
strategy working? 4–9 Summary 4–35
What are the organisation’s most
Self-assessment quiz 4–36
important resources and capabilities,
and will they give the organisation a References 4–39
lasting competitive advantage over
rival companies? 4–11
Unit 4 reading summary 4–42
What are the organisation’s strengths
and weaknesses in relation to market
opportunities and external threats? 4–19
BCG matrix 4–19
GE business screen matrix 4–21
Role of SWOT analysis in crafting a
better strategy 4–24

If an organization is not ‘best in world’ at a critical activity, it is sacrificing
competitive advantage by performing that activity with its existing technique.
James Brian Quinn
The essence of strategy lies in creating tomorrow’s competitive advantages faster

than competitors mimic the ones you possess today.
Amar Bhide
Introduction
Regardless of the type of organisation, organisational success is
likely to be dependent on the characteristics of both the organisation
and its environment. The role of the strategist is finding the match
between what an organisation can do (organisational strengths and
weaknesses) and what it might do (environmental opportunities and
threats). The search for a match or fit between the organisation and
its environment is a continuous process of analysis, synthesis, action-
taking and evaluation.
(Grant et al 2011, pp. 4–5)
• recognising, nurturing and developing critical strategic capabilities
within the organisation using the Congruence and McKinsey 7S
frameworks.
Video
As the opening quote from Grant suggests, strategic managers need

to align what the organisation might do with what it can do. This means
ensuring that there is alignment between decisions about where to play
and how to win (what the organisation might do) and the capabilities and
systems required (what it can do).
Having completed Unit 3, you would know that effective strategic managers
identify what the organisation might do by examining external environments
(Customers, Competitors, Collaborators, Context), in order to identify the
opportunities and threats – and form a view of where they will play, and
how they will win.
The second step requires that strategic managers understand what
they can do by examining the strategic capabilities and resources of
the organisation itself (Company) to identify strategic strengths and
weaknesses. Strategically relevant strengths and weaknesses are the
building blocks of competitive advantage. They also help to answer the
question of how we will win by considering what capabilities and systems
are needed. The outcome of this internal analysis is twofold: (1) to
identify what existing strategic choices are viable with existing capabilities
and systems, and (2) to identify what investment is needed to improve
Unit 4: Building competitive and strategic advantage 4–1

capabilities and systems in order to seize the most compelling opportunities
and avoid the most concerning threats in the future.
Understanding what the organisation might do (external opportunities and
threats – analysed in Unit 3) is important, but on its own it is not sufficient.
As Grant et al (2014, p. 6) point out:
Strategic management is the process of directing and strengthening
an organisation in its competition with other organisations. Strategic
management theories explain why organisations succeed or fail.
The actions an organisation takes in competing have been found to
be a much more significant factor in determining the organisation’s
performance than the business environment in which it operates.
What this quote helps us understand is why it is that within any given
industry where all organisations are subject to the same forces, some
organisations are more successful than others. It helps us recognise why
some organisations, businesses or business units/divisions outperform,
while others languish. It enables strategic managers to start to address the
question of how to create competitive advantage and strategic success.
It is the ability of strategic managers to align what the organisation might
do in seizing opportunities and avoiding threats identified in the external
environment, with what it can do, by building, nurturing and deploying
relevant strengths and overcoming or minimising the effect of its
weaknesses. Effective strategic management relies on this logic.
In this Unit, we will turn our attention to analysing the organisation’s
capabilities (strengths and weaknesses) – its strategically relevant
internal capabilities and resources. We will look at how, by analysing and
understanding these, strategic managers identify the building blocks of
effective strategy. To do this, we must understand how these capabilities
and systems (strengths and weaknesses) are grounded in effectively
managing an organisation’s systems, structures, capabilities and
competencies.
Learning outcomes
● identify strategic capabilities available to the organisation
● explain what strategic capabilities are and how they are developed
● apply a range of techniques and tools to determine an organisation’s
strategic capabilities, and determine whether these represent strengths or
weaknesses
● discuss how strategic strengths and weaknesses drive the development and
selection of strategic options.

Recommended readings
The following readings are sources that can provide more detail to support
much of the learning covered in this Unit:
Thompson, A A, Peteraf, M A, Gamble, J E & Strickland, A J 2016, Chapter
4 – ‘Evaluating a company’s resources and competitive position’, Crafting
Prahalad, C K & Hamel, G ‘The core competence of the corporation’, in
Burgelman, R A, Christensen, C M & Wheelwright, S C 2009, Strategic
management of technology and innovation, 5th edn, McGraw-Hill/Irwin,
Boston, Rdg. I–3, pp. 66–77.
Grant, R, Butler, B, Hung, H & Orr, S 2014, Chapters 5 and 6 in
Contemporary strategic management: An Australasian perspective, 2nd
edn, John Wiley, Milton.

The nature of competitive
advantage
A competitive advantage is defined as any source of difference
between one organisation and its competitors that will assist the
organisation to achieve its objectives.
Extending this commercial market definition to account for organisations

in the government and not-for-profit industries, we can define strategic
advantage as:
any capability controlled by the organisation that will assist in
achieving strategic objectives.
However, competitive advantages, to be really valuable, need to be things

that last – and give the organisation strategic capability that endures – often
referred to as sustainable competitive advantage.
An organisation may possess a particular competitive advantage
for a long period (e.g. if it holds a critical technical patent) or a short
period (e.g. if it is the first to purchase a new piece of equipment,
but competitors are also able to acquire the equipment). The level of
advantage will decrease when competitors may be able to match it
with the same or an alternative source of advantage. Organisations
are normally concerned with extending the duration of competitive
advantage so that there is more opportunity to recoup the cost of
achieving it in the first place.
If the competitive advantage results from being able to sell at a

lower price, competitors will seek to compete by reducing their costs
through innovation or lower cost sources of supply. If the competitive
advantage results from differentiation, competitors may compete by
imitating and improving on the product or service.
Sources of competitive advantage that arise from organisational

processes, rather than products, and from sets of assets, rather than
single assets, are more difficult to compete against and therefore
result in a more sustained competitive advantage. The complexity
of internal processes and multiple asset sets make them difficult to
imitate. Organisational processes depend upon internal relationships,
while assets and agreements must be developed over time. The
relationships between specific processes, assets and competitive
advantage are also difficult to identify, making them hard to imitate.
The development of internal processes and assets that create a

competitive advantage will be the result of the organisation’s core
competencies.
(Grant et al 2014, pp. 16–17)

So, we can surmise that strategic managers are accountable for identifying,
sustaining and enhancing strategic advantage. To do this, they must:
• know what the existing sources of strategic advantage are
• identify future sources of strategic advantage that will be needed for the
future context they have identified
• manage both of these (existing and potential sources of advantage)
efficiently to ensure that they are sustained and improved over time
• hard-wire these into the organisation’s core competencies so that they
are sustainable for the long-term.
The illustrative example of Intel provides some clues to the nature of

competitive advantage. If you research the industry, you will notice that
historically, Intel’s competitive advantage was based on the organisation’s
superior product development and manufacturing capabilities. Its product-
development capabilities allowed Intel to stay one step ahead of rivals
in the race to produce ever more powerful microprocessors for many
decades. In turn, this capability gave Intel a temporary monopoly in the
supply of leading-edge microprocessors, which allowed it to charge a high
price when its rivals had yet to introduce a comparable product.
Customers, however, found Intel’s near monopoly in high-end chip supply
made these device-makers overly dependent on Intel. So, they sought to
introduce ‘competitive tension’ into the industry by supporting and working
collaboratively with Intel’s competitors, such as AMD, in order to replicate at
least some of Intel’s capabilities.
While Intel was subsequently able to turn this situation around by focusing
on customer service and relationship-building, their perceived ‘arrogance’
allowed another competitor to encroach on their position and to steal away
some of the ‘fuel’ they needed to power their competitive advantage: smart
people. For many years, Intel had an advantage over its rivals when it came
to product innovation, a competitive advantage that stemmed from its ability
to attract innovative young engineers.
It is important to note that an organisation derives most of its strengths
and weaknesses from effective use of its strategic resources. According to
Grant et al (2014, pp. 190–214) these strategic resources typically include
strategic and competitive advantages from:
• responsiveness to change – the ability to identify opportunities or
threats and act fast (first mover advantages), often demonstrated by
an entrepreneurial mindset among strategic managers and decision-
makers
• innovation and creativity (‘new game strategies’) – the ability to
invent and reinvent business models, products and processes that
provide the organisation with a competitive advantage, or overturn the
competitive advantages of other organisations

• superior access to information or greater ability to interpret
information – access to, and/or superior ability to interpret and derive
strategic insights from, unique information (not available to other
organisations), or from more detailed information, or from information
being accessed by strategic managers earlier and with clearer insight
• lower costs – the ability to deliver outcomes and outputs with fewer
resources
• superior access to, or superior management of, complex
combinations of resources and capabilities – the ability of strategic
managers to access better quality or quantities of resources, or to
manage them more effectively, or the ability to integrate the resources
and capabilities of the organisation more effectively and/or more
efficiently
• superior access or management of value-adding networks or
relationships – being part of more efficient and/or effective value-
creating networks, having deeper and more valuable relationships
(ideally exclusive relationships) and managing them strategically to
extract superior value.
Further, Grant et al (2014, pp. 167–174) point out that the building blocks of
these strategic advantages are typically found in combinations of:
• human resources – the experience, capabilities, knowledge, skills,
relationships, engagement and judgement of all the organisation’s
employees and other key stakeholders, such as board members,
investors, financiers, advisers, strategic partners and allies
• intangible resources – the organisation’s technologies (patents,
copyrights, trade secrets), reputation (brands, relationships), culture,
systems and processes, including the things summarised by the
McKinsey 7S framework (shared values, systems, structure, strategy,
staff, skills and style)
• tangible resources – financial (cash, securities, borrowing capacity)
and physical (plant, equipment, buildings, geographic locations, access
to raw materials, etc.).
The tangible resources that are of most interest to us here are those
strategic assets that can be seen and quantified, such as production
equipment, manufacturing plants, raw materials and buildings. However,
these tangible strategic assets are relatively easy for competitors to identify,
imitate, acquire or nullify.
Intangible resources, on the other hand, are those strategic assets that are
difficult for competitors to imitate because they are deeply rooted in the
organisation’s history, buried in its people and their engagement with the
organisation and the relationships they have with each other and with key
external stakeholders and partners.

Examples of intangible resources are knowledge, trust between managers
and employees, ideas, managerial capabilities, relationships between
people (including those within the organisation and external parties
like customers, suppliers, allies and advocates), scientific or technical
insights, innovation capacity and the reputation of the organisation and
its products and brands. Because intangible resources are difficult to
imitate, organisations increasingly rely on these as a foundation for their
competitive advantages – particularly in service and knowledge industries.
However, competencies and resources are insufficient on their own.
Capabilities are the organisation’s ability to effectively deploy these
resources to achieve a desired outcome. Capabilities emerge over time,
through complex interactions between tangible and intangible resources.
They are collections of activities and tangible resources that typically lie in
the skills and knowledge of people, and their functional expertise.
Activity 4.1
Consider the sources of strategic advantage discussed here. Which of
these is being used to drive the existing strategy for your organisation?

Why is internal analysis
important?
Strategic management is an unending cycle, and competitive advantages
seldom last forever. Markets display a characteristic referred to in
economics as creative destruction (the cycle by which resources are
deployed and redeployed away from those organisations that struggle, to
those organisations able to extract the best return from them).
Organisations have increasingly had to develop and continuously refine
their competitive (or strategic) advantage in order to deal with changes in
both the external and internal environments. Creating a ‘fit’ between these
environments is a difficult and complex task, subject to continuous cycles
of change. Organisations that are successful in maintaining competitive (or
strategic) advantage consistently are those that make effective strategic
decisions and develop the capability to respond and change rapidly.
However, self-knowledge must be combined with flexibility in the strategy,
and fast-thinking strategic leadership ‘in the field’. Thus, leadership is a key
strategic capability in successful organisations. We will explore the nature
of strategic leadership in more depth in later Units.
By now, you should be in no doubt that an organisation without distinct,
strategically significant advantages derived from unique strengths, and the
ability to manage these effectively, will become another victim of creative
destruction as money, talent and customers all desert for more attractive
places to do business. Answers to some key strategic questions listed in
the next section are fundamental to understanding where these strengths
are found. They are summarised here; more detail can be found by reading
Chapter 4 of Thompson et al (2016).

Organisation-specific
situation analysis:
the key questions
According to Thompson et al (2016, p. 79) internal organisation-specific
analysis is designed to address six key questions.
1. How well is the company’s present strategy working?
2. What are the company’s most important resources and capabilities,

and will they give the company a lasting competitive advantage
over rival companies?
3. What are the company’s strengths and weaknesses in relation to

the market opportunities and external threats?
4. How do the company’s value chain activities impact its costs

structure and company value proposition?
5. Is the company competitively stronger or weaker than key rivals?
6. What strategic issues and problems merit front-burner management

attention?
Naturally, for organisations not operating in competitive environments, such

as government agencies and departments, Question 5 is not particularly
relevant. However, the remaining questions apply equally to all strategic
managers.
How well is the company’s present strategy

working?
Successful analysis of an organisation’s existing strategies requires two
steps.
Step 1 Determine the organisation’s current strategy.
• What is the basis for its strategic approach:
– low cost or cost leadership?
– Differentiation?
– focus on a particular market segment?
– some other major strategic driver?

• Determine the strategic scope. From what you know about
the existing strategies, is the organisation clear about the
following?
– The elements of its business model (how does it
generate its revenues and manage its costs – what value
propositions does it create; for which segments; using
what channels; developing what sorts of relationships with
customers; using what key resources; engaging in what
key activities; working with what key partners?)
– What are its value creation contributions or role(s) in the
industry’s production/distribution chain or the ecosystem?
• Examine recent strategic moves.

– What strategic capabilities has the organisation’s success
relied upon?
– Are these differential (do they create sustainable
advantage over competitors)?
Step 2 Examine the organisation’s longer-term performance across the

following key indicators of strategic and financial performance
• Trends in sales and market share.
• Customer acquisition, conversion (upselling) and retention.
• Financial strength and performance – analysing things
like costs and revenues, comparative profitability, liquidity,
leverage, activity and returns to owners/investors. Importantly,
these need to be compared to those organisations that the
strategic managers are seeking to ‘win’ against, and perhaps to
best-practice benchmarks also.
• Continuous improvement activities and any outcomes there
may have been from improvement initiatives.
• The organisation’s image, reputation and levels of support
or engagement with customers or clients and other key
stakeholders.
• The organisation’s leadership in key capabilities such as
technology, quality, innovation, e-commerce, etc.

What are the organisation’s most important
resources and capabilities, and will they
give the organisation a lasting competitive
advantage over rival companies?
In Unit 3, we spent much time analysing the external environments to
understand the significant opportunities (positive trends) and threats
(negative trends).
During the past 25 years, ideas concerning the role of resources
and capabilities as the principal basis for company strategy and the
primary source of profitability coalesced into what has become known
as the resources based view of the firm (RBV), one of the standard
theories in the field of strategy. The central question of RBV is ‘Why
do some companies in the same industry outperform others?’
(Grant et al 2014, p. 161)
From the quote above, we can see that identifying sustainable competitive
advantage, and recognising what the organisation can do, involves
understanding the strategically relevant resources that the organisation
controls. In other words, we need to analyse internal environments
to identify the strengths and weaknesses. These are derived from an
organisation’s ability to deploy and manage relevant strategic resources.
The resource-based approach has profound implications for
organisations’ strategy formulation. When the primary concern of
strategy was industry selection and positioning, organisations tended
to adopt similar strategies. The resource-based view, by contrast,
emphasises the uniqueness of each company and suggests that
the key to profitability is not through doing the same things as other
companies, but rather through exploiting differences. Establishing
competitive advantage involves formulating and implementing a
strategy that exploits uniqueness of a company’s portfolio of resources
and capabilities.
(Grant et al 2014, p. 164)
So, in addition to recognising the important contribution of industry and

other external analyses (such as Porter’s five forces analysis) in strategy
formulation, we now need to match or align external analysis (the
opportunities and threats or ‘what the organisation might do’) with analysing
its resources (strengths and weaknesses or ‘what it can do’).
But what resources (strengths and weaknesses) matter? Grant et al
(2014, p. 167) indicate the strategy formulation process, and the key
strategic resources, in the figure below.

Figure 4.1 Resources’ impact on strategy formulation
Competitive Industry key

Strategy
advantage success factors
Organisational
capabilities
Resources
Tangible Intangible Human
• Financial • Technology • Skills and know-how
(cash, securities, (patents, copyrights, • Capacity for
borrowing capacity) trade secrets) communication
• Physical (property, • Reputation and collaboration
plant, equipment, (brands, relationships) • Motivation
mineral reserves) • Culture
From this, we see that the organisation’s key strategic resources are
derived from controlling, integrating or ‘blending’ the tangible, intangible and
human assets in ways that are superior to what competitors can do.
Strengths and weaknesses are valuable only if they are current (they exist
now) and available. They aren’t hypothetical or merely ‘the potential’ to do
something.
The purpose of developing SWOT analyses is to ensure the organisation’s
strategy is internally consistent by matching the things that the organisation
can do – i.e. its strategic strengths and weaknesses – to the things that
it might do – i.e. seizing the most attractive external opportunities and/or
avoiding the most dangerous external threats.
Organisational capabilities
(distinctive competence and core competencies)
Resources are not productive on their own. A brain surgeon is
close to useless without a radiologist, anaesthetist, nurses, surgical
instruments, imaging equipment and a host of other resources. To
perform a task, a team of resources must work together. Moreover,
only some resources are inputs to a productive process. In fact,
resources have to be coordinated in order to be effectively productive.
An organisational capability is a company’s capacity to deploy
resources for a desired result… Of primary interest are those
capabilities that can provide a basis for competitive advantage.
(Grant et al 2014, p. 170)

The section of the Grant text cited above goes on to explain that various
terms have been coined to describe an organisation’s strategic capabilities,
famously by Selznick, who referred to them as distinctive competence and
Prahalad and Hamal, who described core competencies of a corporation.
In this course, we regard the terms as interchangeable and will discuss
instead strategically relevant capabilities – those combinations of activities
and resources that can be routinely deployed by the organisation’s strategic
managers to achieve strategically valuable outcomes.
Identifying strategic capabilities

There are typically three methods by which strategic managers can identify
and understand strategic capabilities, as follows.
1. Functional analysis: recognising the strategic value of being ‘better’
at critical component capabilities related to the major functions of the
organisation.
2. Activity mapping: understanding the clusters of key activities that
deliver strategically valuable outcomes.
3. Value chain analysis: understanding the unique sequence of activities
that an organisation creates in designing and managing its business
model.
We will now discuss each of these briefly.

Functional analysis – evaluating the extent to which the organisation
derives strategic advantage through superior performance of:
• corporate management functions (financial control, strategic portfolio
management, strategic innovation, multi-business coordination,
strategic merger and acquisition management, management across
national borders)
• management information (integrated systems delivering real-time
insights enabling faster and better management decisions, market
research and analysis)
• research and development (research, new product development,
product design, customer experience design and innovation)
• operational management (production efficiency, fulfilment and
distribution accuracy, efficiency and speed, continuous improvement,
flexibility and speed of response, performance management, customer
experience management)
• sales and marketing (brand management, reputation management,
effective and efficient communication of value propositions, relationship
management, sales force effectiveness).

The outputs from a functional analysis are used to identify those functional
activities that the organisation performs better than its competitors, and the
strategic value of doing so.
Activity mapping – involves understanding those clusters or ‘nodes’
of activity where superior performance delivers strategically valuable
outcomes. This is somewhat similar to functional analysis, but relates
more to the elements of the business model and seeks to understand
what collections or groups of activities are involved in generating the
organisation’s revenues and managing its costs via:
• creating value propositions
• targeting and positioning to preferred market segments
• delivering value through preferred channels
• building, sustaining and harnessing value in customer relationships
• managing key operational activities
• establishing and sustaining critical partnerships
• managing key resources.
An example of a strategically valuable activity might be expressed as

‘attract, retain and motivate creative staff with expertise in software
engineering’, the outcome of the activity being that the organisation
generates a stream of new technological innovations. Another example
might be ‘captures, analyses and interprets streams of complex market
data in real time’, the outcome of which might be that the organisation’s
strategic managers are able to make strategic decisions faster and more
accurately than competitors. The key issue here is not only to identify the
strategically valuable outcomes, but to understand what activities lead to
them – and then actively nurture them to sustain these activities in order to
sustain superior outcomes.
Activity mapping requires that strategic managers understand what clusters
of strategically valuable activities the organisation currently deploys (or
could deploy), how they generate value and how these deliver strategically
superior outcomes. It requires that the organisation either does different
things (i.e. has different sets of activities) or does things differently
(i.e. undertakes similar activities, but does them better).
Value chain analysis – this is conceptually similar to both the analysis
of functions and activities. It recognises the importance of understanding
those things that the organisation does in managing the ‘chain’ or sequence
of activities that form its business model, identifying those things that add
value, and those that don’t. Having identified what parts of the value chain
add value to the business model, strategic managers actively manage
the strategically important activities, and ensure that value isn’t destroyed
elsewhere in the chain. Michael Porter illustrated a typical manufacturing
value chain as:

Figure 4.2 A typical organisation-specific value chain
Primary Supply Chain Operations Distribution Sales and Service Profit

Activities Management Marketing Margin
and Costs
Support Product R&D, Technology, and Systems Development

Activities
Human Resource Management
and
Costs General Administration
Primary activities are the things that are involved directly in producing,
communicating and delivering the organisation’s value propositions. In the
typical value chain that Porter illustrated here, this would include acquiring
and managing logistics for raw materials or inputs (Inbound logistics);
manufacturing/producing, assembly, packaging (Operations); warehousing,
order processing, distribution and fulfilment/delivery (Outbound logistics);
advertising, promotion, sales (Marketing and sales); installation, after-sales
support, repair and maintenance, training (Service).
Support activities: are the things that enable the efficient and effective
management of the primary activities. These include things like
planning, finance, accounting, legal support, stakeholder relations and
general management including strategy development (Organisational
infrastructure); recruiting, engaging, on-boarding, developing and rewarding
staff (Human resources management); managing information systems,
research, product design and development (Technology development);
acquiring supplies, including inputs, fixed assets, services, etc.
(Procurement).
Once again, it is important to understand that the value chain for each firm
is likely to be in some way different – competitive advantage will come from
either undertaking different activities, or doing them differently. The critical
point in any value chain analysis is to understand: 1) what is the unique
sequence of activities that this organisation uses to generate its revenues
and manage its costs (i.e. what is its business model?); 2) which activities
add strategic value and which don’t; and 3) how can managing these more
effectively, including redesigning the order and structure of the value chain,
deliver a strategic advantage?

How to identify strengths
Strategic strengths are things the organisation can access to respond to
opportunities and threats. They display key characteristics:
a firm resource must have four attributes: a) it must be valuable, in
the sense that it exploits opportunities and/or neutralises threats in
a firm’s environment, b) it must be rare among a firm’s current and
potential competition, c) it must be imperfectly imitable, and d) it must
be able to be exploited by a firm’s organisational processes. These
attributes of company resources can be thought of as indicators of
how heterogeneous and immobile a firm’s resources are, and thus
how useful these resources are for generating sustained competitive
advantage.
(Barney in Grant et al 2014, p. 174)
The words highlighted in bold are the basis for understanding strategic
capabilities via a tool known as the VRIO framework. This framework is
one of the most powerful assessment tools available to strategic managers
to determine the probability of competitive advantage based on resources/
capabilities. Without a VRIO capability, the organisation is very likely
unable to achieve anything more than parity of returns in a competitive
marketplace. The resources and capabilities in a VRIO assessment can
include the previously discussed functional analysis (e.g. management
functions), insights from activity mapping, and insights from value chain
analysis. The VRIO framework, therefore, is a critical means to enable
strategic managers to recognise the extent to which a particular resource is
a strategic strength, based on assessing the extent to which it is:
• strategically valuable – enables the organisation to efficiently,
effectively and quickly respond to external opportunities and threats
• rare – controlled by only a small number of companies
• hard/costly to imitate
and the extent to which the firm is:
• organised to capture the value of the resources.
You can imagine from this that for most organisations there would be
relatively few such strengths.

How to identify weaknesses
A weakness is something an organisation lacks or has less of than key
rivals, something it does poorly or worse than competitors, or an internal
condition that places it at a disadvantage. Weaknesses relate to things like:
• comparative deficiencies in capabilities
• shortage or lack of important tangible, human, or intangible assets
• missing capabilities in key areas.
Weaknesses and deficiencies are strategic liabilities. They are relevant

only if:
• they are essential or significant to the organisation’s business model
and its strategic outcomes
• they put the organisation at a competitive or strategic disadvantage
• their absence (or shortage) limits the organisation’s capacity or
strategic options.
Evaluating the strategic value of intangibles

As you will have noted in Figure 4.1, intangible assets are among the key
sources of competitive advantage. In a time when strategic advantages
based on tangible assets such as equipment or resources are increasingly
easy to copy or overcome, leading strategy authors propose that strategic
or competitive advantages are more likely derived from often hard-to-
measure ‘intangible’ assets. Robert Kaplan and David Norton (creators of
the Balanced Scorecard) propose a process for evaluating the strategic
value of an organisation’s intangible assets.
You should now read the following article, then attempt the activity that
follows.
Read
Reading 4.1 Kaplan, R S & Norton, D P 2004, ‘Measuring the strategic
readiness of intangible assets’, Harvard Business Review,
vol. 82, no. 2, pp. 52–63.

Activity 4.2
1. A senior manager in your organisation (or an organisation you know
well) says to you, ‘I have to develop a SWOT for my business unit, but
I think most of our strengths are our people and the way we do things.
How can I quantify that?’ Based on Reading 4.1, suggest four things to
help measure the ‘people and process’ strengths and weaknesses.
2. Use the VRIO framework to analyse the strategic strengths and

weaknesses of your organisation. Remember that there will be
relatively few, they must be strategically significant, and they should
have a differential and be based on some sort of objective evidence.

What are the organisation’s
strengths and weaknesses
in relation to market
opportunities and external
threats?
Until now, we have considered organisations as if they were engaged in
only one industry or market. In practice, however, many organisations are
comprised of multiple business units, divisions or departments. They offer
the strategic managers a ‘portfolio’ of businesses, markets, products and
services. For organisations with multiple business units or operations in
multiple markets, the strategic conditions in each market will often differ.
Ultimately, the strategies that each business unit adopts must relate
to the individual strengths of the respective units, and the individual
market conditions each faces. The options available to diverse portfolio-
style organisations flow from analysing the strategic position of the
different businesses or products that they offer, and understanding the
unique strategic positions of each. Strategic managers in portfolio-style
organisations need to make choices based on the relative strategic
positions of the whole portfolio of products or businesses rather than simply
managing each in isolation.
Two analysis tools have been especially developed for evaluating such
situations: the BCG matrix and the GE Business Screen matrix. You may
have come across these tools in some of your other courses.
BCG matrix
Developed by the Boston Consulting Group, this technique involves plotting
the strategic position of each business unit (or major product group or
product line) against two key criteria: the rate of growth in its market and its
relative market share.
In Figure 4.3, you will see that market growth appears along the vertical
axis and at 10%, business units or products are deemed to be in high-
growth markets, while at less than 10% they are deemed to be in slower
growth markets.

Figure 4.3 BCG matrix
20%
18% Stars Question marks
16%
14%
12%
Market growth rate
10%
8% Cash cows Dogs
6%
4%
2%
0%
10x 4x 2x 1x 0.5x 0.1x
Relative market share
The horizontal axis captures relative market share. This means market
share ‘relative’ to the next largest competitor in the market. Occupying
a position to the left of the centre line (>1x) indicates that the business
unit (or products) are market leaders – i.e. they are at least one or more
multiples larger than the next largest competitor in the market. A business
unit or product group can only be a Cash cow or Star if it is the largest in its
market.
To the right of the centre line (<1x), the business unit is smaller than the
market leader – right down to the point where the unit/product is as little as
10% (0.1x) the size of the largest competitor in the market. The logic behind
this is that size is a strategic advantage.
So what? Following are the implications of each box in the matrix.
• Question marks: these business units or products require lots of
cash and management attention to support their fast growth, but
lacking scale/size may limit the ability of strategic managers to strongly
influence the way that the market behaves. Typical strategies from here
are to accept being a follower, exploit a niche position or develop a
strategy to become leader.
• Stars: The unit/product requires a lot of investment and attention
but, by virtue of being a market leader, strategic managers are better
placed to ‘set the pace’. It is important to note that this model doesn’t
talk about cash flow or profit. Neither Stars nor Question marks
are necessarily cash-positive or profitable, but are seen as being
strategically valuable because of their anticipated growth.
• Cash cow. As the name implies, this unit/product is often being
‘milked’ for cash. It generates high cash flow and enjoys economies
of scale and scope from market leadership. However, the market itself
is not growing particularly strongly. The market may have reached

maturity, or even be in decline. However, this market may still be very
attractive to the organisation. A strategy will be needed to maintain the
competitive position and/or stimulate growth (if possible).
• A Dog product or business is in a market with little (or negative) growth.
As the organisation is not the market leader, the strategic manager is
also unable to dictate strategy to the market. This doesn’t mean that
the unit/product should be divested or that it shouldn’t be defended, but
it may not be self-funding, and unless the organisation can stimulate
growth in some way, there are likely to be better strategic options.
The BCG matrix, then, offers four basic strategies to consider for each unit
or product in the organisation’s ‘portfolio’.
• Build – look to increase relative market share.
• Hold – preserve market share.
• Harvest – increase short-term cash value.
• Divest – sell or liquidate the unit or delete the product.
Caution: There is a natural temptation to see the four strategies as being

directly related to each of the quadrants: i.e. Build = Question marks; Hold
= Stars; and so on. This is not always the case. It may be that you need to
build Cash cows to sustain their position, or to divest Stars – capitalise on
success and extract the value from the business unit or product by selling it
to someone better able to manage it in the next stage of its life.
Therefore, strategic managers should evaluate:
• the most appropriate way to manage this business unit or product as
part of the whole portfolio
• the likely impact on the whole portfolio of the organisation of building/
holding/harvesting/divesting each unit/product
• the strategic contribution each unit or product makes to the whole.
Remember that in a sustainable organisation, profit and economic value

are not the only valuable strategic outcomes. Taking a balanced scorecard
view means considering all aspects of strategic ‘contribution’
GE business screen matrix

Developed by General Electric, this approach is based on looking at each
SBU, product group or strategic opportunity by assessing two key criteria:
• the level of attractiveness of the industry, market or opportunity
• the organisation’s strength or competitive advantage in relation to the
particular industry conditions or key market success factors.

Figure 4.4 GE matrix
Business strength
Strong Average Weak
Industry/ High
market Medium
attractiveness Low
Industry attractiveness requires assessing:

• size and growth of the segment, both now and in the future,
considering things such as:
– numbers of customers
– levels of need
– purchasing power
– profitability
• structure of the market. Are the nature and structure of the particular
market well suited to the organisation?
• organisation’s strategic vision, mission and objectives, and
the availability of strategic resources. Is pursuing this business
consistent with the organisation’s vision, mission and objectives?
Having assessed market attractiveness, the next step is to assess the

business’s (organisation’s) strengths by looking at the issue of capabilities.
Consider the:
• strengths the organisation has
• skills, competencies, assets or capabilities required to succeed.
After such an assessment, strategic managers identify those business units

(or products) that are most attractively placed, where the organisation has
the greatest strengths or competitive advantages, and then seek to target
them.
The developers of the GE matrix went further and developed some
suggested responses depending on where the business unit (product or
opportunity) fell within the matrix – these are captured in Figure 4.5.

Figure 4.5 GE matrix – generic strategy options
Business strength
Strong Average Weak
Protect position Invest to build Build selectively
• invest to grow at maximum • challenge for leadership • specialise around limited
digestible rate • build selectively on strengths
• concentrate effort on strengths • seek ways to overcome
maintaining strength • reinforce vulnerable areas weaknesses
• withdraw if indications of
sustainable growth are
lacking
Build selectively Selectivity/manage for Limit expansion or harvest
• invest heavily in most earnings • look for ways to expand
attractive markets • protect existing programs without high risk;
• build up ability to counter • concentrate investments otherwise, minimise
competition in segments where investment and rationalise
• emphasise profitability by profitability is good and operations
raising productivity risks are relatively low
Protect and refocus Manage for earnings Divest
• manage for current • protect position in most • sell at a time that will
earnings profitable markets maximise cash value
• concentrate on attractive • upgrade product line • cut fixed costs and avoid
markets • minimise investment investments meantime
• defend strengths
Of course, in practice, none of this precludes a strategic manager from

developing strategies that would reposition the business unit/product
line if that is preferred. However, it would require the development of the
strategies to reposition the business unit or product before the opportunity
were to be pursued.
Aligning strategic strengths to opportunities and threats

How do we connect what the organisation ‘can do’ to what it ‘might do’?
Opportunities and threats are things that:
• enhance its strategic position, facilitate strategic outcomes and create
strategic options and possibilities (opportunities)
• hold the organisation back, threaten its success or even its long-term
survival (threats).

It is important to recognise that both opportunities and threats are
external; they come from trends outside the organisation. They are not
merely creative ways of extrapolating or paraphrasing the organisation’s
strengths or addressing its weaknesses. For example, suggesting that the
organisation ‘has the opportunity to develop new products by employing
industry knowledge’ is a strategy based on a strength in new product
development. An opportunity is something like ‘entry into the Brazil market’,
enabled by the identified trend that trade barriers in Brazil are falling –
it flows directly from the external trend.
And as you also know from Unit 3, the opportunities most relevant to an
organisation are those that:
• offer the best prospects for successful long-term growth
• are positively aligned to the organisation’s vision and mission
• optimise potential competitive advantage and/or strategic success
• are aligned to the organisation’s strategic capabilities.
An organisation is well advised to focus on opportunities where it has

(or can build) the capabilities required to capture them. Strategic managers
need to match the desire to seize opportunities and avoid threats to the
organisation’s strengths, and avoid strategies reliant on weaknesses. If a
strategic manager was convinced that pursuing an opportunity reliant on
a weakness is essential, then the ‘internal consistency’ test says a plan is
needed to acquire the resources or capabilities or overcome the weakness.
Role of SWOT analysis in crafting a better

strategy
SWOT analyses are useful in helping to develop understanding of an
organisation’s strategic strengths and weaknesses, recognise the most
attractive external opportunities and the most dangerous threats. The
organisation must then draw conclusions about how its strategies can
match its strengths to seize the opportunities, and assess how urgent it is
to address the weaknesses, or defend against the threats.
The following table provides a useful checklist of what to look for in
evaluating an organisation’s strengths, weaknesses, opportunities and
threats.

Table 4.1 SWOT analysis – things to look for
Potential Strengths Potential Weakness and
and Competitive Assets Competitive Deficiencies
• Competencies that are well matched to • No clear strategic vision
industry key success factors • No well-developed or proven core
• Ample financial resources to grow the competencies
business • No distinctive competencies or competitively
• Strong brand-game image and/or company superior resources
reputation • Lack of attention to customer needs
• Economies of scale and/or learning- and • A product or service with features and
experience-curve advantages over rivals attributes that are inferior to those of rivals
• Other cost advantage over rivals • Weak balance sheet, short on financial
• Attractive customer base resources to grow the firm, too much debt
• Proprietary technology, superior technological • Higher overall unit costs relative to those of
skills, important patents key competitors
• Strong bargaining power over suppliers or • Too narrow a product line relative to rivals
buyers • Weak brand image or reputation
• Resources and capabilities that are valuable • Weaker dealer network than key rivals and/or
and rare lack of adequate distribution capability
• Resources and capabilities that are hard • Lack of management depth
to copy and for which there are no good • A plague of internal operating problems or
substitutes obsolete facilities
• Superior product quality • Too much underutilized plant capacity
• Wide geographic coverage and/or strong • Resources that are readily copied or for which
global distribution capability there are good substitutes
• Alliances and/or joint ventures that provide
access to valuable technology, competencies,
and/or attractive geographic markets
Potential Market Opportunities Potential External Threats to a Company’s
Future Profitability
• Sharply rising buyer demand for the industry’s • Increasing intensity of competition among
product industry rivals–may squeeze profit margins
• Serving additional customer groups or market • Slowdowns in market growth
segments • Likely entry of potent new competitors
• Expanding into new geographic markets • Growing bargaining power of customers or
• Expanding the company’s product line to suppliers
meet a broader range of customer needs • A shift in buyer needs and tastes away from
• Utilizing existing company skills or the industry’s product
technological know-how to enter new product • Adverse demographic changes that threaten
lines or new business to curtail demand for the industry’s product
• Falling trade barriers in attractive foreign • Adverse economic conditions that threaten
markets critical suppliers or distributors
• Acquiring rival firms or companies with • Changes in technology–particularly
attractive technological expertise or disruptive technology that can undermine the
capabilities company’s distinctive competencies
• Entering into alliances or joint ventures to • Restrictive foreign trade policies
expand the firm’s market coverage or boost • Costly new regulatory requirements
its competitive capability • Tight credit conditions
• Rising prices on energy or other key inputs

Sustaining a competitive advantage
Strategic resources are those that create unique value and perform well
using the VRIO framework. This begs the question: what must strategic
managers do in order to sustain a competitive advantage? Grant et al
(2014, pp. 178–179) cite three tests to determine whether a strength offers
sustainable competitive advantage. This also indicates what strategic
managers should focus on in developing and preserving:
1. durability – how long will the advantage from the strength endure? How
can this be refined and protected?
2. transferability – can the strength be made hard/difficult for a competitor
to acquire (i.e. they can’t simply buy it) and can the strength be
transferred through other parts of the organisation?
3. replicability – is the capability difficult/hard to reproduce or copy?
Is it based on complex and hard-to-imitate organisational routines,
processes and practices that are proprietary and unique?
Again, what you will see in these tests is that sustainable competitive
advantages are rare, and that most organisations would have very few of
them.
Activity 4.3
1. Complete a SWOT analysis of your organisation or, if you are in an
organisation with a portfolio of businesses, complete a SWOT of the
strategic business unit you work in. Based on this analysis, what
conclusions can you draw about the strategic choices and issues for
your organisation?
2. What are your organisation’s sustainable competitive advantages?

How effectively are these being developed and sustained?

How do the organisation’s value chain
activities impact upon its cost structure and
customer value proposition?
As you know from earlier discussion, Michael Porter identified the generic
bases for competitive advantage as cost leadership and differentiation.
To achieve cost leadership obviously requires understanding how
competitive an organisation’s costs are with those of its rivals. But equally,
achieving differentiation necessitates both efficient and effective allocation
of resources and management of costs. Therefore, understanding cost
structures and optimising these to deliver competitive advantage are crucial
strategic management tasks. Three of the key analytical tools used in
understanding the organisation’s costs are:
• strategic cost analysis
• value chain analysis
• benchmarking.
Differences in the costs of competing organisations arise from

differences in:
• prices paid for inputs such as knowledge, people, raw materials,
component parts, energy and other supplier resources
• the production capacity of each organisation’s production and operating
processes and its technologies
• economies of scale, scope and location, and experience-curve effects
• wage rates and productivity levels of labour
• marketing, promotion and administration costs
• compliance and legal costs
• inbound and outbound logistics costs
• costs and efficiencies of alternative distribution channels.
These differences may arise because of a host of external or internal

factors, such as differences in organisational size, age, efficiency,
management ability, organisational competency, geographic location,
exchange rates, political regulation and taxation rates.
Strategic cost analysis

Understanding an organisation’s costs relative to competitors’ costs, and
understanding the costs of a particular business model versus alternative
business models, enables strategic managers to evaluate alternative
strategies, structures, channels and operational practices. They can choose

either to alter the processes needed to achieve superior cost positions,
or to maintain existing processes and actions, conscious of the cost
implications of doing so.
As you will recall from previous Units, a business model reflects the
decisions of strategic managers about how the organisation generates
its revenues and how it manages its costs. That involves the choices that
the strategic managers make about alternative ways of structuring their
answers to seven key questions.
1. What value propositions does the organisation choose to make?
2. What customer segments does it choose to make these to?
3. What sorts of relationships does it seek with customers?
4. What channels does it choose to deliver the value through?
5. What key activities does it need or choose to engage in (and what
activities does it use others to deliver)?
6. What key resources are required to undertake the key activities, create
and deliver the value propositions and maintain relationships with
chosen segments?
7. What key partnerships does it want or need to establish to create a
unique ecosystem or value chain?
The answers to these questions will create a unique business model,

with unique relationships and costs. Strategic cost analysis compares
an organisation’s costs for each answer above against the roughly
equivalent costs of other organisations or key rivals. It looks at all costs,
from sourcing raw materials through to the prices customers or end-users
pay. It can pinpoint which internal activities are sources of cost advantage.
For such analysis to be meaningful, managers must have information on
the comparative costs of other organisations undertaking roughly similar
activities. In other words, it must be able to compare the costs incurred to
create value propositions, to deliver them through its chosen channels,
to establish and maintain the relationships with targeted segments, etc.
Ultimately, it needs to be able to generate insights about the comparative
efficiency of different business models – how effectively and efficiently do
they generate revenues, and how effectively and efficiently do they manage
costs?
Value chain analysis

The term ‘value chain’ is another way of understanding a business model.
It refers to the way an organisation chooses to produce and deliver its value
propositions via a series of value-transforming activities. You will be familiar
with this framework from Figure 4.2 and our earlier discussion.

Consider, for example, a restaurant producing ‘dining experiences’ as
the basis for charging customers. The restaurant’s managers must buy
ingredients; hire, train, manage and deploy cooking and serving staff;
buy or lease premises and fit these premises out; advertise and promote;
prepare and serve meals for a range of sittings (breakfast, lunch, dinner);
clean up afterwards, manage the bookings and possibly deliver meals to
the diners’ homes or workplaces, etc. All of these activities are part of the
restaurant’s value chain – the activities that take raw ingredients and turn
them into meals and experiences that customers enjoy and for which they
will pay. To understand what activities the restaurant does well, what it
does poorly and where it derives competitive advantage, it must be able
to describe what chain of activities create value, and how these compare
with others.
When used effectively, value chain analysis helps understand an
organisation’s cost position and identifies the value-creating (or
destroying) activities as a basis for strategy.
In value chain analysis, two key types of activities are examined: primary
value-creating and support activities.
Primary activities include product and service design, creation and delivery,
as well as marketing and after-sales service. In the restaurant example,
buying ingredients, marketing to attract customers, preparing and serving
meals, clearing and resetting the restaurant ready to serve again, and
arranging home deliveries are all primary activities.
Support activities are those things necessary for the primary activities to
take place. In the restaurant, they would include buying/leasing premises,
bookkeeping, dealing with licensing and compliance issues, etc. The
generic value chain diagram, Figure 4.2, shows how a product moves from
the raw material stage to the final customer.
The essential knowledge that strategic managers get from value chain
analysis is listed below.
• Understanding what activities the organisation engages in, and
which of them actually creates or adds value for the organisation and
its customers. It’s important to note that a value chain is meant to
represent the activities the organisation uses to create and maintain
value, not its organisation structure. These activities may be in
disparate locations and organisational units or divisions, or managed
by different managers. It is the activities that the model is meant
to capture, not how they are organised. In our restaurant, multiple
people may be involved in serving meals, and they may be in different
structures and report to different supervisors and managers, but the
activity would be simply mapped as ‘serving meals’.

• Identify ways the organisation can add as much value as possible,
at as many points as possible, and do so as cheaply as possible.
Activities need to be considered in terms of ‘how does this, or how
could this, add the most strategic value to the organisation at the lowest
possible cost?’
• Most importantly, managers need a strategy to capture and nurture
value (and increase the value over time). They must find ways to
increase returns from activities, and eliminate value-destroying
activities. Remember, we are talking strategic value.
Bear in mind that the value chain diagram in Figure 4.2 is a generic
example. Actual value chains will vary significantly across and within
industries, and even between and within organisations.
Activity 4.4
1. Consider your organisation’s business model or value chain (either
approach is equally relevant). Does your organisation have key value-
creating activities that provide competitive or strategic advantage? If so,
what are they?
2. Does your organisation have value-destroying activities that restrict its

competitive or strategic advantage? If so, what are they?
3. How can understanding these be used to develop strategy to help your

organisation achieve its vision?

Benchmarking
One important way for strategic managers to understand the relative merits
of their chosen business model or value chain is to benchmark or compare
its cost structures and efficiency/effectiveness in delivering and capturing
value with other business models and value chains. One way to do this
is activity-based cost-accounting using data to identify which costs and
activities are strategically significant, which add value and which destroy
value. This then enables strategic managers to benchmark (comparing and
contrasting) activity-specific costs with other organisations, and within the
organisation over time. The objectives of benchmarking are to:
• determine whether the organisation is performing particular value-chain
activities efficiently compared to the way others do them
• determine whether the organisation is getting better or worse at
managing value-chain activities over time
• identify and understand best practice by learning from those who have
demonstrated they are best in an industry or ‘world class’
• assess particular value-chain activities relative to those of competitors
• take action to improve the organisation’s cost effectiveness.
Is the organisation competitively stronger

or weaker than key rivals?
Using value chain, strategic cost analysis and benchmarking is necessary,
but they are not always sufficient to generate competitive advantage
on their own. A much more broad-ranging assessment is needed of an
organisation’s competitive position and strength.
Strength of competitive position in the marketplace hinges on:
1. whether the organisation’s position will improve or deteriorate if the
present strategies continue
2. how well the organisation ranks relative to key rivals on industry key
success factors (KSF) and other measures of strategic strength
3. whether the organisation has a sustainable competitive advantage
4. the ability of the organisation to defend its position in light of:
• industry-driving forces
• competitive pressures
• anticipated moves of rivals or other major players.
Undertaking a quantitative competitive strength assessment helps strategic

managers to understand where their organisation is competitively strong
and weak. It also provides insight into the organisation’s ability to defend or
enhance its strategic position.

Quantifying competitive strengths
In order to analyse strategic strengths relative to rivals, strategic managers
can list industry KSFs and other relevant measures of competitive strength
and compare the position of each competing organisation.
Table 4.2 is an example of such an approach.
Table 4.2 Sample weighted strength assessment

Competitive Strength Assessment
(rating scale: 1 = very weak, 10 = very strong
ABC Co. Rival 1 Rival 2

Key Success
Importance Strength Weighted Strength Weighted Strength Weighted
Factor/Strength
Weight Rating Score Rating Score Rating Score
Measure
Quality/product 0.10 8 0.80 5 0.50 1 0.10
performance
Reputation/image 0.10 8 0.80 7 0.70 1 0.10
Manufacturing 0.10 2 0.20 10 1.00 5 0.50
capability
Technological skills 0.05 10 0.50 1 0.05 3 0.15
Dealer network/ 0.05 9 0.45 4 0.20 5 0.25
distribution
capability
New product 0.05 9 0.45 4 0.20 5 0.25
innovation
capability
Financial resources 0.10 5 0.50 10 1.00 3 0.30
Relative cost 0.30 5 1.50 10 3.00 1 0.30
position
Customer 0.15 5 0.75 7 1.05 1 0.15
service
capabilities
Sum of 1.00
importance weights
Overall 5.95 7.70 2.10
weighted
competitive
strength rating

What strategic issues and problems merit
front-burner managerial attention?
Based on understanding whether the organisation is stronger or weaker
than its rivals, and from conducting industry and competitive analysis,
strategic managers must identify which issues to put on the strategic ‘to do’
list. They need to think strategically about:
• what the organisation ‘might do’ – the pluses and minuses in the
industry and strategic or competitive situation (opportunities and
threats)
• what the organisation ‘can do’ – the organisation’s strengths and
weaknesses, and the implications of its current competitive position.
A good strategy must address what to do about each and every strategic
issue!
Identifying which issues are strategic

To identify the critical strategic issues, a manager might ask the following
questions.
• Is the present strategy adequate in light of competitive pressures and
driving forces?
• Is the strategy well-matched to the industry’s key success factors?
• Does the organisation need to develop or acquire new or different
strengths and strategic capabilities?
• Does the present strategy adequately protect against external threats
and minimise the impact of weaknesses?
• Does the present strategy use the strategic strengths to best effect, and
take advantage of emerging opportunities?
• Is the organisation vulnerable to competitive attack by rivals?
• Where are strong/weak spots in the present strategy?
Activity 4.5
Having completed all the other analyses, what critical strategic issues does
your organisation need to address?

Generic building blocks of
competitive advantage
Strategic options, ways to deliver strategic success, will be discussed
in more detail in subsequent Units. However, one of the key tools for
understanding how to ‘build’ an effective strategy is the 7-S framework
developed by the global consulting firm McKinsey. This framework
suggests that an organisation’s strategic or competitive advantages are
derived from some combination of the following.
• Shared values – the common values and beliefs the employees share;
things beyond profit. Note that not all organisations display these, or
they may not hold or display them strongly.
• Structure – the way the organisation defines and administers internal
power and relationships, including its policies and procedures.
• Systems – the decision-making systems, including both IT-based and
human-based systems.
• Style – the organisational culture and leadership style that typifies the
organisation.
• Staff – having sufficient numbers of the right people, trained, motivated
and committed to the organisation’s success.
• Skills – the presence (or absence) of key strategic competencies
needed to make strategy succeed.
• Strategy – the company’s integrated vision and direction.
Strategic managers must consider the extent to which their organisation

derives strengths or suffers weaknesses from these S factors. Does
the organisation gain advantage over its competitors from defending or
nurturing an existing strength (or overcoming a weakness) related to one or
more of the S areas?
In addition to the McKinsey 7-S framework, other authors have proposed
four common strategic factors, or building blocks, of competitive or strategic
advantage:
• efficiency – using fewer inputs to produce a particular level of output
• quality – offering products and experiences that are perceived by
customers (or key stakeholders) as superior
• innovation – generating a continuing stream of new and more valuable
business models, products and processes that lead to differentiation or
cost leadership
• customer (or client) responsiveness – better identifying and meeting the
needs of customers or key stakeholders.
These can be applied regardless of the organisation’s industry or the
products or services it produces. However, to be successful, they must be
built from the organisation’s strengths.

Summary
Underlying any organisation’s strategic vision must be an understanding
and detailed analysis of its sustainable competitive advantages or its
strategic strengths and weaknesses. These strengths and weaknesses
come from the way it acquires, sustains and manages the tangible,
intangible and human assets or the strategic resources that it controls.
Aligning what the organisation ‘can do’ (using its strengths to maximum
effect, and minimising the impact of, or overcoming, its weaknesses) is
the basis of the strategies that its leaders must create. These must be
aligned to what the organisation ‘might do’ (seeking to seize the most
attractive opportunities and avoid the most significant threats in its external
environment). It is from all of this that strategic choices or options are
identified.
A competently executed evaluation of strategic capabilities exposes
strong and weak points in a strategy, the organisation’s capabilities and
vulnerabilities, and its ability to protect or improve its strategic position, deal
with competitive pressures, and counteract the strengths of rivals.

questions. You will find the answers listed after the References section.
1. Complete the following statement. ‘Strategic managers are accountable
for identifying, sustaining and enhancing strategic advantage. To do
this they must:
• know what the existing sources of strategic advantage are,
• ........
• manage both of these (existing and potential sources of advantage)
efficiently to ensure that they are sustained and improved over
time, and
• hard-wire these into the organisation’s core competencies so that
they are sustainable for the long-term.’
a. benchmark these against competitors to ensure that they are

genuinely differential
b. regularly review and adjust their understanding of competitive
advantage by scanning the external environments
c. look to monetise the competitive advantages through an effective
intellectual capital strategy (e.g. patents and copyrights)
d. identify future sources of strategic advantage that will be needed
for the future context that they have identified (typically via scenario
planning)
e. regularly monitor, evaluate and adjust strategy to ensure that it is
aligned to the forces of the environment most urgent at the time
2. Which of the following is not identified by Michael Porter as one of the

key forms of competitive advantage?
a. differentiation on an industry-wide basis (differentiation)
b. superior access or management of value-adding networks or
relationships
c. low cost on an industry-wide basis (cost leadership)
d. differentiation or low cost on a single segment basis (focus)
3. Complete the following statement. ‘Successful analysis of an

organisation’s existing strategies requires two steps:
Step 1: Determine the organisation’s current strategy.
Step 2: .........’
a. Examine the following key indicators of strategic and financial
performance.
b. Identify and rate the importance of strengths and weaknesses.

c. Calculate the value of tangible, human and intangible resources.
d. Assess the value of the existing and potential portfolio of
businesses or products.
e. Conduct an exhaustive SWOT analysis and interpret the outcomes.
4. Typically, strategic resources consist of tangible resources, intangible

resources and human resources. Which of the following is an example
of an intangible strategic resource?
a. plant and equipment
b. knowledge and know-how
c. culture
d. capacity for collaboration
e. borrowing capacity
f. motivation
5. Which of the following is not one of the typical basic strategy options
considered after interpreting a BCG Matrix?
a. invest
b. harvest
c. build
d. divest
e. hold
6. Complete the following statement. ‘In determining industry

attractiveness, a strategic manager is charged to assess three things:
• size and growth of the segment
• structure of the market, and ……
a. relative market share.

b. relative market growth.
c. stakeholder engagement.
d. shared values.
e. organisation’s strategic vision, mission and objectives, and the
availability of strategic resources.
7. The VRIO framework is used to assess sustainable competitive

advantages to identify whether they form key strategic strengths for an
organisation. Which of the following definitions best describes the term
valuable in the VRIO framework?

a. effectively linked to policies, procedures and practices in a way that
enables the resource to be effectively exploited
b. controlled by only a small number of companies
c. enables the organisation to efficiently, effectively and quickly
respond to external opportunities and threats
d. difficult or expensive to acquire or copy
e. the resource endures over the longer term, it can be refined and
protected and made more long-lasting
8. In a value chain analysis, two key types of activities are examined:
primary value-creating and support activities. Which of the following is
an example of a support activity?
a. operations management
b. service management
c. distribution management
d. human resources management
e. supply chain management
9. Step 4 requires a strategic manager to assess the strength of the
organisation’s competitive position in the marketplace. Which of the
following is not one of the tests that this assessment hinges upon?
a. using cost accounting-based data allows strategic managers to
identify which costs and activities are strategically significant, which
add value and which destroy value
b. whether the organisation’s position will improve or deteriorate if the
present strategies continue
c. how well the organisation ranks relative to key rivals on industry
KSFs and other measures of strategic strength
d. whether the organisation has a sustainable competitive advantage
e. the ability of the organisation to defend its position in light of
industry-driving forces, competitive pressures and anticipated
moves of rivals or other major players
10. The 7-S framework is said to summarise some of the building blocks of
strategy. Which of the following is not one of the 7-Ss?
a. skills
b. stakeholders
c. structure
d. systems
e. staff
f. shared values

References
Birger, J 2006, ‘Second mover advantage’, Fortune Magazine,
20 March, http://archive.fortune.com/magazines/fortune/fortune_
archive/2006/03/20/8371782/index.htm
Brim, B 2008, ‘Debunking strengths myth #2: Why taking a strengths based
approach isn’t as easy as it seems’, Gallup Management Journal Online,
10 January, pp. 1–3.
management of technology and innovation, 5th edn, McGraw-Hill, Boston,
Section 2.
Collins, J 2001, Good to great, Harper Collins, New York.
Collins, J & Porras, J I 2004, Built to last: Successful habits of visionary
companies, Harper Collins, New York.
management: An Australasian perspective, John Wiley, Milton.
management: An Australasian perspective, 2nd edn, John Wiley, Milton.
Hamel, G 2004, ‘Be your own seer!’, Executive Excellence, vol. 21, no. 5,
pp. 4–5.
Kapadia, P 2007, ‘The flip side of signature strength’, SiliconIndia, April,
vol. 10 issue 3, pp. 32–33.
Kaplan, R S & Kaiser, R B 2009, ‘Stop overdoing your strengths’,
Harvard Business Review, February, vol. 87, issue 2, pp. 100–103.
Matthews, J A 2005, ‘Strategy and the crystal cycle’, California
Management Review, vol. 47, no. 2, Winter, pp. 6–32.
Porter, M E 1980a, ‘How competitive forces shape strategy’, The McKinsey
Quarterly, Spring, pp. 34–50.
Porter, M E 1980b, Competitive strategy: Techniques for analysing
industries and competitors, The Free Press, New York.
Porter, M E 1988, ‘From competitive advantage to corporate strategy’,
The McKinsey Quarterly, Spring, pp. 35–70.
Prahalad, C K & Hamel, G ‘The core competence of the corporation’,
in Burgelman, R A, Christensen, C M & Wheelwright, S C 2009, Strategic
Boston, Rdg. I–3, pp. 66–77.
Sawyer, R D 1994, Sun-Tzu, The art of war: New translation, Barnes &
Noble Books, New York.

Thompson, A A, Strickland, A J & Gamble, J C 2010, Crafting and
Crafting and executing strategy: The quest for competitive advantage, 20th
edn, McGraw-Hill Education, Boston.
Treacy, M & Wiersema, F 1995, The discipline of market leaders: Choose
your customers, narrow your focus, dominate your market, Addison
Wesley.
Zenger, J 2009, ‘Strengths or weaknesses?’ Leadership Excellence, May,
vol. 26, iss. 5, pp. 14–15.

answers
1. d
2. b
3. a
4. c
5. a
6. e
7. c
8. d
9. a
10. b

Unit 4 reading summary
Readings are available via active hyperlinks. Please note that you may be
required to enter your UNSW zID and zPass in order to access hyperlinked
articles. You may also receive a message advising that you are ‘Leaving
Box’ or that the bookmark will open in another tab – in which case, please
click ‘Continue’.
Reading 4.1 Kaplan, R S & Norton, D P 2004, ‘Measuring the

strategic readiness of intangible assets’, Harvard

Unit 5
Strategically agile
organisations
CONTENTS
References 5–36
The argument for agility 5–4
Characteristics of agile organisations 5–7
Detailing strategic assumptions 5–14
Managing strategic risk 5–16
Contingency planning 5–17
Developing strategic agility 5–18
Resilience – the final ingredient 5–22
Generating strategic options 5–27

Introduction
Agile: quick and well-coordinated in movement … active, lively …
marked by an ability to think quickly, mentally acute or aware.
(http://dictionary.reference.com/browse/agile)
Resilient: recovering readily from illness, depression, adversity or the

like.
(http://dictionary.reference.com/browse/resilient)
• recognising the importance and contributing capabilities that make
organisations strategically agile and resilient
• understanding the impact of strategic conditions on what strategic
postures and organisation should adopt
• highlighting the need to make strategic assumptions explicit and to
manage strategic risk
• understanding how to develop strategic options via analysis.
Please watch the video and then read on.
Video
What do the two definitions offered earlier in this section suggest about
the nature of strategy? Why is it that the daily business news is routinely
filled with stories of organisations struggling, downsizing or disappearing,
while others outperform expectations? Why is it that this ‘churn’ affects not
only small businesses with few strategic resources and limited strategic
capabilities, but often also large and iconic organisations replete with a
wealth of resources and talented professional managers?
In this Unit, we will answer Lafley and Martin’s (2013, p. 15) question
‘What capabilities must be in place?’ by demonstrating that two critical
capabilities needed by all organisations and strategic managers are:
1) agility, and 2) resilience. As Worley et al (2016, p. 77) identified:
The word ‘Agility’ has entered the business lexicon like few other
terms in recent memory. Today’s strategists extol the importance of
strategic agility and resilience… Yet even as agility is mentioned more
often and in more management contexts, we believe that the core
concept is misunderstood. Agility refers to an organization’s ability to
make timely, effective, and sustained changes that maintain superior
performance.
Unit 5: Strategically agile organisations 5–1

It is fair to suggest that events such as the 2008–09 Global Financial
Crisis, the Eurozone currency crisis and Brexit may represent once-in-a-
generation or black swan1 events that few among even the best strategic
managers predicted. Nonetheless, the point remains that an organisation
that is agile and resilient, having the capacity to think and move quickly and
recover from adversity, has a competitive advantage over slower-moving
organisations unable to recover as readily from adversity.
In a strategic sense, what we mean by agility is the capacity of the strategic
managers of an organisation ‘to make timely, effective, and sustained
changes that maintain superior performance’ (Worley et al (2016, p. 77).
Worley et al go on to suggest that:
An essential feature of agility is repeatability. Agile organizations
continuously adjust to changing circumstances by, for example,
launching new products or eliminating old ones, entering new markets
or exiting underperforming ones, or building new capabilities. This
requires management processes that can support adaptability over
time.
You will recall that in Unit 2 we settled on the following definition of strategy:
emergent initiatives taken by managers on behalf of the organisation’s
performance of the organisation in its external environments.
While much of the discussion in the previous Units has been about ‘the
major intended initiatives’, in this Unit our focus will be on ‘emergent
initiatives taken by managers on behalf of the organisation’s key
stakeholders, involving utilisation of resources to enhance the performance
of the organisation in its external environments’.
You will also recall from earlier Units that one widely held view of strategic
management is to see it as responsible for ‘defining a plausible future
for the organisation’. We have to consider events and outcomes that are
unknown and uncertain at the time we develop the strategy. Accordingly,
a key function for any aspiring strategic manager is to try to discern the
nature of the ‘future’ in which the strategy must succeed.
We therefore need to set out what we see as the likely future, and do so in
five key strategic areas – summarised under 5Cs:
• company (or organisation)
• customers (or clients)
1. Black swan events are so called because of the best-selling 2007 book The Black Swan
by Nassim Nicholas Talib in which he suggested that refusing to allow for randomness and
extreme possibilities in forecasting resembled people who only ever believed that swans could
be white until the black swan was discovered in Australia.

• competitors (or strategic rivals)
• collaborators (or key strategic allies and value chain partners), and
• context (macro and industry environmental forces)
In Unit 3, we developed our capacity to look into the future by considering

possible scenarios (optimistic – pessimistic – likely – divergent). This
forecasting tool is extremely important, but on its own it is not enough.
Therefore, we must also focus on understanding three more strategic
management competencies:
• understanding and monitoring the nature and level of predictability in
external environments, and recognising and making explicit the critical
assumptions on which strategic options are based
• recognising and evaluating risks related to emerging opportunities and
threats, and planning contingent responses for them
• matching the commitment of major strategic resources to the level
of confidence we have about the future – retaining the flexibility to
respond to changes as they happen.
Learning outcomes
• describe the characteristics of strategically agile and resilient organisations
and strategic managers
• outline how interpreting and responding to changes in external conditions
enables both agility and resilience
• discuss the importance of recognising and making explicit any strategic
assumptions
• outline key activities involved in strategic risk analysis and contingency
planning
• discuss how strategically agile organisations match the commitment and
availability of key capabilities to the nature of their environment.
Ghemawat, P 2010, ‘Mapping the business landscape’, Strategy and the
business landscape, 3rd edn, Pearson Prentice-Hall, Upper Saddle River,
NJ, ch. 2.
Kim, W C & Mauborgne 2005, Blue ocean strategy: How to create
uncontested market space and make the competition irrelevant, Harvard
Business School Press, Boston, ch. 1 & 2.

The argument for agility
Let’s start by considering why strategic agility is important. You may recall
that in Units 1 and 2 we considered how strategy increasingly has both:
• proactive strategy elements, which strategic managers initiate or
continue from previous versions of the company strategy, and
• reactive strategy elements that are adaptive reactions to changes in the
environment.
In terms of these latter ‘reactive’ elements, Rigby, Sutherland and Takeuchi

(2016, p. 42) identified that:
…agile methodologies—which involve new values, principles,
practices, and benefits and are a radical alternative to command-and-
control-style management—are spreading across a broad range of
industries and functions and even into the C-suite. National Public
Radio employs agile methods to create new programming. John
Deere uses them to develop new machines, and Saab to produce
new fighter jets. Intronis, a leader in cloud backup services, uses them
in marketing. C.H. Robinson, a global third-party logistics provider,
applies them in human resources. Mission Bell Winery uses them for
everything from wine production to warehousing to running its senior
leadership group. And GE relies on them to speed a much-publicized
transition from 20th-century conglomerate to 21st-century “digital
industrial company.” By taking people out of their functional silos and
putting them in self-managed and customer-focused multidisciplinary
teams, the agile approach is not only accelerating profitable growth
but also helping to create a new generation of skilled general
managers.
While the authors above are specifically referring to the agile project
methodologies extensively used in new product development and
innovation, Thompson et al (2016, p. 9) have proposed:
… managers must always be willing to supplement or modify the
proactive strategy elements with as-needed reactions to unanticipated
developments. Inevitably, there will be occasions when market and
competitive conditions take an unexpected turn that calls for some
kind of strategic reaction. Hence, a portion of a company’s strategy
is always developed on the fly, coming as a response to fresh
strategic maneuvers on the part of rival firms, unexpected
shifts in customer requirements, fast-changing technological
developments, newly appearing market opportunities, a changing
political or economic climate, or other unanticipated happenings
in the surrounding environment. These unplanned, reactive, and
adaptive strategy adjustments make up the firm’s emergent strategy.
What Thompson et al refer to in the bold section (my emphasis) here is

what we will refer to in this course as strategic agility.

Perhaps the greatest advocate of strategic agility is noted strategy author
and London Business School Professor of Strategy Gary Hamel, who set
out reasons why strategic agility is so important. You can watch and listen
to him explaining his reasons for why organisations have to be fit for the
future in the following video.
Video
Video 5.2 G
ary Hamel: Reinventing the Technology of Human
Accomplishment [15:10]
You will have noted in the video talk that Gary Hamel sets out the
arguments for why organisations need to develop fast, flexible capabilities,
key among which are innovations in management (of which strategic
management is a central part) in order to respond to the pace and
ubiquitous nature of changes in the environment.
Earlier in his career, he also published a series of groundbreaking articles.
One of the most notable of these articles is entitled ‘Strategy as revolution’
(Hamel 1996, pp. 69–82) in which he identified 10 principles that are
needed for an organisation to be revolutionary or strategically agile. These
are summarised below.
Principle 1
Strategic planning isn’t strategic. Strategic planning for most organisations
is a calendar-driven ritual, not an exploration of the potential for change.
It works from the present and projects forward on the basis that the future
is an extension of the present, rather than thinking about the future and
working back to see how we ought to position ourselves now for the future.
Principle 2
Strategy-making must be subversive – it must challenge rather than accept
the industry and company ‘norms’ and challenge the often unspoken rules
about the way things ‘work’.
Principle 3
The bottleneck is at the top of the bottle – the board and senior executives
are often the most blinkered by their past experience and have the most to
lose by challenging the way things are done presently.

Principle 4
Revolutionaries exist in every company – people willing to challenge things
exist in most organisations, but it’s hard for them to be heard because
layers of bureaucracy stifle their views getting through. Often the most
creative and divergent thinkers leave in frustration.
Principle 5
Change is not the problem, engagement is – people and their ideas can
emerge if leaders create the climate for this to happen, by engaging and
empowering people, and creating a culture that encourages challenge and
constructive critique.
Principle 6
Strategy-making must be democratic – strategic leaders need to encourage
and actively seek input from as wide a range of stakeholders as possible,
because good strategic ideas and useful insights are widely distributed and
not just within the organisation and industry.
Principle 7
Anyone can be a strategy activist – agile organisations require a culture
where passionate and committed people can become active, step up and
participate and even lead the process of changing the organisation for the
better, no matter where they fit in the ‘hierarchy’.
Principle 8
Perspective is worth 50 IQ points – strategic managers need to see
through new ‘lenses’; they must challenge the accepted norms and see the
organisation as a set of existing and potential competences rather than a
collection of business units. Strategy is about tapping into imagination, not
just making rational business investment decisions.
Principle 9
Top-down and bottom-up are not alternatives – strategy needs to capture
the singleness of purpose that comes top-down, but also harness the
imagination and passion that comes from strategies that percolate up from
the bottom of the pyramid. It needs both.
Principle 10
You can’t see the end from the beginning – revolutionary strategy-making
processes can lead to surprises that may even be confronting, and you
cannot predict what you will find at the start. But if you don’t undertake

the revolution, someone else will, and then you have a bigger problem –
survival.
Activity 5.1
Hamel has explained why strategic agility is needed, and pinpointed the
problems with most strategic planning. Consider your own organisation
(or one that you know well) and its current approaches to management and
strategy development.
Which of the problems that Gary Hamel identified in the video, and which of
the 10 principles outlined above hold true in the organisation?
What does your answer imply about the organisation’s capacity to be
revolutionary or strategically agile?
Characteristics of agile organisations

In the Worley et al (2016, pp. 77–78) article mentioned earlier, the authors
indicated:
We sought to understand the factors that explained sustained levels
of high performance and concluded that organizational agility required
four routines:
1. The strategizing routine establishes the purpose, direction

and market position of the organization, and supports what
management scholars James O’Toole and Warren Bennis referred
to as a “culture of candor” that expects organization members to
challenge the status quo;
2. The perceiving routine connects organizations to their external

environment; they can accurately sense and interpret relevant shifts
better than their peers do;
3. The testing routine encourages organizations to experiment with

different ideas, allowing them to learn on a continuous basis;
4. And, finally, the implementing routine facilitates day-to-day

changes in products, operations, structures, and systems, but more
importantly, orchestrates the development of new capabilities,
business models, and strategies.

Routines and capabilities are what allow organizations to get things
done reliably and repeatedly. Some, such as lowering costs or
improving quality, enable organizations to keep pace with a changing
world. Others, such as designing superior customer experiences or
reducing the time it takes to achieve profitability in new markets, can
provide distinct advantages. The agility routines play the critical role of
making continuous change possible and profitable.
Based on these four routines and Hamel’s work on strategic thinking, we

can see that some of the competencies and behaviours that describe
strategically agile organisations include the following:
• an organisational culture that encourages people at all levels to be:
– customer centred (focused on developing distinctive value
propositions that help customers do their ‘jobs to be done’)
– inquisitive (willing to investigate and keen to discover)
– expansive (wide-ranging and broad-thinking)
– prescient (able to spot trends early and anticipate change)
– inventive (encouraged to use their creativity and imagination)
– inclusive (involving all relevant stakeholders in the process)
– demanding (pushing all the time for the best opportunities and best
outcomes)
– subversive or at least accepting of subversion (willing to challenge
existing business models, industry and company norms or ways of
doing things and views of how the industry and the world work).
• ensuring that timely and relevant strategic information, innovation and

ideas flow both down and up through the organisation.
• engaging all of the employees and stakeholders (engagement here
means more than just involvement; engagement incorporates both
rational or intellectual understanding and emotional commitment,
connecting the hearts and the minds of people).
• accepting that all ideas are valuable and that the best ideas do not
have to come from ‘the top’ or be controlled from above.
• recognition of the importance of perspective (the difference in
perception of those closest to the action, colleagues in support
functions, or senior leaders – all perspectives are valuable).
• recognising that strategic outcomes are often experimental and
iterative, so that they evolve – you cannot always determine with
certainty at the start exactly what outcomes will be produced.

However, we must be cautious – because as Rigby et al (2016, p. 44)
suggest:
Agile is not a panacea. It is most effective and easiest to implement
under conditions commonly found in software innovation: The problem
to be solved is complex; solutions are initially unknown, and product
requirements will most likely change; the work can be modularized;
close collaboration with end users (and rapid feedback from them) is
feasible; and creative teams will typically outperform command-and-
control groups.
In our experience, these conditions exist for many product

development functions, marketing projects, strategic-planning
activities, supply-chain challenges, and resource allocation
decisions. They are less common in routine operations such as plant
maintenance, purchasing, sales calls, and accounting.
The authors (2016, p. 46) identify conditions that favour agile

methodologies, including:
• ‘Customer preferences and solution options change frequently.’
• ‘Problems are complex, solutions are unknown, and scope isn’t easily
defined.’
• ‘Creative breakthroughs and time-to-market are important.’
• The impact of mistakes is seen as providing opportunities for learning
(rather than any mistakes having the potential to be catastrophic).
This introduces the notion that an agile strategic manager adapts the
approach to suit the conditions that they face. This further suggests that the
environmental scanning that we discussed in Unit 3 is vital. David Snowden
and Mary Boone (2007, pp. 69–70) highlighted that ‘Wise executives tailor
their approach to fit the complexity of the circumstances they face’ and
proposed that ‘We believe the time has come to broaden the traditional
approach to leadership and decision making and form a new perspective
based on complexity science…’.
They propose that there are four dominant strategic conditions, and that
different responses are appropriate depending on what type of strategic
conditions the strategic managers face. The four dominant strategic
conditions (2007, pp. 70–74) are identified as:
Simple Contexts: The Domain of Best Practice

Simple contexts are characterized by stability and clear cause-and-effect
relationships that are easily discernible by everyone. Often, the right answer
is self-evident and undisputed. In this realm of “known knowns,” decisions are
unquestioned because all parties share an understanding.
continued

Simple contexts, properly assessed, require straight-forward management and
monitoring. Here, leaders sense, categorize, and respond. That is, they assess
the facts of the situation, categorize them, and then base their response on
established practice.
Complicated Contexts: The Domain of Experts
Complicated contexts, unlike simple ones, may contain multiple right answers,
and though there is a clear relationship between cause and effect, not everyone
can see it. This is the realm of “known unknowns.” While leaders in a simple
context must sense, categorize, and respond to a situation, those in a complicated
context must sense, analyze, and respond. This approach is not easy and often
requires expertise…
Because the complicated context calls for investigating several options – many of
which may be excellent – good practice, as opposed to best practice, is more
appropriate.
Complex Contexts: The Domain of Emergence
In a complicated context, at least one right answer exists. In a complex context,
however, right answers can’t be ferreted out. It’s like the difference between, say,
a Ferrari and the Brazilian rainforest. Ferraris are complicated machines, but an
expert mechanic can take one apart and reassemble it without changing a thing.
The car is static, and the whole is the sum of its parts. The rainforest, on the other
hand, is in constant flux – a species becomes extinct, weather patterns change,
an agricultural project reroutes a water source – and the whole is far more than the
sum of its parts. This is the realm of “unknown unknowns,” and it is the domain to
which much of contemporary business has shifted.
Most situations and decisions in organizations are complex because some
major change – a bad quarter, a shift in management, a merger or acquisition –
introduces unpredictability and flux. In this domain, we can understand why things
happen only in retrospect. Instructive patterns, however, can emerge if the leader
conducts experiments that are safe to fail. That is why, instead of attempting to
impose a course of action, leaders must patiently allow the path forward to reveal
itself. They need to probe first, then sense, and then respond.
Chaotic Contexts: The Domain of Rapid Response
In a chaotic context, searching for right answers would be pointless: The
relationships between cause and effect are impossible to determine because they
shift constantly and no manageable patterns exist – only turbulence. This is the
realm of unknowables. The events of September 11, 2001, fall into this category.
In the chaotic domain, a leader’s immediate job is not to discover patterns but to
staunch the bleeding. A leader must first act to establish order, then sense where
stability is present and from where it is absent, and then respond by working
to transform the situation from chaos to complexity, where the identification
of emerging patterns can both help prevent future crises and discern new
opportunities. Communication of the most direct top-down or broadcast kind is
imperative; there’s simply no time to ask for input.
Snowden and Boone (2007, p. 73) then go on to suggest that effective

strategic managers adapt their decision-making based on these conditions
as follows:

Table 5.1 Adaptive Decision-making
The Context’s The Leader’s Danger Signals Response to
Characteristics Job Danger Signals
Simple Repeating Sense, Complacency Create
patterns and categorize, and comfort communication
consistent events respond channels to
Desire to
challenge
Clear cause- Ensure that make complex
orthodoxy
and-effect proper processes problems simple
relationships are in place Stay connected
Entrained
evident to without
Delegate thinking
everyone; right micromanaging
answers exist Use best No challenge to
Don’t assume
practices received wisdom
Known knowns that things are
Communicate in Overreliance on simple
Fact-based
clear, direct ways best practices if
management Recognize both
context shifts
Understand the value and
that extensive limitations of
interactive best practice
communication
may not be
necessary
Complicated Expert diagnosis Sense, analyze, Experts Encourage
required respond overconfident external
in their own and internal
Cause-and-effect Create panels of
solutions or in the stakeholders
relationships experts
efficacy of past to challenge
discoverable but
Listen to solutions expert opinions
not immediately
conflicting advice to combat
apparent to Analysis
entrained
everyone; more Use good paralysis
thinking
than one right practices
Expert panels
answer possible rather than best Use
practice Viewpoints of experiments
Known unknowns
non-experts and games to
Fact-based included force people to
management think outside
the familiar

The Context’s The Leader’s Danger Signals Response to
Characteristics Job Danger Signals
Complex Flux and Probe, sense, Temptation Be patient and
unpredictability respond to fall back allow time for
Create into habitual, reflection
No right answers;
environments command and
emergent Use approaches
and experiments control mode
instructive that encourage
patterns that allow Temptation to interaction so
patterns to look for facts patterns can
Unknown
emerge rather than emerge
unknowns
Use emerging allowing patterns
Many competing to emerge
practices
ideas
Increase levels Desire for
A need for accelerated
of interaction and
creative and resolution of
communication
innovative problems or
approaches Use methods exploitation
that can help opportunities
Pattern-based
generate
leadership
ideas: Open
up discussion;
set barriers;
stimulate
attractors;
encourage
dissent and
diversity; and
manage starting
conditions and
monitor for
emergence
Chaotic High turbulence Act, sense, Applying Set up
respond command and mechanisms
No clear cause-
control approach (such as parallel
and-effect Look for what
no longer needed teams) to take
relationships, works instead
advantage of
so no point in of seeking right “Cult of the
opportunities
looking for right answers leader”
afforded by
answers
Develop novel Missed a chaotic
Unknowables practices opportunity for environment
innovation
Many decisions Take immediate Encourage
to make and no action to Chaos unabated advisors to
time to think reestablish order challenge your
(command and point of view
High tension
control) once the crisis
Pattern-based has abated
Provide
leadership
clear, direct Work to shift
communication context from
chaotic to
complex

From this, we can see that one of the most important characteristics of
strategically agile organisations is the ability of the strategic managers
to understand the environmental context in which strategic decisions are
taken. It is entirely possible that:
• the strategic environment in one part of the organisation is in one
condition (simple or complicated) while in another part it may be
complex or even chaotic
• that strategic conditions change over time, moving from simple or
complicated to complex and even chaotic, and back again.
With this in mind, the answer to Lafley and Martin’s (2013, p. 15) questions
(Where will we play? How will we win? What capabilities must be in place?)
will vary depending on these environmental conditions. The strategic
manager may choose to enter or leave a market because the organisation
is better suited (its strengths and weaknesses are a better match) to
conditions in another market. Alternatively, the strategic manager may
(should) build the capabilities to respond differently to their assessment
of likely future conditions (move from pursuing best practice to building
capability for good, emerging or even novel practice).
As a result, strategic managers need to sense what the current and
emerging strategic environmental conditions are, and build relevant
capabilities in anticipation of future conditions. In terms of what Worley et al
(2016, pp. 77–78) described, this means flexibly adapting the key routines
of strategising, perceiving, testing and implementing.
A final characteristic we will discuss in more detail in a later section of
this Unit is resilience – the capacity to manage strategic resources such
as people, intellectual capital, relationships, resources and money in
such a way that the organisation can withstand the fluctuations in the
strategic environment. Beyond merely surviving, resilience implies that the
organisation is able to adapt, evolve and exploit opportunities and respond
to threats in difficult environments because of its possession and competent
management of agile strategic capabilities.

Detailing strategic
assumptions
A key capability of strategically agile organisations is responsiveness –
the capacity to recognise quickly when things change or are likely to
change, and to adapt to the changes. One means by which agile strategic
managers are able to do this is to explicitly recognise, monitor and respond
when new insights arise around any critical strategic assumptions.
The harder you fight to hold on to specific assumptions, the more
likely there’s gold in letting go of them.
(John Seely Brown, former Chief Scientist at Xerox and Palo Alto
Research Center)
As this quote suggests, a problem for many strategic managers is that they
make implicit assumptions and maintain them when they are (a) out of date,
(b) subjective, (c) biased or flawed, and (d) limiting, i.e. they reduce the
range of possible strategies that are considered, tested and implemented.
Whenever a person makes plans about the future, they make assumptions.
For example, if someone makes the statement: ‘Next year my family and I
are going to Europe for a four-week holiday’, they are basing it on a series
of assumptions, such as:
• the person and the family will still be together (and taking holidays
together)
• they will not experience any sort of financial, work or health crises that
will stop them from taking such a holiday
• travel to Europe won’t suddenly become more difficult
• the value of currencies won’t change so much that they will no longer
be able to afford the trip.
The same is true when a strategic manager develops strategies for an

organisation. The strategies will be based on a set of key assumptions
about the future. Many of these assumptions will be spelled out in the
scenarios that are put forward (particularly the likely scenario). This further
emphasises the importance of the scenario planning that we discussed in
Unit 3.
When done effectively, scenario planning makes explicit the assumptions
about the future and allows strategic managers to evaluate and test these
assumptions and seek independent advice or look for evidence as to their
validity.
A second benefit that agile organisations derive from making strategic
assumptions explicit is that they can form the basis for an early discussion
with key stakeholders about the nature of the future, and possible strategies
that might be developed for these futures. As our earlier study of the work

of Gary Hamel demonstrates, we need to start from the future and work
back rather than starting at the present and working forward.
The commitment and support of numerous stakeholders is needed to
implement a strategy effectively. Having a conversation around what
assumptions the strategic manager has about the future, how valid these
are, and what they imply about strategic options creates an opportunity to
unpack the different views of the future that stakeholders may hold. Once
unpacked, these different views can be discussed and reconciled so that
strategies are developed against a common or agreed view of the future. At
the very least, the stakeholders will understand the perspective of the future
that the strategic managers used to set the strategy.
Another major reason for detailing assumptions is that they are often made
about things that, if they were to change, would necessitate review and
potential revisions of the strategy (being agile). This is a risk-management
practice – making explicit the issues that if left implicit, could result in major
risks to the organisation’s strategy.
So, you can see that there are two key reasons why it is important that the
assumptions on which a strategy is based are made explicit:
• to generate engagement from key stakeholders
• to identify the ‘trigger events’ or thresholds for review or revision.
Strategic managers of agile organisations therefore:

• work to make strategic assumptions explicit
• monitor any of these assumptions that are strategically critical
• respond quickly to changes in the issues on which key assumptions are
made by deploying the resources necessary to seize the opportunities
or avoid the threats.
As you can see, this presents an ideal environment for use of the agile
methodologies that Rigby et al (2016, pp. 42–43) describe:
1. forming small cross-functional self-managing teams with all the
required skills
2. empowering the team to develop and test a draft blueprint for how the
challenge should be addressed
3. implementing a continuous cycle of rapid test-and-learn; developing
and testing and iterating a range of possible options for addressing the
challenge (referred to as sprints)
4. holding short, regular review meetings to assess progress, identify
roadblocks and develop cheap and fast experiments to test and resolve
differences in views.

Managing strategic risk
Another characteristic of agile organisations is highly effective strategic risk
management. Based on adapting the model set out in Crouhy et al (2013,
p. 2), in simple terms, strategic risk management involves:
1. identifying what strategic risks exist
2. measuring and estimating the impact of these risks
3. assessing the probability that the risk will eventuate
4. identifying those risks that are unacceptable to the organisation, and
developing a plan to mitigate or respond to these risks
5. typical agile responses in managing strategic risks, including:
• avoiding the risk (develop a contingency plan for what you will do if
the risk eventuates)
• accepting the risk
• seeking to offset the risk (set aside money or other resources to
deal with the risk if it arises)
• sharing the risk (look for another person or organisation willing to
take on the risk in return for a share of the benefits of the strategy.
This is often the way in which strategic alliances are formed –
organisations sharing risks.)
• trading the risk (e.g. insure or hedge against the risk).
6. monitoring critical risks – develop advance warning systems.
Types of strategic risk

Crouhy et al (2013, p. 28) identified various sorts of strategic risk that
organisations need to manage, including:
• market risk – fluctuations in conditions in the market and industry
that materially affect the possible outcomes the organisation can
achieve; e.g. changes in Porter’s five forces/industry model (changing
competitive rivalry; threat of new entrants; threat of substitutes; power
of buyers; power of suppliers; power of complements)
• credit risk – changes in the availability or price of credit (funding)
• liquidity risk – unacceptable levels of cash flow at strategically critical
times
• operational risk – strategic failures due to inadequate systems,
inadequacies of leaders/management, staff, equipment, controls or
strategically critical human errors
• legal and regulatory risk – failure of a strategy resulting from changes
to government policy, changes to interpretations of legislation or
regulation (e.g. tax rulings) or actions by courts or organisations with
quasi-judicial powers, such as the ACCC, APRA, ASIC or the ATO

• business risk – these are classic risks in a commercial environment.
Examples of such risk include unexpected fluctuations in demand,
changes to prices and availability of inputs and materials, performance
problems in a key supplier or value-chain partner, losses caused by
an unanticipated ‘event’ such as fire, fraud, theft, terrorism or natural
disaster.
• reputation risk – adverse impacts on the organisation’s reputation
resulting in a loss of trust, confidence or a deterioration in relationships
with key stakeholders (e.g. customers, investors, staff or the media)
• strategic risk – unacceptably large potential losses if the strategy
fails or underperforms. This may be due to the size of the strategic
commitment being assessed as too big or too distracting.
Contingency planning
One key technique for strategically agile organisations to manage risk
is via contingency planning. Contingency planning essentially answers
the question, ‘What will we do if?’ They are strategic programs that agile
strategic managers develop for issues that are assessed as being high risk
even if they are not highly likely. In other words, agile strategic managers
outline or sketch out potential responses to what they might need to do in
the event that a high-risk event occurred. And they routinely monitor for
changes in the environment that signal that the probability of such a high-
risk event may be increasing.
Activity 5.2
Consider your own organisation (or one that you know well). What critical
assumptions about the future are required to remain true for the strategies
to be effective? What strategic risks are there for the organisation? What
contingency plans exist to address these if required?

Developing strategic agility
Good [strategic] management processes align resources to the
strategy and apply the “plan, do, check, act” logic of continuous
improvement popularized by quality guru W. Edwards Deming. These
systems should focus attention and resources on the economic logic
of the company, and channel resources to its most important activities.
(Worley et al 2016, p. 78)
What does this quote highlight for us about strategic agility? And how
does it relate to the four routines (strategising – perceiving – testing –
implementing) that the same authors proposed?
The authors researched agile organisations that consistently demonstrated
superior performance, and proposed the following set of ‘agile management
processes’.
Table 5.2 Agile management processes

Well-designed Management Flexible Management Fast Management
Processes Processes Processes
• Align resources/ • Align tightly around the • Have cycle times adjusted
behaviours to business process’s purpose and to fit the rhythm of the
strategy outcomes market
• Follow a continuous • Focus on effectiveness • Consist of simple, not
improvement ‘plan-do- more than efficiency; how overly complex, processes
check-act’ logic the process is conducted that are easily explained
• Support and align with can vary • Involve wide sharing of
other management • Accept a wide variety of relevant information and
processes inputs transparency
Source: adapted from Worley et al 2016, p. 80
What’s needed?
So, as these principles and tips suggest, a key characteristic of agile
organisations is that they develop and sustain their strategic competencies
and resources – through elements like:
• effective two-way communications and real-time information flows
• access to pools of motivated and talented people
• structures that incorporate empowered cross-functional teams capable
of innovating and making quick decisions
• investments in innovation and R&D
• a management culture that is customer- and market-focused and
committed to continuous learning
• sustaining a powerful and positive reputation and trust-based
relationship with key stakeholders.
• access to appropriate (and cheap) sources of finance

• access to reliable and flexible supplies of key inputs at reasonable
prices
• flexible production and distribution systems that can quickly and
profitably respond to sudden changes in demand and price sensitivity.
This is consistent with the Worley et al (2016, p. 80) finding that:

One essential aspect of agile management processes is flexibility
– the ability to operate effectively without being tied to a rigid set
of steps. Thus, flexible management processes are different from
simple process improvements. Flexibility requires having a clear
understanding of what the management process is supposed to
achieve, functional links to a portfolio of inputs, and the freedom to
adapt the process as necessary. While the purpose of the process
must be well established and widely shared, the information needed
by the process and the means to the ends shouldn’t be fixed or
narrow.
In other words, agile organisations are able to develop, nurture and rapidly
deploy those resources that relate directly to the key success factors of the
industries in which they operate – and do so flexibly throughout the various
stages in the business cycle. They detect quickly and early that the cycle is
moving into a new phase or that the environment is moving from simple to
complicated, complex or even chaotic, and are able to respond flexibly to
seize the opportunities and avoid the threats more quickly and effectively
than their competitors.
Agile strategic managers

Perhaps the most critical strategic resources that agile organisations need
are effective strategic managers who are:
• distributed throughout the organisation
• empowered to make decisions (remember Hamel’s Principle 8
suggests that perspective is worth 50 IQ points)
• capable of leading, motivating and aligning engaged multi-functional
teams in difficult conditions
• capable of deploying strategic capabilities and using strategic systems
to match the volatility of the operating conditions.
We will discuss the nature of change management and effective leadership

in Unit 11 on Implementation. However, famous management author Henry
Mintzberg highlighted a number of the key attributes of agile strategic
managers when (along with Jonathan Gosling in 2003) he wrote The Five
Minds of a Manager and suggested that agility demonstrated a balance of
the following five mindsets.

1. Managing the self – the reflective mindset. Agile strategic managers
have high levels of self-awareness and self-belief or self-efficacy,
and a commitment to improve themselves in ways that enhance their
management practice).
2. Managing organisations – the analytical mindset. Agile strategic
managers display an ability to recognise, break down and understand
complicated and complex problems (and perhaps sense chaotic
conditions quickly) and to discern appropriate examples of appropriate
best practice or good practice, collaborate to generate emergent
practice or novel practice, and to know when each is appropriate. They
are good at understanding and discerning the details that matter and
making timely decisions based on that understanding.
3. Managing context – the worldly mindset. Unlike the tendency in many
organisations to see strategic problems and appropriate solutions
as the same irrespective of location, the worldly view suggests that
agile strategic managers see and appreciate nuances or differences
in problems, and in local contexts. They pay attention to individual
differences and seek to understand the individual issues and situations
rather than trying to oversimplify and repeat decisions ‘out of context’.
4. Managing relationships – the collaborative mindset. Gosling and
Mintzberg identified that understanding others and being able to
work effectively with peers, superiors, subordinates, colleagues and
outside stakeholders by establishing and nurturing effective and
trusted relationships, was another key characteristic of agile strategic
managers and the organisations within which they lead.
5. Managing change – the action mindset. This final mindset was
suggested not as a blind bias to ‘do something’, but as the result of
careful and timely reflection. Once an agile strategic manager has
identified an appropriate path forward based on analysis and reflection
or hypothesis and test-learn-iterate, then they commit themselves and
those with whom they work to a continuously improving/learning cycle
of action to lead to the desired outcome.
Gosling and Mintzberg (2003, p. 61) also proposed that agile organisations
are moving from an old paradigm referred to as heroic management
(based on the self) to engaging management (based on collaboration).
They describe it as follows.

Table 5.3 Heroic management versus Engaging management
Heroic management Engaging management
(based on self) (based on collaboration)
Managers are important people, separate Managers are important to the extent that they
from those who develop products and deliver help other people do the important work of
services. developing products and delivering services.
The higher ‘up’ the managers go the more An organization is an interacting network, not
important they become. At the ‘top’ [is the a vertical hierarchy. Effective leaders work
CEO]. throughout, they do not sit on top.
Down the hierarchy comes the strategy – clear, Out of the network emerge strategies, as
deliberate and bold – emanating from the chief, engaged people solve little problems that grow
who makes the dramatic moves. Everyone else into big initiatives.
‘implements’.
Implementation is the problem because, while Implementation is the problem because it
the chief embraces change, most others resist cannot be separated from formulation. That is
it. That is why outsiders must be favored over why committed insiders are necessary to come
insiders. up with the key changes.
To manage is to make decisions and allocate To manage is to bring out the positive energy
resources – including human resources. that exists naturally within people. Managing
Management thus means analyzing, often this means inspiring and engaging, based on
calculating, based on facts from reports. judgment that is rooted in context.
Rewards for increased performance go to the Rewards for making the organization a better
leaders. What matters is what’s measured – place go to everyone. Human values, many of
shareholder value in particular. which cannot be measured, matter.
Leadership is thrust upon those who thrust their Leadership is a sacred trust, earned through
will upon others. the respect of others.
Source: adapted from Gosling and Mintzberg 2003, p. 61.
In addition to the key works of Hamel, Gosling and Mintzberg discussed

here, the following very short (one page) reading highlights or summarises
some of the key competencies required of these empowered strategic
managers distributed throughout agile organisations.
Read
Reading 5.1 Fillios, M 2009, ‘Building an agile organization’, Baseline,
March, p. 44.

Resilience – the final ingredient
Call it the resilience gap. The world is becoming turbulent faster than
organizations are becoming resilient. The evidence is all around
us. Big companies are failing more frequently. Of the 20 largest
U.S. bankruptcies in the past two decades, ten occurred in the last
two years. Corporate earnings are more erratic. Over the past four
decades, year-to-year volatility in the earnings growth rate of S&P
500 companies has increased by nearly 50%-despite vigorous efforts
to “manage” earnings. Performance slumps are proliferating. In
each of the years from 1973 to 1977, an average of 37 Fortune 500
companies were entering or in the midst of a 50%, five-year decline
in net income; from 1993 to 1997, smack in the middle of the longest
economic boom in modem times, the average number of companies
suffering through such an earnings contraction more than doubled, to
84 each year. Even perennially successful companies are finding it
more difficult to deliver consistently superior returns…
The fact that success has become less persistent strongly suggests
that momentum is not the force it once was. To be sure, there is still
enormous value in having a coterie of loyal customers, a well-known
brand, deep industry know-how, preferential access to distribution
channels, proprietary physical assets, and a robust patent portfolio.
But that value has steadily dissipated as the enemies of momentum
have multiplied. Technological discontinuities, regulatory upheavals,
geopolitical shocks, industry deverticalization and disintermediation,
abrupt shifts in consumer tastes, and hordes of nontraditional
competitors – these are just a few of the forces undermining the
advantages of incumbency…
For all these companies, and for yours, continued success no

longer hinges on momentum. Rather, it rides on resilience – on the
ability to dynamically reinvent business models and strategies as
circumstances change.
(Hamel & Valikangas 2003, pp. 52–53)
While the above was written in 2003, the conditions that it refers to have not
become less erratic, volatile or turbulent; arguably, they have become more
so. In that scenario, the resilience to which Hamel and Valikangas refer has
become even more important.
Resilience is a characteristic of people and organisations capable of
surviving difficult and testing times, and capable of engaging in the sort
of regular reinvention to which Hamel and Valikangas refer. It is typically
found in organisational cultures, teams of people and individuals who, when
faced with challenging circumstances and difficult challenges, are able to
draw on reserves of innovation, determination and commitment to shared
goals when others who are less resilient ‘give up’.
Some authors and commentators describe ‘resilient systems’ or ‘resilient
balance sheets’, which typically means that the systems or balance sheets
or assets continue to perform effectively even when stress-tested against

worst-case scenarios. The same general description is true of people – in
other words, their attitudes and behaviours remain positive and continue to
perform when tested under worst-case conditions.
Resilience in strategy
According to Hamel and Valikangas (2003, pp. 53–54):
Strategic resilience is not about responding to a onetime crisis. It’s not
about rebounding from a setback. It’s about continuously anticipating
and adjusting to deep, secular trends that can permanently impair the
earning power of a core business. It’s about having the capacity to
change before the case for change becomes desperately obvious.
In the terms mentioned in an earlier quote from Worley et al (2016, pp.

77–78) it is about highly developed, tested and responsive routines
for strategizing, perceiving, testing and implementing. In terms of what
Snowden and Boone (2007, p. 73) proposed, it is about knowing when to
move quickly from best to good to emergent to novel practice, and back
again. From the research by Hamel and Valikangas (2003, p. 54) this
involves addressing four key challenges:
The Cognitive Challenge: A company must become entirely free
of denial, nostalgia, and arrogance. It must be deeply conscious
of what’s changing and perpetually willing to consider how those
changes are likely to affect its current success.
The Strategic Challenge: Resilience requires alternatives as well

as awareness – the ability to create a plethora of new options as
compelling alternatives to dying strategies.
The Political Challenge: An organization must be able to divert

resources from yesterday’s products and programs to tomorrow’s.
This doesn’t mean funding flights of fancy; it means building an
ability to support a broad portfolio of breakout experiments with the
necessary capital and talent.
The Ideological Challenge: Few organizations question the doctrine of

optimization. But optimizing a business model that is slowly becoming
irrelevant can’t secure a company’s future. If renewal is to become
continuous and opportunity-driven, rather than episodic and crisis-
driven, companies will need to embrace a creed that extends beyond
operational excellence and flawless execution.
To deliver this resilience, the authors (pp. 59-63) advocate a series of

specific behaviours by strategic managers:
1. routinely visiting and becoming familiar with environments where
change is happening – and specifically those environments where
change in the industry is likely to happen first (and not rely on
consultant or analyst’s reports and business media as sources of such
insight)

2. eliminating any filters that prevent honest, forthright and possibly
uncomfortable assessments and insights getting through, often
because those doing the filtering have a vested interest in continuing
the business model or strategies as they are now
3. recognising when existing strategy is decaying – is failing to have
impact (or will soon do so) because it is being replicated by others
(e.g. competitors); supplanted by better strategies developed by others;
exhausted because markets have become saturated, customers
become bored or optimisation strategies are delivering diminishing
returns; or strategies are eviscerated by a disruptive technology or
business model that renders them redundant.
4. actively encouraging and promoting variety – looking for innovation in
strategy, diversity in perspective, experimentation and test-learn-iterate
approaches, while managing risk appropriately
5. balancing their portfolio of strategic investments so that they don’t
over-invest in strategies based on ‘business-as-usual’ and under-invest
in strategies for ‘what could be’, remembering that the newness of an
idea has little or no correlation with being more ‘risky’. What must be
managed is the risk, not the ‘novelty’.
6. balancing the paradox of optimization (making the existing investments
and businesses as efficient and possible) and renewal (finding
strategies that make the existing investments redundant). In the
words of Jim Collins and Jerry Porras (2004, p. 43) not giving in to
the ‘tyranny of the or, embrace the genius of the and’. In other words,
pursue efficiency and optimisation in all investments and strategies, at
the same time as looking for innovation, diversity and experimentation
with new and potentially transformative change.
In conclusion, Hamel and Valikangas (2003, p. 63) noted that:

Battlefield commanders talk about “getting inside the enemy’s
decision cycle.” If you can retrieve, interpret, and act upon battlefield
intelligence faster than your adversary, they contend, you will be
perpetually on the offensive, acting rather than reacting. In an
analogous way, one can think about getting inside a competitor’s
“renewal cycle.” Any company that can make sense of its
environment, generate strategic options, and realign its resources
faster than its rivals will enjoy a decisive advantage. This is the
essence of resilience. And it will prove to be the ultimate competitive
advantage in the age of turbulence – when companies are being
challenged to change more profoundly, and more rapidly, than ever
before.
Resilience in teams and cultures

Agile organisations typically develop this capacity for resilience and ensure
it is developed in their strategic managers via programs such as:

1. articulating a clear purpose and shared values for the organisation –
and making this central to all key decisions on who to hire, collaborate
with and how to respond to events in the market.
2. building shared commitment to the organisation through adequate
and timely recognition and reward systems and by creating equitable
workplaces that provide work–life balance so that when ‘discretionary
effort’ is needed, it is given freely.
3. recruitment – looking for and selecting candidates who have strong
self-efficacy (self-belief that will withstand difficult circumstances),
strong strategic fit (their skills match what will be required in the
environments of the future) and who share the organisation’s values.
4. job and career rotation and development – using programs deliberately
designed to put strategic managers into new and testing developmental
situations, and appropriately supporting them.
5. team formation and team-building – deliberate strategies to build and
sustain cross-functional teams, and team management skills
6. individual support and mentoring – a commitment and capability among
managers at all levels to develop the resilience and self-efficacy of
people throughout the organisation.
7. a focus on effectiveness under stress – developing efficient and
effective systems, structures and relationships and ‘stress testing’ them
to ensure that they function at their best under duress.
8. routines for managing assets and resources to ensure optimum
availability and effectiveness – ensuring that decisions about the use
of resources (including cash) at all levels are focused on ensuring that
they are never wasted and used only for things that add strategic value.
Resilience in individuals
In a person, resilience typically has two components: psychological and
physiological.
Psychological resilience is based on high self-efficacy, which comprises:
• objective and positive self-awareness (knowing your strengths and
weaknesses)
• strong belief in yourself and your abilities – based on previous ‘mastery’
experiences
• a strong personal belief system or sense of purpose – believing that
there is value and purpose in what you do and in your role in the world
• a network of other people to support you and reflect your value or
worth.

Physiological resilience is the ability to function effectively and optimally at
times of high demand and pressure. In a person, this is derived from:
• healthy diet
• healthy body
• adequate sleep
• ability to deal with stress.
In an organisation, these attributes could be summarised as.

• self-awareness (knowing the organisation’s strengths and weaknesses)
• effective and balanced teams of skilled people who are committed to
the organisation and have diverse and complementary abilities
• a shared sense of purpose
• strong relationships within networks of other organisations and people
who support the organisation
• adequate resources – ideally liquid resources like intellectual capital,
innovativeness, trusted relationships, cash or other unique assets –
that can be deployed when and where required
• adequate and flexible processes and systems.
Activity 5.3
Based on the discussion of what resilient organisations do and how
strategic managers of agile organisations develop resilience in their
organisations, teams and selves, write a short job description for a resilient
strategic manager? How well do you think you would perform against the
job description?

Generating strategic
options
Once they have been through the strategising routines, and have: (1)
identified future scenarios and sensitised these in some way by identifying
critical assumptions about the future, (2) completed internal and external
analyses to identify strategically relevant strengths, weaknesses,
opportunities and threats, and (3) assessed strategic risks via appropriate
perceiving and testing routines, strategic managers of agile organisations
need to arrive at a range of possible alternatives or options that they
can ‘craft’ into strategies. They also need to develop contingency plans
based on understanding what would be necessary if any of their strategic
assumptions turned out to be wrong or if risks assessed as having great
impact were to eventuate.
As you will recall, two of the key strategic questions that must be resolved
are ‘Where will we play?’ and ‘How will we win?’ The answers to these
questions must consist of a possible course of action that, if effectively
implemented, will lead to the achievement of the objectives. Thus, they
must have some ‘cause and effect’ link to the objectives.
You will recall our discussion of SWOT analysis, in which we have said that
for a strategy to be internally consistent it should:
• seize the most attractive and relevant opportunities and avoid the most
dangerous and worrying threats (this will usually be spelled out in the
objectives)
• maximise the impact of the organisation’s strengths while minimising
the effect of its weaknesses (which will be spelled out in the strategies).
The first point at which strategy options can be triggered is when a

strategic manager considers: ‘What links or matches can I see between the
strengths of the organisation and the opportunities and threats?’
The second step is to consider: ‘Given the assumptions we have made
about the future and the likely future scenarios we have identified, what is
the most effective use we can make of our strengths? And how could we
overcome or negate the impact of our weaknesses in order to give us more
options?’
While we will cover them in much more detail in later Units, there are key
strategy areas that research and strategy authors strongly suggest should
be considered as a range of generic options. Specifically, as key enablers,
we should consider what strategic use we can make of:
• talented and engaged employees, their commitment, their imagination
and their creativity
• relationships with other organisations and/or key individuals

• investments in strategically enabling and differential uses of
technologies
• innovation and new business model, product and process development
• knowledge and intellectual property.
Are we well placed to develop strategic advantage through cost leadership

or differentiation? And are we best placed to do this on a focused (niche) or
broad market basis? What will this mean for diversifying into new markets
or concentrating on narrower options?
Can we look to achieve our strategic objectives through adopting an
offensive strategic orientation or a defensive one?
Can we achieve our objectives using organic strategies that rely on our own
resources or do we need to form alliances and partnerships?
Can we use merger or acquisition to overcome weaknesses or rapidly gain
strengths to help achieve our objectives?
How will the merger and acquisition contribute to our being more agile or
more resilient?
Will the organisation gain strengths from vertical or horizontal integration
and will this make us more agile?
Should we focus on developing key strategic competencies and capabilities
in-house, or can we access them via strategic use of outsourcing?
Are there any other strategic options that I can generate?
All of these areas will be explored in more detail in subsequent Units.

Summary
Given our definition that:
the field of strategic management deals with the major intended and
emergent initiatives taken by managers on behalf of the organisation’s
performance of the organisation in its external environments
you should be in no doubt that the balance of the intended and emergent
initiatives needs to adjust to the nature of the external environment
and what is happening there. Successful strategic organisations are
those able to think and act quickly, and to survive and recover from
adverse circumstances. In other words, they are both agile and resilient.
Strategically agile organisations have advantages derived from better
use of their strategising, perceiving, testing and implementing routines
to generate a wide range of options that optimise the value of existing
strategies and simultaneously create new and potentially transformative
strategies that may make existing business models, strategies and value
propositions redundant. They invest in deliberately building agility and
resilience in their strategies, their teams and themselves.
In order to do this, it is vital that organisations and their strategic managers
make explicit the assumptions on which strategies depend insofar as they
relate to the five key strategic areas of the:
• company (or organisation)
• customers (or clients)
• competitors (or strategic rivals)
• collaborators (or key strategic allies and value chain partners), and
• context (macro and industry environmental forces).
In combination with the scenario planning that was discussed in Unit 3,

strategic managers in agile organisations need to explicitly detail these
assumptions and monitor them, reacting promptly to any changes that imply
unacceptable risks.
You would also now be conscious that agile organisations demonstrate
behaviours based on Gary Hamel’s key concepts of strategy as revolution
– in particular, that they create a management culture that encourages
people to be inquisitive, expansive, prescient, inventive, inclusive,
demanding, and subversive, and able to:
• develop systems to ensure that timely and relevant strategic
information, innovation and ideas flow both down and up through an
organisation
• engage all of the employees and stakeholders
• accept that all ideas are equal and that the best ideas do not have to
come from ‘the top’
• recognise the importance of perspective

• recognise that you can’t know the end at the beginning
• are resilient.
We will now move on to consider specific issues of technology strategy,

innovation strategy and new product development, multinational strategy
development and the implementation of strategy.
Based on the understanding you have gained from the various analyses
that you have completed in this Unit, you will now be empowered to start
thinking about the final three critical strategic questions: How will we win?
What capabilities must we have? and What systems will we need?

1. Identify the missing element in the following statement. “In a strategic
sense, what we mean by agility is the capacity of the strategic
managers of an organisation to:
• develop capabilities in their teams and organisations that enable
rapid response and that are capable of executing a range of
alternative actions,
• gather and interpret relevant information in close to real time,
• identify signals in the information that opportunities and threats are
emerging, and:
• …………. ”
a. conduct regular scheduled planning events that produce planning
documents at all levels of the organisation.
b. interpret the top-down direction of the organisation as it effects
the actions and programs of all levels of the organisation board
approval.
c. respond to these signals and develop a strategy to seize the
opportunities or avoid/minimise the threats in a timely fashion.
d. influence the external stakeholders in order to minimise the threats
and to maximise the opportunities available to the organisation.
e. focus mostly on the short-term events because the ability of
organisations to influence the long term is diminished.
2. Worley et al (2016, pp. 77–78) suggested that four routines determined

superior strategic performance. Which of the following is not one of the
routines that they identified?
a. strategising
b. implementing
c. testing
d. perceiving
e. sensitising

3. Snowden and Boone (2007, pp. 70–74) suggested that there are four
dominant strategic conditions and that a different sort of practice was
appropriate for each set of conditions. From the list below, what is their
recommended approach (what type of practice) is recommended for a
Complicated environment?
a. novel practice
b. emergent practice
c. good practice
d. best practice
e. scientific practice
4. Complete the following statement. ‘In order to achieve strategic agility,

the strategic managers in an organisation must have:
• ………….
• access to relevant information about trends related to those
assumptions.
• skills in interpreting the implications of the data and in forming
reasoned arguments about how to respond.
• strategic resources available at the times and places necessary to
respond.
• an engaged and strategically aligned workforce and other key
stakeholders such as partners and allies.’
a. an understanding of what critical strategic assumptions the
organisation’s strategy is based upon.
b. the timely and ongoing political support of the board and owners of
the organisation.
c. deep pockets and more money than the competition so that they
can outspend them.
d. clear line of sight so that they can see what everyone in the
organisation is doing and intervene as required.
e. adequate rest, sleep and a well-executed personal development
plan before arriving at the crisis.

5. In his seminal article Strategy as Revolution, Gary Hamel listed 10
principles. One of these, Principle 3, was: ‘The bottleneck is at the top
of the bottle’. Which of the following definitions best explains what this
principle means?
a. Agile organisations require a culture where passionate and
committed people can become active, step up and participate and
even lead the process of changing the organisation for the better,
no matter where they fit in the hierarchy.
b. Strategy needs to capture the singleness of purpose that comes
top-down, but also harness the imagination and passion that comes
from strategies that percolate up from the bottom of the pyramid. It
needs both.
c. Strategy-making must challenge rather than accept the industry
and company ‘norms’ and challenge the often unspoken rules
about the way things ‘work’.
d. The board and senior executives are often the most blinkered by
their past experience and have the most to lose by challenging the
way things are done presently.
e. Strategic leaders need to encourage and actively seek input
from as wide a range of stakeholders as possible, because good
strategic ideas and useful insights are widely distributed and not
just within the organisation and industry.
6. From the following list, which of the items identified is not one of the
forces about which critical assumptions need to be made explicit?
a. The political environment.
b. Movement in the share price or value of the organisation.
c. The nature of competition.
d. Economic forces.
e. Needs, behaviours and actions of existing and potential customers.
f. Technological forces.
g. The power of buyers (or customers) including intermediaries.
h. Actions, strategies and support of strategic allies and value chain
partners and collaborators.

7. The process outlined for managing strategic risks contained five steps.
Select from the alternatives below the one that is missing from the
bullet point list offered here:
• Identify what strategic risks exist.
• Measure and estimate the impact of these risks.
• Assess the probability that the risk will eventuate.
• ……………
• Monitor the risks – develop advance warning information systems
that alert the strategic managers when the profiles of the various
unacceptable risk areas change.
a. Create a management culture that encourages people to be
inquisitive and prescient.
b. Identify those risks that are unacceptable to the organisation and
develop a plan to mitigate or respond to these risks.
c. Down the hierarchy comes strategy – clear, deliberate and bold
– emanating from the chief, who makes the dramatic moves.
Everyone else ‘implements’.
d. Focus particular attention on legal and regulatory risk by seeking to

influence courts or organisations with quasi-judicial powers like the
ACCC, APRA, ASIC or the ATO.
d. Seek to manage change through an action mindset. Once an agile
strategic manager has identified an appropriate path forward based
on analysis and reflection, then they commit themselves and those
that they work with to a program of action to lead to the desired
outcome.
8. From the research by Hamel and Valikangas (2003, p. 54), building

an organisation’s strategic resilience involves addressing four
key challenges. From the list that follows, which is not one of the
challenges that they identified?
a. political
b. ideological
c. technological
d. strategic
e. cognitive

9. Individual resilience is said to have two components – psychological
resilience and physiological resilience. Which of the following is not a
technique typically suggested for managing psychological resilience?
a. objective and positive self-awareness (knowing your strengths and
weaknesses)
b. a strong personal belief system or sense of purpose – believing
that there is value and purpose to what you do and to your role in
the world
c. high net worth and the possession of large quantities of liquid
reserves and worldly possessions
d. a network of other people to support you and reflect your value
e. strong belief in yourself and your abilities – based on previous
‘mastery’ experiences
10. Complete the following statement. ‘Strategic options are said to be

internally consistent when they………….’
a. maximise the opportunities and minimise the threats, and at the
same time avoid the impact of the organisation’s strengths while
seizing the effect of its weaknesses
b. minimise the opportunities and avoid the threats, and at the
same time seize the impact of the organisation’s strengths while
minimising the effect of its weaknesses
c. maximise the opportunities and minimise the threats, and at the
seizing the effect of its weaknesses
d. seize the opportunities and maximise the threats, and at the
e. seize the opportunities and avoid the threats, and at the same
time maximise the impact of the organisation’s strengths while

References
Bartels, N 2006, ‘Agile more important than lean’, Manufacturing Business
Technology, May, vol. 24, iss. 5, pp. 46–48.
Clark Lawrence, P 2008, ‘Wanted – Fully engaged and learning agile
people’, People & Strategy, 2008, vol. 31, iss. 4, pp. 11–12.
Collins, J & Porras, J 2004, Built To last: Successful habits of visionary
companies, Harper Business, New York.
Crouhy, M, Galai, D & Mark, R 2013, Risk management, 2nd edn,
McGraw-Hill, New York.
Gosling, J & Mintzberg, H 2003, ‘The five minds of a manager’, Harvard
Business Review, November, vol. 81, iss. 11, pp. 54–63.
management: An Australasian perspective, John Wiley & Sons, Milton.
Hamel, G 1996, ‘Strategy as revolution’, Harvard Business Review, vol. 74,
no. 4, pp. 69–82.
Hamel, G & Valikangas, L 2003, ‘The quest for resilience’, Harvard
Business Review, September, pp. 52–63.
Kim, W C & Mauborgne, R 2005, Blue ocean strategy: How to create
uncontested market space and make the competition irrelevant, Harvard
Business School Press, Boston.
McFarland, K R, 2008, The breakthrough company: How everyday
companies become extraordinary performers, Schwartz, Melbourne.
Porter, M E 1985, Competitive advantage: Creating and sustaining superior
performance, The Free Press, New York.
Rigby, D, Sutherland, J & Takeuchi, H 2016, ‘Embracing agile’,
Harvard Business Review, May, pp. 40–50.
Snowden, D & Boone, M 2007, ‘A leader’s framework for decision making’,
Harvard Business Review, November, pp. 68–76.
Taleb, N N 2007, The black swan: The impact of the highly improbable,
Random House, New York.
Thompson, A, Peteraf, M, Strickland, A & Gamble, J 2016, Crafting
McGraw-Hill Education, Boston.
Worley, C, Williams, T & Lawler, E 2016, ‘Creating management processes
built for change’, MIT Sloan Management Review, Fall, pp. 77–82.

answers
1. c
2. e
3. c
4. a
5. d
6. b
7. b
8. c
9. c
10. e

Reading 5.1 Fillios, M 2009, ‘Building an agile organization’,

Baseline, March, p. 44.

Unit 6
Technology and strategy
CONTENTS
How does technology impact on strategy? 6–4 References 6–32
Incorporating technology into Self-assessment quiz answers 6–33
corporate strategy 6–8
The particular case of digital strategy 6–9
Strategic vs operational use of
technology 6–13
The role of strategic managers in
technology strategy 6–15
Incorporating technology into
strategic thinking 6–22
Using these five steps to help create
an organisation’s technology strategy 6–25

Business as usual? The answer is no! The technology has been launched and we have
been shown a vision … This is disruptive technology, and what it means is that the price
of staying in business has shifted.
Professor Warren McFarlan

Harvard Business School
Introduction
Technology developments can have interesting consequences,
particularly for commercial organisations. Disruptive technology
significantly alters the nature of business and industry shifts
competitive advantage from one organisation to another. It can
appear suddenly, without warning. A relatively small and new
organisation may be able to adopt a disruptive technology with
little negative impact and gain considerable benefit. The capital
investment that a larger and more established organisation is likely
to have in its existing technology, however, might preclude it from
adopting a disruptive technology. Under these conditions, the large
organisation would experience a disadvantage relative to the small
organisation that had acquired the technology… Many organisations
will also place an emphasis on competitiveness achieved through the
acquisition of technology. The rapid rate of technology development
in most companies’ macro environment means that any competitive
advantage gained through the acquisition of technology is relatively
short-lived. Competitors can usually acquire the same or a
comparable technology within a reasonably short period of time,
eliminating the relative advantage that it provided.
(Grant et al 2014, p. 116)
• recognising the strategic importance and impact of technology as a
strategic tool and strategic driver
• distinguishing between operational and strategic uses of technology
• understanding the process for developing a technology strategy.
Video
As this opening quote suggests, technology is, and for many centuries
has been, a major strategic ‘game changer’. Consider the impact of the
invention of the steam engine, telephone, penicillin, electric power, jet
engine, fax machine, internet, smartphone, global positioning systems
(GPS), medical-diagnostics technology, cloud computing and streaming
music and video. And consider the impact of these technologies on the
organisations that had previously dominated industries such as land
transport, craft-based manufacturing, shipping, postal services, media,
publishing, maps and directories, gas for lighting/heating/cooking, medical
diagnosis and treatment, document couriers, mobile telephony, computer
Unit 6: Technology and strategy 6–1

hardware, music or free-to-air television. The transformation of ‘industries’
via technology is becoming almost ubiquitous, as the following short story
illustrates.
Read
Reading 6.1 Butcher, M 2016, ‘How a former model decided to launch
an app to tackle mental health’, Techcrunch.
Technology and its transformative effects on organisations and industries

is all around us – from the impacts of Spotify and other streaming services
on music and media, to that of Amazon and other online offerings on
retail, and Uber’s impact on the taxi industry, or the transformation of
the way we buy, consume and evaluate travel and purchase tickets, to
almost anything. Indeed, in the same way that technologies such as DNA
analysis have revolutionised the practice of law and justice, a wide range
of technologies seem to be continuously revolutionising the practice of
strategic management. And as Reading 6.1 indicates, technology is not just
about the outputs of large organisations and pioneering breakthroughs. It is
just as relevant to small startups with minimal funding, seeking to transform
the way value is created for groups and individuals with unsatisfied needs,
like people suffering from mental-health challenges and their loved ones.
In the developed world, and much of the developing world too, there
are few people today whose lives are untouched by the changes that
technology has wrought – both at work and outside work.
As the earlier quote from Grant et al highlights for us, technology is also
a major cause of some previously unassailable competitive advantages
disappearing completely, while others have emerged almost overnight.
Effective technology strategies have been a major contributor to some
organisations disappearing (e.g. Digital Equipment Corporation in the
switch from mini-computers to PCs) and others suffering major strategic
distress (e.g. Kodak and the impact of digital photography; Encyclopaedia
Britannica as people moved to online information). At the same time, such
strategies have resulted in new organisations growing out of the home
garage or government-funded laboratory to become global corporations
(e.g. Amazon, Alibaba, Apple, Charles Schwab, Cochlear, CSL, eBay,
Google, Suntech, Seek.com and Trade Me). However, many of us would be
surprised to discover how poorly many managers understand the strategic
role of technology, and how to integrate it effectively into strategy.

As this range of examples highlights for us, technology plays a profound
and ever-increasing role in daily life throughout the developed and
developing world, as well as within organisations, changing the ways that
work is performed and how lives are lived.
In every modern organisation – large, small, commercial, public or not-
for-profit – technology is as important as finance, marketing and human
resources for strategic success. And the quote from Grant et al (2014)
highlights that getting technology strategy right is as vital as getting finance,
marketing and other strategies right, because getting it wrong can be ‘fatal’.
There can be little doubt that technology plays a key role as an industry
driver (or perhaps enabler or accelerator would be a better term) in almost
every industry today.
Learning outcomes
• discuss the effect of technological change on an industry
• explain the difference between the strategic and operational use of
technology
• develop appropriate technology-critical success factors
• evaluate the potential strategic impacts and advantages of technology
• apply an effective process to develop an organisation’s technology strategy.

How does technology
impact on strategy?
Before we progress too far into this Unit, it is important to understand
exactly what we mean by ‘technology’. Let’s consider the definition found in
Burgelman, Christensen and Wheelwright (2008, p. 3) which suggests that:
Technology refers to the theoretical and practical knowledge, skills,
and artefacts that can be used to develop products and services, as
well as their production and delivery systems. Technology can be
embodied in people, materials, cognitive and physical processes,
plant equipment and tools... Technologies are usually the outcome of
development activities to put inventions and discoveries to practical
use.
What is clear from this definition is that technology is not simply digital or
information technologies, nor is it simply related to what computers do.
We need to have the broadest possible definition of technology in order to
consider, evaluate and harness strategic advantage from as broad a base
of technology as possible.
Before we go on, be aware that most of the readings you encounter not
just in this Unit, but in the wider discussion of technology strategy, focus on
information and communication technology (ICT) and digital technologies
enabled by things like mobile telephony and the internet. While it is
undoubtedly true that ICT is an essential element of most organisations’
strategic thinking, let’s be clear that technology strategy is not only about
ICT.
In the healthcare, veterinary care, pharmaceutical, agricultural and food-
production industries, for example, the impact of gene technology is already
considered to be as great as the impact of ICT, and the potential impact
is said to be even greater. In fact, there are some suggestions that gene
technology may also revolutionise energy, transport and a whole host of
other non-medical industries.
Composite materials technology such as low-weight high-strength materials
like carbon-fibre and titanium have revolutionised the construction industry,
aircraft and vehicle manufacturing, cooking equipment (e.g. Teflon),
sporting goods such as skis, diving gear, running shoes and golf clubs,
motor racing, boats and myriad other applications.
Satellite and GPS technologies are now used extensively in defence, police
and emergency services, aircraft and shipping, motor vehicles and portable
digital devices such as smartphones and activity trackers such as FitBit
and the Apple watch. Laser technology has revolutionised manufacturing,
defence, retail, logistics and distribution, building, construction and security
industries. And wireless and infra-red technology pervades our homes
as we sit on the lounge changing channels and controlling appliances
at will, or playing the bewildering array of games available on our Xbox,

PlayStation or Nintendo Wii. These are but a few examples of the broader
impact of technologies beyond the focus on ICT and telecommunications.
So, while the focus in this course may often fall on ICT due to the broader
interest in this area of many of our students and the authors who write
about the topic, don’t assume that we equate technology with ICT, and
especially not: ‘technology strategy = what you are doing on the internet
or just our digital strategy’ – as some magazines and commentators would
have you believe.
With this qualification, technology strategy, in whatever manner it exists
within your organisation, is undoubtedly an essential element in your
organisation’s survival and success – regardless of the form that the
technology takes.
The Grant et al quote pointed out that technology strategy has been an
effective strategic enabler of competitive advantage in some organisations
and a relative disadvantage in others. This relates of course to Michael
Porter’s view of strategic or competitive advantages, which he suggests
come from overall cost, leadership, focus or differentiation. Burgelman et al
point out (2008, pp. 1–13) that technology can:
• help organisations design and deliver products and services cheaper,
faster, more efficiently or more reliably, or help create superior products
and services (e.g. new production technologies)
• help organisations identify and manage their costs more effectively in
order to maintain cost leadership (e.g. new management technologies
such as resource and asset utilisation and planning systems or the
algorithms that analyse unstructured data being produced by the
multitude of devices and machines that go to make up the ‘internet of
things’ and enable more efficient management of large and complex
ecosystems)
• facilitate more accessible, effective, efficient and valuable relationships
with customers/clients and suppliers (e.g. identify pain points or create
opportunities to better manage customer relationships and supply/value
chains using things like e-business tools)
• form the basis for the products and services that the organisation
provides to its customers – allowing the customers to work better
and improve their quality of life (e.g. smartphone apps and electronic
commerce interface software)
• harness, capture and help organisations manage the capabilities and
power of their productive assets like knowledge, processes, systems
and information (e.g. knowledge management systems)
• provide and analyse information with higher levels of speed and
accuracy, allowing managers to make better-informed decisions;
information can be captured and analysed on all the strategically
important environments using communications and information
technology (e.g. more powerful databases and cognitive systems)

• be used to eliminate barriers within organisations and achieve scale
and scope efficiencies, even across disparate business units or
divisions and geographically spread operations (e.g. intranet facilities
and e-communities).
We can conclude from this that, except for scientific research institutions
and technology producers, the technology itself isn’t usually the goal or
mission of most organisations. Indeed, as Jim Collins highlighted in his
groundbreaking second book Good to great:
When used right, technology becomes an accelerator of strategic
momentum, not a creator of it. The good-to-great companies never
began their transitions with pioneering technology, for the simplest
reason that you cannot make good use of technology until you know
which technologies are relevant. And which are those? Those – and
only those –that link directly to (1) what you can be best in the world
at (2) what you are deeply passionate about, and (3) what drives your
economic engine…
(Collins 2000, pp. 152–153)
This notion of technology as an enabler or accelerator of strategic

advantage is an important distinction, in the same way that developing
human resources and finances aren’t typically the goals of most
organisations. But all three (technology, people and money) are vital means
to help almost every organisation achieve its goals.
The best possible human resources capabilities or competencies, the
best possible financial capabilities or competencies, and the best possible
technological capabilities or competencies are the tools that offer strategic
managers and their organisations the opportunity to achieve strategic or
competitive advantage.
These strategic or competitive advantages enable or empower the strategic
manager to more quickly and effectively achieve the organisation’s strategic
vision, outcomes and goals – in other words, they accelerate strategic
success. Consequently, technology has become one of the foundation
capabilities that strategic managers must understand.

Activity 6.1
Consider the use of technology in your own organisation. What technology
(if any) is involved in helping to:
1. achieve lower costs?
2. create differentiated value for customers or clients?
3. better focus on the needs of targeted segments?
4. harness, capture and manage the capabilities and power of productive
assets like knowledge, processes, systems and information?
5. provide and analyse management information so managers can make
better-informed decisions?
6. capture and analyse strategic information?

Incorporating technology
into corporate strategy
But is just having technology enough? Consider the following insight:
The alignment of IT with business strategy remains a perennial
concern for firms worldwide. The fact that alignment continues
to perplex and frustrate executives after more than a decade of
research and analysis highlights the true challenge of moulding IT to
fit the evolving needs of a business strategy. This research argues
that firms meet this challenge by translating formal strategic plans
into business activities and ways for IT to support the business. By
evaluating alignment at the process level, we get a heightened sense
for whether the locus of alignment is consistent with the goals of the
firm. For example, a company that tries to differentiate itself on the
basis of superior customer service is unlikely to achieve that goal
if IT resources are focused on peripheral areas, starving the most
critical activities of IT support. The locus of alignment—the process or
processes where alignment is tightest—must reflect a firm’s strategic
goals.
(Tallon 2007, p. 259)
Once again, even though the quote itself is over a decade old, and focuses
specifically on IT, we need to ignore these issues and recognise that the
point here is about the locus of alignment of all technology strategies to the
organisation’s strategic direction. The key point Tallon makes here is that
technology needs to be aligned clearly and directly with those activities that
are central to generating competitive advantage and strategic success. We
need to answer the questions of which strategically important capabilities
we want to support and which strategically important processes we want to
accelerate through our investments in technology.
However, the possession and control of technology on its own is not
a strategy. There must be a ‘locus of alignment’ or a fundamental
strategically valuable outcome from the investments in technology –
strategically valuable in impacting on the organisation’s value proposition
to its customers/clients, and valuable in accelerating the strategic or
competitive advantage of the organisation. As Sako (2012, p. 24) highlights:
Moreover, [technology strategy and its impact on] business
models are at the heart of the issue in distinctive ways. First, new
technologies create opportunities for new business models. Second,
appropriate business models are necessary to translate technical
success into commercial success. Third, business models themselves
are subject to innovation involving discontinuous changes in the
paradigm used by firms to go to market. In this sense, the ability
to sense deep truths about what consumers really want, to satisfy
consumers’ unmet needs, is perhaps the most important driver of
business model innovation.

The particular case of digital strategy
Nowhere is this impact and importance of technology strategy more
apparent and topical at present than in the realm of digital strategy – the
use of digital technologies to drive strategic success. It would seem that
almost daily we hear of new entrants disrupting long-established players
who doubtless considered themselves in a powerful strategic position using
innovative strategies and business models based on digital capabilities. As
Hirt and Willmot (2014, pp. 1–2) identified:
Today’s challenge is different. Robust attackers are scaling up with
incredible speed, inserting themselves artfully between you and your
customers and zeroing in on lucrative value-chain segments.
The digital technologies underlying these competitive thrusts may not

be new, but they are being used to new effect. Staggering amounts
of information are accessible as never before—from proprietary big
data to new public sources of open data. Analytical and processing
capabilities have made similar leaps with algorithms scattering
intelligence across digital networks, themselves often lodged in the
cloud. Smart mobile devices make that information and computing
power accessible to users around the world.
As these technologies gain momentum, they are profoundly changing

the strategic context: altering the structure of competition, the conduct
of business, and, ultimately, performance across industries. One
banking CEO, for instance, says the industry is in the midst of a
transition that occurs once every 100 years. To stay ahead of the
unfolding trends and disruptions, leaders across industries will need to
challenge their assumptions and pressure-test their strategies. …
Digitization often lowers entry barriers, causing long-established

boundaries between sectors to tumble. At the same time, the “plug
and play” nature of digital assets causes value chains to disaggregate,
creating openings for focused, fast-moving competitors. New market
entrants often scale up rapidly at lower cost than legacy players can,
and returns may grow rapidly as more customers join the network.

Dawson, Hirt and Scanlan (2016, p. 4) recently highlighted the impacts of
digitisation in the following image.
Figure 6.1 Impacts of digitisation

Degree of change in the nature of
supply and demand
Modest
• Find new-cheaper
and easier-ways to
connect supply and
demand
• Address unmet Make new • Uncover latent supply

demand by unbundling markets • Make capacity
or tailoring available in smaller
• Make it easy Undistort Unconstrain increments
and make it now demand supply
Demand Supply
Create Reimagine
new value business
• Enrich the product or propositions systems • Change supply-
service with information, side cost structure
Hyperscale
social content, or by automating,
platforms
connectivity visualizing, or
• Do more of the disintermediating
customers’ work • Face new competitors
for them and/or opportunities by
leveraging customer
relationships or
information
• Create or fight network
effects
Extreme
And Hirt and Willmot (2014, pp. 3–9) also did a very good job of
summarising seven strategically significant forces arising from digital
innovation and disruption:
1. Pressures on prices and margins: digitisation creates transparency,
making comparisons easier and increasingly commoditising offerings
(particularly in services).
2. Competitors emerge from unexpected places: traditional barriers to
entry are eroded via digitisation.

3. Winner-takes-all dynamics: digitisation enables radically different
(more efficient) business models and comparative advantage drives
consolidation to one/few ‘winners’ very quickly.
4. Plug-and-play business models: disaggregation of value chains and
emergence of specialist providers facilitates emergence and constant
iteration of ecosystems to offer real-time offerings and dynamic pricing.
5. Mismatch of talent: automation not only of simple repetitive tasks, but
of knowledge-based repeatable tasks, and competition for talent that
can’t be automated.
6. Converging global supply and demand: digitisation enables
customer access to information/purchase of offerings across traditional
geographic and industry boundaries.
7. Relentlessly evolving business models – at higher velocity.
However, before launching into a more in-depth consideration of digital

strategy let’s start by understanding what we mean by ‘digital’.
In its purest form, what we are referring to is the reduction of information
such as numbers, words, images, signals or whatever into a series of
ones and zeros. This has resulted in the ability of various devices such as
cameras, phones, computers and all manner of systems and machines to:
• reduce all information into this stream of ones and zeros
• transmit the streams of ones and zeros at very high speeds and in
large volumes from one place to another
• then reassemble them into a recognisable form (a virtually perfect
rendition of the original document, image, signal, voice thread, website
page impression, etc.)
• perfectly reproduce these images/documents/recordings/etc. again and
again at massive scale in real-time so that every version is exactly the
same as the original, and
• do so at virtually zero marginal cost.
This capability is why digital technology has become so transformative.

As Sako (2012, pp. 22–23) also suggests, ‘Starting with e-commerce and
more recently with interactive Web applications and cloud computing, digital
technology has created opportunities for new business models. Digital
technology impacts two sides of business models: both cost and revenue.’
Widespread and low-cost access to transformative digital technology is
enabling organisations large and small to overturn long-held beliefs and
assumptions about the structure of industry business models, and the
necessary components of competitive advantages and strategies. As the
following discussion by Dorner and Edelman (2015) highlights:

Companies today are rushing headlong to become more digital. But what does
digital really mean?
For some executives, it’s about technology. For others, digital is a new way of
engaging with customers. And for others still, it represents an entirely new way
of doing business. None of these definitions is necessarily incorrect. But such
diverse perspectives often trip up leadership teams because they reflect a lack
of alignment and common vision about where the business needs to go. This
often results in piecemeal initiatives or misguided efforts that lead to missed
opportunities, sluggish performance, or false starts.
It’s tempting to look for simple definitions, but to be meaningful and sustainable,
we believe that digital should be seen less as a thing and more a way of doing
things. To help make this definition more concrete, we’ve broken it down into
three attributes: creating value at the new frontiers of the business world, creating
value in the processes that execute a vision of customer experiences, and building
foundational capabilities that support the entire structure.
Hopefully, what you will distil from this quote is that they are highlighting
that digital technology is a powerful strategic enabler – because it helps in
doing things that matter strategically.
The key elements of a digital strategy

If we understand what is driving digital strategy, then the follow-on question
is, what are the elements of an effective digital strategy? Consider the
recent finding by Ross, Sebastian and Beath (2017):
We studied digital strategies as part of a research project on designing digital

organizations that the MIT Center for Information Systems Research conducted
in partnership with The Boston Consulting Group; in that project, we interviewed
more than 70 senior executives at 27 companies. Our findings underscored the
importance of developing a winning business strategy that takes advantage of
digital technologies. A great digital strategy provides direction, enabling executives
to lead digital initiatives, gauge their progress, and then redirect those efforts as
needed. The first step in setting this direction is to decide what kind of digital
strategy to pursue: a customer engagement strategy or a digitized solutions
strategy.
A customer engagement strategy targets superior, personalized experiences
that engender customer loyalty. A digitized solutions strategy targets information-
enriched products and services that deliver new value for customers. The best
strategy for a company will depend on its existing capabilities and the way it
wants to compete. The most important requirement for a great digital strategy,
however, is to choose one kind of strategy or the other, not both. A digital strategy
aimed at operational excellence may appear to be a third choice, but increasingly,
operational excellence is the minimum requirement for doing business digitally,
not the basis for a sustainable competitive advantage.

What this suggests is that before attempting to develop a digital (or
technology) strategy, the strategic managers in any organisation must
decide what strategic focus they want to adopt – in Michael Porter’s terms,
choose what form of differentiation to focus on (customer engagement or
digital [product] solutions). At the same time, they should ensure that they
build in operational excellence (low cost), which is a minimum requirement
or ‘ticket to play’.
Activity 6.2
1. Can you see some of the nine forces cited by Hirt and Willmot (2014) or
the economic changes identified by Dawson, Hirt and Scanlan (2016)
in your industry (or one that you know reasonably well)? How are these
impacting firms and their strategies?
2. Is your organisation using its digital strategy to (a) lower costs and
earn the ‘right to play’, and (b) focus on either customer engagement
or digital solutions? What should it be doing differently based on your
assessment of where it is at currently?
Strategic vs operational use of technology

While the discussion above of digital strategy has hopefully highlighted
some real challenges, what it also highlights is the critical distinction
between the strategic and operational uses of technology, including digital
technologies.
As the Tallon (2007) quote earlier and the Ross, Sebastian and Beath
(2017) quote above make clear, in many organisations there is often a poor
understanding of the strategic role of technology and a clear focusing on
how it helps the organisation to gain or exploit strategic advantage.

Consider the following insight:
The result in many major corporations is that IT is an expensive
mess. Orders are lost. Customers call help desks that aren’t helpful.
Tracking systems don’t track. Indeed, the average business fritters
away 20% of its corporate IT budget on purchases that fail to
achieve their objectives, according to Gartner Research. This adds
up to approximately $500 billion wasted worldwide. Such waste…
is a direct result of the fact that IT has so far operated without the
constructive involvement of the senior management team, despite
the best intentions of CIOs. Over the years, IT departments have
enthusiastically fulfilled requests by different corporate functions. In
the process, companies have created and populated dozens of legacy
information systems, each consisting of millions of lines of code that
do not talk to one another. As the data from discrete functions collect
in separate databases, more and more resources are required merely
to keep the systems operating properly.
(Field & Stoddard 2004, p. 74)
While this observation is already more than a decade old, it still rings
very true to many strategic managers and organisations to this day. This
distinction between the operational and strategic uses of technology
is an important one. This is not to say that strategic use of technology
is inherently valuable while operational use of technology is not. No
value judgement is intended here, nor are we trying to suggest that one
is more important than the other. However, the distinction is important
because confusing one for the other can lead to significant problems – the
‘expensive mess’ to which Field and Stoddard refer.
An organisation that confuses operational applications for strategic uses will
be trapped into simply becoming more efficient at the same things it does
now. And if what it does now doesn’t provide a competitive or strategic
advantage, then getting more efficient at it simply delays the inevitable –
strategic irrelevance. Indeed, as the following quote makes clear:
The evidence from our study does not support the idea that
technology change plays the principal role in the decline of once-
great companies (or the perpetual mediocrity of others). Certainly,
technology is important – you can’t remain a laggard and hope to
be great. But technology by itself is never a primary cause of either
greatness or decline.
(Collins 2001, p. 157)
As you can see, while technology won’t provide the strategic answers
itself, it is important that technology is incorporated into strategy to avoid
becoming irrelevant. Just as an organisation that confuses operational
use for strategic use will be trapped into just being better at its current
business, an organisation that confuses a strategic use of technology for an
operational one will be trapped into constantly postponing the opportunity
to become more efficient – the low-cost ticket to play that we discussed
earlier.

In this course, we define operational use as applying technology
primarily to improve internal processes that don’t explicitly enhance the
organisation’s competitive position or bring it closer to fulfilling its strategic
vision.
On the other hand, strategic use occurs when a technology is being used
to gain a strategic or competitive advantage, or as an essential element in
fulfilling the strategic vision of the organisation. It is sometimes hard to see
the distinction.
The strategic use of technology is what Tallon referred to in the earlier
quote, stating, ‘This research argues that firms meet this challenge by
translating formal strategic plans into business activities and ways for IT to
support the business’.
The key is to understand both the intent and the outcome of the
technology. Is it primarily about doing what we do now, but doing it better
(operational)? Is it about doing something that will enable us to succeed
and achieve strategic outcomes into the future (strategic)?
For example, focusing on how technology might allow the organisation to
cost-effectively store more data is an operational focus – there’s no explicit
consideration about how the technology provides competitive advantage
or is vital to achieving the strategic vision more effectively. But considering
how some technology might increase the use of stored data to provide
better services and products for customers, or deliver core services to
clients more responsively or more effectively, is a strategic view. This is
because we would be considering how technology may help to deepen the
relationship between the organisation and its customers or clients, and thus
increase their loyalty or involvement with the organisation – the customer
engagement digital strategy to which Ross, Sebastian and Beath (2017)
referred.
The role of strategic managers in technology

strategy
So, what does a strategic manager need to do in order to develop a
technology strategy? How does a strategic manager avoid being trapped in
an operational focus and make sure that they are developing the strategic
focus as well? How do managers of firms meet this challenge by translating
formal strategic plans into business activities and ways for technology
functions to support the business, as Tallon advocates?

Consider this quote, a classic in the technology strategy field:
The management of organisations’ technical innovation is part of
organisations’ strategic development, since new technologies, product
prototypes and the subsequent stream of new products are developed
and explored there. Selection of the wrong technologies and products,
as well as downstream mismanagement of the firms’ profit making
processes can lead to a decline of the organisations’ profitability.
(Antoniou & Ansoff 2004, pp. 275–276)
The authors here leave us in little doubt about the importance of effective
technology, innovation and new product strategies. We will examine
innovation and new product development strategies in the next Unit, and
will focus on technology strategy here.
However, it is important to make it clear that there is an intimate and vital
link between developing technology strategy and developing innovation and
new product strategy – they are symbiotic and reinforce each other. Doing
each effectively is vital to gaining value from both.
In a key article, Edler, Meyer-Krahmer and Reger (2002) identified
that technology (and R&D) strategy had moved through three phases,
arriving at the current point where organisations with effective technology
strategy (which they describe as a third-generation technology and R&D
organisation) were summarised as displaying the following characteristics:
Table 6.1 Third-generation technology and R&D

Management and • Strategically balanced R&D portfolio across the organisation (holistic
strategic context strategic framework)
• Developing a long-term vision for technology
Philosophy • Strategic and operational partnership between R&D and other
functions and departments or with business units
Organisation • Coordination of central and outlying technology and R&D – breaking
the isolation of technology units and R&D
• Full responsibility of project managers
• Looking for and exploiting synergies
Technology/R&D • Technology/R&D and business strategies integrated across
strategy organisation and globally
• Selecting targets by setting fundamental research in a business
context
Source: adapted from Edler, Meyer-Krahmer and Reger 2002, p. 151.
They went further to set out the cornerstones of a fourth-generation

technology and R&D framework.

Table 6.2 Fourth-generation technology and R&D
Philosophy • Technology and R&D regarded as a long-term instrument for gaining
and defending competitive advantage
• Technology and R&D are located where value is created
• Tapping into pockets of innovation across the organisation
• Increasing the productivity of technology and R&D
Strategy • Explicit formulated technology strategy implemented across the
organisation
• Corporate technology highly integrated into the corporate and
business units or divisional strategies
• Members of senior management team linking the technology
strategies
Organisation • Coordination of central and decentralised technology and R&D
• Locating technology development and research at points of business
needs
• Fully integrating various elements of the value chain
• Establishing and coordinating centres of excellence where they are
best located in the organisation, and around the world for global
organisations
• Horizontal and vertical networking with partners and allies – even on
core technologies
Resource allocation • Shared corporate and business unit ownership of R&D and
technology portfolio and resources
• More emphasis on technology foresight activities – to keep abreast of
newest technology and set research agenda
Source: adapted from Edler, Meyer-Krahmer and Reger 2002, p. 163.
Implications for strategic managers and what they do

To give this a more practical and applied focus, let’s review what Antoniou
and Ansoff (2004) identify as the four key steps for strategic managers in
developing effective technology strategy:
• forecasting future technology turbulence – what technologies are
emerging, and which have the greatest likelihood of changing the
dynamics of the industry and market?
• diagnosing the organisation’s present technological
aggressiveness – what is the organisation’s technological appetite
and risk profile, and what technology capabilities does it bring to the
task?
• determining the organisation’s future technological gap – what
areas of technology is the organisation well placed to compete upon or
lead and where is it likely to be a follower or even latecomer?
• designing actions and priorities for a future technology
development – what practical steps and actions can the strategic
managers implement to enact an effective technology strategy?

Antoniou and Ansoff (2004, p. 280) propose that the strategic managers of
an organisation must:
• guide the organisation’s forecasting units
• direct the organisation’s technology innovation focus
• assure the competency of the organisation’s technologists
• direct marketing and production for timely introduction of products and
services to the market
• choose the organisation’s technology strategy.
In order to forecast the future technology direction and turbulence, the

authors recommend answering questions like the following.
• Is the organisation a technology leader, imitator or follower?
• How intensive is technological competition now (low/medium/high)?
• Is this intensity changing (moving from low–medium; medium–high, or
back down the scale)?
• What is the nature of technological change – is technological change in
the industry incremental or discontinuous; is it forecast to change any
time soon?
• What is the nature of industry competition – is the focus in the industry
on competing based on superior marketing or product or technological
innovation? Is this changing or moving to another form of competition?
• Are industry product life cycles short or long? Is this changing?
By asking these questions, a strategic manager can determine how

significant technology is as a strategic factor for their organisation. For
example, the importance placed on technology strategy in an industry
technology leader will differ from that identified in an imitator or follower.
Added to this, the importance placed on technology strategy will be
greatest:
• when technology-based competitive intensity is high, or increasing, as
opposed to being low, or declining
• in industries undergoing (or likely to undergo) discontinuous change,
rather than industries where change is incremental
• in industries where competition is based on technology (and innovation
and new product development will matter more when competition is
based on products) rather than on marketing
• when industry product life cycles are short or shortening.

Antoniou and Ansoff (2004) also suggest that before developing a
technology strategy, the organisation’s strategic managers must assess
the:
• competencies of the organisation’s existing technologists – those
people primarily responsible for creating and managing the
technologies
• rate of technological obsolescence: is it fast or slow, is it changing
• organisation’s R&D leadership and capabilities
• organisation’s strategic position in the industry and the extent to which
this is based on technological leadership
• importance of technology as a key success factor in the industry
• effectiveness of existing technology, processes and products, plus
those technologies that are forecast to enter the market soon
• length of time needed to develop new technology processes and
products.
They summarise the role of the strategic manager in technology strategy

as:
• directing or enhancing the organisation’s technology forecasting
processes
• determining the priority placed on technology (and innovation and
new product development) as a contributor to strategic or competitive
advantage
• assuring that the organisation has access to competent technologists
• managing the speed with which technology (and innovation or new
products) takes to get into the organisation (or to market)
• identifying a preferred strategic position for technology (innovation and
new products).

Activity 6.3
1. Consider some of these issues in relation to your own organisation.
Is your organisation a technology leader, imitator or follower?

How intensive is technological competition now (low/medium/high)?
Is this intensity changing (moving from low–medium, medium–high, or back
down the scale)?
What is the nature of technological change in your industry (incremental or
discontinuous; is this forecast to change any time soon)?
What is the nature of industry competition (is the focus on competing based
on superior marketing–product–technological innovation; is this changing or
moving to another form)?
Are industry product life cycles short or long? Is this changing?
2. What conclusions do your answers suggest about the importance of a

technology strategy to your organisation and its strategic positioning?
3. Analyse technology in your organisation and industry:
How relevant and up-to-date are the

competencies of the organisation’s
technologists – those people
primarily responsible for creating
and managing the technologies?
What is the rate of technological
obsolescence in your industry; is it
fast or slow, and is it changing?
How effective is your organisation’s

R&D leadership and capabilities?
What is your organisation’s strategic

position in the industry? To what
extent is this based on technological
leadership?

How important is technology as a
key success factor in the industry?
Is this likely to change in the future?
How effective are existing

technology, processes and
products, plus any that are forecast
to be implemented soon?
How quickly is your organisation

able to develop new technology
processes and products?
4. What conclusions do your answers suggest about the current

competitive position of technology strategy to your organisation within
your industry?
5. What are the implications you would now draw about:
Your organisation’s technology

forecasting processes?
The priority that should be placed

on technology (and innovation
and new product development)
as a contributor to strategic or
The competences of your existing
technologists and technology
leaders?
Managing the speed with

which technology is developed,
implemented and adopted in your
organisation?
Identifying your preferred strategic
position for technology?

Incorporating technology into strategic
thinking
We now need to consider the specifics of evaluating technologies, and how
specific technologies can be effectively integrated into an organisation’s
strategies.
One of the most widely respected and cited frameworks in technology
strategy was published by MIT as far back as 1978. The recommendations
by the author (Fusfeld 1978, reprinted in Burgelman et al 2008, pp. 62–66)
advocate that strategic managers use a five-step approach to developing a
specific technology strategy.
Step 1: Identify the fundamental unit of technology

Firstly, you need to define the unit of technology. What does ‘technology’
mean in this environment? What sorts of technologies (theoretical and
practical knowledge, skills and artefacts) are being used to develop
products and services as well as their production and delivery systems? Is
this the same throughout the organisation and the industry? Although this
may seem trivial, this is an important issue, and many organisations have
paid dearly for not correctly identifying discrete units of technology.
So, the very first step in each strategic situation must be to identify the
fundamental unit of technology.
Step 2: Analyse product acceptance

Once you understand what units of technology are relevant to the strategic
environment and chosen position (leader – follower) that your organisation
has chosen, further analysis is required to identify the extent of acceptance
of the technologies and the products. Fusfeld suggested that there are
seven dimensions or qualities of ‘product acceptance’. Product acceptance
can be thought of as understanding how the technology is, or can be, used
or applied in your industry and organisation.
These seven dimensions are said to apply to any technology and industry:
1. Functional performance. What is the technology meant to do and how
is the performance of the technology measured? For example, printer
performance is measured in pages per minute (ppm) and data transfer
devices are measured in megabits per second (Mbps).
2. Acquisition cost – this equates the cost to some sort of measure of its
functionality or performance. For example, in the case of a refrigerator
this may be price per cubic foot (or metre) – the key being that a
refrigerator provides cooled storage space measured in cubic feet or
metres, and that different sizes (ft3 or m3) will have different costs per
unit.

3. Ease of use characteristics – does the technology make the products
easy for consumers to use, and if so, how? For example, digitisation
and miniaturisation have made mobile phones so small and portable
that their reduced size and weight have contributed enormously to
acceptance.
4. Operating costs – in addition to the cost to acquire, what ongoing
costs are required to support and deliver the strategic output. Again,
Fusfeld talks about kilowatt-hours as the measure of a refrigerator’s
operating costs.
5. Reliability – what amount of servicing is required to maintain its
operations, and what is the expected life of the technology in service?
6. Serviceability – how easy and costly it is to service, and how quickly
and easily it can be restored to operation if it fails
7. Compatibility – how well does the technology fit in or operate with
other technologies?
Step 3: Identify technology demand elasticities

Demand elasticity is a way of understanding the potential changes in the
adoption and use of a product as a result of technological change. It raises
two questions:
• How quickly (and by how much) does demand for the technology
change as the technology itself changes? For example, if the product
gets easier to use or the cost per outcome falls, what would be the
impact on demand? This is known as absolute demand elasticity –
the extent to which industry-wide demand changes as some critical
measure of product acceptance changes.
• The other variant of demand elasticity is the effect of technology
on determining the amount of industry demand (share) between
competitors. This is known as relative elasticity. For example, if HP
introduces a 2400 dpi printer and it leads to them increasing their
market share at the expense of Canon or Brother, this would be a case
of relative demand elasticity.
As you can see, this can be applied to each of the acceptance dimensions
– functional performance, acquisition cost, ease of use, reliability, etc. It is
also possible that in different markets, and at different stages of the product
life cycle or acceptance of the technology in the market, different types of
elasticity can be at work.
Step 4: Profiling technology by market segment

This step is used to develop a competitive technology profile within
each market segment. It recognises that for different customer groups
(segments), different technology acceptance criteria are relevant.

Profiling utilises the information from the preceding three steps in order to
gain a picture of what the competitive situation will be when a technology is
ready for release to the market. The faster the rate of change of technology,
the more critical this analysis becomes.
The critical issues that any profile needs to capture are:
• what are the features that are driving acceptance for the product in
each market segment?
• what changes in these features can we anticipate in the future?
• what is the type and level of demand elasticity now, and what is it likely
to be in the future?
• where does each of the competing market offerings or value
propositions (including your own) stand using these criteria?
Step 5: Assessing the technology and product portfolio

Fusfeld suggested that strategic managers needed to then chart the
technology and product portfolio to analyse the organisations technology
strategic readiness.
He proposed comparing the technological dimensions of any product
against the existing and potential demand for that dimension. He
suggested that this would identify how well matched any new product was
to meet the needs and preferences of each existing and potential customer
segment.
This leads to two possible strategic conclusions. On the one hand, the
organisation could adapt the technology so that it could more effectively
deliver the different benefits sought by each segment. Alternatively, the
organisation could focus on those segments where the product already has
the greatest differential benefits.
Fusfeld also suggested that strategic managers needed to analyse the
fit between generic technologies that the organisation has available to
them, and compare these capabilities to the technologies offered by
all competitors in each of the product markets in which the enterprise
competes.
This enables the strategic managers to identify what competitors are
doing and what their strategy has been and is likely to be in the future.
The analysis also helps identify the strengths and weaknesses of the
organisation’s technology capability and product range.
Such analysis is important for any organisation. It helps identify product
demand and provides a strategic analysis of competitor products and the
technologies that underpin them. Organisations that fail to analyse their
products in such a manner may very quickly find themselves with products
that can’t sell.

Using these five steps to help create an
organisation’s technology strategy
Applying the five steps outlined above enables strategic managers to use
technology as a means of creating product differentiation and competitive
advantage in the market – a critical role of a technology strategy.
The same approach can be used to identify potential internal uses
of technology to create strategic advantage other than in product
development. Let’s consider the application of the five steps to an internal
orientation (i.e. using technology to enable strategy by means other than
product development).
Table 6.3 An internal orientation of the five steps

Step 1 What technologies exist within or outside the organisation that
Identify fundamental units of may have application to the existing or potential processes
technology and systems that we use?
Step 2 How widely relevant would these technologies be across the
Analyse product acceptance organisation and its value chain? How widely used are these
technologies elsewhere outside the organisation and what
benefits do they or can they create? Remember to distinguish
between operational and strategic benefits!
Step 3 How widely might these technologies be applied throughout
Identify technology demand the organisation and within the value chain? How many
elasticities different parts of the organisation or value chain might benefit
from the application of this technology?
Step 4 What might be the impact of adopting this technology in
Profiling technology by market each of the areas of the organisation or value chain that we
segment identified as relevant? What might be the effect on each area
and its mode of operating?
Step 5 How significant or how desirable is the technology for each
Assessing the technology and internal audience? Using the characteristics of the technology
product portfolio and mapping them against each internal ‘market’ what
technology best suits each of the internal ‘customers’ at both
a strategic and operational level?

Activity 6.4
Consider some of the key technologies that are either already being
used by your organisation or may be emerging and available to your
organisation. Using the five steps, develop a profile of your organisation’s
key technologies for internal strategic enhancement. What observations
can you make based on the analysis about opportunities for technology
to strategically enable or empower units or businesses within your
organisation?

Summary
Having worked through this Unit, you should now be aware that technology
strategy is as important and central to the strategic success of any
organisation as its human resources, marketing and finance strategies.
Technology strategy is, or should be, one of the key strategic enablers
or accelerators of strategy, and therefore a core consideration in most
organisations’ strategic development processes.
You should also recognise that technology can assist organisations to
achieve Porter’s competitive advantages of pursuing a low-cost provider
strategy, a broad differentiation strategy, a best-cost provider strategy
(offering excellent product attributes at lower costs), a focused lower cost
strategy or a focused differentiation strategy, by helping organisations to:
• design and deliver cheaper, better products and services and helping to
do so faster
• achieve cost leadership
• maintain and improve critical relationships such as those with
customers/clients and suppliers
• produce market offerings (products and services) that are valued and
even prized by customers
• improve the deployment and use of strategic resources
• make better-informed and faster management decisions
• eliminate barriers within organisations and achieve scale and scope
efficiencies.
You will also understand that in this Unit we have been careful to focus
on the strategic rather than operational uses of technology – those that
are critical to achieving an organisation’s goals and gaining the best of
competitors.
You should also now be comfortable with the process by which
organisations ought to go about incorporating technology into their strategic
thinking, through initially:
• forecasting future technology turbulence
• diagnosing the organisation’s present technological aggressiveness
• determining the organisation’s future technological gap
• designing actions and priorities for future technology development.
From this, you, as a strategic manager can distil or interpret how significant
technology is as a strategic factor for your organisation.

As Antoniou and Ansoff (2004) suggest, strategic managers must
assess the:
• competencies of the organisation’s existing technologists
• rate of technological obsolescence
• organisation’s R&D leadership and capabilities
• organisation’s strategic position in the industry and the extent to which
this is based on technological leadership
• importance of technology as a key success factor in the industry
• effectiveness of existing technology, processes and products, plus
those forecast to be implemented soon, and the length of time needed
to develop new technology processes and products.
And then:
• direct or acquire effective technology forecasting processes
• determine the priority placed on technology (and innovation and new
product development) as a contributor to strategic or competitive
advantage
• be sure that the organisation has access to competent technologists
• manage the speed with which technology (and innovation or new
products) gets into the organisation (or to market)
• identify a preferred strategic position for technology (innovation and
new products).
Central to this process, strategic managers must think through the internal
and market implications of:
1. identifying fundamental units of technology
2. analysing the level of product acceptance
3. identifying the extent and type of technology demand elasticities
4. profiling the applicability of technology by market segment
5. assessing the technology and product portfolio of their own
organisation and its competitors.
Flowing from this, you should now understand that strategic success
in different markets will necessitate different strategic approaches to
technology. In some markets, a first mover’s advantage is essential – so
innovation and technology strategy must focus on being first to market.
However, in other markets, early entry is not required, and learning from the
progressive behaviour changes of the market through waiting and learning
(fast following) may be more strategically relevant.

In short, you should now be confident that you, and your organisation,
can evaluate and develop effective technology strategies – an essential
ingredient in any organisation’s strategic success in the increasingly
turbulent environment of the 21st century.

To help you review your learning in this Unit, try these five multiple-choice
1. According to Burgelman et al (2008, pp. 1-13) which of the following
is not one of the ways in which technology can help organisations
strategically?
a. helps organisations design and deliver products and services
cheaper, faster, more efficiently or more reliably
b. helps create superior products and services
c. helps automate the organisation’s operation
d. helps identify and manage their costs more effectively
e. facilitates more valuable relationships with customers/clients and
suppliers
f. helps organisations manage the capabilities and power of their
productive assets like knowledge, processes, systems and
information
g. provides and analyses information with higher levels of speed and
accuracy, allowing managers to make better-informed decisions
h. eliminates barriers within organisations and achieve scale and
scope efficiencies
2. Hirt and Willmot (2014, pp. 3–9) identified seven strategically significant
forces arising from digital innovation and disruption.
• Pressures on prices and margins
• Competitors emerge from unexpected places
• Winner-takes-all dynamics
• Mismatch of talent
• Converging global supply and demand
• Relentlessly evolving business models
From the list that follows, what is the missing item from the bulleted list
above:
a. Greater capacity for electronic oversight
b. Better informed and digitally engaged customers
c. Radically shortened product life cycles
d. Faster and more efficient distribution channels
e. Plug-and-play business models
f. Deeper and more stable strategic alliances

3. According to Antoniou and Ansoff (2004, p. 280) in leading and
effective technology strategy, the strategic managers of an organisation
must:
• guide the organisation’s forecasting units
• direct the organisation’s technology innovation focus
• direct marketing and production for timely introduction of products
and services to the market
• choose the organisation’s technology strategy
From the options in the list that follows, which is the missing item from
the bullet point list above
a. ensure that the technology budget keeps pace with inflation
b. ensure that the technology budget keeps pace with investments by
the competition
c. network with other strategic managers who are considered
technology leaders
d. assure the competency of the organisation’s technologists
e. make sure that they are up to date and informed about the latest
changes in technologies that may be relevant
4. In his groundbreaking article in 1978, Alan Fusfeld proposed a five-step
process for incorporating technology into strategic thinking. From the
following list, which is not one of the five steps Fusfeld proposed?
a. Identify fundamental units of technology
b. Analyse product acceptance
c. Assess the nature and level of technology-based competition
d. Identify technology demand elasticities
e. Profile technology by market segment
f. Assess the technology and product portfolio
5. From the list that follows, which of the descriptions best explains the
‘ease of use characteristics’ that Fusfeld identified as one of the seven
dimensions that are said to apply to any technology and industry:
a. Does the technology make the products easy for consumers to use,
and if so, how?
b. What is the technology meant to do and how is the performance of
the technology measured?
c. The costs involved in delivering some sort of measure of its
functionality or performance
d. How easy and costly it is to service, and how quickly and easily it
can be restored to operation if it fails
e. How well does the technology fit in or operate with other
technologies?

References
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http://www.mckinsey.com/business-functions/strategy-and-corporate-
finance/our-insights/strategic-principles-for-competing-in-the-digital-age
Ross, J, Sebastian, I & Beath, C 2017, ‘How to develop a great digital
strategy’, MIT Sloan Management Review, Winter/
Sako, M, 2012, ‘Technology strategy and management business models for
strategy and innovation’, Communications of the ACM, July, vol. 55 no. 7,
pp. 22–23.
Tallon, P P 2007, ‘A process-oriented perspective on the alignment of
information technology and business strategy’, Journal of Management
Information Systems, vol. 24, no. 3, pp. 227–268.

answers
1. c
2. e
3. d
4. c
5. a

Reading 6.1 Butcher, M 2016, ‘How a former model decided to

launch an app to tackle mental health’, Techcrunch.

Unit 7
Innovation and new product
development
CONTENTS
The strategic importance References 7–39
of innovation 7–3
Disruptive innovation 7–5
Stimulating and managing innovation 7–7
Models of innovation processes 7–7
A generic strategic innovation
management model 7–9
Design thinking – a contemporary
approach 7–20
Investing in a portfolio of innovation 7–22
New products – a key outcome of
strategic innovation 7–25
Designing and developing new products 7–25
How are new products created? 7–26
Managing products in the market 7–26
Managing a product portfolio 7–30

Introduction
• defining the strategic role and impacts of innovation, including
disruptive innovation
• discussing the practices that drive innovation and how to manage an
innovation portfolio
Video
Before starting this study of innovation, we’ll try to understand why

innovation is important. To help us, let’s first read the following short quote
from a major study conducted by IBM with 5,247 business leaders from 21
industries in 70 countries around the world in 2015:
What makes the world’s top executives cringe? “The ‘Uber syndrome’
– where a competitor with a completely different business model
enters your industry and flattens you,” said one executive. As the CIO
of a U.S. transportation firm, this is someone who knows just how
much momentum an eighteen-wheeler builds up when it’s barrelling
along the freeway. But many other business leaders also fear a new
rival could turn their companies into roadkill.
“It’s very difficult to predict how the competitive landscape will play
out,” the CEO of a Dutch IT company said. “Will adjacent players try to
get into our space? Will the folks who built the pipe try to compete with
us?” the CEO of a U.S. digital marketing firm asked.
Management guru Clayton Christensen coined the term “disruptive

innovation” to describe how new entrants target the bottom of a
market and then relentlessly move up market, eventually ousting
established firms. But what was once a relatively rare phenomenon
has now become a regular occurrence. Innovations that harness new
technologies or business models, or exploit old technologies in new
ways, are emerging on an almost daily basis. And the most disruptive
enterprises don’t gradually displace the incumbents; they reshape
entire industries, swiftly obliterating whatever stands in their way.
(IBM 2015, p.1)
Unit 7: Innovation and new product development 7–1

So what? What is the significance of this, and how does it help us
to understand something important about the nature of strategic
management? Well firstly, after our studies in Unit 3 on analysing external
forces, it will come as no surprise to see that strategic leaders like these
5,000+ business leaders who spoke with IBM see the world as increasingly
complex, that the turbulence of external forces is driving the need for
radically different approaches to strategic management. And secondly,
that they see disruptive innovation, continuous reinvention, breakthrough
thinking and a willingness to upset the status quo as critical to future
survival and success. There is no longer any possibility of ‘business as
usual’.
It’s now clear – the old ways of doing things are no longer good enough.
Strategic managers are under pressure to find new ways to tackle both new
and old problems.
Innovation typically manifests itself in new or refined outcomes in three
specific areas: (1) new or improved business models; (2) new or improved
products; or (3) new or improved business processes. Although we will
consider the issue separately in this Unit, new product development (NPD)
is frequently one of the key strategic outcomes of innovation.
In order to build our understanding of these important issues, we will
start by gaining an understanding of the role of innovation in strategic
management. We’ll then move on to consider the particular focus of
innovation in producing a stream of new products or product enhancements
that are often at the centre of the organisation’s competitive advantage and
its differential value propositions.
Learning outcomes
• define what innovation means and how it relates to strategic management
• outline what disruptive innovation is and how it impacts on firms and
industries
• discuss the organisational behaviours and processes that stimulate creativity
and innovation
• explain the role of innovation as a form of competitive advantage
• discuss the role of products in an organisation’s strategy and business
model
• explain the new product development process.

The strategic importance
of innovation
Why is innovation important, and what do we mean by innovation anyway?
As the quote from the IBM suggests, strategic pressures on organisations
from forces like changing customer/client wants and needs, rapid changes
in technology, increasing competition, an increasingly mobile and skilled
international workforce, increasing wealth in developing markets, rapid
shifts in global capital, and increasingly demanding shareholders and
stakeholders, all mean that the products, services, practices and strategies
of yesterday are unlikely to be enough to guarantee success today.
Consequently, few organisations are likely to succeed in achieving the
strategic vision, fulfilling the mission or being sustainable in the long term,
unless the strategic leaders and managers of the organisation encourage,
harness and exploit innovation in products, processes, strategies and,
ultimately, in business models.
But what do we mean by innovation? We could rely on the following
definition of innovation as:
something new or different introduced.
(http://dictionary.reference.com/browse/innovation?s=t)
This seems simple enough. However, this is a strategy course and the
same dictionary defines strategy as issues that are:
… a plan, method, or series of manoeuvres or stratagems for
obtaining a specific goal or result...relating to issues that are important
or essential …
(http://dictionary.reference.com/browse/strategy)
It can be deduced, then, that in this Unit we will focus on the use of
strategic innovation. By combining the two definitions, we could answer
the question: ‘What is strategic innovation?’ by proposing that it is:
something new or different relating to issues that are important or
essential and that may help the organisation in obtaining a specific goal
or result.
Innovation has become a strategic management imperative – strategic

managers pursue it in order to avoid the implications of old ways that are
obsolete, or about to be.
Christensen’s term ‘disruptive innovation’ followed his groundbreaking
1997 study highlighting how existing players in key industries can lose their
strategic advantage (and perhaps even cease to exist) when an ‘outsider’
enters an industry via the strategic advantage gained because of an
innovation that renders existing products and strategies obsolete. This is the
‘Uber syndrome’ that makes the IBM C-Suite survey respondents cringe.

In addition to Uber and its impact on the taxi industry, consider the impact
of cloud computing on the IT software and hardware industries, mobile
phones on providers of fixed-line networks, iTunes on the recorded music
industry, streaming music services such as Spotify and Apple Music on
iTunes, the decline of newspapers and free-to-air TV as people get their
news and stream their entertainment online, and the impact of online
shopping on main street retail around the world. These are examples of
how a disruptive innovation can change the rules of the strategy game –
redefining the answer to Lafley and Martin’s questions about where we
will play, how we will win and what capabilities must be in place. All of this
highlights the importance of innovation as a strategic enabler that must be
effectively managed.
The major outcomes of innovation can be new business models and new
processes and practices that produce superior customer outcomes or
lower costs, or a stream of new and differentiated products. Innovation can
deliver outcomes in all four quadrants of a balanced scorecard (financial;
customer; business improvement; learning and growth) and is a major
driver and outcome of adopting a shared-value perspective in strategy.
Innovation – specifically the development of new products and
enhancements to existing products – is a key means of the organisation
achieving growth. This has been a major driver for most of the high-profile
strategic success stories that dominate the business media: Google, Apple,
Samsung, Tesla, GE, Cochlear, Atlassian and thousands more. As one of
the foremost thinkers in the early development of marketing and corporate
strategy Igor Ansoff (1985, p. 113) pointed out, growth can come from only
four sources – by:
• getting existing customers to buy more of your current products
• creating new products to offer to your existing customers
• finding new customers to whom you can offer your existing products
• finding new customers and offering them new products.
Implicit in all of these strategies is the need to either enhance the value of
existing products to the market or to develop new products that customers
value more and are willing to buy more, or pay more for.
Thus, product development (developing new products or enhancing the
value of existing products) becomes a means of achieving cost leadership,
differentiation or focus – sources of competitive advantage that you will
recall from Michael Porter’s work (1980a, pp. 36–40).

Table 7.1 Sources of competitive advantage
Cost leadership Innovations in value-creating processes and systems allow the organisation
to achieve lower costs through greater efficiency or economies of scale,
scope, learning and location.
Differentiation Innovations in products (goods and services) or processes and procedures
enable the organisation to offer products of higher quality or with features
and benefits others can’t match, or support and services that provide a
superior customer experience.
Focus Innovation in products, systems or practices allows the organisation to gain
a reputation for producing products that more closely match the wants and
needs that these niche customers have. Innovations in processes allow the
organisation to be more responsive to the particular needs of the targeted
market segments.
Source: adapted from Porter 1980a, pp. 36–40.
Disruptive innovation
Another reason for placing so much importance on innovation is that it may
just be needed to survive. Once again, this issue is the ‘Uber syndrome’
that the 5,000+ IBM C-Suite respondents cringe about. Clayton Christensen
(1997) demonstrated the importance of disruptive innovation in finding
that many existing (incumbent) organisations in an industry become
trapped by their investments in existing business models, products and
processes. Incumbents typically focus on satisfying high-value customers,
ignoring those who would offer little value via the existing business model,
and seeking to maximise the return on their existing investments – which
seems a perfectly reasonable thing to do!
However, Christensen found that as a result of these preoccupations and
existing investments, they are unlikely to challenge the existing industry
models. Consider how railways were disrupted by the motor car, passenger
liners were disrupted by jet aircraft, mainframe computer makers were
disrupted by the PC, fixed-line phone networks were disrupted by cellular
technology, high-street financial and insurance providers are being
disrupted by online providers and aggregators, and Kodak, an iconic
Fortune 500 company for many decades, was virtually wiped out by digital
photography.
In all of these examples, it is typically ‘outsiders’ – organisations with few
vested interests or investments in existing business models to protect –
who have been free to pursue ‘disruptive innovation’. This stems from the
fact that outsiders have little to lose and much to gain from disrupting the
industry, and typically face ‘barriers to entry’ from existing business models.

Christensen actually described two forms of disruptive innovations – which
he described as:
• low-end disruption where the new entrant targets mainstream
customers who are more interested in lower prices and less interested
in the existing offerings that focus on additional features and attributes,
and
• new-market disruption where the innovator actually targets non-
consumption, focusing on being able to come up with a strategy
to satisfy and attract those customers who are currently unable to
participate because of barriers to their participation.
To hear Clayton Chistensen explain these ideas in more detail and offer
illustrative examples you should watch the following video.
Video
Video 7.2 C
hristensen, C, 2012, ‘Disruptive Innovation Explained’,
Harvard Business Review [7:51]
None of this is to suggest that the only innovation that is valuable is

disruptive or game-changing innovation. While these attract lots of
headlines, such transformational innovations are usually infrequent.
Just as important, and often much more impactful and frequent, are the
benefits derived from the multitude of much lower risk and less expensive
incremental or sustaining innovations that are designed to enhance
existing business models, products and processes.
However, each of these incremental improvements typically create only
small strategic gains – whereas disruptive innovation generates strategic
leaps. Christensen et al (2002, p. 31) actually found that in starting new
businesses, the probability of success is 10 times greater when using a
disruptive strategy than an incremental or sustaining innovation.
Therefore, a key strategic management principle is to both (1) invest in
innovations designed to continuously improve existing business models,
products and processes, and (2) continuously critique whether investments
in the existing business models, products and processes are blinding the
organisation to the potential of disruptive innovations. This means that
the strategic manager should seek to disrupt their own business models,
products and processes before someone else does it to them.

Stimulating and managing
innovation
An organisation’s ‘innovation model’ or ‘innovation value chain’ is typically
that series of actions and practices which, over time, are likely to lead to
generating incremental, step-change and potentially transformational or
disruptive innovations.
The model that we present of the innovation process here is a simplification
of what, in practice, is often less linear and far more iterative and variable
Our aim is to highlight some common concepts and practices of innovative
organisations, and attempt to reduce the complexity of innovation for
strategic advantage into more manageable stages.
The key characteristics of innovative organisations can be divided into five
common practices:
• knowledge and awareness
• persuasion and matching/selection
• decision and adoption/commitment
• implementation
• confirmation and routinisation.
We will only be able to examine each of these in brief, but before we do so,
let’s try and understand the general models used to describe strategically
innovative organisations.
Models of innovation processes

Andrew and Sirkin (2003, p. 79) identified three possible models for
effectively managing innovation, with organisations labelled as ‘integrators’,
‘orchestrators’ and ‘licensors’.
Table 7.2 Alternative models for roles in the innovation process

Integrator Orchestrator Licensor
Description • manage all • focus on some • license the
steps required to steps and link with innovation (new
generate profits partners to carry product) to another
from an idea (new out the rest company to take it
product) to market
Investment • high – capital may • medium – capital • low – production
requirements be needed to set up may be needed and marketing
new production and only to market expenses are
operational facilities the product (for borne by other
(for instance) example) organisations

Integrator Orchestrator Licensor
Capability • strong cross- • able to collaborate • intellectual property
requirements functional with multiple (IP) management
links within the partners skills
organisation simultaneously • good at basic
• product design • complex project- science and R&D
• manufacturing and management skills • good at managing
production process • good at gathering contracts
design skills and using customer • able to influence
• good at sourcing insights product standards
technical talent • brand management
skills
• culture accepting
of not having direct
control
• speed of strategic
movement and
decision
Best used when • speed to market • there are mature • there is strong IP
… isn’t crucial relationships protection
• technology is between partners • the innovator’s
proven or allies brand value is low
• customer tastes are • competition is • the market is new
stable intense and based or unknown to
• innovation is significantly on the innovating
incremental innovation organisation
• strong substitutes • significant
exist infrastructure is
• technology is early needed but not yet
in the life cycle developed
Source: adapted from Andrew and Sirkin 2003, p. 79.
Clearly, before deciding which of these roles suits the ‘winning aspiration’
of the organisation, strategic managers should examine its innovation
and capital resources as a part of their internal strategic analyses (Unit
4), and compare these with the capabilities required in the table above.
Strategic managers should also analyse the external environments (Unit 3)
and consider what market and industry conditions are likely to occur over
the foreseeable future, and then develop a position consistent with those
defined in the section of the table above entitled ‘Best used when…’. From
these analyses, the strategic manager could identify which of these models
is best suited to the organisation and conditions.

A generic strategic innovation
management model
While design thinking and lean start-up methodologies offer highly effective
contemporary approaches to strategic innovation management, there are
many other credible approaches that strategic managers can adopt to
stimulate, manage and embed strategic innovation in their organisation’s
culture. While the specifics of the approaches adopted can vary, most
follow a generic series of stages, captured by Tornatzky et al (1983) who
suggested that innovation models are usually some variation of:
Table 7.3 Representation of the stages in the innovation process

1. Knowledge and awareness Creating, R&D, information gathering, conceptualising,
planning, identification of needs
2. Persuasion and matching/ Solutions/innovations are matched to problems or to
selection ‘jobs that customers need done’
3. Decision and adoption/ Use
commitment
4. Implementation Events, actions and decisions involved in putting
innovation into use and modifying it where necessary
5. Confirmation and routinisation Testing and evaluation/maturing of the organisation–
innovation relationship, innovation becomes normal
As mentioned earlier, it is important to remember that this is not a linear,

sequential process, even though the table above makes it appear as
such. Each of the stages overlaps with the one before and after it. Each
of the stages links to every other stage in a never-ending iterative cycle of
actions and reactions, causes and effects, and inputs and outcomes. The
initial thoughts, insights and ideas that may be triggered in the knowledge
and awareness stage may be refined as the concepts develop through
the persuasion and matching stage and are tested and modified as the
innovation is adopted, implemented and confirmed. Implementation and
confirmation/routinisation may trigger new insights that spur a new cycle
of innovations. In practice, innovation is a constantly evolving and organic
process, rather than a highly controlled and linear sequence of steps.
That said, let’s now consider each stage in the process in some more
detail.

1. Knowledge and awareness
Innovation requires that ideas for new business models, new products,
new processes, and new strategies or refinements to existing products,
processes and business models must first be conceived, then developed,
evaluated, tested and produced or implemented. Accordingly, conceiving
the idea, developing it and evaluating it must take place first.
But from where do ideas for innovations come? Clearly, some come from
pursuing and investing in R&D. Some also come from bringing together
highly creative and diverse groups of people and allowing them the time
and freedom to think. Some come from investigating apparently unrelated
discoveries or thinking of possible alternative uses of technology, and many
emerge from the alert, inquisitive and open-minded observation of markets,
customers, communities and industries, and noticing opportunities for new
‘jobs to be done’ or better ways to do the jobs that are being done now.
The critical point for our discussion here is that creativity is an essential
element during both the early stages of the conception and the
development of innovation.
The key issue is how an organisation can become innovative by leveraging
the creative and innovative abilities of staff, allies, partners and key
stakeholders – and then capturing and harnessing these effectively. In
Video 7.1, some key principles of idea generation are discussed.
Video
Video 7.3 J ohnson S, 2016, ‘The playful wonderland behind great
inventions’ [7:26]
Steven Johnson has been writing and speaking on innovation and sources of
innovation for many years. In an earlier (2010) presentation on where good
ideas come from, he commented that ‘chance favours the connected mind’.
This can be seen in the significant increased use of ‘crowdsourcing’, where
someone with an idea or a need seeks inputs, often via use of the community
capabilities of the internet, from as many external people as possible –
the connection that Johnson refers to as colliding with another hunch. As
research by Chen et al (2012, p. 142) found:
In today’s dynamic business environment, companies are under
tremendous pressure to become more innovative and maintain a
steady stream of ideas that can lead to new and improved products
and services. Companies have begun to explore the possibility of
capturing consumers’ ‘collective intelligence’ by establishing firm-
sponsored online brainstorming sites where individuals can share their
ideas and offer comments on the ideas contributed by others.

As you can see from the video and the research findings cited above, rather
than relying only on the available minds within the organisation, modern
strategic managers reach out to the world and seek ideas to help them
innovate and address their strategic issues.
It is not possible in one section of one Unit of this course to do justice to
the huge amount that has been written and spoken about the importance
of and the sources of creativity and innovation. If you want to explore these
further, you may wish to search the UNSW Library’s electronic databases
because what follows is only a summary of some key themes and issues.
Sources of innovation
Innovation (including new products) comes from a range of sources.
Armstrong et al (2015, pp. 251–256) identify the following sources of new
products (one form of innovation).
• Internal sources such as R&D, brainstorming, suggestions and ideas
from staff provide up to 55% of all new product ideas.
• Customers (existing, potential and including the non-customers or
outliers that Christensen cites as the focus for disruptive innovation) are
said to account for up to 28% of innovations and new product ideas.
• Competitors. Observing and analysing competitors’ innovation
strategies, including observing innovations of organisations in related,
adjacent and international markets.
• Distributors and suppliers. Information or insights gained from other
participants in the value chain.
• Other sources including information from the media, advertising
agencies, trade shows, research bodies, government agencies,
universities, etc.
Activity 7.1
Based on Video 7.1 and the strategic importance and sources of innovation
mentioned above, consider your own organisation and suggest ways in
which the organisation could build a stronger insights and innovation ideas
pipeline.

This initial creative stage will provide an organisation with a range of both
potential soft (social) innovations and hard (technical) innovations. These
concepts are often subjected to further development and rapid prototyping
via basic and applied research.
The critical notion is that ideas are formed, and then nurtured into
strategic forms (business models, products, processes and systems) that
are designed to meet strategic needs, solve business or organisational
problems, or realise the strategic opportunities or avoid strategic threats.
2. Persuasion and matching/selection

Following the idea generation and initial development of ideas, strategic
leaders need to assess whether to invest further in the innovation. This
needs to balance (1) the need and desire for speed (to capture the
opportunity before it disappears or is taken by a more agile competitor) with
(2) good governance, so that scarce resources are used to best effect. In
an ideal world, an organisation will have a range of possible innovations
that can be pursued. However, it is not always possible to pursue all of
them.
At this point, strategic managers need to screen and rank ideas and build
a portfolio of strategic initiatives that will deliver the best possible strategic
and competitive advantage returns on the innovation investments.
One of the most important considerations at this stage in the process is
how to evaluate these potential risks and benefits. The matching/selection
process is vitally important, because it needs to be rigorous enough to
minimise investing in innovations that waste resources that would deliver
better strategic outcomes. But at the same time, it should not stifle or kill
creativity and innovation ideas that will potentially deliver real strategic
benefits to the organisation. Commonly, this means considering both cost–
benefit and strategic justifications for the innovations. With this in mind,
Pisano (2015) suggests that an organisation really needs an innovation
strategy. Specifically, he suggests that:
Without an innovation strategy, innovation improvement efforts can
easily become a grab bag of much touted best practices: dividing
R&D into decentralized autonomous teams, spawning internal
entrepreneurial ventures, setting up corporate venture-capital
arms, pursuing external alliances, embracing open innovation and
crowdsourcing, collaborating with customers, and implementing
rapid prototyping, to name just a few. There is nothing wrong with
any of those practices per se. The problem is that an organization’s
capacity for innovation stems from an innovation system: a coherent
set of interdependent processes and structures that dictates how the
company searches for novel problems and solutions, synthesizes
ideas into a business concept and product designs, and selects which
projects get funded.
(Pisano 2015, p. 46)

Pisano identified that:
Like the creation of any good strategy, the process of developing
an innovation strategy should start with a clear understanding and
articulation of specific objectives related to helping the company
achieve a sustainable competitive advantage. This requires going
beyond all-too-common generalities, such as “We must innovate to
grow,” “We innovate to create value,” or “We need to innovate to
stay ahead of competitors.” Those are not strategies. They provide
no sense of the types of innovation that might matter (and those that
won’t).
(Pisano 2015, pp. 48–49)
Pisano goes further to suggest that right from the start, strategic managers
who are looking to develop innovation strategies must address a series of
clear questions (Pisano 2015, pp. 49–50):
1. How will our investments in innovation create value for existing or
potential customers?
2. How will the organisation capture a share of the value that our
innovations create?
3. What types of innovation will allow the organisation to most effectively
create and capture value, and what types and quantum of resources
should each type receive?
To assist in developing an innovation strategy, Pisano offers a matrix

suggesting that strategic managers need to understand how well placed
their organisation is to pursue different types of innovation, and how
effectively aligned innovation projects are to the organisation’s overall
strategic direction:

Figure 7.1 A strategic innovation portfolio framework
Requires new business model
DISRUPTIVE ARCHITECTURAL
Examples Examples
Open source software Personalized medicine
For software companies For pharmaceutical companies
Video on demand Digital imaging
For DVD rental services For Polaroid and Kodak
Ride-sharing services Internet search
For taxi and limo companies For newspapers
Leverages existing business model
ROUTINE RADICAL
Examples Examples
A next-generation Biotechnology
BMW 3 series For pharmaceutical companies
A new vanguard Jet engines
Index fund For aircraft manufacturers
A new pixar 3D Fiber-optic cable
Animated film For telecommunications companies
Leverages existing technical competences Requires new technical competences
Source: adapted from Pisano 2015, p. 51.
As he goes on to point out (2015, p. 51):
A company’s innovation strategy should specify how the different types of innovation
fit into the business strategy and the resources that should be allocated to each.
In much of the writing on innovation today, radical, disruptive, and architectural
innovations are viewed as the keys to growth, and routine innovation is denigrated
as myopic at best and suicidal at worst. That line of thinking is simplistic.
In fact, the vast majority of profits are created through routine innovation. Since
Intel launched its last major disruptive innovation (the i386 chip), in 1985, it has
earned more than $200 billion in operating income, most of which has come
from next-generation microprocessors. Microsoft is often criticized for milking its
existing technologies rather than introducing true disruptions. But this strategy
has generated $303 billion in operating income since the introduction of Windows
NT, in 1993 (and $258 billion since the introduction of the Xbox, in 2001). Apple’s
last major breakthrough (as of this writing), the iPad, was launched in 2010. Since
then Apple has launched a steady stream of upgrades to its core platforms (Mac,
iPhone, and iPad), generating an eye-popping $190 billion in operating income.
The point here is not that companies should focus solely on routine innovation.
Rather, it is that there is not one preferred type. In fact, as the examples above
suggest, different kinds of innovation can become complements, rather than
substitutes, over time. Intel, Microsoft, and Apple would not have had the
continued

opportunity to garner massive profits from routine innovations had they not laid the
foundations with various breakthroughs. Conversely, a company that introduces a
disruptive innovation and cannot follow up with a stream of improvements will not
hold new entrants at bay for long
A useful tool for evaluating innovations (as well as for evaluating product
portfolios and other strategic opportunities) is the GE Business Screen,
which we also considered in Unit 4. This approach suggests that an
innovation (or product or strategic opportunity) should be objectively
assessed against two key variables: the attractiveness of the opportunity
that the innovation will ‘unlock’, and the organisation’s strength
against the critical success factors needed to manage the innovation
successfully. The GE Business Screen typically uses the following generic
characteristics.
Table 7.4 GE business screen – generic characteristics

Organisation’s ability to compete – based Market attractiveness –
on the organisation’s relative: based on the market’s comparative:
• size • size
• growth • growth
• share by segment • customer satisfaction levels
• level of customer loyalty • competition (quantity, types, effectiveness,
• margins levels of competitor commitment)
• distribution networks and abilities • price levels
• technology skills • profitability
• patents • importance of technology
• marketing strength • governmental regulations
• flexibility • sensitivity to economic trends.
• organisation.
3. Decision and adoption/commitment

At this point, the organisation’s strategic leaders need to either adopt and
fully commit to the innovation, or reject it.
The processes used here vary from organisation to organisation. However,
it is important that any process for arriving at a decision to proceed or not
must be strategic and timely.
The options available to the organisation’s strategic leaders are:
• yes – proceed with the innovation initiative (and more resources are
committed)
• maybe, but not now – shelve or warehouse the innovation to be
reconsidered at a future date
• no – the innovation is killed off.

Cooper, Edgett and Kleinschmidt (2002, p. 46) suggest that this process
(referred to as decision ‘stage gates’) is most effective when the decision-
makers have developed objective criteria that any investment must meet.
They suggest that decision-makers ought to consider the following.
Must-meet criteria – these might include generic things such as:
a. strategic alignment – fits well with the organisation’s strategic vision
b. reasonable likelihood that the innovation is technically feasible
c. meets health and safety, environmental and legal compliance
requirements
d. offers a positive return for the risks involved
e. does not have any unacceptable risks (show stoppers) or
characteristics that conflict with the organisation’s values or its
sustainability position.
Should-meet criteria – including things like:

a. strategic
i. level of strategic fit with the organisation’s existing direction and
capabilities
ii. offers significant strategic or competitive advantage
b. product advantage – the innovation allows the organisation to

differentiate because it:
i. offers unique benefits
ii. meets customer need better
iii. provides better value for money
c. market attractiveness – the innovation enables the organisation to enter

or gain a strategic position in attractive markets because of the
i. market size
ii. market growth
iii. competitive situation
d. leverages the organisation’s core strategic competencies by offering:

i. marketing synergies
ii. technical synergies
iii. production, operational synergies

e. technical feasibility – the organisation is attracted to the innovation
because:
i. the technical gap between the competencies needed to achieve
the innovation and the organisation’s existing capabilities is
manageable
ii. managing the project requirements to achieve the innovation is not
overly complex
iii. the innovation is based on technology that is understood and can
be managed effectively by the organisation’s technologists
f. risk versus return – evaluate the innovations on:

i. expected net present value (NPV) profitability over time
ii. cost–return ratios
iii. degree of confidence or certainty that returns are achievable
g. prioritise those things that are quick to do at low cost, but don’t ignore
high strategic and financial returns that may take time.
In terms of following such a structured process for innovation management

versus the more agile and creative iterations that are advocated by many
subject-matter experts, Pisano suggests that:
…trade-offs are inherent in choices about innovation processes. For
instance, many companies have adopted fairly structured “phase-
gate” models for managing their innovation processes. Advocates
argue that those models inject a degree of predictability and discipline
into what can be a messy endeavor. Opponents counter that they
destroy creativity. Who is right? Both are – but for different kinds
of projects. Highly structured phase-gate processes, which tend
to focus on resolving as much technical and market uncertainty
as possible early on, work well for innovations involving a known
technology for a known market. But they generally do not allow for
the considerable iteration required for combinations of new markets
and new technology. Those uncertain and complex projects require
a different kind of process, one that involves rapid prototyping, early
experimentation, parallel problem solving, and iteration.
(Pisano 2015, p. 54)
4. Implementation
Although Unit 11 is devoted to a discussion of strategy implementation, it
is important to mention that effective implementation is the key to success
with any innovation strategy. Kotler and Keller suggest (2012, p. 524)
that up to 85% of the reasons for the failure of strategies is due to poor
implementation rather than poor strategy.

As so few organisations actually invest in innovation, effective
implementation is critical. Strategic managers must do everything they
can to ensure they do not have to abandon their efforts or that these
efforts don’t generate a risk-averse culture in relation to innovation in their
organisation by mismanaging a series of projects that fail to deliver.
At the same time, however, ‘playing it safe’ is likely to lead to an
organisation choosing only those projects with a high likelihood of success
– incremental innovation, rather than looking to make strategic leaps
through disruptive innovation. It is exactly this sort of risk aversion that is
one of the reasons that disruptive innovation most commonly comes
from ‘outsiders’.
A sustainable organisation, therefore, must have processes for evaluating
innovation that appropriately balance risk and return. And it must also
have effective and efficient innovation implementation skills and processes
so that project failures don’t occur for avoidable reasons. The GE Business
Screen is one way of attempting to provide some rigour in this process.
Although the process of implementation is typically continuous and iterative,
it must eventually end, and the innovation must either be abandoned or
become embedded in the organisation. When successful, the innovation
becomes institutionalised and is viewed as part of the normal operations of
the organisation.
5. Confirmation and routinisation

At the confirmation stage in the process, the organisation’s strategic
managers reinforce the innovation decision and implement actions to
ensure that it becomes ‘the new way of doing things’. People across the
organisation’s value chain (both inside and outside the organisation) now
need to be given the time and opportunity to understand, test, evaluate,
modify, adopt and continuously improve and iterate the innovation. This
may involve a commitment of significant resources towards adequate
communication, training and other change-management strategies.
In order to measure the success of the innovation, a clear set of expected
innovation KPIs are needed.
Some measures used to understand the success of an innovation are
listed below.
• Strategic measures – indicators of increased or increasing
organisational strategic competency or competitive advantage, and
the innovation’s impact on shared value (benefits to the firm and its
stakeholders or communities).
• Innovation measures – performance against things like new product
introduction rates, speed to market and speed to profit.

• Customer/client/stakeholder measures – indicators of customer
satisfaction and advocacy, employee alignment and engagement,
positive brand/company/product/service image, customer/value
chain partner/investor/employee loyalty, etc. The extent to which the
innovation helped customers or key stakeholders to achieve outcomes
that they value.
• Growth measures – measures of growth in market share, overall
market size, sales, new markets entered and export capability.
• Performance measures – the extent to which the innovation out-
performs competing alternatives in the market or is more efficient/
effective than a process that it replaces.
• Quality measures – measures of the types and number of reported
defects, percentage of rework and breakdown frequency.
• Agility measures – measures of the organisation’s flexibility and
responsiveness to changing strategic conditions, the capacity to switch
strategic resources from one strategy to another in an effective and
timely manner.
The organisation must consider a wide range of strategic indicators, and

use these to assess how successfully the strategic managers stimulate and
lead innovation.
Activity 7.2
Thinking of innovation practices in your organisation or one that you know
well, how effectively is it managed? What sorts of metrics should be used to
judge success? How could it be improved against these metrics?

Design thinking – a contemporary approach
While there are many useful approaches to stimulating and managing
innovation, one of the most effective and widely adopted frameworks is
known as design thinking. So popular is this approach that in September
2015 Harvard Business Review devoted an entire issue to the evolution
of design thinking. One of the key findings (Kolko 2015, p. 68) in this
issue was:
There’s a shift under way in large organisations, one that puts design much
closer to the center of the enterprise. But the shift isn’t about aesthetics. It’s about
applying the principles of design to the way people work. This new approach is
in large part a response to the increasing complexity of modern technology and
modern business. That complexity takes many forms. Sometimes software is at
the center of a product and needs to be integrated with hardware (itself a complex
task) and made intuitive and simple from the user’s point of view (another difficult
challenge). Sometimes the problem being tackled is itself multi-faceted: Think
about how much tougher it is to re-invent a health care delivery system than to
design a shoe. And sometimes the business environment is so volatile that a
company must experiment with multiple paths in order to survive.
I could list a dozen other types of complexity that businesses grapple with every
day. But here’s what they all have in common: People need help making sense
of them. Specifically, people need their interactions with technologies and other
complex systems to be simple, intuitive, and pleasurable.
A set of principles collectively known as design thinking—empathy with users, a
discipline of proto-typing, and tolerance for failure chief among them— is the best
tool we have for creating those kinds of interactions and developing a responsive,
flexible organizational culture.
Numerous organisations such as Samsung and PepsiCo are cited as

exemplars of how design thinking is being used to innovate not only with
product development (its traditional role), but with complex issue decision-
making and strategic management more broadly.
The term design thinking is derived from the fact that the basis of the model
is a five-stage process taught in design schools around the world.
Stage 1. Empathise
Before looking to generate innovative ideas, the strategic manager and
team should look to understand and ‘get into the head’ of selected key
stakeholders. Interestingly, rather than focusing on the average or typical
users (the majority), design thinking advocates try to see through the
eyes of the ‘extreme users’, people at either end of the distribution curve
(extremely pro and extremely anti) on the basis that any solutions that
can satisfy the extreme users will certainly satisfy the mainstream users
quite easily.

Stage 2. Define the problem
This is the most important stage because it requires the strategic manager
or team to make sure not only that they understand the problem, but that
it is the right problem to solve. Getting the problem right is more likely
to achieve strategic value for the organisation. Stages 1 and 2 are often
repeated numerous times. A problem is posed, research on users is
conducted, the problem is refined, the research is revisited and reviewed in
the light of what the research of extreme users indicates.
Stage 3. Ideate
This word has been coined to summarise the process of creating and
considering as many options as possible. This stage values quantity over
quality. Using brainstorming, field research and as many other creative
mind-stimulating techniques as they can, the team should generate as
many options to address the problem as possible.
Stage 4. Prototype and test

What is hopefully a large number of options is filtered to a manageable
smaller sample that can be cheaply and quickly turned into prototypes.
These are then ‘tested’ against the findings of the original extreme user
research (and possibly even tested in the field with extreme users) to
see which of the ideas are feasible and which have the best outcomes.
Stages 2 and 3 can also be repeated a number of times if desired, possibly
involving more and more stakeholders, to generate as many options as
possible within available time and resources.
Stage 5. Pick the winner and execute

Following the filtering and cheap/rapid testing process, a best option
emerges ready for further development and implementation. In addition, a
range of other ideas may have been generated that are available later.
One of the best-known exponents of the design thinking process is the
design and innovation consultancy IDEO, a business started by two of the
pioneers of the approach, Tim Brown and David Kelley. IDEO has been
engaged by numerous Fortune 500 businesses to assist them in generating
creative and innovative solutions to business problems, and to help create
numerous new products. One of the key outcomes of innovative strategy
processes such as design thinking is to generate a pipeline of new product
ideas. We will explore new product development briefly in the next section.

Investing in a portfolio of innovation
So far, we have pointed out that effective strategic managers need to
encourage and support innovation – the ‘game changing’ disruptive,
architectural and radical innovations that might transform the organisation
and even the industry, as well as the less dramatic but important routine
innovations that make cumulatively valuable improvements to business
models, products and processes. This raises a critical question – how to
effectively balance investments in what may turn out to be ‘transformational’
innovation and investments in incremental improvement. In their 2012
Harvard Business Review article entitled ‘Managing Your Innovation
Portfolio’, authors Nagji and Tuff (2012, p. 69) found that:
Firms pursue innovation at three levels of ambition: enhancements to core

offerings, pursuit of adjacent opportunities, and ventures into transformational
territory. Analysis of innovation investments and returns reveals two striking
findings. Firms that outperform their peers tend to allocate their investments in
a certain ratio: 70% to safe bets in the core, 20% to less sure things in adjacent
spaces, and 10% to high-risk transformational initiatives. As it happens, an inverse
ratio applies to returns on innovation.
Although never the dominant activity, transformational initiatives are vital to a
company’s ongoing health, and firms must recognize that they demand unique
management approaches.
• Talent should include a diverse set of skills and be able to deal with ambiguous
data.
• Teams should be separated from day-to-day operations.
• Funding should come from outside the normal budget cycle.
• Pipeline management should focus on the iterative development of a few
promising ideas, not the ruthless filtering of many.
• Metrics should recognize nonfinancial achievements in early phases.
Once again, you can see from this the role of strategic managers in
allocating resources effectively (70% to safe bets, 20% to less sure things
and 10% to the transformational initiatives), while also ensuring that the
organisation has the right talent, that effective teams are formed, that
adequate funding is available (outside the normal budget cycle) and that
the idea screening process should look for and fund promising ideas
rather than ‘ruthlessly’ filtering out too many. The metrics for making these
judgements should be strategic as well as financial.
Nagji and Tuff illustrate the portfolio management approach in the
following diagram:

Figure 7.2 The innovation ambition matrix
THE INNOVATION AMBITION MATRIX

Firms that excel at total innovation management simultaneously invest at three
levels of ambition, carefully managing the balance among them.
serve adjacent customers target new customer needs
Transformational
Developing breakthroughs
Serve existing markets Enter adjacent markets, Create new markets,
and inventing things for

markets that don’t yet exist
Adjacent
Expanding from existing
business into “new to the
company” business
Core
WHERE TO PLAY
Optimizing existing
and customers
products for existing

customers
Use existing products Add incremental Develop new

and assets products and assets products and assets
HOW TO WIN
Source: adapted from Nagji and Tuff 2012, p. 69.
Please note the following important information in the diagram.

1. The strategic role of core innovations (attracting 70% of the portfolio
investments) is to optimise existing products for existing customers –
a role that Ansoff described as market penetration and that Pisano
(2015, p. 51) describes as Routine.
2. The strategic role of adjacent innovation (attracting 20% of innovation
portfolio investments) is to expand from existing business into ‘new to
the company’ business, using both incremental and new products to
move into adjacent customer markets (which Ansoff would describe as
both product development and market development and that Pisano
describes as Radical and Disruptive).

3. And finally, the strategic role of transformational innovation
(attracting 10% of innovation portfolio investments) is to develop
breakthroughs and inventing things for markets that don’t yet exist –
which Ansoff described as diversification and Pisano describes as
Architectural.
In this way, successful strategic managers ensure that they are not caught
out by architectural, disruptive and radical innovations by others. They
do so by taking calculated risks and investing in potentially spectacular
strategic transformational breakthroughs. At the same time, they are
managing the organisation’s risk appetite by ensuring a steady stream of
positive returns on the 70% invested in the less risky core and the 20%
invested in the slightly more risky adjacent innovations. Such a portfolio is
also typically much easier to justify within most organisational cultures and
governance climates.
The exception to this portfolio approach is the experience of startup
organisations. These firms typically take great risks (often risking all the
owner’s and early investors’ capital) against the potential for spectacular
returns. Such organisations often rely on funding from venture capitalists to
progress their innovations to the commercial stage.
Venture capitalists, however, like those found in Silicon Valley and other
innovation hubs such as Boston in the United States, and around Oxford
and Cambridge universities in the United Kingdom, are expert at assessing
risks and managing their investment portfolios. They do this by making a
number of diversified investments in a range of high-risk ventures in return
typically for a significant ownership stake in a portfolio of small startups.
This is based on the expectation that 70–90% of the investments will not
pay off, but that the 10–30% that do will do so spectacularly and provide a
substantial return on the total invested in the portfolio of startups.

New products –
a key outcome of
strategic innovation
One of the key strategic outcomes often sought from innovation strategy
is a ‘pipeline’ of new products or product enhancements that enhance the
organisation’s value propositions to its targeted segments. To understand
this more clearly, we need to consider specific issues related to the role of
products in providing competitive advantage and as a strategic resource for
an organisation.
Designing and developing new products

As Armstrong et al (2015, p. 252) point out:
New products are important – to both customers and the marketers
who serve them. For customers, they bring new solutions and
variety to their lives. For companies, new products are a key source
of growth. Even in a down economy, companies must continue to
innovate. New products provide new ways to connect with customers
as they adapt their buying to the changing economic times.
It is important to note that this quote applies equally to businesses,

government departments (subject to changes in government, government
policy, changing community expectations, wants and needs and public
pressures) and not-for-profit organisations, whose donors and clients are
just as demanding and who are just as likely to be subjected to competition
and other external pressures.
Kotler and Keller’s (2012, p. 527) research suggests that there are four
competencies needed for an organisation to manage the new product
development process effectively: marketing, technical, manufacturing
and project-management competencies. Therefore, in analysing the
organisation’s sustainable competitive or strategic advantage, any
organisation where these four competencies appear are strengths is
well suited to using product differentiation as a key strategy. Of these,
the research indicates that the key strategic resource is marketing
competencies. Five years after new product launches, the organisations
whose marketing competencies were the most pronounced were more
likely to have succeeded with their new products. Second-most significant
among these were the project management and technical competencies.

How are new products created?
Armstrong et al (2015, p. 254) propose an eight-step process for new
product development (NPD). You will note that these are entirely consistent
with many of the key approaches and principles we have already discussed
for effective innovation strategy. The key NPD steps are listed below.
• Idea generation – the systematic search for new product ideas,
including active searching of internal sources, customers, competitors,
distributors, suppliers and external sources such as research
laboratories, universities, trade shows and exhibitions. Increasingly,
this is also enabled using design-thinking techniques already
mentioned above.
• Idea screening – sorting out which new product ideas are worth
investing in.
• Concept development and testing – developing a product concept,
rapid prototyping and testing to assess feasibility and likely success in
the market.
• Business analysis – developing and reviewing the product’s
likely performance (acceptance, sales/adoption and profitability) to
see whether it meets the organisation’s requirements and has an
appropriate strategic fit with the vision/mission and objectives and
desired financial outcomes.
• Marketing strategy – designing a marketing strategy to successfully
launch and support the product in the market.
• Product development – turning the concept/prototype into a final
product that the organisation can produce efficiently and in sufficient
volume.
• Test marketing – objectively evaluating the marketing strategies
designed to launch and support the new product via limited market
testing in ‘live’ circumstances.
• Commercialisation – introducing the product to the market and
supporting it until it becomes an effective and sustained part of the
product portfolio.
Managing products in the market

So far in this Unit, we have concentrated on the strategic innovation and
product development process, and identified some of the common steps
and sequences used.
In practice, many of the benefits gained from innovation are gained
by organisations who are ‘first to market’ or at least ‘early to market’.
Therefore, strategic advantage can be gained from being a ‘first mover’, or
at least a ‘fast follower’ or an early mover. This is particularly the case in

markets with high levels of consumer-determined success; that is, markets
in which consumer acceptance of new products is very fast.
Research indicates that many products have a life cycle similar to the
stages of the human life cycle – creation, birth, growth, maturity, decline
and death. In managing a product, there are different strategies and
management approaches that suit different stages of the product life
cycle. In other words, there is a certain window of opportunity to generate
maximum profit from the product.
Figure 7.3 The product life cycle

Sales and profits ($)
Sales
Profits
Time
Product
development Introduction Growth Maturity Decline
stage
Losses/
investments ($)
Source: adapted from Armstrong et al 2015, p. 263.
This theory suggests that products go through the following phases.

• Product development phase: (conception and birth) where sales and
profits are negative because of the fact that the significant expenditure
on development is not yet offset by significant revenue.
• Introduction phase: (infancy). A few risk-seeking or risk-accepting
customers (known as innovators) are trying, evaluating and, hopefully,
preferring the product. Sales are increasing, but profits are still
negative because the costs of introduction (particularly marketing and
distribution costs) are high, revenues are still low and the economies of
scale and learning are yet to be achieved.
• Growth phase: (teenage and early adulthood). If the product meets
a market need, more customers/clients become more aware of and
favourably disposed towards the product (customers buying here are
referred to as the ‘early adopters’), and demand is building. Sales
increase – as do profits – as scale and learning economies begin to be
achieved. However, this growth also typically attracts competitors who
enter the market with a copy or ‘me too’ product in order to capture a
share of the market opportunity.

• Maturity phase: (middle age). As competitors enter the market and
demand is increasingly matched by supply (from all competitors),
sales increase. However, increased need for spending on marketing
in a more competitive market reduces profits. As you can see from the
graph, the rate of growth of sales is slowing and profits are beginning to
reach a plateau. The types of customers who typically buy a product at
this stage of the life cycle are referred to as ‘the early majority’ or ‘late
majority’ – people who prefer to buy the product only when it is proven
and almost risk-free.
• Decline phase: (old age). Competition leads to over-supply. Because
competitors don’t share market intelligence with each other, the level
of supply typically exceeds demand. Customers/clients are no longer
increasing their purchasing and are perhaps waiting for a replacement
product. Competition often becomes cutthroat as various organisations
seek to hold market share and sacrifice profit through aggressive
marketing. Demand begins to decline. New products that have superior
features and benefits enter the market. Old products decline, and
frequently ‘die’ as a superior innovation or new product takes their
place. The types of customers who typically buy a product at this late
stage are referred to as ‘laggards’. They are typically uninterested and
uninvolved and are purchasing the product because they are compelled
to do so, sometimes reluctantly.
From this, you should now be able to see that:

• the capacity for innovation and new product development is a vital
strategic competency
• the later a product is introduced and enters this window of opportunity,
the higher the penalty in terms of lost revenue.
However, the need to be ‘first to market’ is only one possible strategically
viable position. Research demonstrates that there are other feasible
positions in the life cycle. Simply pursuing innovation in order to be first
to market may be over-simplified. Markides and Geroski (2004) suggest
that the real long-term benefits from new products are not always gained
by ‘pioneers’ (organisations that are first to market), but instead are often
achieved by the ‘colonisers’ (organisations often called ‘fast followers’ who
enter later, but are able to exploit scale or some other advantage in the
market).
This research suggests that while some of the pioneers survived and
gained some success, much of the value of innovation was captured by
colonisers (fast followers). The difference in the strategies of the two groups
is recorded below.
• Colonisers focus on the wants, needs and preferences of mass-
market customers (early and late majority) rather than the technically
driven niche customers who often buy products early in the life cycle
(innovators and early adopters).

• Colonisers achieve scale in production and distribution quickly, driving
prices down to where they become attractive to larger mass markets.
• Colonisers invest heavily in marketing to communicate brand
awareness and brand dominance.
• Colonisers often use disruptive innovation to create a superior
customer value proposition for the mass market.
An illustration of this is the digital music industry, with Apple ‘colonising’ an

industry in which they are a comparatively late entrant. Apple is seeking to
do the same in the streaming music industry against ‘pioneers’ like Spotify.
Amazon is an example of a late entrant in the retail industry (as are a range
of other online specialists). However, the use of disruptive innovation has
enabled a strategic advantage via creating a superior value proposition. All
of this suggests that there are potentially three viable strategic positions in
markets for new products.
Table 7.5 Strategic positions in markets

Viable strategic positions Skills required
1. First to market (pioneers) • High levels of innovation
• Efficient and effective new product development processes
2. Fast followers (colonisers) • Environmental analysis (spotting emerging disruptive
innovations)
• Backwards engineering (able to quickly copy an innovation)
• Efficient production and distribution
3. Late entrants • Reducing customer switching costs
• Innovation and cost reductions in production, distribution and
value chain management
In summary, while first to market has some distinct advantages, there are a
number of viable strategic positions. Organisations need to evaluate which
of these they are best equipped to implement or achieve. This should be
based on a rigorous and objective internal analysis (see Unit 4) on how well
what they might do (opportunities and threats) matches what they can do
(strengths and weaknesses). These are fundamental questions that Lafley
and Martin (2013, pp. 14–15) would suggest relates to:
• what is our aspiration?
• where will we play?
• how will we win?
• what capabilities must be in place?
• what management systems are required?

Managing a product portfolio
The final strategic product-management issue to consider is how to
manage a portfolio of multiple value propositions being offered by the same
organisation. Most organisations have multiple products, and operate in
different markets, sometimes each with a different set of customers and
competitors and each of which may have a different strategic position.
The strategic problem for a single-product enterprise is that the
organisation is destined to follow the product life cycle and is entirely
exposed to the fluctuations of the single market. For organisations with a
portfolio of products, different strategies are appropriate to different relative
positions and stages in the life cycle.
The first portfolio management tool typically used by strategic managers
has already been covered in some depth here and in previous Units, i.e.
the GE Business Screen (Table 7.4). As mentioned earlier, it compares the
attractiveness of a product’s market and the organisation’s comparative
strengths. A portfolio of products can be mapped, and different products will
end up in different quadrants. As also mentioned earlier, organisations may
then adopt the generic position of:
• investing in strategies based on products in the portfolio that are
attractive and where the organisation is identified as being stronger or
at least average in key capabilities
• selectively investing in strategies for products in the portfolio where the
organisation has strengths, but the markets are not especially attractive
• divesting products in areas where the organisation is weak and the
market is not attractive.
As we know from Unit 4, another product portfolio management tool is the

BCG matrix. The Boston Consulting Group developed and pioneered the
approach of a four-quadrant matrix that requires strategic managers to
map the product portfolio on two axes – market growth rates and strategic
position.
There is a small caveat on the use of the BCG matrix – you will note that
it really only considers some very skewed economic criteria for strategic
importance (market growth and relative position). A wider application of
other strategic considerations – what strategic value the product may offer
other than market leadership in high growth markets – may need to be
considered.
However, what is valuable here is the idea that with a portfolio of products,
the strategic manager needs to consider their relative position and strategic
contribution. This may result in adapting this matrix with other strategic
criteria along the two axes, and then applying it.

Activity 7.3
1. Using the product life cycle, the model of pioneers and colonisers and
the product portfolio matrix tools, what strategically valuable products
does your organisation have?
2. How should your organisation be managing these, based on the

strategic product management concepts we have studied?

Summary
In this Unit, we have recognised the importance of innovation as a means
of achieving strategic or competitive advantage. We considered the
importance of having an innovation strategy that invests in a range of
Routine, Radical, Disruptive and Architectural innovation projects. We have
identified how effective innovation can create a position of cost-leadership,
differentiation or focus. We also learned that routine incremental
innovation is important, but that organisations must also look for strategic
leaps, ideally pursuing strategic advantage through constant innovation,
in radical, disruptive and even architectural innovations. We noted that
an organisation may manage innovation as an integrator, orchestrator or
licensor, and that while ‘early to market’ as a pioneer is a viable strategic
position, so too, is that of the coloniser (market follower or late entrant).
We considered a five-stage model of the process of innovation and
highlighted the most recent thinking around an effective innovation process
– design thinking. As with most models, the generic model and design
thinking are not meant to be perfect representations of reality. Rather, they
are intended to highlight the importance of various key tasks and sub-
processes that are essential to success. The stages in the generic model
may be summarised as follows.
1. Knowledge and awareness. Strategic leaders must first become
aware of the need and opportunities for change, or of the existence of
an innovation. The innovation needs to be conceived, developed and
produced.
2. Persuasion and matching/selection. Strategic leaders must form a
favourable or unfavourable attitude towards the innovation.
3. Decision and adoption/commitment. At this point in the process,
strategic leaders engage in activities that lead to a choice to adopt or
reject the innovation.
4 Implementation. Putting the innovation to use. Implementation is a
major (perhaps the most important) issue leading to ultimate success,
and will be the subject of Unit 11.
5. Confirmation and routinisation. The decision to adopt the innovation
and actually begin using it is not the end of the process. Once an
innovation has been implemented, it frequently goes through a process
of testing and evaluation during which strategic managers attempt to
confirm (or reject) the choice. Eventually, the successful innovation is
incorporated both technically and socially into ‘the way we do things
around here’. It becomes the norm, part of the routine.
And the five interrelated and iterative stages of design thinking are:
1. empathise – conduct field research on extreme users
2. define – be really clear about what problem you need to solve and what
the real problem is

3. ideate – use creative thinking and research processes to generate as
many options for addressing the problem as possible
4. prototype and test – conduct cheap, fast tests on simple prototypes
against the research on extreme users to identify which option(s)
are best
5. pick the winner, and execute.
We also talked about the need for the organisation to manage the
innovation portfolio, and the risks associated with investing in innovation,
appropriately. This discussion focused on recent findings that strategically
successful innovation managers use a portfolio ratio of investing 70% of
allocated resources in core innovation projects, 20% in adjacent innovation
projects and 10% in transformational innovation projects. They also
manage the innovation portfolio following a few simple principles.
• Talent should include a diverse set of skills and be able to deal with
ambiguous data.
• Teams should be separated from day-to-day operations.
• Funding should come from outside the normal budget cycle.
• Pipeline management should focus on the iterative development of a
few promising ideas, not the ruthless filtering of many.
• Metrics should recognise non-financial achievements in early phases.
We touched on the importance of stimulating creativity within your
organisation, and the need to manage it in such a way that innovation has
the best chance of success. The sources of innovation were discussed
briefly. To stimulate creativity in your own organisation, you really need to
read more broadly in this area.
We need to grasp that few (if any) organisations have the luxury of doing
things ‘the old way’, of just exploiting existing knowledge. Innovation is
so critical to the success of today’s organisations that it has become a
major strategic management focus, and according to 5,000+ of the world’s
business leaders across multiple countries and industries, it’s the number-
one issue on their leadership agenda.
We considered the role of products as a key outcome of innovation, and
developed a basic understanding of why product development is an
important strategic activity. We identified why it is that new products often
fail, and considered a philosophy and some processes and practices that
would increase the successful translation of innovation into successful new
product strategies.
We also noted that as strategic resources are scarce, they can’t be wasted
or gambled on innovation and new products that are poorly suited to the
organisation’s strategic direction and competencies. This involves ensuring
that a rigorous and objective process for evaluating and screening new
product ideas and projects is adopted.

It is vital that a wide range of internal and external stakeholders such
as R&D, marketing, finance, production and operational managers, key
strategic partners and ‘extreme users’ or lead customers be involved in the
design process from the very early stages. A smooth-running, effective and
efficient design/production process can be a major strategic advantage for
an organisation, and can lead to being first or early into the market.
Finally, we considered strategic issues flowing from the product life cycle,
and those related to managing a portfolio of products.
Having considered all these aspects of strategy development, we now
need to move on to some particularly important issues to round out our
understanding of the strategic management of organisations. In particular,
we need to focus on:
• opportunities offered by the strategic tool kit, generic strategies such as
merger and acquisition and forward and backwards integration (Unit 8)
• the vitally important strategic advantage that organisations gain from
investing in developing their intellectual capital (IC) and knowledge
(Unit 9)
• the peculiar issues that can arise when implementing strategy
internationally or outside national borders (Unit 10)
• the key to successful implementation to maximise its impact and
likelihood of success (Unit 11)
• how to capture and communicate all the strategy when we have
developed it and how to recognise, build and manage relationships with
key strategic stakeholders (Unit 12).

To help you review your learning in this Unit, try these multiple-choice
1. In the course materials, Innovators are said to gain competitive or
strategic advantage through three means. From the bulleted list below,
one source of competitive advantage is missing. Identify the missing
elements from the choices that follow.
• Gaining superior returns by being early to market
• Achieving better costs by being able to innovate in processes
and systems that lead to greater efficiency, quality or customer
responsiveness.
a. Pursuing more of existing markets with new products.

b. Pursuing new markets with new products.
c. Gaining a greater reputation for being innovative.
d. Entering new markets with existing products.
e. Increasing the understanding and knowledge of the importance of
innovation among key stakeholders.
2. Clayton Christensen (1997) used the term ‘disruptive innovation’ to

describe what phenomenon?
a. Incremental improvements to existing business models, processes
and products that provide small but important additional value for
customers and organisations.
b. Game-changing innovations used to create entirely new business
models, products or processes that deliver superior value for
customers and the organisation.
c. Improvements in business models, processes and products that
enable the organisation to enter new markets with new products.
d. Improvements in business models, processes and products that
enable the organisation to win new business in existing markets.
e. A balanced portfolio of core, adjacent and transformational
innovations that deliver a pipeline of value-adding opportunities for
the organisation.
3. Andrew and Sirkin (2003) described three possible strategic roles for
innovators – integrator, orchestrator and licensor. From the alternatives
below, which is the best description of the role of the orchestrator?
a. License the innovation to another company to take it to market.
b. Manage all steps required to generate profits from an idea.
c. Focus on the wants, needs and preferences of mass-market
customers (Early and Late Majority) rather than the technically driven
niche customers who often buy products early in the life cycle.

d. Capable of backwards or reverse engineering (able to quickly copy
an innovation).
e. Focus on some steps and link with partners to carry out the rest.
4. In the generic model used in the materials based on the approach of

Tornatzky et al (1983) there are five stages. One of these has been left
out in the bulleted list below. From the following alternatives, which is
the missing stage?
• Knowledge and awareness
• Persuasion and matching/selection
• Decision and adoption/commitment
• Implementation
a. Introduction
b. Growth
c. Maturity
d. Decline
e. Confirmation and routinisation
5. A key finding (Pisano 2015, pp. 44–54) indicated that there are three
key questions that should drive innovation strategy. Two of these are
indicated below.
• How will our investments in innovation create value for existing or
potential customers?
• What types of innovation will allow the organisation to most
effectively create and capture value, and what types and quantum
of resources should each type receive?
From the list that follows, which is the third (missing) question that
innovation strategy should address?
a. How will the organisation capture a share of the value that our
innovations create?
b. What is the risk-return profile of the innovations?
c. How many innovations are market-leading?
d. What is the growth rate of the market into which the innovation is
pitched?
e. What is the nature of competition in the market that this innovation
will compete in?

6. In the persuasion and selection stage of the generic innovation model,
two processes were identified as being key to an effective innovation
evaluation. One was said to be economic or financial evaluation, and
the other was:
a. business strength and innovation attractiveness
b. market share and market growth
c. overall cost leadership
d. focused differentiation
e. non-economic or strategic evaluation
7. Design thinking is a model for stimulating and managing innovation. It

is described as having five stages. The first stage is entitled Empathise.
From the list below, which definition best describes the activities
involved in this stage?
a. Creating and considering as many options as possible
b. Conducting a number of cheap and fast prototype tests
c. Getting into the heads of extreme users
d. Selecting and implementing the best options
e. Getting the problem right and making sure you have the right
problem
8. Authors Nagji and Tuff advocate a particular distribution of innovation

investments across the portfolio of investment projects – Core
Innovation, Adjacent Innovation and Transformational Innovation. In
the discussion of this approach, we suggested that Transformational
Innovation was a strategy similar to which stage of Ansoff’s matrix?
a. Diversification
b. Differentiation
c. Market Penetration
d. Product Development
e. Market Development
9. Which of the following is not a stage in the product life cycle concept?
a. Decline
b. Diversification
c. Maturity
d. Introduction
e. Growth

10. In the BCG method for managing a product portfolio, a product that is
not the market leader but that operates within a fast-growing market is
said to be what sort of product?
a. Star
b. Mature
c. Dog
d. Cash cow
e. Question mark

References
Andrew, J P & Sirkin, H L 2003, ‘Innovating for cash’, Harvard Business
Review, vol. 81, no. 9, September, pp. 76–83.
Ansoff, H I 1985, Corporate strategy: An analytic approach to business
policy for growth and expansion, Penguin, Harmondsworth.
Armstrong, G, Adam, S, Denize, S & Kotler, P 2015, Principles of
marketing, 6th edn, Pearson Australia, Sydney.
Chen, L, Marsden, J R & Zhang, Z 2012, ‘Theory and analysis of company-
sponsored value co-creation’, Journal of Management Information Systems,
Fall, vol. 29, no. 2, pp. 141–172.
Christensen, C M 1997, The innovator’s dilemma: When new technologies
cause great firms to fail, Harvard Business School Press, Boston.
Christensen, C, Johnson M & Rigby, D, 2002, ‘Foundations for growth:
How to identify and build disruptive new businesses’, MIT Sloan
Management Review, Spring, pp. 22–31.
Cooper, R G, Edgett, S J & Kleinschmidt, E J 2002, ‘Optimizing the stage
gate process: What best-practice companies do II’, Research Technology
Management, vol. 45, no. 6, pp. 43–49.
Edler, J, Meyer-Krahmer, F & Reger, G 2002, ‘Changes in the strategic
management of technology: Results of a global benchmarking study’,
R&D Management, vol. 32, no. 2, pp. 149–164.
Hansen, M & Birkinshaw, J 2007, ‘The innovation value chain’, Harvard
IBM 2010, Capitalising on complexity: Insights from the global chief
executive study, IBM Global.
IBM Corporation 2015, Redefining boundaries: The global C-suite study,
November. accessed 14 August 2017:
https://www-935.ibm.com/services/c-suite/study/study/
Johnson, S 2011, Where do good ideas come from? The seven patterns of
innovation, Penguin, United Kingdom
Kotler, P, Brown, L, Adam, S, Burton, S & Armstrong, G 2008, Marketing,
7th edn, Prentice Hall, Sydney.
Kotler, P & Keller, K 2012, Marketing management, 14th edn, Prentice Hall,
New York.
Lafley, A G & Martin, R 2013, Playing to win, Harvard Business Review
Press, Boston
Markides, C & Geroski, P 2004, ‘The art of scale: How to turn someone
else’s idea into a big business’, s+b, iss. 35, pp. 1–10.

Nagji, B & Tuff, G 2012, ‘Managing your innovation portfolio’,
Harvard Business Review, May, pp. 66–74.
Pisano, G 2015, ‘You need an innovation strategy’, Harvard Business
Review, June, pp. 44–54.
Porter, M E 1980a, ‘How competitive forces shape strategy’,
The McKinsey Quarterly, Spring, pp. 34–50.
Sutton, R I 2002, ‘Weird ideas that spark innovation’, MIT Sloan
Management Review, Winter, vol. 43, no. 2, pp. 83–87.
Tornatzky, L G, Eveland, J D, Boylan, M G, Hetzner, W A, Johnson,
E C, Roitman, D & Schneider, J 1983, The process of technical innovation:
Reviewing the literature, National Science Foundation, Washington DC.
Vona, M K & deMarco, M 2007, ‘Strategies to enhance innovation’,
Chief Learning Officer, Dec, vol. 6, issue 12, pp. 28–34.

answers
1. c
2. b
3. e
4. e
5. a
6. d
7. c
8. a
9. b
10. e

Unit 8
The strategic toolkit
CONTENTS
References 8–36
Search for growth and strategic and
competitive advantage 8–5
Can we redefine the industry that we Unit 8 reading summary 8–39
are in? 8–10
Strategic orientation: defence or
offence, concentration or diversification? 8–12
Should the organisation diversify or
concentrate? 8–15
Porter’s generic strategies 8–17
Individual tools from the toolkit 8–21
Cooperative or collaborative strategies 8–22
Vertical integration strategies 8–24
Integration vs de-integration 8–25
Outsourcing strategies 8–26
Strategic timing 8–28

Competitive strategy is about being different. It means deliberately choosing to perform
activities differently, or to perform different activities than rivals, to deliver a unique mix of
value.
(Michael E. Porter)
Nothing focuses the mind better than the constant sight of a competitor who wants to
wipe you off the map.
(Wayne Calloway, former CEO, PepsiCo)

Introduction
• applying the generic basis for competitive advantage to drive growth
• understanding an organisation’s profitable core and potential
adjacencies
• recognising the potential to reshape industries through blue ocean
strategies
• recognising the strategic toolkit of organic growth, M&A, diversification,
integration and collaboration.
Video
Having dealt with the process of analysing key external and internal
environments, developing a strategic vision and setting objectives at some
length in previous Units, we now need to further develop our understanding
of crafting a strategy, of setting out how an organisation chooses to deliver
the strategic outcomes it has set for itself. We have already considered two
particularly important sources of strategic advantage: technology strategy
(Unit 6) and innovation/new product strategy (Unit 7).
But are strategies for technology, innovation and new products, and
intellectual capital the only strategies that a strategic manager needs
to consider? Of course not! While these are important in strategic
management, there are numerous other strategy options that a strategic
manager must consider and evaluate.
The application of strategies will certainly vary from organisation to
organisation based on the unique combination of its individual mission,
vision and purpose and its particular strengths and weaknesses. Having
said that, while specifics of the applications may vary, many of the
strategies are chosen from a generic range of strategy options that have
been used successfully by many organisations previously. They are all
attempts to apply and enhance competitive advantage via one of a limited
set of generic approaches.
Michael Porter (1985, pp. 35–40) famously summarised these as follows.
Unit 8: The strategic toolkit 8–1

Figure 8.1 Porter’s five generic competitive strategies
Type of Competitive Advantage Being Pursued
Lower Cost Differentiation
A Broad Overall Low-Cost Broad Differentiation

Cross- Provider Strategy Strategy
Section
Market Target
of Buyers Best-Cost
Provider
A Narrow Strategy
Buyer Focused
Segment Focused
Differentiation
(or Market Low-Cost Strategy
Strategy
Niche)
Source: adapted from Porter 1985, cited in Thompson et al 2016, p. 118.
In summary, Porter highlights that competitive advantage is created by

some combination of pursuing either lower costs or differentiation, and
doing so either for targeted small (niche) segments or applying it to a
broad range of the market segments. Sitting in the middle of the model, is
a strategy option of low-cost and differentiation, which Porter termed the
‘best-cost’ option.
However, while this is conceptually straightforward, growth can be elusive.
Extensive empirical research by Bain & Company partners Chris Zook,
James Allen and John Smith (2000, p. 3) found that:
Most growth strategies fail, even when they succeed. What do we
mean by this? We mean that only a small minority of companies
succeed in creating shareholder value over long periods of time,
even when they manage to grow revenues. Many companies enjoy
temporary spurts of growth, only to see their gains erode under the
onslaught of competitors. And even those who achieve sustained
revenue gains are often surprised to find no corresponding gain in
shareholder value. Yet a handful of companies do succeed in growing
revenues, net income, and most importantly, shareholder value for
extended periods.
In order to achieve growth, this research then identified a range of

characteristics of profitable organic and adjacent growth opportunities.
As a consequence, once strategic managers identify a clear strategic
position, and have developed the organisation’s value proposition based on
overall or focused low-cost, broad or focused differentiation, or best cost,
they must then consider how to achieve the desired growth. In doing so,
there is a toolkit containing a generic range of strategic options that can be
summarised as:

• applying the organisation’s unique strategic resources to match the
identified opportunities and threats and achieve specific outcomes –
known as an organic strategy
• merger and acquisition (M&A) activities to create a new organisation,
or expand an existing one, building a new set of strategic advantages
from combining the strategic resources of two or more former
organisations
• diversifying risks by operating in multiple product and customer markets
(diversification) or in multiple parts of the value chain (vertical
integration)
• understanding whether this is better than concentrating on single
markets (focused or niche strategies) or on an expansion of a single
role in the value chain (horizontal integration)
• developing strategically important networks of relationships
(collaborative strategies and strategic alliances) that enhance the
organisation’s strategic competencies and options.
We will also explore how some organisations have been able to move away
from having to ruthlessly compete in a ‘red ocean’ by developing an entirely
new business model – creating a ‘blue ocean’ of new possibilities.
Learning outcomes
• discuss the role of organisational growth, sources of growth, the Ansoff
matrix and the concept of growth from a profitable core
• describe the benefits and processes for developing a ‘blue ocean strategy’
• determine the type of strategic orientation used within your organisation,
including whether it is offensive or defensive, concentrated or diversified
• discuss the advantages and disadvantages of a range of alternative generic
strategies for deriving strategic advantage, including:
– building a profitable organic core (market penetration) and achieving
growth through adjacencies (market penetration, product development
or market development)
– merger and acquisition
– vertical and horizontal integration
– diversification
– collaborative strategies and strategic alliances
– cost-based strategies
– focused or niche strategies.

If there are any issues that you would like to explore in greater depth, the
following readings may provide further details.
and executing strategy: The quest for competitive advantage. Concepts and
readings, 20th edn, McGraw-Hill Education, Boston, ch. 5, 6 and 8.
management: An Australasian perspective, 2edn, John Wiley & Sons
Australia, Milton, ch. 6, 8 and 9.

Search for growth and
strategic and competitive
advantage
One of the key developments in strategic thinking flowed from the seminal
work of Igor Ansoff (1958) who identified that the options for growing an
organisation essentially stem from either:
• selling more existing products in existing markets (market
penetration)
• developing new products for the existing market (product
development)
• finding new markets for the existing products (market development)
or
• finding new markets and offering new products (diversification).
This can be represented in the following matrix which may be familiar from
some of your other MBA courses.
Figure 8.2 Product/market matrix
Product
Existing New
Market
Existing Market penetration Product development
New Market development Diversification
Ansoff demonstrated that growth was more likely to occur when there
was a significant gap between existing levels of industry sales and the full
potential of a market – a strategic gap in other words, where there are lots
of potential customers who are yet to be satisfied by the existing value
propositions offered in the market.
If the total supply of goods and services into a market comes very close
to matching the total demand for them, the only way for an individual
organisation to grow by more than the average rate of growth in the
industry is to be more successful than their competitors.
This may happen via a ‘fight for market share’. This is common in
industries where growth has slowed and the nature of supply and demand
is ‘maturing’ or ‘mature’. In such markets, Porter’s strategies of focusing
on low costs or differentiation come to the fore. Organisations compete
either by offering a similar value proposition at cheaper prices (low cost) or
offering a differentiated value proposition.

In support of this, ongoing extensive empirical research by two of the Bain
& Company partners mentioned earlier (2011, pp. 107–108) found that:
Differentiation is the essence of strategy, the prime source of
competitive advantage. You earn money not just by performing a
valuable task but by being different from your competitors in a manner
that lets you serve your core customers better and more profitably…
In studying companies that sustained a high level of performance
over many years, we found that more than 80% of them had this kind
of well-defined and easily understood differentiation at the center
of their strategy… You can find high performers like these in most
industries. The cold truth about hot markets is this: Over the long run,
a company’s strategic differentiation and execution matter far more to
its performance—our research suggests at least four times as much—
than the business it happens to be in. Every industry has leaders and
laggards, and the leaders are typically the most highly differentiated.
Added to this, earlier research by Zook, Allen and Smith (2000, p. 7)

demonstrated that:
The profitable core is the unique, and by definition, highly profitable
combination of business assets, skills, products and relationships that
distinguishes a company from its competitors and allows it to provide
a unique value proposition to a segment of customers. The profitable
core may be a distinct business, a subset of a business, or it may be
composed of elements of several businesses. Over the long term, the
profitable core is a company’s primary engine of growth and value
creation… The most successful companies have one or two clearly
defined profitable cores and out-invest their competitors in that core,
leveraging it for highly profitable growth.
They go on to propose that these ‘most successful companies’ follow a set

of principles that they summarised as building a profitable core:

Figure 8.3 Growing the profitable core
Strong
competitive
position
Increase market
share
Recognise and
target the right
Produce greater opportunities
value to customers
Develop new Reinvest at a

products and higher rate than
improve services/ competitors
costs
Source: adapted from Zook, Allen and Smith 2000, p. 8.
In a subsequent article, Zook and Allen (2003, p. 67) went on to suggest

that as well as generating profitable growth from the core:
Our research yielded two major conclusions. One was that most
sustained, profitable growth comes when a company pushes out the
boundaries of its core business into an adjacent space. We identified
six types of adjacencies, ranging from adjacent links in the value chain
to adjacent customers to adjacent geographies.
The six adjacencies that they identified (2003, p. 69) were:

1. expanding along the value chain (Market Penetration/Diversification)
2. growing new products and services (Product Development)
3. using new distribution channels (Market Penetration/Market
Development)
4. entering new geographies (Market Development)
5. addressing new customer segments by modifying a proven product or
technology (Market Development)
6. moving into the ‘white space’ with a new business built around a strong
capability (Diversification).

You will note how well these align to Ansoff’s four growth strategies (shown
in brackets). They also found (2003, pp. 67–68) that:
Our second finding was that companies like Nike consistently,
profitably outgrow their rivals by developing a formula for expanding
those boundaries in predictable, repeatable ways. The average
company succeeds only 25% of the time in launching new initiatives.
Companies that have hit upon a repeatable formula have success
rates of twice that, and some drive their rates up to 80% or
higher. That’s because growing a business is normally a complex,
experimental, and somewhat chaotic process. Repeatability allows the
company to systematize the growth and, by doing so, take advantage
of learning-curve effects.
They summarised this by advocating (2011, p. 110) as follows:

The best way to grow is usually by replicating your strongest
strategic advantage in new contexts. Companies typically expand
in one or more of four ways: They create or purchase new products
and services, create or enter new customer segments, enter new
geographic locations, or enter related lines of business. A company
can pursue each of these strategies in various ways—for example,
adding new price points or finding new uses for a product or service
that will appeal to new customers.
The power of a repeatable model lies in the way it turns the sources
of differentiation into routines, behaviors, and activity systems that
everyone in the organization can understand and follow so that when
a company sets out on a particular growth path, it knows how to
maintain the differentiation that led to its initial success.
They go on to suggest (2011, pp. 111–113) that this requires strategic

managers to establish the following two key disciplines throughout the
organisation:
Non-negotiable principles. This is a fundamental building block of
repeatability, a way of keeping everyone on the same page. Analysis
of our 200-company database reveals that 83% of the best-performing
businesses had established explicit, widely understood principles
across the organization, while only 26% of the worst performers had
done so. Indeed, a link between well-defined, shared core principles
and frontline behavior was more highly correlated with business
performance than any other factor we studied.
The logic of this connection seems clear. Non-negotiables translate

the most important beliefs and assumptions underlying the company’s
differentiation into a few prescriptive statements that all employees
can understand, relate to, and use as a reference point for making
trade-offs and decisions. In effect, they are the headlines of the user’s
manual for a company’s strategy.

Robust learning systems. Clear differentiation supported by non-
negotiables confers a competitive advantage—for a while. As markets
shift, however, successful organizations must also be able to learn
quickly and adapt to new circumstances…. The most common method
of learning in companies with great repeatable models comes from
direct, immediate customer feedback…. Real-time response is a
competitive weapon of growing importance in a world of increasing
speed and complexity. The companies that move fastest can often
operate within competitors’ decision cycles, so competitors are always
responding to them rather than the other way around.
The disciplines that they advocate in describing the need for a repeatable
business model will be discussed in more depth in Unit 11, which is
devoted to implementing strategy.
Activity 8.1
Thinking about the organisation that you work for (or one that you know
well) how would you describe the ‘profitable’ core? What growth has been
achieved (or could be achieved) from adjacencies? How repeatable is the
strategy?
Value innovation – growing the market rather than

fighting for share
An important strategic alternative to fighting for share of the existing market
is to stimulate demand that previously was not in the market – in other
words, attracting new customers who are not yet part of the market. This
is achieved typically through value innovation, by constructing a value
proposition that attracts new customers.
There are numerous examples of organisations that have found growth by
satisfying customers who were ‘ignored’ or discounted by the existing value
propositions or business models in an industry. The use of telephone and
online stockbroking to profitably satisfy small-scale investors is an example.
Discount airlines such as Southwest, JetBlue, Ryanair, easyJet, Jetstar,
Tigerair and AirAsia have opened the air travel market for many customers
previously unable to afford to fly.

In this Unit, we will now talk about developing the strategies that answer the
key strategic questions about how we will win.
Can we redefine the industry that we are in?

Can we move from a red ocean to a blue ocean?
Often, strategic managers find that their thinking is constrained by seeing
the industry that they compete in as fixed. They perceive that the industry is
subject (as Porter’s five forces model implies) to having to craft a strategy
to respond to increasingly difficult and complex forces within an industry
whose boundaries are clearly defined and understood. They often see
themselves as subject to increasing competition and fierce rivalry, in a
manner that takes on the characteristics of sharks in a feeding frenzy – a
phenomenon referred to by Kim and Mauborgne (2005) as ‘swimming
in a red ocean’. However, one of the first strategy-forming decisions that
strategic managers should ask is ‘can we reshape the industry rather than
feeling like we are victims of forces beyond our control?’
In one of Harvard Business Review’s most popular articles of all
time, based on extensive research of a number of stand-out strategic
organisations that had ‘changed the rules of the game’, these two INSEAD
academics posed an alternative strategy based on the finding that some
highly successful strategic managers reshaped the industry, or created an
entirely new industry or industry dynamic, that they referred to as ‘creating
a blue ocean’. Rather than competing with rivals in the existing market,
this groundbreaking article suggests that organisations reframe their
thinking and create a new market or new industry, by developing a different
business model.
This is achieved by value innovation based on identifying critical success
factors from other industries that will appeal to existing customers on a
basis other than price, and will attract new customers who are unsatisfied
or who have been blocked from participating in the existing business
models.
What consistently separated winners from losers in creating blue
oceans was their approach to strategy. The companies caught in
the red ocean followed a conventional approach, racing to beat
the competition by building a defensible position within the existing
industry order. The creators of blue oceans, surprisingly, didn’t
use the competition as their benchmark. Instead they followed a
different strategic logic that we call value innovation… We call it value
innovation because instead of focusing on beating the competition,
you focus on making the competition irrelevant by creating a leap in
value for buyers and your company, thereby opening up new and
uncontested market space.
(Kim & Mauborgne 2005, p. 12)

An example of this value innovation cited in the book was Cirque du Soleil.
The creators of Cirque du Soleil redefined the audience experience. Rather
than competing with existing circuses, they combined the core customer
value delivered by traditional circus acts such as clowns, jugglers, acrobats,
high-wire acts, trapeze artists and so on, with elements of what people
normally experienced in live theatre and musicals, and created a new and
unique market space.
Blue ocean strategy seeks to create a new strategic canvas by critiquing
existing industry business models. It asks some key questions.
• Which of the factors that the industry takes for granted should be
eliminated?
• How do we remove factors from the strategy that the customers don’t
value, but the industry has long emphasised?
• Which factors should be reduced well below the industry’s standard?
• How can we identify factors of existing products that are over-designed
and reduce these, and offer more of the things that the customers want
or need?
• Which factors should be raised well above the industry’s standard?
• How can we address and resolve the compromises that have been
made in the past that the customers resent?
• Which factors should be created that the industry has never offered?
• How do we look for new sources of value for customers that may
result in new demand (things that will attract customers who have not
participated much or at all)?
For further detail, you might like to read the following article.
Read
Reading 8.1 Kim, W C & Mauborgne, R 2005, ‘Blue ocean strategy:
From theory to practice’, California Management Review,
vol. 47, issue 3, pp. 105–121.

Strategic orientation: defence or offence,
concentration or diversification?
If the option of moving to a blue ocean isn’t available, a critical question that
strategic managers need to ask is, ‘Given our understanding of the strategic
environments, should we go on the offensive to secure a competitive
advantage, or should we move to a defensive posture to protect our
strategic position?’
Like an army, a sporting team or a political party, there are times for every
organisation and every strategic manager when circumstances dictate that
the timing is right for attack (offensive strategy). There are other times when
analyses of the internal and external environments dictate that defence is
more appropriate.
However, an important caveat here is that sustainable competitive
advantage is almost never achieved by remaining on the defensive for long
periods of time. It is also true to say that few organisations survive for long
unless they can effectively defend when circumstances demand it. What
is crucial is recognising when the time and conditions suit the move from a
defensive posture to an offensive strategy or the other way around.
To help identify which of these orientations is suited to a particular point in
time, the questions in Table 8.1 can act as a guide.
Table 8.1 Indicators of offensive and defensive orientation

The answers favour offensive The answers favour defensive
action when … action when …
How well do our strengths There is a strong correlation There is a poor match between
match the opportunities in between market opportunities the organisation’s current
the market? and the organisation’s strengths strengths and the market
– particularly if these strengths opportunities. The organisation’s
are valuable, rare, difficult to weaknesses are in areas that are
imitate and supported by the critical success factors (CSFs) in
organisation’s policies and the industry.
procedures.
How well do our The opportunities in the market The opportunities in the market
competitors’ strengths are only weakly correlated to the are highly correlated to the
match the opportunities in strengths and competencies of strengths and core competencies
the market? rivals. of rivals, particularly if these
competitor strengths are
valuable, rare, difficult to
imitate and supported by the
organisation’s policies and
procedures.

The answers favour offensive The answers favour defensive
action when … action when …
Are we well placed to The organisation is well The organisation is poorly
seize the opportunities placed, has high levels of placed, or has poor strategic
and avoid the threats? strategic resource availability, resource availability and its
Are competitors better management and technical skills, competitive advantages are
placed? and intellectual property that only weakly correlated to
provide sustainable competitive industry-critical success factors.
advantages that strongly Competitors are much better
correlate to the opportunities placed.
and threats. The organisation
is at least as well placed
as competitors and ideally,
significantly better placed against
critical success factors.
How vulnerable do our The organisation’s weaknesses Competitor strengths are strongly
weaknesses make us to are not particularly accessible correlated to industry success
attack from competitors to competitor attacks, and are factors and your organisation’s
or organisations offering poorly correlated to competitor weaknesses. The organisation is
substitutes? strengths and industry success particularly vulnerable to attack
factors. in these areas.
Is competition in the While it is always necessary Competition is highly unstable,
industry changing? If so, to consider the possibility of new entrants are likely (and
how fast is it changing, ‘surprise attack’, new entrants or powerfully placed) and
and in what manner? disruptive innovation, competition competition is moving to new
is relatively predictable and forms; competitive forces are
changes are on the basis of changing.
existing industry competitive
forces.
Also, harking back to Unit 3 where we discussed scenario planning,

defence may be more appropriate when the pessimistic scenario is seen
as increasingly more likely. When the balance of scenarios is becoming
more optimistic there should be a strong bias to offensive strategy.
Offensive strategies
According to Thompson et al (2016, pp. 146–147) there are seven basic
types of offensive strategy.
1. Offering an equally good or better value proposition at a lower price.
2. Leapfrogging competitors by being first to market with next-generation
value propositions.
3. Pursuing continuous product innovation to draw sales and market
share away from less-innovative rivals.
4. Pursuing disruptive value proposition innovations to create new
markets
5. Adopting and improving on the good ideas of other companies.

6. Using hit-and-run or guerrilla warfare tactics to grab market share from
complacent or distracted rivals.
7. Launching a pre-emptive strike to secure an industry’s limited
resources or capture a rare opportunity.
In determining the offensive strategies to employ, a strategic manager

needs to evaluate which rivals to attack. Four scenarios typically offer the
best environment for offensive strategy.
• Market leaders become vulnerable when their competitive advantage
has been temporarily eroded, or made redundant by technology,
legislation or change to cost structures, or when they are distracted
by events such as negative media reporting, internal conflict, loss of
key personnel, or the failure of a new product or other major strategic
initiative.
• If there are runner-up organisations whose weaknesses match your
organisation’s strengths, this overlap can be exploited.
• Struggling organisations who may be in distress and potentially on the
verge of ‘going under’.
• Small local or regional organisations with limited strategic capabilities
that may not be doing a good job for their customers and key
stakeholders.
The basis for the offensive strategy should be exploiting the organisation’s
sustainable strategic or competitive advantages, and should be based
on value propositions that are of major importance to customers and are
strongly correlated to industry-critical success factors.
Defensive strategies
Few organisations can remain on the offensive all the time. There are times
when there will be a need to pause and consolidate before resuming an
offensive stance. There are also times when conditions in the market suit
a rival’s competitive advantages more. These are times when strategic
managers need to consider either (a) looking to pursue a blue ocean
strategy or (b) if this isn’t viable, adopting a defensive posture.
Circumstances might include:
• fortifying or ‘locking in’ the organisation’s recent gains or present
position
• helping to rebuild and replenish the resources that may be needed later
to create and sustain an offensive action
• lessening the risk of being attacked
• blunting the impact of any attack that may occur
• influencing challengers to aim attacks at other rivals.

Defensive strategies aim to block the avenues open to challengers by
undertaking strategic actions or tactics such as:
• developing barriers to entry that raise the cost of attack or potentially
negate the basis for any competitor attack
• using innovation to introduce new value improvements in order to close
any gaps that rivals may pursue
• continuous improvement and lean strategies to improve the
organisation’s cost structure
• developing exclusive or deeper relationships with key suppliers and
strategic allies whose support will be important in combating competitor
attacks
• continuously developing or improving agile strategic resources (such as
cash and other highly liquid financial resources, unique people-based
resources and intangibles like knowledge and high-performing team
relationships).
You will note that defensive strategies are designed to not only protect
the organisation’s position, but also to signal to competitors that attacking
the organisation in certain areas will be difficult and costly, and may be
counterproductive.
Should the organisation diversify or

concentrate?
Should the organisation compete in a few markets or industries, or should it
compete in many?
Concentration involves focusing strategic resources and efforts on
trying to be very successful or dominant within very few (maybe only one)
industries or markets. This is consistent with Zook, Allen and Smith’s (200,
p. 7) findings that:
In many companies, however, the profitable core is buried beneath
layers of underperforming businesses. Frequently the profitable core
generates only a small portion of company revenues, yet provides the
bulk of a company’s profits. The most successful companies have one
or two clearly defined profitable cores and out-invest their competitors
in that core, leveraging it for highly profitable growth.
Concentration might mean competing in a specific market or industry in

many different regions or countries, but always in the same market. The
strategic benefits of concentration are advantages gained from scale,
learning/knowledge/experience and image/reputation in a ‘single’ area
where you are known to excel, or as Zook, Allen and Smith (2000, p. 6)
suggest:

A further probe into the most successful growth strategies reveals
two key elements: the first is a strong, or even dominant, competitive
position in a core business or segment that has been managed
aggressively to gain consistent market share, year in and year out,
against key competitors. The second is an investment programme that
reinvests in the core at a rate that sustains competitive advantage.
To put it another way, winning companies often control the industry
profit pool – even their competitors’ profitability levels – and use
that leverage to ensure that they invest at a higher rate than their
competitors. Frequently, the result is even greater levels of market
control and greater levels of competitive superiority – allowing even
more investment to build positions in the ‘periphery’ of the core
business.
The benefits of concentration are that it allows the organisation to develop

sustainable competitive advantages that are valuable, rare, difficult to
imitate and supported by the organisation’s policies and procedures. The
disadvantage is that the organisation is highly exposed to the forces and
cycles within the market/industry. If customers become more demanding or
price-conscious or if demand declines, the organisation will be subject to
revenue pressures. If customers’ need for the products declines, then the
organisation’s demand will decline too.
Diversification, on the other hand, involves looking to build business
units or business portfolios across a broad range of industries or markets.
These might be in industries with synergies with each other. For example,
Apple’s ‘ecosystem’ of devices, an apps marketplace and music streaming;
Microsoft’s business software leading to gaming software and hardware via
Xbox and the Surface computer.
The industries may also be widely dissimilar – for example, Wesfarmers’
investments in retail, insurance, fertiliser and chemicals, coal and gas, and
sawmilling. Alternatively, the various organisations might be closely related
to each other – for example, Facebook’s acquisition of Instagram and
WhatsApp as part of its social-networking portfolio of offerings.
In one sense, diversification can be a risk-management tool – - reducing an
organisation’s vulnerability to a single market or industry. However, it also
leads to a spread of resources, capital and management talent across a
wide range of sometimes unrelated industries and businesses.
Organisations may diversify:
• broadly (a number of business units in industries that appear to have
little to do with each other – like Wesfarmers)
or
• narrowly (also called ‘integration’) where a number of businesses offer
synergies or are associated with each other in some way (e.g. Qantas
Group – Qantas international, Qantas domestic, Jetstar, Qantas
Holidays, Qantas Freight, Express Ground Handling, Qantas Loyalty).

Another example of this narrow (integrated) diversification is the
Commonwealth Bank, which is not only one of Australia’s largest
banks, but is also involved in funds management, retirement savings or
superannuation operations, sharebroking business and insurance. This
diversification allows the bank to increase the sources of new business
(new customers being attracted to the ‘whole’ business via multiple
product offerings). It also leads to an increase in the share of each
customer’s business that they gain, or increased ‘share of wallet’, so that
funds-management products can be marketed to banking and insurance
customers, insurance to banking customers, banking to insurance
customers, etc.
These two general strategies may be pursued by different organisations
within the same industry, or within a single economy, at the same time –
some organisations will be diversifying while others are concentrating. They
are both popular and successful ‘corporate level’ strategies.
Porter’s generic strategies

As we mentioned earlier, organisations derive their strategic advantage
from a cost leadership focus, a differentiation focus or a combination of
both, and from seeking to satisfy a broad cross-section of customers in the
market, or focus on a relatively small section of the market (niche).
Let’s now look at the key points for each of these strategies.
Low-cost leadership
Low-cost leadership means low overall costs, not just low manufacturing
or production costs. The key to success is in achieving lower costs
relative to others in the industry, which leads to pricing discretion or higher
profit margins (which can then be reinvested in gaining other strategic
advantages) or greater market share and strategic advantage over rivals.
In order to secure a cost advantage, the organisation needs to do a better
job than rivals of performing key value-chain activities, which typically
involves:
• capturing economies of scale and avoiding any diseconomies
• capturing the effects of learning and experience curves (getting better
at doing something because you do it more)
• managing the costs of key inputs
• lowering costs across the value chain
• optimising utilisation.

An alternative is to revamp the value chain, for example by:
• using more efficient e-business or e-commerce business models
• using direct-to-end-user sales/marketing methods
• simplifying product design
• offering basic, no-frills products/services
• shifting to simpler, less capital-intensive or more flexible processes
• finding ways to do without high-cost inputs
• relocating activities to reduce logistics costs and complexity
• focusing on a limited product/service range
• re-engineering core organisation processes.
A low-cost strategy works best when:

• price competition is vigorous
• products are standardised or readily available from many suppliers
• there are few ways to achieve differentiation that offer any significant
value to customers
• most customers use the products in the same ways
• customers incur low switching costs
• customers are large and have significant bargaining power
• industry newcomers use introductory low prices to build a customer
base.
However, there are a number of difficulties with cost-focused approaches:

• aggressive price-cutting leads to erosion of profits and customer
perceptions of value
• customers no longer appreciate differentiations
• low-cost methods are easily imitated by rivals
• cost fixation leads to missed profit or strategic opportunities
• buyer sensitivity to price fluctuates
• technological breakthroughs may make cost advantages less relevant
• creative and innovative employees find ‘cost-driven’ cultures alienating
and prefer to work for organisations offering more stimulating and
rewarding environments.

Differentiation strategies
The objective of differentiation strategy is to incorporate valuable features
that cause customers or clients to prefer one organisation’s value
propositions over those of others. Keys to success in differentiation are:
• finding ways to differentiate that create value for customers that are
not easily matched or cheaply copied by rivals
• avoiding over-spending to achieve differentiation.
How can an organisation achieve a differentiation-based advantage?

Essentially, the answer is to incorporate value proposition features/
attributes that increase customer utility or improve the overall experience.
Longer lasting, more profitable competitive advantages typically come via:
• product innovation
• technical superiority
• product quality and reliability
• comprehensive customer service or customer intimacy.
A differentiation strategy works best when it is unique and few of the

organisation’s rivals are pursuing similar differentiation approaches, or
when rapid technological change and innovation are occurring.
Pitfalls of differentiation strategies

• Differentiating on features that customers do not value.
• Over-differentiating with value propositions that exceed customers’
needs and for which they are unwilling to pay.
• Misaligning price value (over-charging or under-charging).
• Failing to communicate the superior value effectively.
Focus strategies
Focus or niche strategies involve concentrating on a narrow part or
segment of the total market to serve the specialist buyers or niche
customers better than rivals. Keys to success in this strategy are:
• choosing a market niche where customers have distinctive preferences,
special requirements or unique needs
• developing unique capabilities to serve the needs of the targeted
customer segments.

Best-cost strategy
This strategy combines a strategic emphasis on low cost with a strategic
emphasis on differentiation. The organisation looks to create superior
product at a lower relative cost, or give customers more value for money.
It differs from a low-cost strategy per se because the aim of a low-cost
strategy is to achieve lower costs than any other competitor and then to
pass these lower costs on to consumers in the form of lower prices, while
still maintaining the targeted ROI.
The intent of a best-cost strategy is to create superior value propositions
at lower costs than brands with comparable features and attributes.
Success depends on having the resources and processes to provide
attractive performance and features at a lower cost than rivals.
It is most effective when:
• standardised features/attributes won’t meet diverse needs of customers
• many customers are both price and value-sensitive.
However, there is a danger of being ‘stuck in the middle’ – when an

organisation has unsuccessfully attempted to combine the best aspects of
cost leadership and differentiation.
Activity 8.2
Consider the alternatives outlined above (blue ocean strategies; offensive
and defensive strategies; cost leadership – differentiation on a broad
or narrow focus). Which of these would you recommend could be most
effectively applied to your organisation? What is the reasoning behind your
recommendation?

Individual tools from the
toolkit
In this section, we explore a range of generic tools or common strategies
used by many organisations. This is not an exhaustive list as the strategic
options depend very much on how the ‘strategic problem’ is defined.
Organic strategies
Organic strategies are where the organisation identifies its profitable core
and invests its own resources in those strategies that most effectively
exploit what Zook, Allen and Smith (2000, p. 7) defined as ‘…the unique,
and by definition, highly profitable combination of business assets,
skills, products and relationships that distinguishes a company from
its competitors and allows it to provide a unique value proposition to a
segment of customers’.
Advantages of organic strategies are that they:
• offer maximum control over execution of the strategy
• rely on the organisation’s strategic resources, things that its strategic
managers are typically good at managing
• minimise cultural or decision-making problems that may arise with
having to integrate and coordinate actions of multiple organisations.
The disadvantage is that the strategy can proceed only as fast or as far as
available resources can accommodate.
Zook, Allen and Smith (2000, p. 9) propose organic growth into a range
of adjacencies – new customers, new geographic markets, new positions
in the value chain or white spaces. This can be achieved using the
organisation’s strengths and strategic capabilities (i.e. reinvesting some of
the value captured as part of the virtuous cycle illustrated in Figure 8.3).
Merger and acquisition (M&A) strategies

An alternative way of generating growth is via mergers and acquisitions
– whether that be to grow the profitable core or to grow into strategic
adjacencies. Mergers and acquisitions (M&As) are means by which two or
more organisations can be combined, and a new, more strategically able
organisation formed from doing so.
The underlying rationale for mergers and acquisitions is to allow an
organisation more quickly to gain strategic advantages or change the
dynamics of an industry (removing a competitor or creating a new and more
effective one). Typically, strategic reasons for undertaking mergers and
acquisitions are to enable growth of the core or adjacencies through:

• faster increase in market size and power
• quickly entering markets
• rapid building of strategic competencies
• lower risks than organic growth
• quick increase in focus or diversification
• reduced competition.
However, there are often problems in successfully managing mergers and

acquisitions:
• integration difficulties (bringing two cultures, sets of systems,
procedures and practices together)
• opposition of government regulators concerned about the effect on
market competition or loss of local control
• inadequate due diligence (overvalued or inheriting problems)
• the size/cost of funding
• poor synergies
• excessive diversification
• over-focusing on growth and size (a ‘big is beautiful’ fixation)
• organisations become too large, inefficient and slow-moving.
Cooperative or collaborative strategies

Strategic advantage through cooperation or collaboration can occur
when two or more organisations develop a strategic relationship and look
for ways to combine or integrate their unique resources and capabilities.
Similarly to the benefits of concentration mentioned above, the net result
of effective collaboration or cooperation is the creation of a set of valuable,
rare, hard-to-imitate resources that are built on procedural and process
synergies of the participating organisations.
The sustainable strategic advantage is derived from the relationships
between the participating organisations – the fact that the new ‘whole is
greater than the sum of the individual parts’ by virtue of each participating
organisation bringing specialised resources (tangible, intangible and/or
human) that competitors find difficult to understand or imitate.
Typically, sustainable competitive advantage is built on the complementary
capabilities and synergies of each partner, or from scale or scope through
doing the same things in different markets. However, collaborative
strategies require high levels of strategic management skill.

The most common form of cooperative strategy is the ‘strategic alliance’, a
formal or informal partnership between organisations whereby they agree
to share, combine or provide access to resources in order to pursue mutual
strategic interests. They come in three basic types:
• joint venture (setting up a new entity jointly owned by two strategic
partners)
• equity strategic alliance (each partner takes equity in the other partner)
• non-equity strategic alliance (an agreement to collaborate without
investing equity).
The benefits of such strategies are that allies can:
• establish a stronger presence in markets than each could afford to do
on their own
• share useful know-how or expertise that greatly aids each partner in
competing against rivals for industry leadership
• pursue opportunities in new or unfamiliar geographic markets,
distribution channels or roles in the value-chain markets
• share the cost of things like investments in innovation, thus lowering
the costs and risks of failure to each of the parties in the alliance.
However, these arrangements can be hard to manage, and typically require
the following key conditions in order to work.
• Careful selection of partners/allies to ensure similar levels of
commitment and shared value from the alliance.
• Managing conflicts of interests.
• Sufficient synergies in mission/purpose, corporate cultures, decision-
making and management behaviours.
• A clear strategic focus for the alliance, with demonstrable outcomes.
• Investment of time/resources to manage changing roles and
contributions and operational issues.
Activity 8.3
Identify a successful merger/acquisition or a successful strategic alliance
and make some notes on why you think that it has been successful.

Vertical integration strategies
Integration refers to an organisation participating in multiple different
levels of an industry value chain, one of the adjacencies that Zook, Allen
and Smith (2000) identified as being successful opportunities for growth.
Horizontal integration is when the organisation tries to gain a greater
share of a particular single activity or role in the value chain. Examples
of this were the acquisition of Bankwest and Aussie Home Loans by the
Commonwealth Bank, or Tiger Airline’s acquisition by Virgin Airlines.
Vertical integration is when the organisation undertakes roles either
upstream (further away from the customer) or downstream (closer to the
customer). Imagine an industry with the following value chain:
Figure 8.4 An industry value chain
Component Recruiter and Transport

Component Component
supplier labour hire provider
Manufacturer Manufacturer Manufacturer
Wholesaler Wholesaler
Retailer
NB - different-sized
diamonds indicate
different-sized retailers

An example of a vertical integration in this schematic would be if one of
the manufacturers decided to acquire (or establish) their own component
supplier, and/or a wholesaler or retailer. On the other hand, a horizontal
integration would occur if the manufacturer sought to acquire another
manufacturer.
Vertical integration means that an organisation moves to produce its
own inputs (backward integration) or dispose of its own outputs (forward
integration). An example of backward integration is the Qantas group
supplying its own in-flight catering and baggage handling at Australian
airports. An example of forward integration is Apple, Microsoft and
Samsung’s creation of their own network of retail shops which sell and
support not only their own hardware and services, but also those of other
hardware manufacturers and software producers (e.g. carrying cases, wi-fi
devices, screens and apps).
An organisation pursing vertical integration is normally motivated by a
desire to strengthen the strategic position of its core business (i.e. Qantas
undertakes catering to control more of the critical success factors in being
an airline; Apple operates retail shops in order to control more of the critical
success factors in being a technology fashion brand).
Disadvantages of vertical integration

• Increases the resources needed by different and disparate value-chain
participants and fragments their efficient allocation.
• Locks the organisation deeper into the same industry; thus, it suffers
more in any industry-wide downturn or crisis.
• Potentially (if the organisation favours its own business as a provider)
results in fixed/more expensive/less flexible source of supply and less
flexibility in meeting customer demand for product variety.
• May require different/incompatible skills/capabilities to manage each of
the extra roles.
Integration vs de-integration
Whether integration is a viable or attractive strategy depends on:
• how much it can lower cost, build expertise, increase differentiation or
otherwise enhance performance of strategy-critical activities
• its impact on investment cost, flexibility and administrative overheads
• the contribution it makes to strengthening market position or helping
create strategic advantage.

Many organisations find that de-integrating, unbundling and outsourcing
value-chain activities is a better strategic option for lowering costs,
improving competitiveness or gaining added operating flexibility.
Outsourcing strategies
An alternative to vertical integration is for an organisation to outsource
key parts of the value-creation activities to specialist subcontractors.
Over the last 20 to 30 years, many enterprises have moved to outsource
what they regard as ‘non-vital’ activities, those things that Zook, Allen
and Smith (2000) described as not a part of the ‘profitable core’. This
requires the organisation to identify those core value-creation activities
(strategically central, valuable, rare, hard to imitate) that help address the
strategic question ‘how will we win?’ Anything that is non-core can then be
outsourced and performed more effectively and efficiently by independent
suppliers.
The amount of outsourcing varies significantly from organisation to
organisation and creates a sliding scale or continuum. At one end of this
continuum are ‘virtual corporations’, organisations that have pursued
extensive strategic outsourcing and exist mostly as the ‘controller’ of
different contracted suppliers and service providers. Nike is an example
of this; it designs and distributes the shoes, but primarily coordinates
a complex international range of outsourced market research and
manufacturing contractors. Spanish fashion house Zara and Apple operate
in much the same way. Design and logistical management and retail selling
happens in-house, but all other activities, including making the products,
are outsourced to large numbers of long-term contractors.
At the other end of the spectrum are organisations that outsource only
limited specialised value chain functions; e.g. organisations that do
almost everything in-house, but might outsource logistics and delivery or
payroll activities. There is no firm guidance on what is the right amount of
outsourcing, it being dependent on:
• where sustainable competitive advantages are best controlled
• how much strategic benefit is gained from having key activities
concentrated with a specialist provider (can the outsourced provider do
things significantly more effectively and at lower costs than in-house?)
• whether strategic speed and freedom of action can still be achieved
even though particular activities have been outsourced.

Strategic advantages of outsourcing
• Improves the organisation’s ability to obtain high-quality and/or cheaper
components or services via a competitive market.
• Improves innovation through interaction with ‘best-in-world’ suppliers.
• Enhances strategic flexibility to change structure and activities in the
value chain.
• Allows the organisation to focus on those activities that it can perform
better than outsiders.
Strategic disadvantages of outsourcing

• The organisation may lose control of core competencies and resources.
• The organisation may build suppliers into future competitors.
• The organisation may be exposed to forces affecting the supplier with
little capacity to control or respond.
• Requires skills in managing complex relationships.

Strategic timing
In war there is but one favorable moment; the great art is to seize it!
(Napoleon Bonaparte)
There is timing in the whole life of the warrior, in his thriving and
declining, in his harmony and discord. Similarly, there is timing in the
way of the merchant, in the rise and fall of capital. All things entail
rising and falling timing. You must be able to discern this.
(Miyamoto Musashi, 1584–1645, famed Japanese Samurai)
As these quotes suggest, when to make a strategic move is often as

crucial as what move to make. There are some issues to do with strategic
timing – for example, first-mover advantages (gains that accrue from doing
something first) may arise when:
• market pioneering strategies help build the organisation’s image and
reputation
• early commitments to new technologies, new-style components and
distribution channels can produce cost advantage
• loyalty of first-time buyers is typically higher or early action may take
most of the available customers out of the market
• moving first can be used as an offensive strategy: pre-emptive strike.
However, moving early can be a disadvantage (or fail to produce an

advantage) when:
• costs of being a pioneer are prohibitive
• the number of potential first-time buyers is small or their loyalty is weak
• innovator’s products are often primitive, expensive and may not live up
to customer expectations
• rapid technological change allows followers to leapfrog pioneers (you
may remember the success of ‘colonisers’ discussed in Unit 7 around
this issue).
Thus, a strategy that may succeed at one time may fail at another because
conditions are not optimal. The congruence of environmental conditions
and strategy is what matters – the timing has to suit the strategy. As you
would be aware from Units 3 and 4, matching what the organisation can
do (internal strengths and weaknesses) to what it might do (the emerging
opportunities and threats) maximises the likelihood of strategic success.
Therefore, it is the responsibility of strategic managers to judge when the
time is right for a particular strategy – when the conditions best suit the key
success factors that a particular strategy relies upon.

Activity 8.4
Can you think of an organisation that has been particularly successful due
to the timing of implementing a new strategy?

Summary
This Unit has been about crafting a strategy, Stage 4 of Thompson et al’s
(2016, p. 20) process for strategic management.
Part of our task is to address two of Lafley and Martin’s (2013, pp. 14–15)
key strategic questions, in particular:
• Where will we play?
In addition to the vital contribution of technology, innovation and new

product development, and knowledge/IP-based strategies, an organisation
needs to generate a range of possible strategies that allow it to achieve its
objectives and fulfil its mission. In addition to ‘thinking them up’, many of
the alternatives or options that a strategic manager ought to consider are
not new. The best choice may be to use one of the generic tools from the
toolkit of strategy alternatives tried and tested by many strategic managers
of the past.
The strategic manager must evaluate whether the organisation and its
strategic situation at a particular point in time favour an offensive or defensive
orientation. If the timing is right, the strategic manager must craft a strategy
that is consistent with sustainable, valuable, rare, hard to imitate and
organisationally consistent competitive advantages. According to Michael
Porter (1980), strategies typically rely on one of the generic five alternatives:
• cost leadership in a broad market
• cost leadership in a focused part of the market
• differentiation in a broad market
• differentiation in a focused part of the market
• best-cost provider (differentiation and low costs).
To achieve strategic and competitive advantage, a range of tested options
should also be included in the strategic manager’s consideration set, each
with their own arguments for and against. Strategic managers should
consider the following questions.
• Should we concentrate or diversify?
• Should we rely principally on organic capabilities?
• Should we merge with or acquire other organisations?
• Should we collaborate or cooperate to deliver the strategies via joint
ventures, strategic partnerships or strategic alliances?
• Should we integrate horizontally or vertically and, if vertically, is it better
for us to integrate forwards or backwards?
• Should we control all of our value-chain activities or are we better to
outsource non-core activities?
• What is the optimal timing for our strategies?

That does not mean that a strategic manager is bound to use only one of
these options or tools. In considering alternatives, a strategic manager must
focus on crafting a strategy to create strategic advantage.
In the next Unit, we will focus our attention on the vital role that knowledge
and intellectual property play in strategic management, before turning our
attention to how strategy changes when we cross borders, and the vitally
important issue of effectively implementing and monitoring strategy.

1. Michael Porter proposed five generic competitive strategies. Which of
the following is not one of these?
a. Focused differentiation.
b. Best-cost provider.
c. Merger and acquisition.
d. Overall low-cost provider.
e. Broad differentiation.
f. Focused low-cost.
2. Complete the following quote from Kim and Mauborgne by identifying

the missing term:
‘The creators of blue oceans, surprisingly, didn’t use the competition
as their benchmark. Instead they followed a different strategic logic
that we call ______ We call it _______ because instead of focusing on
beating the competition, you focus on making the competition irrelevant
by creating a leap in value for buyers and your company, thereby
opening up new and uncontested market space.’
a. value innovation
b. disruptive innovation
c. differentiation
d. sustainable competitive advantage
e. organic growth
3. The blue ocean strategy seeks to create a new strategic canvas

by critiquing existing industry business models by asking four key
questions. From the list below, which is not one of these questions?
a. Which of the factors that the industry takes for granted should be
eliminated?
b. Which factors should be created that the industry has never
offered?
c. Which factors should be raised well above the industry’s standard?
d. Which factors should be reduced well below the industry’s
standard?
e. Which customers can we choose to ignore or disregard?

4. From the options below, which is not one of the six critical activities
that Zook, Allen and Smith (2000, p. 8) suggest is required in order to
build and sustain a profitable core?
a. Recognise and target the right opportunities
b. Evaluate strategic timing
c. Reinvest at a higher rate than competitors
d. Develop new products and improve services/costs
e. Produce greater value for customers
f. Increase market share
g. Sustain a strong competitive position
5. Which of the following is not one of the six strategic growth

adjacencies that Zook and Allen identified (2003, p. 69):
a. Expanding along the value chain
b. Merging or acquiring another organisation
c. Addressing new customer segments by modifying a proven product
or technology
d. Growing new products and service
e. Moving into the ‘white space’ with a new business built around a
strong capability
f. Entering new geographies
g. Using new distribution channels.
6. Which of the following statements identifies a condition that is

favourable for offensive rather than defensive strategy?
a. The opportunities in the market are highly correlated to the
strengths and core competencies of rivals, particularly if these
competitor strengths are valuable, rare, difficult to imitate and
supported by the organisation’s policies and procedures.
b. The opportunities in the market are only weakly correlated to the
strengths and competencies of rivals.
c. Competition is highly unstable, new entrants are likely (and
powerfully placed) and competition is moving to new forms,
competitive forces are changing.
d. Competitor strengths are strongly correlated to industry success
factors and your organisation’s weaknesses. The organisation is
particularly vulnerable to attack in these areas.
e. The organisation is poorly placed, or has poor strategic resource
availability and its competitive advantages are only weakly
correlated to industry-critical success factors. Competitors are
much better placed.

7. Which of the following statements is not one of the pitfalls of
differentiation strategies?
a. Not understanding what customers want or prefer, and
differentiating on the ‘wrong’ things.
b. Over-differentiating so that product features exceed customers’
needs.
c. Buyer sensitivity to price fluctuates and therefore when customers
are less sensitive market share declines.
d. Charging a price premium that buyers perceive is too high.
e. Failing to signal and communicate the superior value in ways that
customers understand.
f. Trying to differentiate on a feature that customers do not perceive
enhances the value or lowers costs.
8. Qantas’s arrangement with Emirates is an example of which sort of

collaboration strategy?
a. Joint venture
b. Strategic alliance
c. Vertical integration
d. Horizontal integration
e. Merger
f. Organic strategy
9. Which of the following is not a key benefit derived from strategic

alliances?
a. Gain inside knowledge on unfamiliar markets, industries and
segments.
b. Access valuable resources (tangible, intangible and human) rather
than having to develop them internally.
c. Get into critical markets quickly.
d. Open opportunities in a target industry by combining the
organisation’s capabilities with the strategic resources of a partner.
e. Master new technologies and build new expertise faster.
f. Lock the organisation deeper into the same industry; thus suffer
more in any industry-wide downturn or crisis.

10. Listed below are some of the issues related to timing in strategy. Which
of those listed here is a caution (or potential disadvantage) of moving
early or being first to market?
a. Market pioneering strategies help build the organisation’s image
and reputation.
b. Early commitments to new technologies, new-style components
and distribution channels can produce cost advantage.
c. Loyalty of first-time buyers is high or takes most of the available
customers out of the market.
d. Moving first can be used as an offensive strategy: pre-emptive
strike.
e. Rapid technological change allows followers to leapfrog pioneers
(you may remember the success of ‘colonisers’ discussed in Unit 7
around this issue).

References
Ansoff, H I 1958, ‘A model for diversification’, Management Science, July,
vol. 4, issue 4, pp. 392–414.
Basu, K 2006, ‘Merging brands after mergers’, California Management
Review, Summer, vol. 48, issue 4, pp. 28–40.
Dranokoff, L, Koller, T & Schneider, A 2002, ‘Divestiture: Strategy’s missing
link’, Harvard Business Review, vol. 80, no. 5, pp. 74–85.
management: An Australasian perspective, John Wiley & Sons Australia,
Milton.
management: An Australasian perspective, 2edn, John Wiley & Sons
Australia, Milton
Gulati, R, Sytch, M & Mehrotra, P 2008, ‘Breaking up is never easy:
Planning for exit in a strategic alliance’, California Management Review,
Summer, vol. 50, issue 4, pp. 147–163.
Keasler, T R & Denning, K C 2009, ‘A re-examination of corporate strategic
alliances: New market perspectives’, Quarterly Journal of Finance &
Accounting, 2009, vol. 48, issue 1, pp. 21–47.
Kim, W C & Mauborgne, R 2005, ‘Blue ocean strategy: From theory to
practice’, California Management Review, vol. 47, no. 3, pp. 105–121.
McGrath, R G & Macmillan, I C 2005, ‘Market busting: Strategies for
exceptional growth’, Harvard Business Review, vol. 83, no. 3, pp. 80–91.
Nag, R, Hambrick, D C & Chen, M J 2005, ‘What is strategic management,
really? A consensus view on the essence of the field’, Academy of
Management Best Conference Paper, pp. H1–6.
Porter, M E, 1985, Competitive advantage: Creating and sustaining
superior performance, The Free Press, New York.
Thompson, A A & Strickland, A J 2001, Crafting & executing strategy,
12th edn, McGraw-Hill Irwin, Boston.
Crafting and executing strategy: The quest for competitive advantage,
19th edn, McGraw-Hill/Irwin, NY.
Crafting and executing strategy: The quest for competitive advantage.
Concepts and readings, 20th edn, McGraw-Hill Education, Boston

Zook, C, Allen, J & Smith, J 2000, ‘Strategies for corporate growth’,
European Business Journal, March, vol. 12, no. 1, pp. 3–10.
Zook, C & Allen, J 2003, ‘Growth outside the core’, Harvard Business
Review, December, pp. 66–73.
Zook, C & Allen, J 2011, ‘The great repeatable business model’,
Harvard Business Review, November, pp. 106–114.
Zook, C & Allen, J 2016, ‘Reigniting growth’, Harvard Business Review,
March, pp. 70–76.

answers
1. c
2. a
3. e
4. b
5. b
6. a
7. c
8. b
9. f
10. e

Reading 8.1 Kim, W C & Mauborgne, R 2005, ‘Blue ocean strategy:

From theory to practice’, California Management
Review, vol. 47, issue 3, pp. 105–121.

Unit 9
Managing intellectual
capital and knowledge
CONTENTS
References 9–32
Strategic significance of intellectual
capital and knowledge 9–5
Knowledge management 9–9 Unit 9 reading summary 9–34
Identifying, generating and managing

knowledge effectively 9–13
Capturing the value of intellectual capital 9–19
Measuring and focusing efforts on
building intellectual capital 9–22
Intellectual property 9–23
A strategic intellectual capital
management model 9–25

Knowledge comes, but wisdom lingers…
(Alfred Lord Tennyson, English poet 1809–1892)
Lately, we have experienced a shift from an economy based on physical objects to an

economy based on knowledge. In such an economy, most of a firm’s value is measured
in ‘knowledge capital’, embedded in its personnel, organization, patents, copyrights,
brand value and other intangible assets.
(Bo Bernhard Nielsen 2005, p. 9)

Introduction
The importance of recognising and managing strategically valuable
knowledge has been recognised for many decades:
Managing an organization’s strategy constitutes an attempt to find the
best fit between internal resources and the external environment to
seize the best opportunities as they become available… Resources
required to fuel strategic initiatives are of many types… Typically,
resources appear on an organization’s balance sheet as assets of
a physical or financial nature. Admittedly some intangible assets
also appear on the balance sheet, such as patents or trademarks.
However, for many organizations working within knowledge-intensive
industries, perhaps the most critical asset they possess never appears
on the balance sheet, namely intellectual capital (IC). This intangible
asset represents organizational processes, human know-how, and
relationships that support or create wealth for the company.
(Herremans & Isaac 2004, p. 217)
Although more recently it has been increasingly focused on managing the

knowledge potential of data:
When executives talk about “knowledge management” today, the
conversation usually turns very quickly to the challenge of big data
and analytics. That’s hardly surprising: Extraordinary amounts of rich,
complicated data about customers, operations, and employees are
now available to most managers, but that data is proving difficult to
translate into useful knowledge. Surely, the thinking goes, if the right
experts and the right tools are set loose on those megabytes, brilliant
strategic insights will emerge.
(Ihrig & MacMillan 2015, p. 82)
However, as the authors of this more recent research go on to suggest:

Tantalizing as the promise of big data is, an undue focus on it may
cause companies to neglect something even more important—
the proper management of all their strategic knowledge assets:
core competencies, areas of expertise, intellectual property, and
deep pools of talent. We contend that in the absence of a clear
understanding of the knowledge drivers of an organization’s success,
the real value of big data will never materialize.
Yet few companies think explicitly about what knowledge they

possess, which parts of it are key to future success, how critical
knowledge assets should be managed, and which spheres of
knowledge can usefully be combined.
(Ihrig & MacMillan 2015, p. 82)
activities that follow you can get a sense of what this Unit is about from the
• recognising intellectual capital as a source of competitive advantage
• identifying and managing intellectual capital via analysis, codifying,
dissemination, exploitation and protection.
Unit 9: Managing intellectual capital and knowledge 9–1

Video
The opening quotes help us to appreciate the importance and contribution

of knowledge, intellectual capital and intellectual property to organisational
success, and to position it in relation to big data and data analytics
(considered in Unit 6: Technology and Strategy).
Historically, many organisations focused on gaining competitive advantage
derived from such things as operational efficiency, lower labour and
other input costs, economies of scale and processes to build superior
efficiency. They were focusing on one of Porter’s sources of generic
advantage derived from having lower costs. However, over time these
strategic advantages have dissipated as they were often easy to emulate
or negate. The widespread adoption of practices such as Lean and
Six Sigma, the proliferation of operational management and efficiency
focused technologies, extensive adoption of automation, and even radical
innovation such as 3D printing, have resulted in the competitive advantages
from ‘continuous improvement’ to business-as-usual strategies offering
diminishing returns. Thompson et al (2016, p. 66) highlight the diffusion
of technical know-how across companies and countries as one of the
12 drivers of industry change and point out that ‘as knowledge of how
to perform a particular activity or use a particular technology spreads,
products tend to become more commodity-like…’ and this source of
competitive advantage diminishes.
Using the by now familiar ‘Playing to Win’ framework from Lafley and Martin
(2013, pp. 14–15) as our starting point then, what we now need to consider
is the interrelationship of the answers to the questions:
• What capabilities must be in place?
• What management systems are required?
We must also consider how a firm’s unique knowledge, translated into

intellectual capital and codified and disseminated efficiently and effectively
through knowledge management systems, powerfully enables strategic
management.
The discussions of the strategic importance of knowledge and intellectual
capital that we focus on in this Unit continue a theme that we have already
highlighted in many previous Units.

In Unit 1, we discussed the importance of understanding strategic assets
as a part of building an effective, and ideally strategically powerful business
model. Knowledge is a critical component of the strategic assets of most,
and arguably all, organisations.
In Unit 4, we highlighted the need for an organisation to have strategic
tangible, intangible and human resources that are valuable, rare, hard to
imitate and supported and integrated with the organisation’s policies and
procedures (VRIO). These sustainable competitive advantages can then
translate into valuable strategic strengths from which strategies can be
crafted. Knowledge is often, arguably always, a key source of these VRIO
intangible and human resources.
In Unit 6, we discussed how technology can play the role of a strategic
enabler when applied strategically and not just operationally. We also
focused some attention on the disruption of many industries and the
transformation of entire industries, ecosystems and business models
that have come about through digital technologies. While things like data
analytics, real-time market and organisational analysis and intelligence
systems are powerful enablers within the digital suite, ultimately it still
comes down to the knowledge of strategic managers to interpret and act on
such capabilities.
In Unit 7, we discussed innovation and highlighted how for many
organisations, innovation had become a key competitive advantage.
Frequently the principal source of innovation, both its generation and
application, relies extensively on unique knowledge within the organisation
and its strategic allies and stakeholders.
Implicit in all of these discussions is the importance of managers within
the organisation focusing attention on harnessing knowledge and using
it to generate competitive or strategic advantage, differentiation and
innovation, and internalising (codifying and making explicit) the learning
from the process of generating strategically important knowledge. Ihrig and
MacMillan (2015, p. 82) refer to this as identifying and deploying ‘mission
critical knowledge’.
Intellectual capital and intellectual property are simply the captured and
applied value derived from the organisation’s unique knowledge.
One need look no further than the rapid rise of industries such as IT,
biotechnology, social media and e-commerce, or the share-market
performance of organisations such as Apple, Alibaba, Google, Microsoft,
SAP, Samsung, Huawei, Cochlear, ResMed and CSL.
In summary, the reason that we spend a whole Unit discussing knowledge
and intellectual capital is because:
• intellectual property or IP (the outcomes of intellectual capital and
applied knowledge, creativity and innovation) is perhaps the major
strategic resource for many organisations

• organisations must manage processes to recognise, capture, share
and gain strategic or commercial value from their intellectual capital
• it requires more than simply protecting the IP; it requires a deliberate
strategy to continue to build it and to extract strategic value from it.
Learning outcomes
• examine and discuss the role of knowledge as a source of strategic and
• outline how knowledge is created and sustained within an organisation
• describe a process for identifying, mapping and managing strategically
valuable knowledge
• discuss a range of examples of intellectual capital and explain why
organisations invest in intellectual capital
• identify and discuss key issues involved in managing knowledge and
intellectual capital.
The following books will assist you if you would like to explore any of these
issues in more depth.
Nonaka, I 2008, The knowledge-creating company, Harvard Business
School Publishing, Boston.
Senge, P 2006, The fifth discipline: The art & practice of the learning
organisation, Doubleday, New York.

Strategic significance of
intellectual capital and
knowledge
The focus on knowledge and intellectual capital/property as a distinctive
and sustainable competitive or strategic advantage has grown apace.
Initially it was important simply to acknowledge the strategically important
role of knowledge management started, as the quote below suggests:
Increasingly, knowledge assets ... constitute a source of competitive
advantage. For innovating firms, these changes have put a premium
on finding ways to appropriate rents from investments in intangible
assets like proprietary knowledge and good will. Earlier, plant and
equipment were central to competitiveness; today, successful
firms can be founded on something as simple as computer access
to the internet. Earlier, workers could create value by performing
repeated tasks that did not require a sophisticated understanding of
the products concerned, and they were fairly immobile, frequently
staying with the same jobs for most of their lives. Today, not only
must workers typically master a greater knowledge of the production
process, they are also far more mobile...
(Davis 2004, p. 402)
Since the early years of the 21st century, growth and strategic success in
the economies not only of developed countries, but of many developing
economies, have increasingly shifted to knowledge and service-based
industries. Strategic or competitive advantage is being derived not simply
from lowering costs, but from the superior value flowing from the intellectual
capabilities of its human resources, data and networks. Success derived
from better harnessing knowledge can be seen in technology companies
such as Oracle, Intel, CSL, Cochlear and Atlassian, and also in more
traditional industries like heavy manufacturing, agriculture and mining.
It is important also to highlight that this does not simply apply to large,
listed multinational corporations; it applies equally to small-to-medium sized
organisations (SMEs), to government bodies and to agencies and public-
sector institutions.
Consider the strategic resources that the myriad small professional services
and tradespeople such as doctors, plumbers, accountants, naturopaths,
tax advisers, architects, acupuncturists, financial planners, cabinet-makers,
lawyers and dressmakers rely upon. In such cases, it is almost always
the customers’ perception that the operators of these businesses have
knowledge that they themselves don’t have. Consider also the strategic
resources used by the millions of small businesses that write apps or
software, who develop new businesses and business models, launch new
products or solve problems in new ways.

Consider also the strategic resources that consulting firms and professional
advisers, universities, research hospitals and government laboratories rely
upon. All of these organisations depend to a very large degree on the value
of knowledge as their principal strategic resource.
And this is just as true for economies like Australia, the United States,
Britain, western Europe, New Zealand, Singapore and Japan, where
governments and organisations increasingly compete for talented (and
scarce) workers, particularly ‘knowledge workers’ – those people whose
creativity and intellectual capabilities are critical success factors in high-
value technology- and service-driven industries.
It is clear then that knowledge, intellectual capital (the accumulation of
accessible knowledge within the organisation), and the intellectual property
that is the captured expression of that knowledge, are vital areas of
strategic management.
But the strategic value of knowledge is about more than using technologies
to trawl through the tsunami of data that swirls around organisations and
strategic managers. It’s about more than using data analytics to find the
kernels of valuable insight in the huge lakes of data within organisations
and ecosystems. As Ihrig and MacMillan (2015, p. 82) make clear:
When executives talk about “knowledge management” today, the conversation

usually turns very quickly to the challenge of big data and analytics. That’s hardly
surprising: Extraordinary amounts of rich, complicated data about customers,
operations, and employees are now available to most managers, but that data
is proving difficult to translate into useful knowledge. Surely, the thinking goes,
if the right experts and the right tools are set loose on those megabytes, brilliant
strategic insights will emerge.
Tantalizing as the promise of big data is, an undue focus on it may cause
companies to neglect something even more important—the proper management
of all their strategic knowledge assets: core competencies, areas of expertise,
intellectual property, and deep pools of talent. We contend that in the absence of
a clear understanding of the knowledge drivers of an organization’s success, the
real value of big data will never materialize.
Yet few companies think explicitly about what knowledge they possess, which
parts of it are key to future success, how critical knowledge assets should be
managed, and which spheres of knowledge can usefully be combined.

However, as Maguire (2008, p. 76) points out, it is not as simple as
recognising the value of knowledge and intellectual capital:
Many companies have talented individuals or teams who come up with wonderful
inventions. Finding a practical use for these ideas, marketing them and then fully
exploiting their potential, however, can require quite different skills, which may not
always be found in the same individual, team or even company that came up with
the original idea. And one area that is often neglected by organisations is not just
protecting, but also commercialising, those designs and inventions.
Many organisations are not clear on how best to value their intellectual capital,
to protect their ideas and inventions against theft by competitors, or to make
themselves attractive to potential investors or organisations, who might be
interested in eventually buying them.
A key issue then is that there has been a shift from competition focused
on ‘plant and equipment’ to competition based on appropriating ‘rents
from investments in intangible assets like proprietary knowledge and good
will’. Davis (2004, p. 402). The same article goes on to suggest that this
competition is driven by five key forces.
• The ease with which tangible assets can be duplicated or negated by
competitors has resulted in an increasing focus on intangible assets as
the sources of sustainable competitive advantage.
• Globalisation and accompanying increases in competition have
necessitated organisations to seek differential strategic advantages
that are unique or hard to copy. Globalisation has also provided more
sources of knowledge: organisations adopting multi-country or global
strategies have the opportunity to acquire and apply knowledge from
multiple countries to world markets.
• Manufacturing and routine process-style operations have been
extensively automated, or shifted to countries with abundant sources
of cheap and well-educated labour, such as China, India, Vietnam,
and Indonesia, and countries of Eastern Europe, Central and South
America.
• The increasing ease of distribution of information through digitisation
and electronic data transfer increases the ability of organisations to
capture and disseminate knowledge, but also for that knowledge to be
copied.
• The increasing willingness of governments, particularly members of the
World Trade Organization, to enact and enforce legislation protecting
the intellectual property rights of organisations – making it more
attractive and more viable for organisations to invest in developing
intellectual property.

As a consequence, there has been an increasing focus in both developed
and many developing economies on seeking to grow the value of
knowledge and service-based industries, where strategic or competitive
advantage is derived not from lower costs, but from superior intellectual
capabilities of intangible and human resources.
As Nag and Gioia (2012, p. 421) observed:
One of the most venerable observations about knowledge is Francis
Bacon’s dictum that ‘knowledge is power’. Management scholars
have now firmly established the role of knowledge as one of the key
competitive resources of modern times (Drucker, 1993; Penrose,
1959) and have under-scored the importance of knowledge in
strategic and competitive contexts by proposing a knowledge-based
view of the firm (Grant, 1996; Kogut and Zander, 1992). Proponents of
this view not only treat knowledge as the principal strategic resource,
but also argue that firms supersede markets in their ability to create
and harness this resource (Kogut and Zander, 1992). A central
premise of the knowledge-based view is that knowledge that is largely
tacit and grounded in the unique historical and social context of a firm
can be a source of sustained competitive advantage, because such
knowledge is difficult for competitors to imitate and acquire freely in
factor markets (Barney, 1991).
The significant things we see here are that intellectual property, the
outcomes of intellectual capital and applied knowledge, creativity and
innovation, are perhaps the major source of strategic value for many
organisations, but only when the organisation is deliberate and structured in
its desire to learn.
Consider what a different organisation Cochlear (Australian-listed producer
of the ‘bionic ear’ hearing implants) would be if not for its knowledge-based
ability to produce new devices. Or the value of government agencies
such as the CSIRO (Commonwealth Scientific and Industrial Research
Organisation) without its accumulated knowledge. How could major public
health and education providers achieve their social goals without effectively
managing their knowledge base? Think about the value of intellectual
capital and knowledge to private not-for-profit think tanks like the RAND
Corporation (USA) and Lowy Institute (Australia), not-for-profit agencies
such as Medecins Sans Frontieres and Amnesty International and, indeed,
most universities around the world.
Would you be studying at the AGSM if you didn’t think that the program
offered you access to knowledge that you didn’t currently have, or easier
access than trying to find and interpret it all yourself?
And why are so many students willing to sacrifice so much money and
time to study at famed institutions such as Stanford, Harvard, the AGSM,
INSEAD, Cambridge, Oxford, London Business School, NIDA, the Royal
Ballet and Beaux-Arts de Paris? No doubt it is because they are convinced

that these places offer them access to knowledge that will enhance their
careers and prospects for the sorts of lives of which they dream.
But what do we mean by knowledge, intellectual capital and intellectual
property? Herremans and Isaac (2004, p. 217) suggest that intellectual
capital is:
This intangible asset represents organizational processes, human
know-how, and relationships that support or create wealth for the
company … intellectual, relational and other resources, and not simply
those resources normally appearing on the balance sheet
And as the earlier Ihrig and MacMillan quote points out, what really matters
is strategic managers’ understanding of ‘…what knowledge they possess,
which parts of it are key to future success, how critical knowledge assets
should be managed, and which spheres of knowledge can usefully be
combined’.
So, we can see that knowledge, and the intellectual capital that flows from
effectively capturing and deploying knowledge, can meet the VRIO test of
sustainable strategic or competitive advantage by being valuable, rare,
hard to imitate and supported by the organisation’s policies and
procedures. Intellectual capital is about human know-how (or knowledge),
intellectual resources and relationships. We have already considered
relationships at some length in earlier Units, especially in Unit 4 where
we considered the value chain and Unit 8 where we looked at strategic
alliances, so we will touch only lightly on them in this Unit. We will look
more deeply, however, at the strategic competencies and strategic
advantage an organisation gains from effectively managing its knowledge,
know-how and intellectual resources.
Knowledge management
So, what is knowledge management? Picking up from the Ihrig and
MacMillan (2015, p. 82) quote we considered earlier, they allude to
‘the proper management of all their strategic knowledge assets: core
competencies, areas of expertise, intellectual property, and deep pools
of talent…’ which they propose are ‘the knowledge drivers of an
organization’s success’.
So, you can see that in a strategic-management context, we use the term
‘knowledge management’ in relation to the processes and practices that an
organisation’s strategic managers put in place to:
• identify what strategically valuable knowledge exists within the
organisation, or within its networks and relationships
• codify and disseminate the knowledge throughout the organisation
to ensure its availability and use to delivery strategic outcomes (the
activities that Ihrig and MacMillian describe as ‘mission critical’)

• nurture and further develop existing strategically valuable knowledge
• identify what strategically important knowledge competitors have and
how it can be countered
• develop processes and practices to further enhance the organisation’s
strategic knowledge base.
When done well, an organisation’s ‘knowledge management’ becomes

a significant strategic enabler. And as you can see from the Ihrig and
MacMillan quote, it’s about more than just data analytics and what insights
can be extracted from big data – or indeed from any specific IT or software
solution.
We therefore need to distinguish between what role knowledge plays,
which is significant and even in some cases vital, from how it is managed,
which may or may not require some technologies, IT or other systems
support to make it effective. In the strategic management sense, knowledge
can be seen as:
Acquaintance with facts, truths, or principles related to core strategic
competencies or critical success factors, gained from study,
investigation, acquaintance, sight, experience, or report.
And by integrating it into the earlier Herremans and Isaac’s (2004) quote,
strategically valuable knowledge becomes intellectual capital:
Acquaintance with facts, truths, or principles related to core
strategic competences or critical success factors, gained from
study, investigation, sight, experience, or report that are captured
in organizational processes, human know-how, and relationships to
support or create wealth for the organisation.
We can say that knowledge is valuable when the acquaintance with facts,
truths and principles gained via study, investigation, experience, sight,
experience or report:
• relates to rare strategic resources (ideally tangible, intangible and
human resources that are differential) and to industry-critical success
factors that competitors or other organisations find hard to imitate
• is translated into and synchronised with the organisation’s policies,
procedures and processes
• is directed to support or create strategic outcomes.
When this happens, knowledge is ‘mission-critical’ and can become

intellectual capital – a valuable strategic resource.

Intellectual property
These definitions of knowledge and intellectual capital are distinct from
intellectual property, which is defined by the Macquarie Dictionary as:
The rights of creative workers in literary, artistic, industrial and
scientific fields, which can be protected either by copyright or
trademarks, patents, etc.
You will see that here, intellectual property relates to the rights attached
to creative outputs that can be protected by legal processes such as
copyright, trademarks and patents.
Intellectual property (IP) is an output of effective processes in managing
knowledge and turning it into intellectual capital. An organisation may be
able to generate knowledge related to tangible, intangible and human
strategic resources or mission-critical success factors. It must then turn
that knowledge into procedures, processes, human capabilities and
relationships and then legally protect these via patent and copyright. This
then becomes the IP of the organisation (and possibly of the individuals
who helped to create it). These rights can then be given value in a balance
sheet, based on the organisation’s ability to earn money from them, either
through making commercial returns or licensing, trading or selling them.
The embodiment and protection of IP is a vitally important and highly topical
management issue. As evidence of this, you could look at the numerous
court actions between Apple and Samsung as each firm sought to prevent
the other from using software and design features in their devices that were
seen as unique advantages. Another example was Google’s acquisition of
Motorola Mobility (which they have since sold to Lenovo), principally seen
as a move to access Motorola’s numerous patents that had come from
more than 80 years of R&D (the majority of which Google continues to hold
ownership over).
Activity 9.1
1. Based on these definitions of knowledge and intellectual capital, what
intellectual capital does your organisation have that relates to strategic
resources or to mission-critical success factors?

2. How effectively has this been translated into policies, procedures,
processes, human abilities and relationships in your organisation?
3. How effective is their management in terms of supporting or creating

strategic outcomes for the organisation?
4. Does your organisation then turn any of this into IP? If so, how effective
are the existing processes and practices for doing this?

Identifying, generating
and managing knowledge
effectively
The first thing that a strategic manager must do in this space is identify
what knowledge exists, and then decide what is ‘mission-critical’ or
strategically relevant. As Ihrig and MacMillan (2015, p. 82) observe:
The first step is to put boundaries around what you’re trying to do.
Even if you tried to collect and inventory all the knowledge floating
around your company—the classic knowledge-management
approach—you wouldn’t get anything useful from the exercise (and
you’d suffer badly from cognitive overload).
So they propose that the first step is to identify what is strategic knowledge,
and what isn’t. To do this they propose that strategic managers map
knowledge. This mapping process involves a series of clear steps:
1. Step 1 – using a multi-functional, cross-business team of people,
identify for each part of the business (1) the key dimensions or
attributes that drive the organisation’s success in the marketplace, and
then (2) various types of knowledge (both ‘tacit’ i.e. unstructured and
typically also undocumented, and ‘explicit’ i.e. structured and often
codified). The authors highlight that:
Your list of key assets should ultimately include some that are
“hard,” such as technical proficiency, and some that are “soft,” such
as a culture that supports intelligent risk taking. You may also have
identified knowledge that you should possess but don’t or that you
suspect needs shoring up. This, too should be captured.
2. Step 2 – map all the mission-critical or strategically significant

knowledge on a two-dimensional scale, with:
• the vertical axis showing the degree to which the knowledge is
unstructured (intuitive, undocumented, probably resident in the
heads of a few key ‘experts’ and often hard to articulate) versus
structured (typically well-articulated, easily conveyed, often codified
into documents or systems and using a shared language that is
widely understood in the organisation)
• the horizontal axis plotting the degree to which the knowledge is
proprietary (found only within a few heads or small pockets) versus
widely diffused (spread throughout and, possibly, even outside the
organisation).
The resulting map might look something like this:

Figure 9.1 Sample of a knowledge asset map
STRUCTURED A GENERIC ENGINEERING COMPANY’S KNOWLEDGE ASSETS
Company product
specifications published
Proprietary
on the website
blueprints
Company standard
operating procedures
Project management
Worldwide
capabilities
engineering
community of
practice
Insight into
Company-specific
clients’
technical skills
strategic
needs
Tactic knowledge
UNSTRUCTURED
of lead engineers
Inside the company Outside the company
UNDIFFUSED DIFFUSED
Source: adapted from Ihrig and MacMillan 2015, p. 85.
3. Step 3 – Interpret the map. Discuss among the key strategic managers
in the team:
• What knowledge needs to be more widely diffused (including
shared with partners or the ecosystem) or contextualised (used in
new parts of the organisation or in new ways)?
• What knowledge needs to be captured, codified and protected?
• What knowledge needs to be further developed?
• What new areas of knowledge might be created by leveraging
existing knowledge in new ways (perhaps by looking at areas of
possible interaction and divergence as well as gaps)?
• What investments need to be made in generating genuinely new
knowledge (areas of discovery)?

Capturing, codifying and disseminating knowledge
Knowledge management scholars Ikujiro Nonaka and Hiro Takeuchi (1998)
reported that perhaps the most significant aspect of managing knowledge
effectively is the internal process for creating organisational as opposed to
personal knowledge. They distinguish between tacit knowledge – highly
personal knowledge that an individual has and does not or cannot share
easily; and explicit knowledge – knowledge that is captured, documented
and disseminated within the organisation to be used to create the
strategically valuable outcomes we have mentioned earlier.
In their work, Nonaka and Takeuchi (1998) proposed that knowledge can
be passed on in four ways:
• Tacit exchanges, for example, a technical trainee watching and
copying someone with greater technical mastery (e.g. a master training
an apprentice).
• Explicit exchanges where someone takes previously unconnected
pieces of information and connects them to create new knowledge (e.g.
an accountant studying bank statements, sales records and purchases,
and creating a profit and loss statement).
• Tacit–explicit exchanges where technical experts or people with
unique knowledge record or document (codify) knowledge in formats
that others can access and learn from. For example, you are gaining
from a tacit–explicit exchange in this course when you read articles by
researchers and authors who are documenting knowledge.
• Explicit–tacit exchanges, where people take explicit information, build
new insights and understandings from these and become individually
more effective and efficient, gaining new skills personally.
As many organisations have found out – often at great inconvenience and

cost – if know-how and relationships are personal, e.g. between a staff
member and a client, or if the staff member keeps tacit knowledge in their
head alone, when that staff member leaves the organisation, so too does
the knowledge – and often the client relationship goes as well.
Organisations that can effectively codify and disseminate all mission-critical
knowledge, including individual (tacit) knowledge, gain the maximum
strategic advantage from knowledge.
Nevis, DiBella and Gould (1995, pp. 74–81) proposed a three-stage
model, which suggests that managing knowledge strategically requires the
organisation to develop effective processes and practices to:
• acquire knowledge, through learning, development, recruitment,
relationship building and alliances

• share or disseminate knowledge, through practices and processes
that enable the knowledge to be disseminated throughout the
organisation
• utilise knowledge, whereby it is integrated so that it is not just
available, but is being used to generate strategic advantage.
These become particularly important when they relate to strategically
important or ‘mission-critical’ knowledge – knowledge that relates to
valuable, rare, hard-to-imitate strategic resources that are effectively
integrated with the organisation’s policies and procedures and relate to
industry-critical success factors.
Knowledge becomes strategically valuable – indeed, it becomes a strategic
resource – when it is organised so that the right people have access to the
right information at the right time.
There is a requirement that somehow the organisation must develop the
means by which processes, practices and systems turn as much of the
knowledge and intellectual capital into ‘chunks of data’ or perhaps ‘bits of
information’ which they keep current and useable and make available to the
right stakeholders at the right time.
More recent research by Nag and Gioia (2012, p. 448) identified the
following.
Our findings suggest that it is not simply that some firms operating
under the same industry conditions necessarily possess better
knowledge than other firms, but rather that managers can help to
create better knowledge when they influence commonly available
information to be used in uncommon ways.
In other words, the research found that competitive and strategic advantage
is not just in the knowledge itself, but is derived from how the organisation’s
strategists manage the knowledge. You will note that this ties in neatly
with the principles and concepts that we discussed in Unit 6 on technology
strategy, where we made it clear that technology, including information
technology, was a key strategic enabler.
Specifically, Nag and Gioia (2012, p. 448) found that:
Managerial scanning, and especially proactive scanning, then, is
not just an information and knowledge-acquisition activity, but also a
crucial interfacing activity that connects others in an organization to
facilitate collective knowledge use practices. Scanning thus not only
shapes incoming information but might also be seen as ‘amplifying’
that information for subsequent adaptive knowledge use in practice
and/or augmenting knowledge use for wider, more generative
application.

What this research makes clear is that the most strategic effective use of
knowledge comes about when the strategic managers of the organisation:
• regularly set and initiate the search for strategically important
knowledge
• encourage people throughout the organisation to intensely search for
knowledge, not just about current issues, but about strategic issues of
the future
• encourage and facilitate the use of the knowledge to modify the
strategies and resources of the organisation as it is, but also look for
innovative and divergent views of how the knowledge might challenge
the existing approaches and suggest new ways of seeing.
All of this raises a key issue in the strategic use of knowledge and
intellectual capital. Knowledge tends to be strongly dependent on the
organisation’s human resources or people. In the case of intellectual
capital, this is further emphasised by the fact that not only is know-how
part of the definition, so too are relationships – also involving people. An
organisation’s ability to use knowledge and intellectual capital is therefore
likely to be highly dependent on its ability to:
• attract the right people – people with knowledge that is strategically
valuable
• develop and continuously improve staff know-how and relationships
• encourage people to continuously use, develop and enhance their
knowledge and share it with others in innovative ways
• keep staff motivated, rewarded and connected to the organisation.
The important issue in managing knowledge (creating it, capturing it,

transferring it, protecting it and ensuring it is available to the right people
when required) is the subject of the following reading.
Read
Reading 9.1 Dewhurst, M, Hancock, D & Ellsworth, D 2013,
‘Redesigning knowledge work’, Harvard Business Review,
January–February, pp. 58–64.

Activity 9.2
Given these issues concerning the effective strategic management
of knowledge, consider your own organisation and how knowledge is
managed. How effectively does your organisation complete the following
tasks?
1. Map and interpret what knowledge is mission-critical and how well the
organisation is currently codifying and disseminating mission-critical
knowledge?
2. Manage job roles, work structures and organisational design to

maximise the strategic impact of mission-critical knowledge?
3. Incorporate strategic knowledge acquisition into its recruitment and

employee development processes.
4. Incorporate strategic knowledge development into its learning and

employee development processes and programs.

5. Incorporate strategic knowledge use into its information systems and
information sharing activities.
6. Incorporate strategic knowledge use and development into its

employee measurement, motivation and reward practices.
7. Incorporate strategic knowledge use and development into the way it

structures and nurtures relationships.
Capturing the value of intellectual capital

In defining intellectual capital earlier, we drew the following from Herremans
and Isaac (2004):
… organizational processes, human know-how, and relationships that
support or create wealth for the company.
Having discussed knowledge at some length, we need to consider other

elements of intellectual capital, particularly relationships and organisational
processes.

Relationships
Relationships are a critical source and component of an organisation’s
intellectual capital. Much of the recent research highlights that intellectual
capital is heavily dependent on both ‘human capital’, which Schiuma et al
(2008, p. 167) define as ‘people’s decisions dealing with their work, the
improvement of their skills and knowledge’ and ‘social capital’. Indeed,
in their research on the turnaround of the iconic Italian motorbike maker
Ducati, Schiuma et al (2008, p. 168) highlight how the extensive academic
and practitioner research identified the vital nature of organisational social
capital:
Organisational SC [social capital] is realised through members’ levels
of collective goal orientation and shared trust, which create value
by facilitating successful collective action. Organisational SC is an
asset that can benefit both the organisation (e.g. creating value for
shareholders) and its members (e.g. enhancing employee skills)’
Social capital involves internal systems and processes that maximise:

• collaboration: with other functions, units and people in the
organisation and key strategic stakeholders outside the organisation
• networking: creating or encouraging opportunities, developing
processes and allocating resources to facilitate the development
of trusting and sharing relationships that maximise knowledge
development, sharing, capture and exchange
• communication: ensuring that knowledge is codified (i.e. captured
and recorded) and disseminated or passed on to those who can make
strategic benefit of it, in forms and at times that maximise its value
• assimilation of knowledge: to capture and communicate knowledge
is on its own not enough; the organisation needs to have systems and
practices in place to ensure that the knowledge is understood and
assimilated by those able to use it to generate strategic advantage.
This requires that strategic managers must set in place structures, processes
and internal and external relational activities to achieve these things.
This may involve investments in activities that are about:
• identifying the sorts of relationships with the greatest potential for
generating strategic advantage (internally and externally), setting
objectives, allocating resources and accountabilities for developing
such relationships effectively
• building relationships that may have future strategic knowledge-building
potential, although there may be no immediate pay-off
• taking a medium to long-term view of how effective knowledge-building
relationships are created, rather than simply thrusting people together
at a time of need and instructing them to ‘relate’.

It’s worth noting that the detail and value of relationships, and what it takes
to sustain and create strategic value from them, may be a tacit form of
mission-critical knowledge, which could or perhaps should appear in the
strategic asset mapping activity illustrated in Figure 9.1.
Organisational processes
In addition to focusing resources on building relationships that may create
relational capital, strategic managers need to focus on building strategic
advantages through processes. In Unit 4, we discussed the value chain
detailed by Michael Porter. We identified that organisations could gain
strategic or competitive advantage through managing value-creating
processes or activities more effectively than competitors. Strategically
valuable knowledge may be found in mission-critical value-chain activities
such as sourcing materials and inputs, logistics, project management,
customer service and support, compliance, etc.

Measuring and focusing
efforts on building
intellectual capital
Clearly, an organisation’s strategic managers will need to develop systems
and practices to measure and monitor the effectiveness of codifying and
disseminating or diffusing knowledge – the components of intellectual capital.
Kaplan and Norton (1996 reprinted 2007) recommended that the balanced
scorecard can help here. They proposed (2007, p. 150):
As companies around the world transform themselves for competition
that is based on information, their ability to exploit intangible assets
has become far more decisive than their ability to invest in and
manage physical assets... The balanced scorecard supplemented
traditional financial measures with criteria that measured performance
from three additional perspectives – those of customers, internal
business processes, and learning and growth… The scorecard wasn’t
a replacement for financial measures, it was their complement.
Paraphrasing this work, there are four perspectives that need to be

addressed.
• Finance: to succeed financially, how should we appear to our
shareholders?
• Customers: to achieve our vision, how should we appear to our
customers?
• Internal business processes: to satisfy our customers and
shareholders, what business processes must we excel at?
• Learning and growth: to achieve our vision, how will we sustain our
ability to change and improve?
Having determined what the balance of these four perspectives ought to be,
Kaplan and Norton (2007, p. 153) suggest that strategic managers engage
in a continuous cycle of:
• translating and clarifying the vision, and gaining consensus
• communicating and educating the people who need to know
• setting goals to make the objectives happen
• linking reward systems to these performance measures
• developing business plans that
– set targets
– align the strategic initiatives with each other effectively
– allocate appropriate resources
– establish the necessary milestones

• provide feedback and learning opportunities through
– articulating the shared vision
– supplying relevant strategic feedback
– facilitate strategic reviews and organisational learning.
Two of the critical balanced scorecard perspectives – internal business

processes and the development of people – relate very clearly to the
issues of intellectual capital discussed here. Indeed, it is hard to imagine
an organisation focusing attention on developing its intellectual capital
strategies and not implementing a system like the balanced scorecard in
order to ensure that strategic managers are accountable for and devote
attention to these issues.
Intellectual property
As you are now aware, IP is created when the knowledge, relationship
resources or organisational processes that constitute mission-critical
intellectual capital are turned into something that can be protected by
copyright, patent or licence, etc. In addition, many organisations put in
place contracts or legally drafted agreements with employees, strategic
allies, value-chain partners, customers and other stakeholders designed to
protect their IP (or intellectual ‘property’). The organisation thus gains the
legal ‘right’ to exclusive ownership of the knowledge, relational resource or
organisational process, and attempts to protect it via legal process.
Those of you who have studied the course Business Law and Technology
will know that because of the complexities of laws relating to copyright,
patents, licences, trademarks and contract law, it may be difficult or
impossible to protect much of what we have discussed as ‘intellectual
capital’. The experience of many organisations is that IP protection
can be very difficult to obtain in countries where the rule of law and the
enforcement of laws relating to IP rights are poor.
Even in countries with sound and reliable legal systems, enforcement of IP
protection, licences and agreements is often very expensive and open to
interpretation by individual judges, creating uncertainty about their effect.
A number of these and other issues relating to the strategic advantages
gained from IP and the protection of IP rights were highlighted by Reitzig
(2004, p. 38) and are summarised in the following table.

Table 9.1 The strategic advantages gained from IP
Strategic aspect Strategic question Intellectual property rights strategy
options
Definition of How do intellectual • Create IPR-based technological
competitive strategy property rights (IPRs) help incumbency
companies gain and sustain • Create brand names
competitive advantage? • Create IPR-protected de facto
standards
External context – How do IPRs affect the • Use IPRs to amass market share in
industry structure structure of an industry? technologically discrete industries
• Use IPRs as bargaining chips in
technologically complex industries
External context What options do IPRs offer • Use IPRs to differentiate vertically or
– horizontal in competition with other horizontally
competition industry players?
External context How do IPRs relate to • Create advantages through cumulative
– horizontal incumbency advantage and patenting and combining brands and
competition entry barriers? patents
• Create ‘learning societies’ by identifying
and binding elite scientists
• Support ‘product-space packing’ with
trademarks and patents
External context – How can IPRs help • Use IPRs to increase power in a
vertical competition companies gain vertical different segment of the value chain
power along the value
chain?
Internal context Which organisational • Create IP functions at the corporate and
design is necessary to business-unit level
accommodate an IP
strategy?
The article suggests that IPRs can be used to:

• shape the industry structure in ways that assist the rights holders (to
determine segments; set standards; share licences)
• create and sustain vertical and horizontal differentiation (through brand
names and unique products)
• create and defend an incumbent position (by defending IPRs through
legal action and by raising legally defensible entry barriers)
• create power in negotiations with customers, suppliers, value chain
partners and strategic allies.

A strategic intellectual
capital management model
If we now bring together elements of many of these models, we can see
that the strategic value of intellectual capital and knowledge comes from
the following.
1. Identifying what strategic management is mission-critical and how
effectively it is being managed, perhaps through use of a strategic
knowledge assets map such as in Figure 9.1.
2. Analysing or interpreting what knowledge needs to be better codified,
disseminated or diffused, and what opportunities and priorities exist for
new knowledge creation.
3. Acquiring and diffusing mission-critical knowledge throughout the
organisation through:
a. scanning internal and external environments

b. recruitment of people with a diverse range of knowledge
c. learning and development activities, which may include
i. formal training and learning activities including support for
ongoing education
ii. job sharing and job rotations
iii. project activities with a developmental focus
iv. travel and exchanges with other parts of the organisation and
other organisations
d. benchmarking and best-practice sharing

e. forming value-creating and knowledge-sharing relationships such
as formal and informal networks, strategic alliances, memberships
to industry and professional bodies, etc.
f. investments in investigation and research (not just R&D but
investigation and research in a broader sense).
4. Motivating and rewarding employees for the value of knowledge that

they contribute or develop for the organisation; the extent to which they
utilise knowledge effectively and the extent to which they share it.
5. Fostering, nurturing and investing in social capital, formal and informal
networks and relationships including:
a. internal groups, teams, networks and relationships
b. external groups, alliances, networks and relationships including
industry and professional associations, community groups,
government advisory groups, strategic alliances, value chains,
research bodies.

6. Identifying, developing, nurturing and refining strategic organisational
processes, job roles and structures – particularly those that impact on
the value chain and that are most closely related to mission-critical
success factors and provide the means for generating lower costs or
differential value and strategic advantage through:
a. efficiency
b. quality
c. customer intimacy.
If these activities are to be part of strategic management, then it is

important to remember the following.
• Some of the focus in recruiting, developing and disseminating, etc.,
must be on strategic know-how or knowledge and relationships – things
that are designed to enhance the strategic advantages gained from
existing core and differential competencies, and/or are undertaken to
develop new ones.
• In organisations that are multi-site or even multi-country, there needs to
be some adaptation to recognise local issues and local cultures.
We will discuss managing strategy across national borders in more

detail in Unit 10. However, Jonsson’s (2008) examination of the use of
knowledge management systems in IKEA found that systems to ensure that
knowledge was transferred forward (from corporate head office to national
operational level) and backward (from the field in different national markets)
led to substantial benefits across the whole organisation and developed
strategically valuable knowledge that increased success and competitive
advantage across the global network. The research highlighted the vital
importance of accommodating some local customisation and of developing
intellectual capital in managing cultural issues.
Activity 9.3
1. What strategically valuable intellectual capital does your organisation
have?

2. How can it be managed more effectively?

Summary
As organisations have begun to recognise that strategic value is
increasingly found in their intangible and human resources much more
than tangible assets, the pursuit of knowledge and intellectual capital as a
source of competitive advantage has grown in strategic importance.
An organisation’s intellectual capital is made up of its strategically
valuable knowledge or know-how, relationships, resources and processes.
Therefore, a key role for strategic managers is to identify, enhance and
protect these.
Intellectual property rights may be attached to some of the organisation’s
intellectual capital via contracts, patents, copyright, trademarks and the like,
but these are only a part of its strategically important intellectual capital.
Strategic managers should do the following:
• analyse and understand the existing profile of mission-critical strategic
knowledge within the organisation and its ecosystem
• actively manage and promote the scanning and integration of new
knowledge, from both internal and external sources and look for
enhancements to existing knowledge and unconventional uses
(innovation)
• identify contextual issues about the scope, forces and influence of
intellectual capital in the other 4Cs – company, customers, competitors
and collaborators (industry and macro environments).
• develop policies, practices and processes that enhance knowledge,
social capital and relationships, things such as:
– job roles and work design
– recruitment
– motivation and rewards
– learning and development
– investigation and research
– networking and collaboration
– communication.
• foster, develop and nurture organisational processes that create

strategic advantages
• ideally, protect these where possible through attaching IP rights to
them.
When managed effectively, intellectual capital and knowledge will
increasingly become one of the major enablers in an organisation’s
strategic arsenal.

1. Complete the following quote:
‘However, for many organisations working within knowledge-intensive
industries, perhaps the most critical asset they possess never appears
on the balance sheet, namely intellectual capital (IC). This intangible
asset represents ___________ that support or create wealth for the
company.’
a. tangible, intangible and human resources
b. people, processes and physical evidence
c. brands, trademarks, patents and copyrights
d. organisational processes, human know-how, and relationships
e. relationships and social infrastructure
2. Davis suggested that competition for knowledge is driven by five key

forces. Which of the following is not one of the five forces he identified?
a. The increasing willingness of governments, particularly members
of the World Trade Organization, to enact and enforce legislation
protecting the intellectual property rights of organisations
b. The increasing ease of distribution of information through
digitisation and electronic data transfer increases the ability of
organisations with knowledge in one place
c. Globalisation and accompanying increases in competition have
further necessitated organisations to seek differential strategic
advantages that are unique or hard to copy
d. The ease with which tangible assets can be duplicated or negated
by competitors has resulted in an increasing focus on intangible
assets as the sources of sustainable competitive advantage
e. Manufacturing and routine process-style operations have been
extensively automated, or shifted to countries with abundant
sources of cheap and well-educated labour
f. The increasing availability of high-quality knowledge workers being
educated in increasingly sophisticated secondary and tertiary
education institutions
3. Ihrig and MacMillan (2015, pp. 80–87) suggest that a critical part of
understanding the strategically important or mission-critical knowledge
of the organisation is to map its existing knowledge and then interpret
the map. Which of the following steps do they suggest comes first:
a. Map all the mission-critical or strategically significant knowledge on
a two-dimensional scale

b. Identify what knowledge needs to be more widely diffused
(including sharing with partners or the ecosystem) or contextualised
(used in new parts of the organisation or in new ways)
c. Use a multi-functional, cross-business team of people to identify
the key dimensions or attributes that drive the organisation’s
success in the marketplace and the various types of knowledge
(‘tacit’ and ‘explicit’)
d. Discuss what knowledge needs to be captured, codified and
protected
e. Determine what investments need to be made in generating
genuinely new knowledge (areas of discovery)
4. Nag and Gioia suggest that there is a three-part model for generating
innovative strategic outcomes via knowledge management. Two of
these are summarised below. Identify from the list that follows the point
that is missing. Strategic managers must:
• identify what knowledge is strategically important based on its
criticality and its distinctiveness.
• work to ensure that knowledge is adapted or augmented for use
in the organisation
a. identify how intensely and how proactively the critical and

distinctive knowledge should be searched for
b. translate and clarify the vision, and gain consensus
c. set goals to make the objectives happen
d. communicate with and educate the people who need to know
e. link reward systems to these performance measures
5. Intellectual capital can be found in relationships that create social

capital. Which of the following is not one of the outcomes highlighted as
a source of social capital?
a. assimilation of knowledge
b. compliance
c. networking
d. collaboration
e. communication
6. The strategic advantage to be gained from intellectual property involves

addressing a number of strategic questions, the very first of which asks
‘How do intellectual property rights (IPRs) help companies gain and
sustain competitive advantage?’ From the list below, which option is
one of the three presented as answers to that question?

a. use IPRs to differentiate vertically or horizontally
b. create brand names
c. create ‘learning societies’ by identifying and binding elite scientists
d. create IP functions at the corporate and business-unit level
e. support ‘product-space packing’ with trademarks and patents
7. In a strategic intellectual capital management model, Step 2 involves

‘Bringing knowledge into the organisation’. Which of the following is not
one of the tactics mentioned for doing this?
a. investments in investigation and research
b. benchmarking and best practice sharing
c. create and sustain vertical and horizontal differentiation
d. learning and development activities
e. forming value-creating and knowledge-sharing relationships
f. recruitment of people with a diverse range of knowledge

References
Davis, L 2004, ‘Intellectual property rights strategy and policy’, Economics,
Innovation, New Technology, vol. 13, no. 5, July, pp. 399–415.
Dewhurst, M, Hancock, B & Ellsworth, D 2013, ‘Redesigning knowledge
work’, Harvard Business Review, January–February, pp. 56–64.
Herremans, I M & Isaac, R G 2004, ‘The intellectual capital realization
process (ICRP): An application of the resource-based view of the firm’,
Journal of Managerial Issues, Summer, vol. XVI, no. 2, pp. 217–231.
Ihrig, M & MacMillan, M 2015, ‘Managing your mission-critical knowledge’,
Harvard Business Review, January-February, pp. 80–87.
Jonsson, A 2008, ‘A transnational perspective on knowledge sharing:
Lessons learned from IKEA’s entry into Russia, China & Japan’
International Review of Retail, Distribution & Consumer Research,
February, vol. 18, issue 1, pp. 17–44.
Kaplan, R S & Norton, D P 2007 (reprint from 1996), ‘Using the balanced
scorecard as a strategic management system’, Harvard Business Review,
vol. 85, no. 7/8, pp. 150–161.
Maguire, J 2008, ‘Intellectual capital: Not a black and white issue’,
Engineering & Technology, November 8–21, vol. 3, issue 19, pp. 76–77.
Nag, R & Gioia, D A 2012, ‘From common to uncommon knowledge:
Foundations of firm specific use of knowledge as a resource’, Academy of
Management Journal, vol. 55, no. 2, pp. 421–457.
Nevis E, DiBella A & Gould J, 1995, ‘Understanding Organizations as
Learning Systems’, Sloan Management Review, Winter, pp. 73-85
Nonaka, I & Takeuchi, H 1998, ‘The knowledge creating company’ in
Mabey, C, Salaman, G & Storey, J (eds), 1998, Strategic human resource
management: A reader, SAGE, pp. 310–324.
Reitzig, M 2004, ‘Strategic management of intellectual property’, MIT Sloan
Management Review, vol. 45, no. 3, pp. 35–40.
Schiuma, G, Lerro, A & Sanitante, D 2008, ‘The intellectual capital
dimensions of Ducati’s turnaround: Exploring knowledge assets grounding
a change management program’, International Journal of Innovation
Management, June, vol. 12, iss. 2, pp. 161–193.

answers
1. d
2. f
3. c
4. a
5. b
6. b
7. c

Reading 9.1 Dewhurst, M, Hancock, D & Ellsworth, D 2013,

‘Redesigning knowledge work’, Harvard Business
Review, January–February, pp. 58–64.

Unit 10
Cross-border strategies
CONTENTS
References 10–38
The nature of international strategy 10–5
International strategy in context 10–5
Unit 10 readings summary 10–41
Differing approaches to multi-country
strategy 10–10
Global versus multi-country strategy 10–12
Understanding key differences
between the two major approaches 10–16
Recognising cross-country differences 10–18
Strategies for international markets 10–25
Getting more granular: generic
strategies for expanding from home
markets 10–26

You do not choose to become global. The market chooses for you; it forces your hand.
(Alain Gomez, ex-Chairman of France’s Thomson Group)
… there’s no purely domestic industry anymore.
Robert J Pelosky, Morgan Stanley)

Introduction
Why is it important to study the impact on strategy of crossing borders?
Let’s start by understanding just how widespread and significant the drivers
of international or global strategic expansion are. Consider the following
quote from the magazine Financial Executive.
Globalization has become an unstoppable trend that is reshaping the
world of commerce. Today’s supply chains stretch from Dalian (in
China) to Des Moines; retailers sell goods from Moscow to Manila;
and chief financial officers from Santiago to Stockholm are trying to
analyze profitability across a host of global markets.
However, from the perspective of the C-suite — and in particular,

of CFOs — the world is not flat. Divergent economic growth rates,
distinctive consumer preferences, varied competitive environments
and different currencies, cultures, tax regimes and regulations all
require strategies, management processes and operating models that
can adapt to diverse and volatile market environments.
This makes the task of developing and managing credible plans and
forecasts increasingly difficult in a world where the only certainty is
uncertainty.
Globalization also brings events and trends originating on the other

side of the world much closer to home at a moment’s notice. Whether
circumstances involve the volcanic ash disrupting European airspace
in 2010, the Japanese earthquake of 2011 or the flooding this year
in Thailand, commercial impacts now reach far beyond their origins.
In earlier times the impact of such events was largely localized; now,
global supply chains are disrupted and quarterly earnings targets are
missed
(Axson 2012, pp. 65–66)
• recognising the drivers of multi-country and cross border strategies and
the differences between a multi-country and a global strategy
• understanding the challenges of managing in multiple countries
• analysis and managing cross-border strategies using frameworks such
as CAGE and ADDING Value.
Video
Unit 10: Cross-border strategies 10–1

So what? What emerges from even the most cursory study of the business
and news media over the last three decades is that organisations of
all shapes, sizes and nature – from government instrumentalities to
commercial entities, from mega-corporations to small businesses – look to
find ways to grow, often by seeking opportunities outside their ‘domestic
markets’. This has largely been enabled by government and corporate
support around the world for the lowering of barriers to the free movement
of goods, capital and labour, via free-trade agreements – a trend referred to
as ‘globalisation’.
However, like many changes in communities, societies and economies,
globalisation has both advantages and disadvantages. Globalisation is
not always popular. A discussion of the advantages and disadvantages
of globalisation can be found by reading the following section on the
Economics Online website:
Read
Reading 10.1 ‘Globalisation’, Economics Online
Public discussion of the benefits, regulation and management of

globalisation and free-market trade policy are, appropriately, a subject
for ongoing public debate. As you can see from Reading 10.1, while
generally beneficial economically overall, the free movement of goods
and services, labour and capital has caused significant economic and
social disadvantage and dislocation for many communities that previously
enjoyed stable employment and opportunity. Governments and leaders in
business and organisations must rightly focus on ensuring that the rights
and concerns of groups in the community who may not benefit from trade
and employment policy are considered, and policies should account for this
dislocation and disadvantage. Potentially, this is one of the major Political
issues that a strategic manager should consider in completing a PESTLE
analysis.
The implication is that in most managers’ careers there is a very real
likelihood that they will be faced with the unique challenges of managing
strategy in multiple national markets. To illustrate this point, consider the
following two organisations – ANZ Banking Group and Walmart – and the
facts about their operations.
Read
Reading 10.2 ANZ Banking Group – About ANZ

Video
Video 10.2 ‘The Story of Walmart’s International Growth’, 6 October 2016
[1:30]
In this subject, we do not seek to address the debate around the benefits
and costs of globalisation and international free-market economic
policies. We take as given that appropriate public debate should address
this, but it is likely that the trend of recent decades towards increasing
internationalisation of markets and industries will continue, albeit perhaps
more slowly than previously. Therefore, in this Unit we will simply focus
on developing a clearer understanding of what aspects of strategic
management remain the same, and what aspects might be different when
developing, implementing and managing a multi-country strategy.
In earlier Units, we looked at a range of topics relevant to this discussion.
Issues such as decisions about where the organisation will play included
consideration of which geographies to play in (Lafley & Martin 2013
pp. 14–15). We have also considered global geographies as one of the
sources of growth from the core (Zook & Allen 2010, p. 77). Topics such as
industry analysis, competitor analysis, internal capabilities and competitive
advantage at a broad level all imply that strategic environments are
impacted by more than national markets and local competitors.
The principles and concepts that we studied in those Units also apply when
competing internationally. However, in this Unit we will focus our attention
specifically on the nature of strategy when an organisation competes in
multiple national markets. We will seek to understand what differences
there are between single-country, multi-country and multi-national
strategies, and global strategy.
While the frameworks and concepts we have studied thus far are all equally
relevant to domestic or international strategies, there are some specific
issues and complexities that arise when an organisation implements a
strategy that crosses national boundaries.
We will concentrate our efforts in this Unit on developing an understanding
of how multi-country and global strategies are developed, and why. We will
consider what it is about competing outside national borders that makes
the planning and implementation of these strategies more complex, and
how this raises additional issues for a strategic manager. We shall look at
the strategies organisations competing or operating internationally adopt
when they expand beyond their domestic market, and how to compete on a
multiple-country basis.

Learning outcomes
• discuss the impact of operating in multiple national markets
• explain alternative approaches to establishing multinational operations
• discuss the advantages and disadvantages of competing in multiple national
markets
• identify the unique strategic issues that impact on strategy when operating in
multiple markets
• analyse strategic options and propose responses to the issues raised by
operating in multiple national markets.
The following texts will assist you if you would like to explore any of these
issues in more depth:
Ghemawat, P 2007, Redefining global strategy, Harvard Business School
Press, Boston.
Grant, R, Butler, B, Orr, S & Murray, P 2014, Chapter 11: Contemporary
strategic management: An Australasian perspective, 2nd edn, John Wiley &
Sons Australia, Milton.
Thompson, A A, Peteraf, M A, Gamble, J E & Strickland, A J 2016, ‘Chapter
7: Strategies for Competing in International Markets’ in Crafting & executing
strategy: The quest for competitive advantage. Concepts and readings,
20th edn, McGraw-Hill Education, New York.

The nature of international
strategy
International strategy in context

Consider the following facts.
1. Many organisations in countries around the world operate in markets
outside their ‘home market’. This is as true for not-for-profits such as
FIFA, the Salvation Army, Red Cross, Medecins sans Frontieres and
Amnesty International as it is for Apple, Microsoft, Toyota, Samsung
and Accor Hotels. By way of illustration, a quick glance at the
organisations listed on the Australian Securities Exchange indicates
that more than 70% derive a significant amount of their revenue, and
conduct a significant proportion of their business, outside the domestic
market in Australia.
2. Statistics presented by the Department of Foreign Affairs and
Trade indicate that Australian firms made investments in overseas
businesses worth $2.17 trillion by the end of 2016 (http://dfat.gov.
au/trade/topics/investment/Pages/where-does-australia-invest.aspx)
while overseas investments in Australia were worth $3.2 trillion as
at the end of 2016 (http://dfat.gov.au/trade/topics/investment/Pages/
which-countries-invest-in-australia.aspx). In addition, Australia has
free-trade agreements in force with New Zealand, Chile, the United
States, Singapore, Malaysia, Japan, Korea, China and the countries of
ASEAN.
3. The figure for investments by organisations with head offices outside
Australia highlights the very large number of people who are employed
by the local operations of organisations that have their ‘home markets’
outside the country. For example, many AGSM students work for
organisations such as SAP (Germany), Google and Microsoft (USA),
Axa (France), ING (Holland), Fletcher Building Limited (NZ), Nokia
(Finland), HSBC (Hong Kong and UK), Mulpha (Malaysia), Fuji-Xerox
(Japan), Vodafone (UK) and Singtel Optus (Singapore).
If you were to conduct analyses of nearly every major economy, similar

figures would emerge, not only in developed economies, but also in
developing economies across the globe from Asia to Latin and South
America to Africa to Eastern Europe.
From this we can conclude that many, and perhaps most, managers’
careers will in some way be impacted by the need to understand
international strategy.
In addition to economic benefits, globalisation involves cultural impacts that
are seen by many people as non-economic benefits:

Given the rapid pace of globalization, turbulent economic and political
changes, and the dominance of multinational corporations, values
of global culture—such as a free market economy, democracy and
freedom of choice, individual rights, acceptance and tolerance of
diversity, and openness to change—are steadily sweeping global
markets (Gupta and Govindarajan 2000; Leung et al. 2005). The
spread of global culture has been facilitated through the proliferation
of transnational corporations, the rise of global capitalism,
the widespread aspiration for material possessions, and the
homogenization of global consumption (Ger and Belk 1996).
(Agarwal et al 2010, p. 18)
However, while the benefits of globalisation (rising world incomes, more

people globally being moved out of poverty, greater exposure to and trust
in other cultures and individual rights) are promoted, globalisation is not
without concerns. The disadvantages highlighted in Reading 10.1 are
acutely felt and of concern to many people.
These issues are being hotly debated, and rightly so. As already
mentioned, while these concerns should not be underestimated, they are
not a topic for this course. They are addressed in much more depth in other
courses such as Managing for Organisational Sustainability.
It is nevertheless appropriate to say that a sustainable organisation must
be alert to the impacts of pursuing global or multi-country operations on
the organisation’s mission and values, and on the values and lives of key
stakeholders (not just shareholders). Multi-country strategies add significant
complexity to issues of CSR and sustainability, and the KPIs of strategic
managers in a multi-country strategic environment may require even more
focus on the principles underpinning balanced scorecards and triple bottom
line accountability.
Drivers of international strategy

So why do organisations seek opportunities ‘offshore’? As detailed in
Reading 10.1, key forces driving international strategy include:
1. developments in ICT (information and communications technologies)
including the proliferation of digital technologies such as the internet
and social media
2. supply chain and logistics developments such as widespread
containerisation
3. the widespread adoption of electronic payment systems
4. increasing capital mobility and the ability to move money quickly
(enabled by digital communications technologies and payment
systems)
5. development of complex financial products that support and enable
capital flows and financing between geographic markets

6. increased openness to trade and the movement of capital and labour
7. the creation of multinational and transnational corporations and global
brands. Consider, for example, the growth, global reach and national
origins of companies on the following list of global brands http://brandz.
com/charting/25, which includes three Australian brands as well as
brands from the United States, Canada, the United Kingdom, Europe,
China, Japan and Korea.
There are a number of reasons why an organisation would contemplate

competing outside its domestic or ‘home’ market – for example, seeking
growth when opportunities in the domestic market are constrained or
poor; diversifying risk and exposure to local markets and currencies;
the attractiveness of rapidly growing demand in emerging markets;
the organisation possessing strategic resources that offer competitive
advantages elsewhere. The makers of products like automobiles, mobile
phones, brand-name clothing and accessories and home appliances are
naturally drawn to the opportunities created by the growth in countries
with large populations, such as India, Indonesia, Turkey and China, as
people increasingly move from being poor to the aspiring middle class.
In summary, organisations participating in markets outside of their own
domestic economy are exposed to opportunities for much greater growth
than those operating only at home.
Research now clearly identifies that many listed organisations grow at
rates completely disconnected from the growth or decline in their home
economy. In other words, even stagnating or low-growth economies, such
as Japan, France, Spain and even Greece, found that many of their largest
listed organisations grew at rates bearing no relationship to their home
economies. This is attributed to the fact that so many organisations listed
on national stock markets these days operate extensively outside of single
markets – they are no longer destined to follow the fluctuations of their
home economies.
However, along with the obvious upsides of global strategy, there are
challenges. In competing in multiple national markets, strategic managers
are confronted by complexities of operating with multiple currencies and
in different time zones; understanding different labour laws, legislative
environments, cultural imperatives, distribution networks and infrastructure
issues and legal systems. So why do so many organisations opt to move
beyond their home markets?
Thompson et al (2016, pp. 175–176) identify six key reasons why
organisations pursue strategies beyond their home markets:
• to gain access to new customers
• to achieve lower costs through economies of scale, experience and
increased purchasing power
• to gain access to low-cost inputs of production

• to further exploit their core competencies
• to gain access to resources and capabilities located in foreign markets
• to sustain relationships with key customers who operate in multiple
markets.
To this list we could safely add ‘to manage risk by diversifying markets’.
While this is a particularly commercial view, we might translate it to say that
multi-country strategies offer organisations:
• the opportunity to achieve greater economies of scale, scope, location,
relationships and learning
• more markets and customers or clients from which to derive revenue or
strategic impact
• more opportunities to achieve strategic success and the organisation’s
strategic vision
• access to a wider pool of strategic resources such as raw materials,
knowledge, infrastructure, skilled labour, etc.
• lower risks through diversification (exposure to different cycles in
multiple markets rather than being entirely exposed to the cycles of a
single market). This may offset the risks mentioned earlier (multiple
currencies, legislation, labour markets, time zones).
Before moving on, it is important to note that it is not just large publicly
listed corporations that opt for multi-country strategies. Australian Bureau
of Statistics (ABS) reports (http://www.abs.gov.au/AUSSTATS/abs@.nsf/
DetailsPage/5368.0.55.0062015-16?OpenDocument) indicate that 77% of
all exporting businesses were small firms employing fewer than 20 people,
21% were medium-sized enterprises and only 2% were defined as ‘large
exporters’.
So, you can see that the majority of organisations that have gone offshore
have been small- to medium-sized enterprises rather than the major
organisations that typically capture media and popular attention.
You should also be aware that operating strategies in multiple countries
is not exclusively a skill needed by strategic managers in large listed
commercial enterprises. Consider the following discussion by AGSM
alumnus, Emma Lo Russo, founder and CEO of Social Media Analytics
company Digivizer:
Video
Video 10.3 L
o Russo E, 28 November 2016, ‘Strategies for software and
services success in international markets’, Rare Birds (4:14]

As you can see, strategic managers in diverse organisations – large and
small, public and private, not-for-profit and government – face similar
issues. Even strategic managers in many universities around the world,
such as UNSW, are increasingly operating internationally, and they are
dependent on attracting and satisfying students (and staff) from cultures
across the globe.

Differing approaches to
multi-country strategy
The push to expand internationally, like many strategies, has both risks and
rewards. As Bryan and Fraser (1999, p. 70) suggest:
In a world without economically significant geographic boundaries, the
rules are going to change. The good news is that companies will have
access to the world’s finest resources: the most talented labor, the
largest markets, the most advanced technologies, and the cheapest
and best suppliers of goods and services. The bad news is that the
risks will be high because every business will have to compete against
the world’s best, and integrating markets are volatile and uncertain.
So, while international expansion and a global or multi-country strategy

might enable access to the best and cheapest resources, greater revenue
and strategic opportunity, it will also expose an organisation to multiple
market volatilities and the need to compete effectively against the best
organisations in the world. It’s fair to conclude from this that only a really
effective international strategy is worth pursuing.
You will recall that Ansoff (1985, p. 31) noted that the way to achieve
growth was to:
• pursue more of the existing market with existing products (market
penetration)
• pursue more of the existing market with new products (product
development)
• pursue new markets with existing products (market development)
• pursue new markets with new products (diversification).
International expansion is almost explicitly implied by the last two strategies

– market development and diversification – and if you were to consider
sourcing ‘new products for existing markets’ from outside the home market,
global product acquisition is also implied in product development.
Expanding outside a single home market allows organisations, large or
small, to increase profitability in ways not available to purely domestic
enterprises.
It seems clear then, that growth-oriented organisations are racing to stake
out positions in the markets of more and more countries.
Selecting and implementing appropriate strategies allows an organisation
to pursue strategic advantage internationally, irrespective of size. However,
as you will have noted from Video 10.2, one of the critical success factors
for any organisation seeking to expand to other markets is that to be
truly global, leaders in organisations must develop global mindsets and
ensure that their strategic managers have the right skills and behaviours to
manage multi-country strategies.

Leading academic and author Professor Pankaj Ghemawat (2011, p. 95)
of the IESE Business School in Barcelona and New York University’s Stern
School of Business proposes that managing multi-country strategy requires
strategic leaders who are ‘cosmopolitan’. He proposes that ideally, these
leaders should come from a range of cultures. He also suggested that the
cosmopolitan leaders needed to be developed through four key levers.
• Conceptual frameworks – using frameworks such as the CAGE
model can help the leaders to make sense of the mass of facts about
foreign countries and help fine-tune executives’ perceptions.
• Longer and deeper immersions – such as regular and longer-term
career postings or study tours to different cultural environments, in
order to develop a true appreciation of how the culture, politics and
history of a region affect business there. That necessitates immersions
lasting months, rather than weeks or days.
• Projects and networks – deliberately exposing strategic managers
to working on projects and participating in networks that cross
international borders in order to soften the ethnocentrism of the
executives who participate in them.
• Assessment tools – using analytical tools that evaluate and identify
strengths and weaknesses in each strategic manager’s appreciation
and ability to manage complexity deriving from cultural difference.
These can help companies get a read on managers’ global skills and
knowledge, and target areas for improvement.
You can hear Professor Ghemawat talk more about the balancing of global
and local strategies, and why businesses need to take a balanced view of
conditions that optimise multi-country strategies in the following video. He
also offers some case studies of MTCV, a business that he suggests is
adapting well to ‘World 3.0’
Video
Video 10.4 G
hemawat P, 2011, ‘How To Succeed Between Global and
Local’ [4:48]

Activity 10.1
1. Consider your own organisation or one that you know well that is
using a multi-country strategy. What reasons are offered for why the
organisation is using such a strategy?
2. Thinking about the strategic leaders and managers who are responsible
for the multi-country strategy at your organisation (or the one you are
thinking of in Step 1 of this activity) how cosmopolitan are they? Does
the organisation deliberately invest in recruiting or developing based on
diversity and building this cosmopolitan mindset?
Global versus multi-country strategy

Competing in international markets exposes organisations to both additional
opportunities and additional threats. Let’s try to refine our understanding
of the different approaches that are available to organisations looking to
implement a multi-country strategy.
To start, let’s be clear about some key definitional differences. Generally
speaking, there are two broad categories of international strategy that an
organisation can adopt:
• operating a multi-country strategy, sometimes also called multi-
national strategy, which Thompson et al (2016, p. 190) typify as
‘Think Local – Act Local’
• adopting a global strategy. Global strategy comes in two variants
– transnational strategy, which Thompson et al describe as ‘Think
Global – Act Local’ and genuinely global strategy, which they define
as ‘Think Global – Act Global’. What are the differences?

Global strategy
One way to consider global strategy is to see the organisation employ a
single set of strategies internationally – i.e. using essentially the same
set of strategies and the same business model in every country, with little
adaptation (Think Global – Act Global).
IKEA is such a company. It adopted the same strategy, selling the same
basic products in the same way during its expansion from Sweden into
neighbouring European nations. The strategy was successful initially,
and allowed the company to realise substantial cost savings from greater
economies of scale. The cost savings were passed on to customers in the
form of lower prices, enabling IKEA to gain market share. (We will revisit
IKEA below.)
Another view of global strategy is for an organisation to establish a ‘global
value chain’, with different parts of the chain located in particular countries
best suited to offer strategic advantage (lower costs, differentiation or focus).
For example, a global software producer may locate its worldwide research,
development and product design in North America, situate its worldwide data
entry and coding operations in India, its worldwide technical support and
after-sales service in the Philippines, and its marketing and sales operations
in each country in which they sell. By doing this, they are looking to exploit
economies of scale and location and to create a value chain based on the
strategic advantages of each country as a part of a worldwide operation.
However, in so doing, they face issues of managing this strategy across
multiple time zones, labour markets, regulatory environments and
currencies. This creates complexity that an organisation choosing to
establish sales, coding/data entry, technical support and administration
in each market (a localised multi-country strategy) will not face. But if the
complexity of managing a global value chain is outweighed by the strategic
advantages that operating globally offers compared to re-creating activities
in every country, it may be the better strategy.
A number of major car manufacturers (Ford, Daimler, Volkswagen and
Toyota) pursue global value-chain strategies – manufacturing parts, or indeed
entire vehicle models, in one country and shipping them around the world to
national markets (often rebadged or rebranded to suit local customers).
Aircraft-maker Boeing uses a global value chain as the basis for building
its latest aircraft – the Boeing 787 Dreamliner and the new 777X – as does
Airbus with the A380 superjumbo and the A350.

Airbus has operated a multi-country value chain for decades, with parts
being made in 16 countries, before being assembled into the final aircraft
in Toulouse (France) or Hamburg (Germany). Lockheed-Martin and the
US Defense Department have also selectively invited manufacturers and
suppliers around the world (particularly in Britain, Spain, Canada, Norway
and Australia) to cooperate in developing and manufacturing the next
generation F35 Joint Strike Fighter aircraft.
Examples of organisations adopting global strategy cross many industries,
from device-makers such as Apple, Samsung, HP, Microsoft (Surface),
to software-developers (SAP, Microsoft, Atlassian, etc.) to major retail
groups such as Walmart (USA), Tesco (UK) and Carrefour (France) and
major luxury brands such as Luis Vuitton, Moët & Chandon, Hennessy,
Bvlgari and Giorgio Armani that operate standardised strategies in each
country. They also use a global supply chain, with design and marketing
often centralised in places like Italy or France, and production in places like
China, Indonesia, Vietnam and Bangladesh.
A global strategy involves:
• coordinating strategic moves globally
• coordinating value-chain activities in locations around the globe that
offer the greatest strategic capability
• consistently marketing the same value proposition in many, if not all,
nations where a significant market exists.
Such a strategy is said to work best when customer or buyer requirements

are broadly similar from country to country and there is little advantage
gained from product customisation.
However, sometimes, some adaptation will be required to the strategy
to suit unique local situations – elements such as local tastes, local
regulations, local cultures, etc.
Returning to the IKEA example discussed earlier, when the company
entered the North American market, they discovered that in order to
succeed, they had to customise their product offerings to cater to the
tastes and preferences of American consumers, thus becoming more
locally responsive. While this boosted sales, the shorter production runs
associated with such a strategy also raised the costs of competing in North
America, lowering IKEA’s profit margins.
As illustrated in this very short summary, the desire to offer standardised
products or pursue standardised strategies worldwide often conflicts with
the need to customise products and strategies to account for different
tastes and preferences of consumers, employees, stakeholders, value
chain and infrastructure peculiarities in different marketplaces.

Examples of other companies that have mixed a global approach with local
customisation include fast-food franchises such as McDonald’s, KFC, Pizza
Hut, Subway and Hungry Jacks/Burger King, which adopt a global strategy
by focusing on using franchising to grow rapidly, and by offering many
standard products in the range, such as Big Macs, Whoppers, fries, shakes
and sundaes, but also allowing some adaptations and initiatives to suit local
preferences.
This strategic approach of operating a global strategy with some local
adaptation and customisation is known as a transnational strategy (Think
Global – Act Local). However, this requires a subtle and complex balancing
because while a degree of localisation may lead to higher revenues,
it generates higher costs as well. The tension between how much to
standardise and how much to customise is one of the fundamental conflicts
that global companies have to resolve, as the following quote suggests:
Most companies approach globalization by standardizing processes.
The problem with standardization is that it distracts attention from the
customer and shifts it to internal processes. Managers focus more
on standardizing the way things are done within the company than
on what can and must be done to please the consumer, thereby
developing and maintaining markets. Senior managers need to be
consumer-oriented more than internal standardization oriented …
(Morrison & Beck 2000, p. 28)
Therefore, a global strategy involves a single strategy applied to every

national market, typically with the value chain dispersed across the globe
in order to arbitrage expertise, cost and support in specific locations. This
becomes a transnational strategy when we make some allowances
for localisation. However, the degree to which the benefits of additional
revenues with local customisation are impacted by additional costs must be
carefully managed.
Multi-country strategies
As an alternative to global strategy, an organisation may decide to uniquely
adapt local operations and value propositions to suit each of the multiple
countries in which it operates, customising their strategies to reflect local
conditions. This is known as a multi-country strategy (Think Local – Act
Local), and involves setting up all (or most) of the value chain in each
national market, and developing localised strategies to accommodate the
differences of each national market.
Even with local customisation, there may still be some activities (like
finance and IT) that are coordinated across multiple markets. This will
enable some knowledge or skill transfers, economies of scale or scope.
These common functions aside, essentially each national operation is
treated almost as a stand-alone operation in a strategic sense.

The central focus of a multi-country strategy is the matching of strategies to
suit distinct local market needs or to derive unique competitive or strategic
advantages in each place. Typically, multi-country strategies are called for
when:
• significant country-to-country differences in customers’ needs and
behaviours exist, and buyers in one country want a different product or
look for different value from buyers in other countries
• host government regulations preclude a uniform approach.
However, two major drawbacks of multi-country strategies are:

• problems transferring competencies across borders
• they work against building a unified competitive advantage.
You can see that while we have presented them as two distinct alternatives,
in practice many organisations and their international strategies display
some of the characteristics of a global strategy, and at the same time,
characteristics of a multi-country strategy.
Accordingly, these strategies should not be viewed purely as an ‘either/or’
proposition; rather, they can be seen more as a continuum:
Figure 10.1 The global–local strategy continuum
Purely global Purely local or national

strategy strategy
An organisation’s strategic managers may choose to operate anywhere

along the continuum, or may from time to time move from one strategy to
another along this line, based on their analysis of the strategic risks and
returns that a different position would offer.
Understanding key differences between the

two major approaches
Highlighted below are the major differences between global and multi-
country approaches to international competition:

Figure 10.2 Differences between multi-country and global strategies
Localised multicountry strategy Global strategy
Strategy
Consistent
varies
strategy for each
somewhat across
country
nations
Country A Country B Country C Country A Country B Country C
Country D Country E Country D Country E
• Customise the company’s competitive • Pursue the same basic competitive

approach as needed to fit market and strategy world-wide (low-cost,
business circumstances in each host differentiation, best-cost, focused low-
country – strong responsiveness to local cost, focused differentiation) – minimal
conditions. responsiveness to local conditions.
• Sell different product versions in • Sell same products under same brand
different countries under different brand name worldwide; focus efforts on
names – adapt product attributes to fit building global brands as opposed to
buyer tastes and preferences country by strengthening local/regional brands sold
country. in local/regional markets. Locate plants
• Scatter plants across many host on the basis of maximum locational
countries, each producing product advantage, usually in countries where
versions for local markets. production costs are lowest but plants
• Preferably use local suppliers (some may be scattered if shipping costs are
local sources may be required by host high or other locational advantages
government). dominate.
• Marketing and distribution to local • Use best suppliers from anywhere in the
customs and culture of each country. world.
• Transfer competencies and capabilities • Coordinate marketing and distribution
from country to country where feasible. worldwide; make minor adaption to local
• Give country managers fairly wide countries where needed.
strategy-making latitude and autonomy • Compete on the basis of the same
over local operations. technologies, competencies and
capabilities worldwide; stress rapid
transfer of new ideas, products and
capabilities to other countries.
• Coordinate major strategic decisions
worldwide; expect local managers to
stick closely to global strategy.
Source: adapted from Thompson and Strickland 2010, p. 223.

A multi-country strategy is said to be most appropriate for industries where
multi-country competition dominates.
Multi-country competition is characterised by:
• each country market being self-contained
• competition in one country market being independent of competition in
other country markets
• rivals competing in one country market differing from a set of rivals
competing in another country market
• rivals vying for national market leadership.
Global competition is characterised by:

• competitive conditions across country markets being strongly linked
together because
– many of the same rivals compete in the same country markets
– rivals vie for worldwide leadership
– a true international market exists
• an organisation’s competitive position in one country being affected by
its position in other countries
• competitive advantage (or disadvantage) being based on an
organisation’s worldwide operations and overall global standing.
So, one of the biggest concerns for companies competing in foreign

markets is whether to customise their product offerings in each different
country market to match the tastes and preferences of local buyers, or
instead to offer a mostly standardised product worldwide.
Recognising cross-country differences

Ethnocentricity – the belief that the way things are done in Akron,
Ohio, or Leeds, England, is both right and proper everywhere in the
world – is one of the great enemies of global thinking… The first
step in going global is recognising that a single world view cannot
encompass the entire world, and that which is familiar at home often is
alien and counterproductive elsewhere.
(Morrison & Beck 2000, p. 28)
Anyone who travels overseas, watches television, reads international

news, watches movies made in another country, reads books written in
other countries or even meets visitors from another country, immediately
becomes aware of the variations between what people in different societies
think of as ‘normal’.

At its simplest level, this is what we mean by cultural differences. And
as interesting and challenging as this is at a personal level, consider the
problems that such differences pose when trying to manage a complex
organisational strategy across four, five, 50 or 100 different cultures. The
challenge of developing and managing strategy in multiple cultures cannot
be underestimated!
There are many differences in business conditions once an organisation
crosses into another country and another culture. Firoz and Ramin (2004)
identify the following cultural issues of which any strategic manager
contemplating an international strategy must be conscious.
• Shared values and beliefs including religious observances and rules/
norms, gender roles, business models (e.g. Islam forbids the charging
of interest), attitudes to seniority and age, attitudes to individual versus
group performance, symbols of status, ethical standards, commitment
to organisational values, the nature and content of products
themselves, social behaviour (alcohol consumption, fraternising
between genders).
• Time – this covers not only the predictable time zones, but more
complex issues such as what days are included in the working week,
hours of work, local public holidays, banking, office and school hours
and weekend trading. This may also include attitudes to punctuality and
the amount of time required to build a relationship before business can
be done.
• Verbal and nonverbal communication – this includes style and mode
of dress (what is considered appropriate business dress), how seniors
are addressed, roles and structures in families and society, what hand
to shake with, how feedback and criticism may be given and received,
who speaks and in what order, the observance of personal space
and distance, the giving and receiving of gifts, the use of titles and
honorifics, and the meaning of certain colours or gestures. These and
many other idiosyncrasies may occur between one culture and another.
Issues of culture were probably most clearly highlighted in the work of

Geert Hofstede (1983) who famously identified that national cultures have
six dimensions:
• power distance – the extent to which a society accepts that unequal
distribution of power is normal or appropriate
• uncertainty avoidance – the desire of people in a particular society or
culture to have certainty and to avoid ambiguous situations
• individualism versus collectivism – the extent to which a society or
culture accepts the role of the individual taking primacy over the needs
of the group

• masculinity versus femininity – identifies the weight given by
a culture to male-oriented characteristics such as assertiveness,
ambition, competition and independence, over feminine attributes such
as nurturing, caring, quality of life, equality and collaboration
• long-term orientation versus short-term orientation – identifies the
extent to which a culture admires thrift and sacrifice in the short term in
order to focus on achieving better outcomes in the long term
• indulgence versus restraint – the extent to which a culture allows and
endorses or supresses the gratification of natural human desires such
as enjoying life and having fun.
Using scales from research of different cultures, Hofstede scored many

cultures. Consider the selected scores listed below.
Note – the scores are not ‘out of’; rather, they measure the relative
importance of a dimension.
Table 10.1 Nations rated over six dimensions

Country Power Individualism Masculinity Uncertainty Long-term Indulgence
distance avoidance orientation
Australia 36 90 61 51 21 71
Brazil 69 38 49 76 44 59
China 80 20 66 30 87 24
Germany 35 67 66 65 83 40
India 77 48 56 40 51 26
Indonesia 78 14 46 48 62 38
USA 40 91 62 46 26 68
Source: adapted from www.geert-hofstede.com/
You might like to explore this research in more depth, or to examine a

particular culture with which you are familiar or would like to understand
better. You can do so by clicking this link https://www.hofstede-insights.
com/product/compare-countries/ and then typing in a country.
How can Hofstede’s work assist a strategic manager? The value of these
figures is in the ability to interpret what differences in scores indicate about
the way in which stakeholders, such as customers, strategic partners,
employees, etc., will respond to different strategic management issues.
For example, from this analysis, the way that authority and decision-making
is structured in an organisation may be consistent for Australians, Germans
and Americans, but would need to be different for Chinese, Brazilians,
Indonesians or Indians, whose scores for power distance indicate a much
greater expectation that power will be concentrated elsewhere.

As another example, setting targets, goals and developing incentive
programs may need to be different for strategic managers of organisations
operating in Indonesia and China when compared to managing Americans
or Australians (look at the Individualism scores). The sorts of time frames
for doing business that would work with an Australian or American would
not work with a German or Chinese group with very high long-term
orientation scores. And we could go on.
Managing this diversity is one of the key challenges in effective
international strategy and supports Ghemawat’s suggestions about how we
need to go about creating effective cosmopolitan strategic managers and
cultures.
Perhaps all the issues about the importance of culture can best be summed
up in this quote:
If a company wishes to maintain the competitive advantage, the
success strategy is keeping up with the changing environment of the
market and understanding different cultures of the world…If each
other’s cultural norms and practices are not properly understood,
cross-cultural business transactions will most probably fail. Knowing
what to do is as important as knowing what not to do.
(Firoz & Ramin 2004, p. 320)
In addition to cultural issues, there is a range of other country- or even

region-specific factors that will impact upon strategy. These include:
• demographic make-up of the country.
• infrastructure – including ITC and physical infrastructure
• regulation and the extent to which the rule of law is predictable and
consistent, including an appreciation of what sorts and levels of
corruption exist
• economic forces.
In short, according to Ghemawat in his powerful book on global strategy

(2007), a strategic manager must consider the influence of the effects
of ‘distance’ on strategy, which he summarised in the CAGE distance
framework.
• Cultural distance – created by differences in languages; ethnicities;
religions; values, norms and dispositions. This often leads to a lack of
trust and to insularity and traditionalism.
• Administrative distance – created by a lack of shared colonial
ties; shared regional trading bloc; common currency; and by political
hostility. This can also be typified by closed economies, a home market
bias mentality, weak national institutions and corruption in some
markets.

• Geographic distance – created by physical distances; lack of shared
land borders; time zones; climate and disease environments. The
effects are that some countries will suffer poor internal distribution
and transportation links, issues related to size, attitudes derived from
‘remoteness’ or poor communication links.
• Economic distance – created by rich-poor differences; cost-quality
differences caused by discrepancies in natural, financial and human
resources, infrastructure and knowledge. The effect will be some
countries suffering lower capacity for economic growth and lower
purchasing power.
The author suggests that an organisation considering operating in another

country conduct a detailed analysis of these CAGE differences between
the investors’ market and the targeted market. He then indicates that the
evidence is that organisations that are able to ‘minimise’ these distances
are more likely to succeed. Ghemawat (2007, p. 50) then breaks this down
to an industry level.
Table 10.2 CAGE differences by industry

Cultural distance Administrative distance Geographic distance Economic distance
matters the most is high in industries that plays an important has the biggest
when: are: role when: impact when:
• products have • producers of staple • products have • the nature of
high linguistic goods (electricity) a low value- demand varies
content (e.g. • producers of other to-weight or with income level
TV programs) entitlements (drugs) value-to-bulk ratio (cars)
• products matter • large employers (cement) • the economics of
to cultural or (farming) • products are standardisation of
national identity • large suppliers to fragile or scale are limited
(e.g. foods) government (mass perishable (glass, (cement)
• product transportation) fruit) • labour and
features vary in • national champions • local supervision other factor cost
terms of: (aerospace) and operational differences are
– size (cars) • vital to national requirements salient (garments)
– standards security are high (many • distribution or
(electrical (telecommunications) services) business systems
equipment) • exploiters of natural are different
• products resources (oil, (insurance)
carry country- mining) • companies need
specific quality • subject to high sunk to be responsive
associations costs (infrastructure) and agile (home
(wines) appliances)

However, while these frameworks highlight the practical issues in managing
international strategies, as mentioned briefly in Unit 3, there can be some
potential advantages to organisations operating in one country versus
another. Conditions may be more favourable to the organisation in one
location over another. These location-based advantages often stem from
variations among countries, such as:
• production costs may vary due to differences in comparative wage
rates, productivity, resource availability, inflation rates, energy costs,
tax rates, etc.
• the quality of a country’s business environment (access to finance,
government support, legal framework, etc.)
• clustering of suppliers, trade associations, and makers of
complementary products may offer efficiencies.
There may also be differences in a host government’s trade policies that

will have a significant impact on the attractiveness of one country over
another. These may flow from policies such as:
• local content requirements
• import tariffs or quotas
• restrictions on exports
• regulations regarding prices of imports
• other regulations about things such as:
– technical standards including quarantine and health issues
– product certification
– prior approval of capital spending projects
– withdrawal of funds from the country
– minority or majority ownership by local citizens.
All of these factors have a significant impact on the strategic position and
strategic options available and the capacity to operate internationally.
A short video case study exploring some of these issues and how they
have affected Kraft’s use of both global and local strategies with the Oreo
cookie can be seen by clicking the link below.
Video
Video 10.5 C
ateora, P, Graham, J & Gilly, M, 2013, ‘Kraft Marketing
Oreos Globally’ [5:17]

Activity 10.2
Again, consider your own organisation (or an organisation with which you
are familiar). For the sake of this activity, imagine that you have been asked
to evaluate the potential for opening a new operation in Indonesia.
1. What impact might the following things have on attracting your
organisation to establish operations in another country?
a. Cultural distances
b. Administrative distances
c. Geographic distances
d. Economic distances
2. Having considered these things, how easy do you imagine it would be

to establish a strategy for effectively operating in Indonesia?

Strategies for international markets
In addition to the analysis that can be conducted using the CAGE framework,
Pankaj Ghemawat also proposed a number of strategic principles about how
to conduct multi-country strategy. He proposed (Ghemawat 2007, pp. 77–78)
that effective multi-country strategies could be derived by generating and
evaluating as many options as possible from what he termed the ADDING
Value scorecard – the acronym is explained in the table below.
Table 10.3 Applying the ADDING value scorecard

Adding volume or • look at the true economic profitability of incremental volume
growth • probe the level at which additional volume yields economies of scale (or
scope); globally, nationally, at the plant or customer level
• calibrate the strength of scale effects (slope, percentage of costs or
revenues affected)
Decreasing Costs • unbundle cost effects and price effects
• unbundle costs into sub-categories
• consider cost increases (e.g. due to complexity, adaptation) as well as
decreases, and net them out
• look at cost drivers other than scale and scope
• look at labour costs-to-sales ratios for your industry (or company)
Differentiating • look at R&D-to-sales and advertising-to-sales ratios for your industry
or increasing • focus on willingness-to-pay rather than prices paid
willingness to pay • think through how globality affects willingness-to-pay
• analyse, in particular, how cross-border (cage) heterogeneity in
preferences affects willingness-to-pay for products on offer
• segment the market appropriately
Improving industry • account for international differences in industry profitability
attractiveness or • understand the concentration dynamics of your industry
bargaining power • look broadly at the impact of changes in industry structure
• in particular, think through how you can de-escalate or escalate rivalry
• recognise the implications of what you do for rivals’ costs or willingness-
to-pay for their products. (worsening their positions can do as much for
added value as improving one’s own)
• attend to regulatory and other non-market restraints – and ethics
Normalising (or • characterise the extent and key sources of risk in your businesses (e.g.
optimising) risk capital intensity, other correlates of irreversibility, demand volatility)
• assess how many cross-border operations reduce or increase risk
• recognise any benefits that might accrue from increasing risk
• consider multiple modes of managing exposure to risk or the exploitation
of optionality
Generating • assess the location-specificity versus mobility of knowledge
knowledge (and • consider multiple modes of generating (and diffusing) knowledge
other resources • think of other resources or capabilities in similar terms
and capabilities) • avoid double-counting
Source: adapted from Ghemawat 2007 p. 84.

The author also offered some suggested principles to guide strategic
managers in developing multi-country approaches, which he summarised
as the AAA options for international strategy.
• Adaptation strategies – that adjust to differences across countries.
• Aggregation strategies – that overcome differences among countries
by grouping them based on similarities.
• Arbitrage strategies – that exploit selected differences across
countries instead of treating them as constraints.
Getting more granular: generic strategies for

expanding from home markets
Essentially, in thinking about specific strategies that might help translate
AAA options into something real, most organisations moving outside their
local markets have available to them the following generic approaches:
• Exporting – manufacturing in the home market and shipping products
or offering services in another market to customers acquired through
sales staff, agents, brokers, partners, retailers and wholesalers or other
intermediaries.
• Licensing – enabling a producer/service provider in the other market to
serve local demand by providing the necessary IP, designs, blueprints,
etc. and giving them the rights to make the product and sell it in return
for a licence fee back to the originator in the home country.
• Franchising – a legal arrangement where a ‘local’ operates under your
organisation’s name and image, but is a separate legal entity paying for
the rights to use your organisation’s business model.
• Organic growth – establishing and funding new start-up operations in
countries outside the home market. These may be pursued either as
part of a global strategy or a multi-country (localised) strategy.
• International growth – gaining entry to another national market
through merger or acquisition (Unit 8) via acquiring control of or
merging with an organisation already operating in that market. Again,
the strategy may subsequently involve operating on a multi-country or
global basis.
• Strategic alliances or joint ventures. Finding local partners in other
national markets to operate collaboratively, or jointly establishing a new
legal entity (JV) with an organisation to operate in the new national
market.
As a number of these alternative approaches are generic strategies that

we considered in Unit 8, we will now look at the characteristics of those
strategies we haven’t considered previously.

Characteristics of export strategies
Involves using home country or domestic production as a base for exporting
to foreign markets.
• Advantages include:
– minimises both risk and capital requirements
– conservative way to test international waters
– minimises direct investments in foreign countries.
• However, an export strategy is vulnerable when:
– manufacturing costs in the home country are higher than in foreign
countries where rivals have local cost advantages
– high shipping or transport costs are involved
– moving products to market can be slow – involving either high
inventory requirements in the foreign market or slow response to
fluctuations in demand.
Characteristics of licensing strategies

Licensing makes sense when an organisation:
• has valuable technical know-how or a patented product, but does not
have international capabilities or resources to enter foreign markets; a
local organisation can be licensed as a way of entering the market
• wants to avoid risks of committing resources to markets that are
unfamiliar, present economic uncertainty or are politically volatile
• wants to avoid the risk of providing valuable technical know-how to
foreign organisations and subsequently losing some control over its use
(creating or training a future competitor)
• perceives a high risk of copyright or IP infringements, because
protections and the rule of law are not strong or are hard to enforce in
the new market.
Characteristics of franchising strategies

Franchising is a fast-expanding strategy because it is better suited to global
expansion efforts of the sorts of services and retailing enterprises that
underpin many developed economies. Advantages are:
• franchisee bears most costs and risks of establishing foreign locations
• franchisor has to expend resources only to recruit, train and support
franchisees.

Disadvantages can be:
• difficulty in maintaining cross-country quality control
• the problems of managing expectations and performance of
franchisees, as they are not employees.
Achieving global competitiveness via cooperation –

strategic alliances and JVs
You will recall that collaborative strategies such as strategic alliances and
joint ventures were discussed in Unit 8. In recent years, this has been an
increasingly popular strategy for entry into foreign markets. Cooperative
agreements/strategic alliances often provide rapid and unique opportunities
to enter a foreign market or strengthen an organisation’s competitiveness
in world markets because, when effective, they combine complementary
strengths to quickly produce new (or greater levels of) strategic or
competitive advantage.
Locating activities to build a global competitive

advantage
Where should an organisation place its operations if it wants to achieve
international or global competitive advantage? Two issues are involved here:
• whether to concentrate each activity in a few countries or disperse
activities to many different nations
• where to locate activities – which country is the best location for which
activity.
Let’s address each of these important issues.

Activities should be concentrated when:
• costs of manufacturing or other value chain activities are meaningful,
and they are significantly lower in certain locations than in others
• there are sizeable economies of scale in performing the activity in one
place (or a few places)
• there is a steep learning curve associated with performing an activity in
a single location
• certain locations have superior resources, lower costs, allow better
coordination of related activities, or offer other valuable advantages.

Activities should be dispersed or localised when:
• they need to be performed close to buyers
• transportation costs, diseconomies of scale, or trade barriers make
centralisation expensive
• buffers for fluctuating exchange rates, supply interruptions and adverse
politics are needed.
Transferring valuable competencies to build a global

Transferring competencies, capabilities and resource strengths across
borders contributes to gaining economies of scale, scope, location or
learning, and to developing strategic or competitive advantage. The ability
of organisations engaged in global or multi-country operations to develop
broader competencies and capabilities, and the achievement of strategic
depth in some competitively valuable area, is crucial.
You will already be aware, from the earlier discussion of the 2011
Ghemawat article about the ‘cosmopolitan corporation’, that diversity of
knowledge and cultural background, and increasing the cosmopolitan
mindset, can be a source of human resource-based strategic advantage.
Often this is managed most effectively by organisations transferring people
with particular strategic competencies from country to country to provide
the competency where (and when) it has the greatest strategic impact.
Alternatively, it involves training, knowledge, system or process exchange
so that competencies developed in one location can be replicated in others.
This ties into the discussions we had in Unit 9 about managing intellectual
capital that is identified as critical to the strategy of the organisation. In
other words, if strategic management is a core capability needed for the
organisation’s strategic success, then deliberate effort is required to acquire
it, nurture and develop, codify and disseminate it.
An organisation possessing strategically dominant depth in a competitively
valuable capability has the potential for deploying a sustainable competitive
advantage over competitors in any country that they enter and operate in.
Coordinating cross-border activities to build a global competitive advantage
often involves aligning various value creation activities, each of which
may be located in a different country. However, this can contribute to
competitive advantage in several ways:
• it allows the organisation to choose where and how to challenge rivals
• it shifts value creation from one location to another to take advantage of
more favourable cost or trade conditions or exchange rates
• the organisation can enhance brand reputation by incorporating the same
differentiating attributes in its products in all markets where it competes.

However, there are some difficulties with this approach. It can be:
• difficult to coordinate activities subject to different local conditions such
as political stability, financial conditions, exchange rates, employment
practices, hours and times of work, time zones, language differences,
legal and regulatory differences, etc.
• the costs in time, money and effort of moving ‘components’ from one
place to another become significant.
Innovative global strategies and the ingredients for

international success
Calori et al (2000, p. 347) conducted analysis of successful international
expansion from which they identified that global or multi-country strategy
innovators tended to achieve this distinction via strategy development along
four key dimensions.
• Refining and exploiting competitive advantage. Innovators saw that
international expansion provided a new model of combining resources.
For example, they discovered that opening new markets allowed them
to develop new value chains; or that using marketing power to enter
new markets enabled them to use these new markets to achieve
economies of scale.
• The process of internationalisation caused strategic managers to
change organisational structures and the way they operated in both the
home and international markets. Learning was quickly shared around
the organisation to become world’s best practice through knowledge
gained via international operations. New ways of operating emerged
from crossing borders and they were adopted across the whole
organisation.
• Innovative organisations use international expansion to review
and adapt the product segments that they pursue, not necessarily
continuing to chase the same segments as in their home markets. By
repositioning products and brands in new markets, innovators were
able to pursue more valuable segments and often then move the
products upmarket at home as well.
• Innovative multi-country strategic managers use entry to new markets
to refine the manner in which they coordinate across multiple markets –
they adapt constantly, based on identifying opportunities to change the
whole organisation, not simply copying strategy each time they entered
a new market.
From this, we can see that a regular, perhaps even relentless desire to
use new markets as an opportunity to learn and redefine strategy across
the whole organisation is a hallmark of successful international strategic
managers. Further, Kedia, Nordtvedt and Perez (2002) suggest that the

appropriateness of a particular international strategy strongly correlates to
the style of strategic leadership that exists in the organisation.
In other words, particular international strategies are only likely to work
in an organisation with particular styles of leadership. They suggest that
global strategies are most effective when:
• the strategic leaders of the organisation are comfortable making
integrated decisions (drawing in a complex range of data from a wide
variety of sources) in real time
• strategic leaders use a more participative management style and
display transformational leadership – i.e. leadership displaying
charisma, inspiration and intellectual stimulation.
On the other hand, they suggest that multi-country strategies tend to be

adopted most effectively by:
• strategic leadership teams that are more comfortable making disparate
decisions using batched or delayed information
• leaders who use a more autocratic management style and demonstrate
transactional leadership – i.e. more likely to manage the detail of
process, system and structure, focusing on managing individuals
rather than whole systems and managing through punishment–reward
systems rather than inspiration.
Again, the 2011 Ghemawat article discussed earlier is consistent with

these themes. We can conclude then, that before determining what style of
strategy to adopt (global or multi-country), an organisation should consider
whether:
• the leadership style of the senior management team and board is
cosmopolitan, they are more suited to making integrated, participative
decisions in real time or delayed compartmentalised decisions based
on batched information
• the capacity of the new market entry to generate new forms of
competitive advantage – and whether these new competitive
advantages can be used to alter the way the organisation competes in
many markets or just a few
• new structures and systems will be needed across the organisation
once new markets are entered, and how willing the organisation is to
adapt to these new forms
• the new market entry triggers concentration on a few market segments
(global) or broader-based competition in many product-market
segments (multi-country)
• coordination is best achieved across the multiple countries and
markets. Is it best delegated (multi-country) or concentrated (global)?

Activity 10.3
Consider your own organisation. You may already be involved in managing
multi-country strategies. If so, to what extent did the strategy take account
of the issues outlined in the sections above? What other considerations
were involved? If you don’t already have multi-country strategies in
place, what potential would there be for your organisation to adopt such
strategies?

Summary
The strategies that an organisation uses to compete in international
markets have to be based on and driven by an understanding of the
situation and an appreciation of the organisation’s unique strategic
capabilities. Cultural, administrative, geographic and economic conditions
vary significantly among different countries, regions and industries and this
needs to be analysed appropriately – possibly best done via Ghemawat’s
CAGE framework.
One of the biggest considerations in competing in foreign markets is
whether to customise the organisation’s value propositions to cater to the
tastes and preferences of local customer segments in each country, or
to offer a mostly standardised value proposition worldwide. The tension
between market pressure to customise and competitive pressures to lower
costs is one of the biggest strategic issues that participants in foreign
markets have to resolve.
Multi-country competition exists when competition in one national market
is independent of competition in another national market; there are no
international markets, just a collection of self-contained country markets.
Organisations employing a multi-country strategy decentralise strategic and
operating decisions to business units operating in each country, so that
each local operation can tailor its goods and services to the local market.
Global strategies, on the other hand, seek to gain economies of scale,
scope, learning and location through either standardising the value
proposition as much as possible, or developing international value chains.
An international strategy usually attempts to capitalise on some
combination of three important capabilities:
• adaptation – maximising the organisation’s local relevance
• aggregation – creating economies of scale via regional or global
efficiencies
• arbitrage – gaining advantages by situating parts of the organisation
in places uniquely suited to lower costs or to enable strategic
differentiation.
International business-level strategies are similar to generic business-

level strategies and consist of international cost leadership, international
differentiation, international focus, and international integrated cost
leadership/differentiation strategies.
Global competition exists when competitive conditions across national
markets are linked strongly enough to form a true international market
and when leading competitors compete head-to-head in many different
countries.

In the 21st century, sustainable organisations pursuing global leadership
have to consider competing in emerging markets such as China, India,
Brazil, Russia, Indonesia, Turkey and Mexico – countries where business
risks are considerable, but the opportunities for growth are substantial.
The strategies that an organisation adopts for competing internationally
can vary from merely exporting the home product, to licensing, franchising,
establishing local operations or using international value chains. It may also
include establishing strategic alliances, joint ventures or other cooperative
strategies with local partners.
In all cases, this involves understanding and evaluating the advantages and
disadvantages of each strategic option and the organisation’s capacity to
implement it effectively, given its available competencies and resources.

1. Which of the following is not cited in the course materials as a major
driver of multi-country strategy?
a. Mature or slowing growth or limited opportunities in home or
domestic markets
b. Applying a strategic or competitive advantage that makes the
organisation more competitive in the ‘other’ market
c. Gaining access to attractive growth in other markets
d. Acquiring access to scarce resources
e. Diversifying and reducing risk by exposure to multiple markets with
differing currencies and growth rates
f. Satisfying the expectations of key stakeholders and media analysts
2. From the alternatives listed below, which response captures all of

Ansoff’s growth strategies that are not relevant as drivers of multi-
country strategy:
a. market penetration
b. market development
c. product development
d. diversification
e. both a and c
3. In his 2011 HBR article, Pankaj Ghemawat suggests that cosmopolitan

leaders of organisations have four key levers available to them to help
manage multi-country strategies effectively. Which of the bullet points
listed below is not one of the four levers that Ghemawat identified?
a. Projects and networks
b. Assessment tools
c. Longer and deeper immersions
d. Quality postgraduate academic study
e. Conceptual frameworks
4. Which of the following offers the best definition of what a ‘global

strategy’ involves?
a. Customising strategies to reflect local conditions
b. A single strategy applied to every national market, or coordination
of an international value chain across many national boundaries
c. Borrowing money in one country with low interest rates to invest in
another with better returns

d. Minimising the tax paid overall by situating activities in those
locations with the lowest taxes or greatest government support
e. Competing for national market leadership in each country market
with a different set of rivals in each country market
5. Hofstede (1983) highlighted six key cultural differences that strategic

managers contemplating international strategy can use in seeking to
understand cultural difference. Which of the following is not one of
Hofstede’s cultural dimensions?
a. long-term orientation
b. verbal and non-verbal communication
c. power distance
d. masculinity
e. indulgence
f. uncertainty avoidance
g. individualism
6. In the CAGE framework, Ghemawat suggests that attractive

international markets can best be identified by comparing four key
‘distances’ between the home and the international market opportunity.
Which of the following is the distance that Ghemawat proposed as the
C in the CAGE framework?
a. cooperative distance
b. competitive distance
c. cultural distance
d. creative distance
e. contextual difference
7. In the ADDING Value scorecard, Ghemawat offered a number of

alternative benefits that can be gained via multi-country strategies.
From the list below, which of these is not one of the benefits proposed
in the ADDING Value framework?
a. decreasing industry attractiveness or bargaining power
b. decreasing costs
c. differentiating or increasing willingness to pay
d. normalising (or optimising) risk
e. generating knowledge and other resource capabilities
f. adding value or growth

8. In order to locate value chain activities in multiple countries, we
suggested that activities should be dispersed or localised when certain
conditions were met. From the list below, which of the bullet points is
one of the key criteria that would lead to localised activities?
a. Costs of manufacturing or other value chain activities are
meaningful, and they are significantly lower in certain locations
b. There is a steep learning curve associated with performing an
activity in a single location than in others
c. There are sizeable economies of scale in performing the activity in
one place (or a few places)
d. Certain locations have superior resources, lower costs, allow better
coordination of related activities, or offer other valuable advantages
e. They need to be performed close to the buyer
9. Which of the following is not one of the issues that we proposed that
the Board and strategic leaders should consider in determining whether
a multi-country strategy is suitable?
a. The capacity of the new market entry to generate new forms of
b. The availability of profit sanctuaries and cross-market subsidisation
c. How coordination can best be achieved across the multiple
countries and markets
d. Whether new structures and systems will be needed across the
organisation once new markets are entered
e. Whether the leadership style of the senior management team and
board is ‘cosmopolitan’

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Review, May, vol. 89, no. 5, pp. 92–99.
Hofstede, G 1983, ‘National cultures in four dimensions’, International
Studies of Management & Organization, vol. 13, no. 1/2, pp. 46–74.
Kedia, B L, Nordtvedt, R & Perez, L M 2002, ‘International business
strategies, decision-making theories and leadership styles: An integrated
framework’, CR, vol. 12, no. 1, pp. 38–52.
Lafley, A G & Martin, R L 2013, Playing to win, Harvard Business Review
Press, Boston.
Morrison, A & Beck, J 2000, ‘Taking trouble: The key to affective global
attention’, Strategy & Leadership, 28 February, pp. 26–32.

Thompson, A A, Peteraf, M A, Gamble, J E & Strickland, A J 2016, ‘Chapter
7: Strategies for competing in international markets’, Crafting & executing
strategy: The quest for competitive advantage, 20th edn, McGraw-Hill
Education, New York.
Zook, C & Allen, J 2010, Profit from the core, Harvard Business School
Press, Boston.

answers
1. f
2. a
3. d
4. b
5. b
6. c
7. a
8. e
9. b

Unit 10 readings summary
Reading 10.1 ‘Globalisation’, Economics Online
Reading 10.2 ANZ Banking Group – About ANZ

Unit 11
Implementing strategy
CONTENTS
References 11–31
Implementation: Ingredients for success 11–5
The levers of effective strategy execution 11–9
Effective practices for planning and
managing implementation 11–12
Measuring and monitoring progress 11–15
Models for effectively managing change 11–18
Leadership and the importance of
leading change 11–20

Forceful execution of even a poor plan can often bring victory.
(Sun Tzu)
An idea isn’t worth that much. It’s the execution of the idea that has value. If you
can’t convince one other person that this is something to devote your life to, then
it’s not worth it.
(Joel Spolsky, software engineer and author of a blog on software development)

www.quotationspage.com/quotes/Joel_Spolsky/
Introduction
The fundamental qualities for good execution of a plan is [sic] first;
intelligence; then discernment and judgment, which enable one to
recognize the best method as to attain it; the singleness of purpose;
and, lastly, what is most essential of all, will – stubborn will.
(Marshal Ferdinand Foch, 1851–1929, French General)
• understanding the capabilities needed to execute strategy effectively
• recognising the 10 tasks that lead to effective strategy implementation.
Video
What is so important about the opening quote from the leader of the Allied
forces on the Western Front in World War 1? Why include it here in this
course about organisational strategy a century later? Indeed, why is it that
we have two quotes from noted military figures Sun Tzu and Ferdinand
Foch at the start of our study of strategy implementation, or strategy
execution, a term used interchangeably with implementation?
What these noted military strategists tell us is that strategies are effective
when they are implemented or executed well. In war, only occasionally are
battles won by the side with the most brilliant strategy. Rather, they are
typically won by the side that executes its strategy most effectively. As Sun
Tzu says, even a poor plan can bring success if it is forcefully executed.
Foch highlights the elements of effective execution as:
• identifying the best method to attain an outcome
• singleness of purpose or commitment
• stubborn will or determination to make it work.
And, having completed our examination of the importance of strategic

agility in Unit 5, we might add:
• the ability to identify conditions that necessitate change in the strategy
early, and respond to them quickly.
Unit 11: Implementing strategy 11–1

So far in this course, we have looked at strategy development and the
theories, concepts, tools and process of creating a strategy. We have
also looked at the characteristics and capabilities that provide potential
competitive advantage, and those that assist in making an organisation
strategically agile. As you are by now familiar, we summarise this in the
answers to the five questions posed by Lafley and Martin (2013,
pp. 14–15):
1. What is our winning aspiration?
2. Where will we play?
3. How will we win?
4. What capabilities must be in place?
5. What management systems are required?
Theories, concepts and tools are important, and of course it is necessary

to learn and understand why and how strategies are developed, why some
organisations are successful and why some fail. However, coming up with a
strategy is only the tip of the figurative iceberg. As we saw at the beginning
of this Unit, blogger Joel Spolsky points out, ‘An idea isn’t worth that much.
It’s the execution of the idea that has value.’
We can conclude that as well as developing a potentially ‘winning’ strategy,
a further key reason behind the ultimate success of a strategy is its efficient
and effective implementation or execution.
To paraphrase the famous Thomas Edison, ‘strategic success, like genius,
is one per cent inspiration, ninety-nine per cent perspiration’ (Edison, T A,
quoted in Harper’s Monthly Magazine, September 1932). In this case, the
perspiration is the work put into implementation – executing and managing
the strategies.
In this Unit, we will turn our attention away from theories and tools for
strategic thinking and development, and look at issues surrounding what
needs to be done in order to implement strategy effectively.
This includes:
• understanding why it is that strategies fail (and thus what ought to be
done to avoid failure)
• recognising the importance of leadership, including addressing the
question of what constitutes a good leader and their characteristics
• understanding the frameworks recommended for effective change
management.
Before we proceed, it is worthwhile pointing out that this Unit strongly

relates to Unit 2 on the strategic management process. You may recall
that in Unit 2 we worked with a model based on the approach detailed in
Thompson et al (2016, p. 20).

Figure 11.1 The strategy-making, strategy-executing process
Stage 1 Stage 2 Stage 3 Stage 4 Stage 5
Monitoring
Developing Setting Crafting a Executing
developments,
a strategic objectives strategy to the strategy
evaluating
vision, achieve the
performance,
mission, and objectives and
and initiating
core values the company
corrective
vision
adjustments
Revise as needed in light of the company’s actual

performance, changing conditions, new opportunities,
and new ideas
In particular, we will focus on Stages 4 and 5 of the model – ‘Executing

the strategy’ and ‘Monitoring developments, evaluating performance, and
initiating corrective adjustments’.
You may find it worthwhile to refresh yourself on the details of the model by
skimming through Unit 2 again before reading this Unit.
Learning outcomes
• discuss the critical role of implementation in successful strategy
• discuss the common causes of poor implementation
• recommend changes in behaviours and practices that could lead to more
effective implementation
• explain the relationship between effective implementation, project
management and change management
• discuss the role of leadership in implementing strategy and suggest how
leaders could improve their role.

The following texts will provide more information on many of the topics
covered in this Unit. You may find it helpful to read them.
management: An Australasian perspective, John Wiley & Sons Australia,
Milton, Chapter 12: ‘Strategy evaluation’.
& executing strategy: The quest for competitive advantage, Concepts
and readings, 20th edn, McGraw-Hill Education, New York; Chapter 10:
‘Building an organization capable of good strategy execution’; Chapter 11:
‘Managing internal operations’, and Chapter 12: ‘Corporate culture and
leadership’.

Implementation: Ingredients
for success
Why does strategic execution matter so much, and what is required to
implement strategy effectively?
Video
Video 11.2 P
rofessor Michael Jarrett: ‘Getting strategy execution right’
[3:03]
Consider the following quote:

… in 2002, in the aftermath of the dot-com bubble, Jamie Dimon,
now CEO of JPMorgan Chase, opined, ‘I’d rather have a first-rate
execution and second-rate strategy any time than a brilliant idea and
mediocre management.’ In the same year, Larry Bossidy, former
AlliedSignal CEO, coauthored the best-selling book Execution: The
Discipline of Getting Things Done, in which the authors declared,
‘Strategies most often fail because they aren’t well executed.’
(Martin 2010, p. 66)
In his seminal work on marketing strategy, Thomas Bonoma (1984)

highlighted the vital link between development of strategy and its execution
or implementation. Bonoma suggests that there are four possible scenarios
for designing and executing strategy, which he represented in a matrix as
follows:
Figure 11.2 Diagnosing strategic failure

STRATEGY
Appropriate Inappropriate
SUCCESS RESCUE OR RUIN
Targets are met Good execution may mitigate poor
Excellent
strategy and give management

time to correct it, but poor strategy
IMPLEMENTATION
may hasten failure
TROUBLE FAILURE
Poor execution hampers Cause or failure is hard to
appropriate strategy; management diagnose because poor strategy is
Poor
may conclude that its strategy is masked by the inability to execute

inappropriate
Source: adapted from Bonoma 1984, p. 71.

What Bonoma highlights here is that the implementation of strategy is as
important as the selection and development of strategy itself. As INSEAD
Professor Michael Jarrett highlighted in Video 11.1, it’s the combination
of having the right strategy, and executing effectively that delivers the
strategic outcomes.
But why is implementation such a problem? Consider the following:
A recent survey of more than 400 global CEOs found that executional
excellence was the number one challenge facing corporate leaders in
Asia, Europe, and the United States, heading a list of some 80 issues,
including innovation, geopolitical instability, and top-line growth. We
also know that execution is difficult. Studies have found that two-thirds
to three-quarters of large organizations struggle to implement their
strategies.
(Sull, Homkes & Sull 2015, p. 60)
Research by Armstrong et al (2015) found that strategy typically fails due

to poor implementation, and that the typical causes of poor implementation
are:
• Isolated planning: the people who develop the strategies aren’t those
who have to implement them.
• Inappropriate trade-offs between long and short-term objectives:
too much focus on the short-term outcomes, leading to the organisation
becoming increasingly irrelevant, losing its sources of strategic
advantage.
• Resistance to change: poor support and active opposition to strategy
by vested interests within the organisation or among key stakeholders.
• Lack of implementation planning: creating strategy without designing
or describing how the strategy is to occur.
• Unplanned events: either because more time than planned is needed
for implementation, unanticipated major problems occur, crises arise
that distract attention from implementation, or uncontrollable events
occur in external environments.
• Ineffective coordination of the implementation activities.
• Inadequate personnel: either they are insufficient in training, number,
instruction or capability, or there is inadequate leadership and direction.

This is consistent with the findings of change authors Beer and
Eisenstat, who identified the following common silent killers of strategy
implementation:
• top-down senior management style
• unclear strategy and conflicting priorities
• ineffective senior management team
• poor vertical communication
• poor coordination across functions
• inadequate down-the-line leadership skills and development.
Other strategy execution research found that the principal causes of poor
execution flow from failure to think through information flows and ‘decision
rights’. Neilson, Martin and Powers (2008, p. 60) found that:
A brilliant strategy, blockbuster product, or breakthrough technology
can put you on the competitive map, but only solid execution can keep
you there. You have to be able to deliver on your intent. Unfortunately,
the majority of companies aren’t very good at it … Strategy execution
is the result of thousands of decisions made every day by employees
acting according to the information they have and their own self-
interest. In our work helping more than 250 companies learn to
execute more effectively, we’ve identified four fundamental building
blocks executives can use to influence those actions – clarifying
decision rights, designing information flows, aligning motivators, and
making changes to structure. (For simplicity’s sake, we refer to them
as decision rights, information, motivators, and structure.)
You might recall that this resonates with a Peter Drucker quote in an earlier
Unit, where we noted that ‘structure follows strategy’. Neilson, Martin and
Powers went on to identify the key characteristics of organisations that can
deliver effective strategy execution.

Table 11.1 The 17 fundamental traits of organisational effectiveness
Rank Organization trait Strength
index (out
of 100)
1 Everyone has a good idea of the decisions and actions for 81
which he or she is responsible.
2 Important information about the competitive environment gets to 68
headquarters quickly.
3 Once made, decisions are rarely second-guessed. 58
4 Information flows freely across organizational boundaries. 58
5 Field and line employees usually have the information they 55
need to understand the bottom-line impact of their day-to-day
choices.
6 Line managers have access to the metrics they need to 48
measure the key drivers of their business.
7 Managers up the line get involved in operating decisions. 32
8 Conflicting messages are rarely sent to the market. 32
9 The individual performance-appraisal process differentiates 32
among high, adequate, and low performers.
10 The ability to deliver on performance commitments strongly 32
influences career advancement and compensation.
11 It is more accurate to describe the culture of this organization as 29
“persuade and cajole” than “command and control”.
12 The primary role of corporate staff here is to support the 29
business units rather than to audit them.
13 Promotions can be lateral moves (from one position to another 29
on the same level in the hierarchy).
14 Fast-track employees here can expect promotions more 23
frequently than every three years.
15 On average, middle managers here have five or more direct 19
reports.
16 If the firm has a bad year, but a particular division has a good 13
year, the division head would still get a bonus.
17 Besides pay, many other things motivate individuals to do a 10
good job.
Building Blocks Decision Rights Information Motivators Structure
Source: adapted from Neilson, Martin and Powers 2008, p. 63.

The levers of effective strategy execution
So how do we effectively manage strategy implementation to ensure it has
the best chance of success? Thompson et al (2016) identify 10 basic tasks
of the strategy execution process, represented in this model.
Figure 11.3 The 10 basic tasks of the strategy execution process
Develop the resources

and organizational capabilities
required for successful strategy
execution
Staff the organization with Establish a strategy-
the right people for executing supportive organizational
the strategy structure
Allocate
Exercise strong
sufficient
leadership to propel
resources to the
strategy execution
strategy execution
forward The Action effort
Agenda for
Executing
Install a Institute
Strategy
corporate culture policies and
that promotes good procedures that
strategy facilitate strategy
execution execution
Adopt
Tie rewards and
best practices
incentives directly to the
and business processes
achievement of strategy and
Install that drive continuous
financial targets
information and improvement
operating systems that
support strategy execution
activities
Thompson et al, pp. 290–291 go on to suggest that three types of

organisation-building actions are paramount:
1. Staffing the organization – putting together a strong management
team, and recruiting and retaining employees with the needed
experience, technical skills and intellectual capital.

2. Acquiring, developing and strengthening the resources and
capabilities required for good strategy execution – accumulating
the required resources, developing proficiencies in performing
strategy-critical value chain activities, and updating the company’s
capabilities to match changing market conditions and customer
expectations.
3. Structuring the organization and work effort – organizing value-

chain activities and business processes, establishing lines of
authority and reporting relationships, and deciding how much
decision-making authority to delegate to lower-level managers and
frontline employees.
As you can see from this list, people play a critical part in effective strategy
execution, as Bregman (2017) suggests in the title of a Harvard Business
Review article ‘Execution is a people problem, not a strategy problem’. In
that article, the author notes:
However hard it is to devise a smart strategy, it’s ten times harder
to get people to execute on that strategy. And a poorly executed
strategy, no matter how clever, is worthless… Most organizations rely
on communication plans to make that shift. Unfortunately, strategy
communication, even if you do it daily, is not the same as — and is
not enough to drive — strategy execution. Because while strategy
development and communication are about knowing something,
strategy execution is about doing something. And the gap
between what you know and what you do is often huge. Add in the
necessity of having everyone acting in alignment with each other, and
it gets even huger.
To deliver stellar results, people need to be hyper-aligned and laser-

focused on the highest-impact actions that will drive the organization’s
most important outcomes.
As you can see from the section highlighted in bold, execution requires
moving from knowing something to doing something. A critical first step is
to ensure that you have the right people. Marco Mancesti (2016,
pp. 42–43), Director of R&D at INSEAD, suggests that crucial to
this is the idea of selecting, empowering and supporting an effective
implementation team. He further suggests that this process, getting the
right implementation team, should be guided by the acronym PIKES:
1. Purpose – each individual is motivated to want the implementation to
be successful.
2. Integration – the team share a deep understanding of rules, norms,
values and behaviours.
3. Knowledge – mastery of key technical aspects required plus soft skills
and diversity of insight and perspective.
4. Ecosystem – capacity of individuals in the team to understand and
appreciate the company and external environment.

5. Self – the ability of each team member to control their emotions and
manage stresses.
Activity 11.1
Consider the 10 principal strategy-implementing tasks in Figure 11.3 and
the guidelines that Mancesti has proposed about how to establish an
effective implementation team. Propose three key improvements that you
could initiate or influence that would improve the implementation of strategy
in your own organisation, division or business unit.

Effective practices for
planning and managing
implementation
Companies frequently develop vision and mission statements about
being at the top of their industry, the great service they provide to
customers, and their rewarding work environment. Yet more often
than not, these statements are so far from reality that they become
joke fodder for customers and employees alike. It doesn’t have to be
this way. Your company really can keep its promises – but first you
must create a culture of execution.
(Lepsinger 2008, p. 27)
As you can see from this extract, there is much truth behind the maxim that,
‘if you are failing to plan then you are planning to fail!’ Patten (2015, p. 29)
highlights that in addition to effective strategy formulation, the other key
elements for strategic success are:
1. technological support
2. organisational alignment
3. performance management
4. leadership.
While we have considered strategy formulation and technological support

‘best practices’ in previous Units, in the sections that follow we will focus on
the remaining three elements.
You may have noted that one of the reasons cited earlier by Armstrong et al
(2015) as a common cause of strategic failure was a lack of implementation
planning – creating strategy without designing or describing how the
strategy is to occur. It is not uncommon to find that organisations go to
considerable effort to conduct analyses, develop a strategic vision, select
objectives and craft strategies, but invest far less in taking it to the next
stage – planning how to make it happen effectively. Recall that Bregman
(2017) highlighted that ‘…while strategy development and communication
are about knowing something, strategy execution is about doing
something’.
Effective implementation can be said to contribute as much – and many
would argue, even more – to the likelihood of success of any strategy as
the analytical and creative processes that generate it. Remember Sun Tzu’s
advice that, ‘Forceful execution of even a poor plan can often bring victory’.
Therefore, developing effective implementation plans, organisational
alignment and commitment and implementation practices requires at
least the same level of commitment and professionalism as the strategy
formulation process.

In the preceding section of this Unit, we set out the general principles that,
when followed, minimise the likelihood of failure. In subsequent sections,
we will focus on the importance of effectively measuring and monitoring
progress towards success, managing the change that often accompanies
strategy implementation and the vital role of leadership.
In this section, we will look at the role of effective implementation planning,
and draw heavily on many key project-management concepts. We do
this because often, implementing specifics of a strategy is done through
projects.
The particular agile project-management skills that a strategic manager is
most likely to need to ensure effective execution are:
1. Effective planning – in particular, effective strategy implementation is
more likely when the organisation:
a. selects the right person to act as strategic implementation (project)
team leader
b. prioritises implementation and allocates appropriate numbers of
qualified and experienced people to form an implementation team
c. identifies suitably senior people to act as sponsors for each of
the strategic initiatives, and makes sure these people have the
commitment, power and authority to see that the implementation is
carried through
d. breaks the strategy down into an action plan – which will
often resemble a project work breakdown structure and linear
responsibility charts. This action plan should:
(i) be tested to ensure that it is realistic and feasible
(ii) account for any predictable or likely barriers to effective
implementation
(iii) ensure that critical activities and pathways to successful
completion are identified
(iv) assess risks associated with key implementation project
activities
(v) ideally incorporate some contingencies and tolerances to
account for uncertainty and problems along the way.
2. Conflict resolution – managers implementing strategic projects need

to anticipate and identify sources of likely internal and external conflict,
and set in place actions and undertake negotiations to overcome any
problems.

3. Effective cost estimation and budgeting – the estimated costs of
any strategy must be rigorous and realistic, perhaps even slightly
pessimistic. A strategy should be worth pursuing in a worst-case cost
environment, not simply in the best-case scenario.
4. Scheduling – later in this Unit we will discuss the research and
findings of Sull, Homkes and Sull (2015) – which highlights five myths
that often make execution difficult. One of the issues they found was:
Unfortunately, no Gantt chart survives contact with reality. No plan
can anticipate every event that might help or hinder a company trying
to achieve its strategic objectives. Managers and employees at every
level need to adapt to facts on the ground, surmount unexpected
obstacles, and take advantage of fleeting opportunities…. Such real-
time adjustments require firms to be agile.
(Sull 2015, pp. 5–6)
However, an agile and responsive schedule of activities is needed – to

ensure that the right resources and right commitments are available at
the time that they are needed and that resources are used efficiently.
5. Resource allocation management – which means ensuring that the
allocation and use of resources to achieve outcomes is both effective
and efficient and thereby optimising the use and return on the assets.
6. Control – managing the human, physical, information, financial and
other resources to ensure that not only is the implementation achieved
on time and on budget, but that in doing so, the processes employed
along the way are agile (responding to new information and insights),
effective and efficient. This may include activities like:
a. developing implementation control systems and rules
b. periodic reviews and benchmarking to ensure that the
organisation is learning from the implementation, and is gaining
and disseminating knowledge gained from it (moving along the
implementation learning curve)
c. ensuring that key resources and people are used only when and
where they are needed
d. making sure that the organisation builds skills and competencies in
implementing strategy, and that these are fed into future strategic
planning and implementation cycles.

Measuring and monitoring
progress
An old management axiom suggests that, ‘What gets measured gets done’.
In Unit 2, we considered how sustainable organisations need to define
clear outcome-focused strategic objectives. It is appropriate, therefore, that
we now focus some attention on performance management, i.e. how we
measure and monitor strategic effective execution.
Strategic managers must create measures, KPIs and metrics that clearly
indicate progress towards achieving the organisation’s desired financial
and non-financial or strategic outcomes – which Thompson et al (2016, p.
20) incorporate as a critical activity in Stage 5 ‘Monitoring developments,
evaluating performance and initiating corrective actions’.
This may include measures such as balanced scorecards, and triple and
quadruple bottom-line indicators.
However, any measures or metrics are most effective when they display the
important characteristics of being SMART, the acronym standing for:
• Stretching or Significant (they should be hard to achieve, and doing so
should indicate that the organisation is moving closer to achieving its
strategic objectives and vision)
• Measurable (there must be some way of quantifying them and seeing
whether you are succeeding)
• Achievable (if people don’t believe it can be done, they won’t try; the
people who are responsible must believe that these things can be
done, and have some idea of how)
• Relevant (the measures or metrics should indicate that the organisation
is having an impact on things that relate to the corporate vision, and the
organisation’s mission and purpose)
• Timed (there should be milestones and deadlines, otherwise they may
be put off as more short-term issues take precedence).
You may recall that in Unit 3, we highlighted how one of the key questions
that a strategic manager should consider when conducting external
analysis is, ‘What are the key factors for strategic success?’ This relates to
industry key success factors (KSFs), which Thompson et al (2016, p. 72)
suggest:
…vary from industry to industry, and even from time to time within the same
industry, as drivers of change and competitive conditions change. But regardless
of the circumstances, an industry’s key success factors can always be deduced
by asking the same three questions:
continued

1. On what basis do buyers of the industry’s product choose between the
competing brands of sellers? That is, what product attributes and service
characteristics are crucial?
2.
Given the nature of competitive rivalry prevailing in the marketplace,
what resources and competitive capabilities must a company have to be
competitively successful?
3. What shortcomings are almost certain to put a company at a significant
You will probably recognise that answering these questions really relates to
Lafley and Martin’s (2013, p. 15) question, ‘How will we win?’
A strategic manager might choose to measure and monitor progress
against these KSFs so that relative strategic performance can be
understood – measuring against the organisation’s own past performances
and, ideally, against competitors.
With all of these things in mind, it is important that strategic managers
develop a measurement and monitoring process for any set of
strategies, with the following characteristics.
1. Interim measurements are needed. These should indicate that
progress is being made towards achieving the ultimate strategic
outcomes (objectives).
2. Measures are required that indicate that the strategy is being managed
efficiently. The organisation needs to know that an appropriate return
is being gained from the resources devoted to the strategy.
3. A strategic manager must have indicators and metrics highlighting that
management of the strategy is in line with best practices in managing
similar activities elsewhere.
4. A strategic manager might wish to use the following three checks on
any implementation measurement and monitoring approach:
• It should measure things that are strategically significant.
• It should have measures that are demonstrably related to achieving
the organisation’s objectives and strategic vision.
• The value gained from measuring, monitoring and reporting the
information should be substantially greater than the costs, time and
resources needed to capture them.
5. Once appropriate measures of strategic outcomes and progress

towards the outcomes have been identified, a system needs to be
established so that:
• information is captured, analysed and reported in a timely fashion
to the people who are managing the strategies, ideally in real-time
• corrective actions can be taken to ensure progress towards the
desired final outcomes (objectives and vision).

Activity 11.2
Consider the way that strategic plans are implemented in your own
organisation, or one that you know well. How well do the strategic
managers plan for, manage and measure strategy implementation?
What could be done better?

Models for effectively
managing change
As well as skills derived from agile project management, effective strategy
implementation is essentially about leading change, often seeking
transformational change in what the organisation is doing. More specifically,
it’s about moving from what the organisation is doing now to what it needs
to be doing to achieve its strategic vision. This is often the most difficult
part of what Bregman (2017) highlighted in identifying that ‘…while strategy
development and communication are about knowing something, strategy
execution is about doing something’, which we might modify to suggest it’s
about doing something different, or doing it differently.
In other words, strategic management is about doing something more,
new or different in order to achieve the outcomes that will advance the
organisation towards its objectives. It means that the answers to the
questions posed by Lafley and Martin (2013, pp. 14–15):
• where will we play?
• how will we win?
• what capabilities must be in place?
• what management systems are required?
• and even, potentially, ‘What is our winning aspiration?’
may be different from what the organisation is doing now. Consequently,

good strategy implementation necessitates that strategic managers must
also be good at managing change, from incremental change through to
transformational change. For these reasons, we will now focus briefly on
what strategic change management involves.
According to Michael Beer and his colleagues (1990), who are among the
world’s leading experts on change, change strategies don’t always produce
change, for two key reasons.
While senior managers understand the necessity of change to
cope with new competitive realities, they often misunderstand what
it takes to bring it about. They tend to share two assumptions…
that promulgating company-wide programs – mission statements,
‘corporate culture’ programs, training courses, quality circles, and
new pay-performance systems – will transform organisations, and
that employee behaviour is changed by altering a company’s formal
structure and systems… In a four-year study of organisational change
at six large corporations we found that exactly the opposite is true.
(Beer, Eisenstat & Spector 1990, p. 158)

What this quote highlights for us is that things like mission statements,
training programs, quality circles and pay-for-performance are not enough
on their own: more is needed. But what more should a strategic manager
do to make sure strategy execution is effective?
While talking about change management in particular, John Kotter
(2014) Harvard professor and leading change-management guru,
highlights a series of clear steps likely to lead to more successful change
implementation:
• create a sense of urgency
• build a guiding coalition
• form a strategic vision and initiatives
• engage and enrol enthusiastic supporters in the change
• identify and eliminate the barriers to the change
• look to produce some short-term results that generate momentum
• focus some attention and resources on sustaining the change (don’t let
enthusiasm and commitment dissipate)
• institutionalise the new ways of working
In a classic article on the subject of change management, Goss, Pascale

and Athos (1993) suggest that for change to be effective, strategists must
not only build the necessary organisational skills, capabilities, relationships
and support with internal and external stakeholders. They must also break
down the belief in and commitment to existing ways of thinking and seeing,
and create a new context by highlighting how the old ways of doing things
are less relevant and potentially even dangerous. They must highlight the
value of the new ways of working.
Many of these issues are highlighted and illustrated in the following article.
Reading
Reading 11.1 Sull, D, Homkes, R & Sull C, 2015, ‘Why strategy execution
unravels – and what to do about it’, Harvard Business
Review, March, pp. 58–66.

Leadership and the
importance of leading
change
Typically leaders are responsible to create the strategic plan. Yet, it is
the duty of managers and employees to execute and make the right
things happen. And that’s where the breakdown often occurs. Given
the way managers and employees typically work together, those most
responsible for execution are rarely clear about how what they do
impacts the strategic direction, thus hindering execution… The key
to breaking through the strexecution point (the gap between strategy
design and execution) lies in operationalizing the strategic plan,
effectively driving it down to those individuals most responsible for
execution—mid-managers and front-line employees.
This is only possible when leaders revamp the manager/employee

relationship. First, ensure that both managers and employees have a
clear line of sight between their day-to-day activities and the strategic
initiatives. Second, managers and employees must be far more
proactive in managing performance, meeting often to evaluate progress
and making timely course corrections.
(Ruhmann 2011, p. 3)
What the author of this extract seeks to draw attention to is the fact that the
role of strategic leaders is central to effective strategy execution. And when
we talk about ‘strategic leaders’ we are not necessarily only referring to
those at the top. As you will have noted in Reading 11.1:
Concentrating power at the top may boost performance in the short
term, but it degrades an organization’s capacity to execute over the
long run. Frequent and direct intervention from on high encourages
middle managers to escalate conflicts rather than resolve them, and
over time they lose the ability to work things out with colleagues in other
units. Moreover, if top executives insist on making the important calls
themselves, they diminish middle managers’ decision-making skills,
initiative, and ownership of results… In large, complex organizations,
execution lives and dies with a group we call “distributed leaders,” which
includes not only middle managers who run critical businesses and
functions but also technical and domain experts who occupy key spots
in the informal networks that get things done.
(Sull, Homkes & Sull 2015, p. 9)
But effective strategy execution has also become more difficult in many
organisations due to the increased focus on short-term outcomes – issues
like reducing costs and looking for immediate returns from any investments
in things like capacity and capability building. According to Bashrum (2012,
p. 16) this has resulted in the following.

• Fragmented resources – people responsible for creating effective
strategy execution have been removed from the organisation,
dispersed to more operational roles or are too busy to focus on
strategy.
• Diminishing support structures – the coaching, mentoring and support
structures that are needed to support effective strategy execution, and
to build these capabilities in young and middle-managers, are no longer
there.
• Ageing workforce – much of the experience and knowledge around
effective strategy execution is leaving the organisation, and not being
replaced in similar numbers or with similar levels of skill.
• Crippling oversight – the burdens of regulatory compliance and
corporate governance are stretching managers to the point that there is
little time or energy left for strategic behaviour.
Martin (2010, p. 70) suggests that the strategic ‘choice maker can help his
employees make better choices in four specific ways’. This requires leaders
to be accountable for some key communication and engagement activities:
1. Explain the choice that has been made and the reasons for it – clearly
articulate not just the how and what details of the strategy, but the why
– something you will recall in Unit 2 from the video by Simon Sinek.
2. Explicitly identify the next downstream choice – explain to the next
level of managers what choices they have, what the boundaries of their
autonomy are, and what areas of decision-making they ought to focus
on, in order to execute the strategy effectively.
3. Assist in making the downstream choice as needed – be available
to offer constructive feedback, to act as a coach, mentor or even
just brainstorm with the next level of managers what good strategic
decisions and action programs might be at their level.
4. Commit to revisiting and modifying the choice based on downstream
feedback – be open to modifying the strategy based on the ‘bottom-up’
feedback. Consider the strategy development process as an agile and
iterative cycle of top-down and bottom-up inputs leading to continuous
improvement.
Martin also highlighted (2010, p. 71) that the benefits of this approach are
that it creates a virtuous strategy cycle:
The choice-cascade model has a positive-reinforcement loop inherent
within it. Because downstream choices are valued and feedback is
encouraged, the framework enables employees to send information
back upstream, improving the knowledge base of decision makers
higher up and enabling everyone in the organization to make better
choices. The employee is now not only the brain but also the arms
and legs of the organizational body. He is both a chooser and a doer.
Workers are made to feel empowered, and the whole organization wins.

But what exactly do we mean by ‘leadership’, and how does leadership
impact on the implementation of strategy? Kotter (1990, 1995) suggested
the following differences between managers and leaders.
Figure 11.4 Differences between leaders and managers

What leaders do What managers do
1. Set directions 1. Plan and budget
2. Align people to the vision 2. Structure and staff the organisation
3. Motivate people 3. Control and problem solve
You will note that this model shows that leaders tend to focus on describing
and enabling outcomes, while managers focus on processes and systems.
It is important to state that this is not meant to be pejorative – organisations
need both leaders and managers, and strategic managers at times need
to focus on managing, and at other times need to focus on leading. An
organisation with too many people trying to lead and not enough focus on
managing is as problematic as one with a lack of leadership. And in most
organisations, even at very senior levels, there is some accountability for
leading, and some for managing – although typically, the balance between
these two accountabilities shifts in favour of leading, the higher up in the
organisation someone is located.
However, it is important that we don’t have a fixed view of what leadership
is. Consider the following two quotes:
The idea of top down leadership is based on the myth of the
triumphant individual…Our contemporary views of leadership are
entwined with our notions of heroism, so much so that the distinction
of ‘leader’ and ‘hero’ (or ‘celebrity’ for that matter) often becomes
blurred… But even as the lone hero continues to gallop through our
imaginations, shattering obstacles with silver bullets, leaping tall
buildings at a single bound, we know that that’s a false lulling fantasy
and not the way that real change, enduring change, takes place…In
a society as complex and technologically sophisticated as ours, the
most urgent projects require the coordinated contributions of many
talented people working together.
(Warren Bennis in Beer & Nohria 2000, p. 114)
There are two imperatives in the modern organisation. On the one

hand, the rate of change demands that those closest to the action,
including employees who relate daily to customers’ rapidly shifting
demands, be empowered to make decisions to allow quick and
effective organisational responses… On the other hand, the rate of
change also demands swift and decisive leadership action from the
top of the organisation.
(Dexter Dunphy in Beer & Nohria 2000, p. 126)

Given the importance of implementation to strategic success, the role
of leaders as change agents is clear. For strategic implementation to
be successful, an understanding of the organisational cultural factors at
play is necessary. Leaders who understand an organisation’s history, its
relationships and its stated and unstated ways of doing things, as well as
its current context, are far more likely to be able to successfully manage
implementation. Leaders who have the skills and can exert influence to
identify and manage cultural issues and human interactions effectively will
be more likely to facilitate the type of change that strategic implementation
often requires.
Strategy author Henry Mintzberg sees leadership as somewhat similar to
the notion of quality – it can’t be precisely defined or measured, but you
recognise it when you see it (Mintzberg 1994).
While it’s not unusual to see high-profile senior executives credited in the
media as the single-handed architects of significant success (and failure)
in their organisations, contrary to the implicit assumption, leadership can
take place anywhere in an organisation – it does not have to correlate with
positional power. However, as you will recall from the notion of ‘distributed
leadership’ in Reading 11.1, while executive and senior management
leadership play an important role in successful strategy, it is very often
leaders elsewhere in the organisation who lead the implementation, monitor
progress, identify the need for adjustments, facilitate changes, and motivate
teams and individuals to make it happen.
We need to look at ‘distributed leadership’, recognising not only the point
of view of those at the top, but also impacting leaders at all levels of the
organisation. Consider your own organisation. Can you identify influential
people who act (or have the potential to act) as formal or informal leaders?
To paraphrase UNSW senior academic Tracy Wilcox (1996, p. 21),
strategic leaders can create an environment for effective implementation
through their ability to:
• remain open to alternative perceptions of reality: develop and sustain
the ability to recognise signals within and outside the organisation and
to analyse and challenge the assumptions on which current practices
are based
• create a meaningful vision of an alternative future
• sell this vision: display authenticity and gain trust of key stakeholders
• understand the complexity of the organisation and its internal and
external environments
• remain open and enthusiastic about learning and change
• develop creative thinking skills.

It is important to recognise that leadership involves managing not just
actions and processes, but symbolism and meaning as well. A leader must
not just talk the talk but must also walk the talk!
Those of you who have completed the course Managing Agile
Organisations will have a good appreciation of how aspects of
organisations – such as symbolism, ambiguity, power and culture – can
have an impact on the implementation of strategy. And as we saw earlier,
employee alignment and engagement are crucial to success in strategy and
are a critical source of competitive advantage.
Much of what we have covered in this section is about a leader’s need to
create, communicate and implement a strategic vision for the organisation.
In Unit 2, we highlighted the importance of strategic vision, quoting John
Teets, who said that, ‘Management’s job is not to see the company as it is,
but as it can become’. Or, as Steven Covey (1990) says, ‘start with the end
in mind’.
Kanter (2001) makes the important point that leadership is often most
critical in the middle of an important strategic shift or change program.
At the beginning of a new project or program, it’s easy for people to be
enthusiastic and supportive, particularly when it’s obvious that most
stakeholders are on side. Equally, as it becomes clear that the new project
or vision is nearing completion and is going to be successful, it’s easy for
stakeholders to be happy and supportive (‘success has many parents’).
It is in the middle of projects when problems typically arise and success
is not guaranteed. At these times, the importance of powerful champions
and consistent and aligned actions by ‘distributed leaders’ across the
organisation – the points made by Sull, Homkes and Sull (2015) t – comes
to the fore.
So, to make sure that implementation is effective, leaders must not only
have a strategic vision, but they must then:
• communicate the vision widely and frequently
• motivate employees and stakeholders to embrace the vision through
constant persuasion and by setting an example
• make contact with employees and stakeholders at many levels and
attempt to understand their concerns
• act in a supportive and expressive way
• concentrate on the major strengths within the organisation that will
ensure the success of the strategy
• remain at the centre of the action
• measure the ultimate success of the organisation in terms of its ability
to fulfil the vision.

Activity 11.3
In terms of the principles outlined above for effective change leadership
and management, what critical implementation capabilities and experience
would you look for if you were recruiting a strategic manager?

Summary
By now, you should have developed a clear understanding about how
strategic implementation, or execution, has as much (and perhaps more) to
do with the success of strategy as the creative efforts that go into crafting it
in the first place.
You should recognise that strategy fails primarily because of poor
implementation, most commonly caused by:
• isolated planning
• inappropriate trade-offs between long- and short-term objectives
• resistance to change
• lack of implementation planning
• unplanned events
• ineffective coordination of the implementation activities
• inadequate personnel.
It can also be unsuccessful due to the failure to manage the five myths that
Sull, Homkes and Sull (2015) referred to:
• Myth 1 – execution equals alignment
• Myth 2 – execution means sticking to the plan
• Myth 3 – communicating equals understanding
• Myth 4 – a performance culture drives execution
• Myth 5 – execution should be driven from the top.
You should be aware, too, that implementation takes planning – detailed
planning to cover the 10 key points that Thompson et al (2016) stipulate
(see Figure 11.3).
One of the key implications of this is that effective implementation plans
require effective management of these plans.
The competencies needed to develop these plans and make them work are
heavily reliant on skills and principles of project management, in particular:
1. effective implementation planning, incorporating getting:
• the right person to lead
• the right team to work on the implementation project
• the right sponsors to drive through and support the implementation
• agile action plans and processes
2. conflict resolution and negotiation
3. cost estimation and budgeting
4. activity scheduling
5. resource allocation and management
6. control.

In addition, strategic managers must establish monitoring and management
systems with appropriate intermediate measures, efficiency and
effectiveness indicators, and best-practice benchmarks.
You should also now clearly understand that managing implementation
involves both managing and leading change – a complex and difficult
process. Central to the transformation and renewal process is the role of
leadership.
Making an accurate assessment of any organisation and developing a
vision to match it is difficult, yet it is the most important task for a leader.
Strategy development and implementation or execution then follows from
the answers formulated to Lafley and Martin’s five questions. Commitment
from employees, particularly from distributed leaders, is of prime
importance as they are the key people who help develop and implement
strategy, but to do so they need to understand and be aligned to ‘why?’

1. Bonoma suggested that diagnosing strategic failure leads to a matrix
of four possible outcomes. Which of the following is not one of those
described in the matrix?
a. Maturity – where slowing growth, limited opportunities and a lack of
appropriate strategy leads to slow decline
b. Success, where targets are met. This is derived from appropriate
strategy combined with excellent implementation
c. Rescue or ruin, where good execution mitigates poor strategy,
which may give management time to mitigate the problems
d. Trouble, where poor execution hampers a good strategy
e. Failure, where both inappropriate strategy and poor implementation
and the causes of the failure are hard to diagnose
2. Armstrong et al suggest that poor implementation results from a range

of factors. One of these is isolated planning. Which of the following
statements offers the best definition of the term ‘isolated planning’?
a. Creating strategy without designing or describing how the strategy
is to occur
b. Too much focus on the short-term outcomes, leading to the
organisation becoming increasingly irrelevant, losing its sources of
strategic advantage
c. The people who develop the strategies aren’t those who have to
implement them
d. Lack of accountability or follow-through
e. Lack of clear and decisive leadership
3. Thompson et al set out 10 principal strategy executing tasks. Which of

the tasks listed in the points below is not one of the 10 tasks that they
summarised?
a. Adopt best practices and business processes that drive continuous
improvement in strategy execution activities
b. Create a strategy-supportive organisational structure
c. Build the organisational capabilities required for successful strategy
execution
d. Tie rewards and incentives directly to the achievement of strategic
and financial targets
e. Field and line employees usually have the information they need to
understand the bottom-line impact of their day-to-day choices

4. In the section where we discussed effective practices for planning and
managing implementation, we applied disciplines taken from effective
project management. Listed below are five of the six practices that we
discussed. From the options that follow, which response contains the
one practice missing from the bulleted list?
• Effective cost estimation and budgeting
• Scheduling
• Resource allocation management
• Control
• Effective planning
a. Identify suitably senior people to act as sponsors
b. Conflict resolution
c. Break the strategy down into an action plan
d. Use stories to describe culture
e. Balance positive and negative motivational considerations
5. In Reading 11.1 Sull, Homkes and Sull (2015) identified five myths.
Which of the descriptions below most accurately summarises Myth 4 –
a performance culture drives execution?
a. Frequent and direct intervention from on high encourages middle
managers to escalate conflicts rather than resolve them, and over
time they lose the ability to work things out with colleagues in other
units
b. Managers and employees at every level need to adapt to facts on
the ground, surmount unexpected obstacles, and take advantage
of fleeting opportunities
c. Whereas companies have effective processes for cascading
goals downward in the organisation, their systems for managing
horizontal performance commitments lack teeth
d. A culture that supports execution must recognise and reward
other things (other than past performance) as well, such as agility,
experimentation, teamwork and ambition
e. When asked about obstacles to understanding the strategy, middle
managers are four times more likely to cite a large number of
corporate priorities and strategic initiatives than to mention a lack of
clarity in communication

6. Which of the following is not one of the characteristics of the effective
measuring and monitoring process that were discussed in the section
on measuring and monitoring progress?
a. Use of best-practice indicators and metrics
b. Use of marketing-related key success factors
c. That the measures are strategically significant
d. Measures that the strategy is being managed efficiently
e. Interim measures are being used
7. Martin (2010, p. 70) suggested that the ‘choice maker can help his
employees make better choices in four specific ways’. Which of the
items listed below is not one of the four ways that he proposed strategic
leaders should help engage managers in the rest of the organisation?
a. Explicitly identify the next downstream choice
b. Minimise the impact of fragmented choices
c. Assist in making the downstream choice as needed
d. Explain the choice that has been made and the reasons for it
e. Commit to revisiting and modifying the choice based on
downstream feedback
8. Kotter identified three things that distinguish what leaders do rather

than what managers do. From the list below which is a characteristic of
what leaders do?
a. Structure and staff the organisation
b. Plan and budget
c. Address diminishing support structures
d. Control and problem solve
e. Align people to the vision

References
Armstrong, G, Adam, S, Denize, J & Kotler, P 2015, Principles of
marketing, 6th edn, Pearson, Sydney.
Armstrong, G & Kotler, P 2012, Marketing: An introduction, 11th edn,
Pearson Prentice-Hall, Upper Saddle River, NJ.
Bashrum, M 2012, ‘Culture of execution: Empower your organization’,
Leadership Excellence, vol. 29, issue 11, p. 16.
Beer, M, Eisenstat, R A & Spector, B 1990, ‘Why change programs don’t
produce change’, Harvard Business Review, vol. 68, no. 6, pp. 158–166.
Beer, M & Nohria, N (eds) 2000, Breaking the code of change,
Bonoma, T V 1984, ‘Making your marketing strategy work’, Harvard
Bregman, P 2017, ‘Execution is a people problem, not a strategy problem’,
Harvard Business Review, 4 January.
Covey, S 1990, The seven habits of highly effective people,
Simon & Schuster, NY.
Goss, T, Pascale, R & Athos, A 1993, ‘The reinvention roller coaster:
Risking the present for a powerful future’, Harvard Business Review,
vol. 71, no. 6, pp. 97–108.
Harper’s Monthly Magazine, September 1932.
HBR Spotlight, 2010, ‘How hierarchy can hurt strategy execution’,
Harvard Business Review, July/August, pp. 74–75.
Kanter, R M 2001, Evolve! Succeeding in the digital culture of tomorrow,
Kaplan, R & Norton, G 2008, ‘Kaplan and Norton’s six stage strategy
execution approach’, Chartered Accountants Journal, July, vol. 87, iss. 6,
p. 66.
Kotter, J 1990, ‘What leaders really do’, Harvard Business Review,
Reprinted December 2001, vol. 70, no. 11, pp. 85–96.
Kotter, J 1995, ‘Leading change: Why transformation efforts fail’, Harvard
Kotter, J P & Schlesinger, L A 2008, ‘Choosing strategies for change’,
Harvard Business Review, vol. 86, no. 6, pp. 130–139.
Kotter J, 2014, Accelerate: Building strategic agility for a faster-moving
world? via https://www.kotterinc.com/8-steps-process-for-leading-change/
Lepsinger, R 2008, ‘Starting an execution revolution’, Industrial
Management, May, vol. 50, iss. 3, pp. 27–30.

Mancesti, M 2016, ‘Do you have the right implementation team?’
Leadership Excellence Essentials, May, pp. 42–43.
Martin, R L, 2010, ‘The execution trap’, Harvard Business Review, July/
August, pp. 64–71.
Matthews, J A 2005, ‘Strategy and the crystal cycle’,
California Management Review, vol. 47, no. 2, Winter, pp. 6–32.
Mintzberg, H 1994, ‘The fall and rise of strategic planning’,
Neilson, G L, Martin, K L & Powers, E 2008, ‘The secrets to successful
strategy execution’, Harvard Business Review, June, vol. 86, issue 6, pp.
60–70.
Patten, L 2015, ‘The continued struggle with strategy execution’,
International Journal of Business Management and Economic Research,
vol. 6, no. 50, pp. 288–295.
Ruhmann, J S 2011, ‘Strategy execution: Make it your core competence’,
Leadership Excellence, August, p. 3.
Sull, D, Homkes, R & Sull, C 2015, ‘Why strategy execution unravels –
and what to do about it’, Harvard Business Review, March, pp. 58-66
Thompson, A A, Strickland, A J & Gamble, J E 2008, Crafting & executing
strategy: The quest for competitive advantage, 16th edn, McGraw-Hill Irwin,
Boston.
Crafting & executing strategy: The quest for competitive advantage,
19th edn, McGraw-Hill/Irwin, New York.
Wilcox, T 1996, ‘Transforming organisations through quality management:
A study of leadership and learning’, Studies in Organisational Analysis and
Innovation, no.13, UNSW Industrial Relations Research Centre.

answers
1. a
2. c
3. e
4. b
5. d
6 b
7. b
8. e

Reading 11.1 Sull, D, Homkes, R & Sull C, 2015, ‘Why strategy

execution unravels – and what to do about it’, Harvard
Business Review, March, pp. 58–66.

Unit 12
Recognising and engaging
key strategic stakeholders
CONTENTS
Learning outcomes 12–3 Conclusion 12–27
Understanding strategic stakeholders 12–4 Self-assessment quiz 12–30
Engaging the stakeholders effectively 12–8
References 12–34
Capturing and communicating strategy 12–11
Communicating the strategy 12–13
Measuring and monitoring performance 12–16
Measuring and monitoring strategy 12–16
Adjusting accountability and reward
systems 12–17
Sustainability, CSR and ethical issues
and delivering shared value 12–19

Introduction
The most important thing in communication is to hear what isn’t being
said!
(Peter Drucker, 1909–2005.

www.quotationspage.com/quote/32975.html)
Good communication is as stimulating as black coffee, and just as

hard to sleep after!
(Anne Morrow Lindbergh, 1906–2001, from Gift From the Sea.

www.quotationspage.com/quotes/Anne_Morrow_Lindbergh/)
For our last Unit, we ask you one last time, before reading the key concepts
and undertaking the detailed activities that follow, you can get a sense of
what this Unit is about from the following video. It will highlight key learning
around:
• recognising the impact and processes for effectively engaging strategic
stakeholders
• understanding the concept and the role strategy plays in generating
shared value
• how to communicate strategy effectively and how to measure strategic
success.
Video
Why would we start this Unit with quotes from perhaps one of the most
revered management authors of the post-World War II era, and the author
wife of aviation pioneer Charles Lindbergh? What do these quotes suggest
to us about strategic management?
The key point of the Lindbergh quote is to highlight that when it is done
well, communication can stimulate and inspire. When communication
is effective, it excites people. But as Drucker’s quote brings home,
most people won’t understand what isn’t said – so it is therefore vital to
communicate (say) what each audience needs to understand.
Unit 12: Recognising and engaging key strategic stakeholders 12–1

Why is communication so important? Consider the following quote:
The ‘new marketing myopia’ occurs when marketers fail to see the
broader societal context of business decision-making, sometimes
with disastrous results for their organization and society. It stems from
three related phenomena: (1) a single-minded focus on the customer
to the exclusion of other stakeholders, (2) an overly narrow definition
of the customer and his or her needs, and (3) a failure to recognize
the changed societal context of business that necessitates addressing
multiple stakeholders.
(Smith et al 2010, p. 4)
Although this quote is aimed specifically at marketers, its application is just

as relevant to strategic managers more generally. All organisations have
a range of stakeholders, each with a ‘stake’ or interest in the organisation.
The impact of some stakeholders (employees, investors, strategic allies or
partners, key suppliers, government regulators) may potentially be a ‘make
or break’ factor in the success of a strategy. This stakeholder power may be
used to support the organisation and its strategies, or potentially to impede
them. Therefore, recognising, analysing, communicating with and engaging
stakeholders is a vital strategic management competency.
Strategic managers must be aware of the concerns and likely impacts
of key stakeholders in the strategy formulation stage – typically through
analysing external forces (using PESTLE). But they also need to ensure
that the impact of key stakeholders during the implementation/execution
stages are effectively managed.
So, each group of strategic stakeholders must be identified; their impact
and roles defined and understood, their information needs identified, and
ideally, an effective dialogue (i.e. two-way communication) facilitated on an
ongoing basis.
As this is the final Unit of this course, we now need to bring together the
threads of each of the concepts and themes of the previous 11 Units in
a way that means that strategic managers’ actions have the best chance
of producing the outcomes that agile, sustainable strategic organisations
need. So, in this Unit we will talk about:
• understanding who the key stakeholders are, and how their needs and
perspectives can be understood
• how communication is a critical mechanism for engaging key
stakeholders
• the importance of aligning measurement, accountability and incentive
systems to strategy
• the importance of sustainability – in particular, considering,
understanding and applying principles of corporate social responsibility
(CSR) in developing and evaluating strategy.

Learning outcomes
• outline the principles of stakeholder theory as they relate to strategic
management
• explain alternative processes for developing strategic plans
• describe processes for communicating strategy to key stakeholder
audiences as a means of engagement
• outline how alignment with strategies is facilitated through measurement,
accountability and incentive systems
• explain how consideration of ethics and social responsibility can be
incorporated into strategic plans.

Understanding strategic
stakeholders
To help focus our thinking on why stakeholder management is so important
as part of strategy, watch the following video by R. Edward Freeman of the
Darden School of Business, University of Virginia.
Video
Video 12.2 R
Edward Freeman, 2013, ‘Challenges for stakeholder theory
– R. Edward Freeman invited by ESSEC Business School’
[9:49].
Throughout this course, we have been at great pains to highlight that a

critical role of an effective strategic manager is to recognise, understand
and develop ways to manage both the input and the impact of individuals
and groups like investors, employees, suppliers, customers, channel
partners, strategic allies, regulators, the media, etc. As you can see from
the video, all of these disparate groups can be labelled as ‘stakeholders’.
What you may also have recognised as you watched the video is that
R Edward Freeman touches on a number of other key themes that we
have been discussing in this course – specifically, that strategy is about
creating and exchanging value with these critical stakeholder audiences.
In discussing value, he also mentioned that value is about much more
than just profit. This is a theme that we touched on in early Units where
we discussed the balanced scorecard and triple or quadruple bottom
lines and Michael Porter’s concept of shared value, which we will discuss
below. Freeman highlights that one of the critical issues in understanding
stakeholders evolves from the need to be clear and aligned with the
organisation’s purpose. And, while focused on discussing the role of
business schools specifically, he emphasised that strategic management
is both analytical and creative, and we need to tap into creativity as well as
‘science’.
Research is increasingly finding that not only is stakeholder analysis
important to strategic management, but that organisations that are able
to balance the various needs and ‘value’ exchanges with stakeholders
perform better.
The capitalist system is under siege. In recent years, business has increasingly
been viewed as a major cause of social, environmental and economic problems.
Companies are widely perceived to be prospering at the expense of the broader
community.
continued

A big part of the problem lies with companies themselves, which remain trapped
in an outdated approach to value creation that has emerged over the past few
decades. They continue to view value creation narrowly, optimizing short-term
financial performance in a bubble while missing the most important customer
needs and ignoring the broader influences that determine their longer-term
success. How else could companies overlook the well-being of their customers,
the depletion of natural resources vital to their businesses, the viability of key
suppliers, or the economic distress of the communities in which they produce and
sell? How else could companies think that simply shifting activities to locations
with ever lower wages was a sustainable “solution” to competitive challenges?
Government and civil society have often exacerbated the problem by attempting
to address social weaknesses at the expense of business. The presumed trade-
offs between economic efficiency and social progress have been institutionalized
in decades of policy choices.
The solution lies in the principle of shared value, which involves creating economic
value in a way that also creates value for society by addressing its needs and
challenges. Businesses must reconnect company success with social progress.
Shared value is not social responsibility, philanthropy, or even sustainability, but a
new way to achieve economic success. It is not on the margin of what companies
do but at the center. We believe that it can give rise to the next major transformation
of business thinking.
A growing number of companies known for their hard-nosed approach to
business—such as GE, Google, IBM, Intel, Johnson & Johnson, Nestlé,
Unilever, and Wal-Mart—have already embarked on important efforts to create
shared value by reconceiving the intersection between society and corporate
performance. Yet our recognition of the transformative power of shared value
is still in its genesis. Realizing it will require leaders and managers to develop
new skills and knowledge—such as a far deeper appreciation of societal needs, a
greater understanding of the true bases of company productivity, and the ability to
collaborate across profit/nonprofit boundaries. And government must learn how to
regulate in ways that enable shared value rather than work against it.
Source: Porter & Kramer 2011, p. 64
One of the keys to achieving this notion of shared value is a managerial

mindset that we might refer to as ‘stakeholder orientation’. Stakeholder
orientation involves developing an organisation-wide focus on a broad
range of stakeholders, based on recognising their role as representatives
of the communities to which the organisation also belongs and working to
generate shared value for all, and not simply the classic capitalist focus
on maximising the value for shareholders, customers and competitors. As
Porter highlights:
Business and society have been pitted against each other for too long. That is
in part because economists have legitimized the idea that to provide societal
benefits, companies must temper their economic success. In neoclassical
thinking, a requirement for social improvement—such as safety or hiring the
disabled—imposes a constraint on the corporation. Adding a constraint to a firm
that is already maximizing profits, says the theory, will inevitably raise costs and
reduce those profits.
continued

A related concept, with the same conclusion, is the notion of externalities.
Externalities arise when firms create social costs that they do not have to bear,
such as pollution. Thus, society must impose taxes, regulations, and penalties so
that firms “internalize” these externalities—a belief influencing many government
policy decisions.
This perspective has also shaped the strategies of firms themselves, which have
largely excluded social and environmental considerations from their economic
thinking. Firms have taken the broader context in which they do business as a
given and resisted regulatory standards as invariably contrary to their interests.
Solving social problems has been ceded to governments and to NGOs. Corporate
responsibility programs—a reaction to external pressure—have emerged
largely to improve firms’ reputations and are treated as a necessary expense.
Anything more is seen by many as an irresponsible use of shareholders’ money.
Governments, for their part, have often regulated in a way that makes shared
value more difficult to achieve. Implicitly, each side has assumed that the other is
an obstacle to pursuing its goals and acted accordingly.
The concept of shared value, in contrast, recognizes that societal needs, not just
conventional economic needs, define markets. It also recognizes that social harms
or weaknesses frequently create internal costs for firms—such as wasted energy or
raw materials, costly accidents, and the need for remedial training to compensate
for inadequacies in education. And addressing societal harms and constraints
does not necessarily raise costs for firms, because they can innovate through
using new technologies, operating methods, and management approaches—and
as a result, increase their productivity and expand their markets.
Source: Porter & Kramer 2011, p. 65
From these quotes, you can see that one of the most highly regarded
strategic authors of the 20th century is drawing our attention to the need
for strategic managers to focus on strategic programs that maximise
value for a much wider range of interests, not simply economic value for
shareholders. This is entirely consistent with our discussion in earlier Units
about the need for balanced scorecards and multiple bottom lines. You may
also recall that in discussing agile organisations in Unit 5, we highlighted
Gary Hamel’s 10 principles, and many of these principles strongly imply
that engaging key stakeholders, understanding their perspectives and
involving at least some of them in the strategy development process is
critical.
From a strategic perspective, stakeholders are particularly significant if their
stake is matched by some power or capacity to influence the strategic
program and outcomes of the organisation.
A generic list of stakeholders for most organisations would include some of
the following groups.

Figure 12.1 Generic list of stakeholders
• Owners and financiers • Competitors
• Activist groups • Suppliers
• Customers or clients and their advocates • Government/regulators
• Employees and unions • Political groups
• The board and senior managers • Civic institutions
• Trade associations or professional bodies • Local communities
• Media/commentators • The natural environment
• Future generations
Source: adapted from Carroll and Buchholz 2003.
Effective strategic management of stakeholders is built on a series of five

key principles that require strategic managers to:
1. recognise and monitor the portfolio of relevant stakeholders and the
impacts of the organisation on them
2. seek to understand their perspectives. This does not mean having to
‘do what they want’, but it does require that you ‘understand what they
want’.
3. communicate with stakeholders openly, honestly and appropriately
4. work cooperatively (along with other relevant entities) to minimise
any harm that the strategy or operations may cause or perhaps, taking
a lead from Porter and Kramer (2011), look for ways to create shared
value
5. work to embed a stakeholder orientation (and not just a shareholder
or customer orientation) across the organisation.
In order to manage stakeholders effectively, a strategic manager needs

to start by (a) recognising them, and (b) analysing their perspectives and
their (existing and potential) impacts. From this process, a contingency plan
and stakeholder management strategy can be developed in line with the
risk-management principles, based on those set out by Crouhy et al (2013,
p. 2), as we discussed in Unit 5:
1. identifying what strategic risks exist
2. measuring and estimating the impact of these risks
3. assessing the probability that the risk will eventuate
4. identifying those risks that are unacceptable to the organisation, and
developing a plan to mitigate or respond to these risks
5. monitoring critical risks – develop advance warning systems.

Engaging the stakeholders effectively
As you can see from Video 12.1 and from the discussion above, people
play a critical part in effective strategy execution. Indeed, as we have
already discussed in Unit 11, Bregman (2017, pp. 3–4) highlighted this very
clearly in the title of the Harvard Business Review article ‘Execution is a
people problem, not a strategy problem’ in noting:
However hard it is to devise a smart strategy, it’s ten times harder to get people to
execute on that strategy. And a poorly executed strategy, no matter how clever,
is worthless…
Most organizations rely on communication plans to make that shift. Unfortunately,
strategy communication, even if you do it daily, is not the same as—and is not
enough to drive—strategy execution. Because while strategy development and
communication are about knowing something, strategy execution is about
doing something. And the gap between what you know and what you do is often
huge. Add in the necessity of having everyone acting in alignment with each other,
and it gets even huger. …
To deliver stellar results, people need to be hyper-aligned and laser-focused on the
highest-impact actions that will drive the organization’s most important outcomes.
Again, as you can see from the quote in bold above, execution requires
moving from knowing something to doing something. And this means
getting stakeholders to move from simply ‘knowing’ the strategy to ‘doing
something’ about it. In order to achieve this, Bregman (2017, pp. 4–6)
proposes that strategic managers need to:
1. Define the Big Arrow: ‘identify the most important outcome…to
achieve over the following 12 months. [The Big Arrow is] to do with
creating a strategy and product roadmap that [is] supported by the
entire leadership team. The hardest part of this is getting to that one
most important thing, the thing that would be a catalyst for driving the
rest of the strategy forward.’
2. Test the Big Arrow definition by questioning:
• ‘Will success in the Big Arrow drive the mission of the larger
organization?
• ‘Is the Big Arrow supporting, and supported by, your primary
business goals?
• ‘Will achieving it make a statement to the organization about what’s
most important?
• ‘Will it lead to the execution of your strategy?
• ‘Is it the appropriate stretch?
• ‘Are you excited about it? Do you have an emotional connection
to it? …

• What current behavior(s) do we see in the organization that will
make driving the Big Arrow easier and make success more likely?
3. Identify the people (stakeholders) with highest impact i.e. ‘the

people who [are] most essential to achieving the goal. …Who has the
greatest capacity to affect the forward momentum of the arrow? Who is
an influencer [in/outside] the organization? Who has an outsize impact
on our Big Arrow outcome or behavior? …
4. Determine what they should focus on - assess:
• ‘Key contribution to moving the Big Arrow forward
• ‘Pivotal strength [the one thing] that will allow them to make their
key contribution
• ‘Game changer, the thing that, if the person improves, will most
improve their ability to make their key contribution.’
5. Hold laser-focused coaching sessions – focused on improving

impact on the Big Arrow issues
6. Collect and share data – particularly to encourage collaboration
7. Amplify performance – build execution capabilities i.e. capabilities
in how to communicate priorities, how to deal with someone who is
resistant, how to influence someone who doesn’t report to you, how to
say no to distractions, how to build more effective teams, how to build
relationships and collaborate, and so on.
Activity 12.1
1. Thinking about the strategy or your own organisation (or your business
unit), what would you describe as ‘the big arrow’?
2. Who are the key stakeholders whose commitment and focus are
needed to execute the strategy effectively?

3. If you were going to coach one of these stakeholders to get them more
aligned and focused on the big arrow, how would you approach it?

Capturing and
communicating strategy
Traditional views of strategic plans often focused on producing a document
or plan formatted very similarly to the headings we set out in Units 1 and 2.
In other words, effective ‘strategic plans’ are said to clearly document the five
tasks of strategic management as defined by Thompson et al (2016, p. 20):
1. a strategic vision or what Lafley and Martin (2013, p. 15) referred to as
‘our winning aspiration’
2. objectives – setting out what Lafley and Martin described as answers to
where will we play and with what focus?
3. a strategy to achieve the objectives (how will we win?)
4. details of how to execute the strategy (what are the necessary
capabilities and management systems?)
5. the means for evaluating performance, monitoring developments, and
initiating corrective actions.
As you will recall from Unit 2, that means that strategic managers would
document the following:
• the organisation’s strategic vision
• a set of strategic objectives (statements of ‘what we want to achieve,’
written to conform to the SMART format)
• a set of strategy statements (how will we achieve the objectives?)
• an action plan (detailing the specific policies, tasks, accountabilities,
deadlines, budgets, etc. required to make the strategy happen)
• a process for monitoring, reviewing and adjusting the plan over its
life – but in order to be agile, how does the organisation intend to
account for unforeseen events, changes in the environment, developing
competencies, etc.??
Other views of setting out and communicating a

strategy
This traditional view of the content of a strategy document is quite widely
practised – particularly in larger and multi-country organisations where
control of strategy and management of resources necessitates some
bureaucracy and process to ensure conformity, consistency and efficiency.
However, strategies not only need to be appropriately documented – they
also must be effectively communicated. You might recall from Reading 11.1
that Sull, Homkes and Sull (2015) suggest that one of the myths (Myth 3)
was that ‘communicating equals understanding’.

To be effective, strategy must be communicated in such a way that the key
stakeholder audiences understand the information required to align with the
strategies, and actions must be put in place to ensure the ‘laser-focus’ that
Bregman (2017) refers to is achieved.
There has been much criticism that many traditional ‘strategy documents’
are, in practice, too detailed, too complex, too technical and generally
unwieldy – making them hard to understand and difficult to implement.
So, best practice requires strategic plans to be simpler and easier to
understand, and customised for different audiences.
Eisenhardt and Sull (2001) found that communicating strategy in turbulent
environments is more difficult. Like other advocates of strategic agility, they
suggest that in order to maintain strategic flexibility, managers needed to
respond to environments characterised by constant change. They advocate
that strategy be reduced to a set of simple rules – perhaps what Bregman
refers to as ‘the Big Arrow’. Having these rules expressed allows a
strategic manager to seize opportunities and avoid threats by applying the
appropriate ‘rule’. They present the rules as per the table below.
Table 12.1 Strategy reduced to a set of simple rules

Type of rules Purpose of the rules Examples
How-to rules These set out key features Akamai’s rules for their customer service
of how a process is executed process: staff must consist of technical gurus,
– defining what makes every question must be answered on the
the organisation’s process first call or email, and R&D staff must rotate
unique. through customer service.
McKinsey’s processes for knowledge
management that bonuses are not paid until
key knowledge about what is learned from an
assignment are entered into the database.
Boundary rules They focus a strategic Cisco’s early acquisitions rule: companies
manager on which to be acquired must have no more than 75
opportunities can be pursued employees, 75% of whom are engineers.
and which are outside the GE’s matrix that unless there is a strategic fit
organisation’s strategic between market attractiveness and business
boundaries. strength, the opportunity isn’t pursued.
Priority rules These are designed to help Intel’s rule for allocating manufacturing
managers rank the strategic capacity: allocation is based on a product’s
issues, opportunities and gross margin.
threats.
Timing rules These are designed to Nortel’s rules for product development: project
synchronise strategic teams must know when a product has to be
managers with both the pace delivered to a leading customer to win, and
of the strategic environment product development must be less than 18
(how fast opportunities months.
and threats emerge) and Apple’s mandate to the iPod development
with other parts of the team that it had to be in the market within 12
organisation. months!

Type of rules Purpose of the rules Examples
Exit rules These are designed to assist Oticon’s rule for pulling out of projects
strategic managers to decide in development if a key team member –
when to pull out of a declining manager or not – chooses to leave the project
or potentially unattractive for another within the company, the project is
strategic position or business. killed.
GE’s rule that unless the business could be
number 1 or 2 in the market they would divest.
Source: adapted from Eisenhardt and Sull 2001, p. 111.
The key benefit of being clear about such rules is that it focuses strategic
managers on analysing, identifying and pursuing only those strategies that
fit within predetermined guidelines – saving precious management time and
resources in pursuing strategic issues the organisation is poorly positioned
to implement successfully. An associated benefit is that it provides a
‘filter’ allowing strategic managers across the organisation to be alert for
opportunities that align to the rules, and allowing managers of strategy
implementation activities to know how they need to manage them. This
approach also addresses a number of the myths that Sull, Homkes and Sull
(2015) highlighted in Reading 11.1 when describing how execution unravels
and what a strategic manager can do about it.
Eisenhardt and Sull (2001) describe characteristics that these simple
strategic rules should demonstrate. In particular, they suggest that the rules
should not be: too broad, too vague, mindless, stale or too conceptual
rather than experience-based.
These rules can have a long life and persist from one strategic cycle to the
next, or they can be created as and when needed. An organisation should
review its rules regularly to ensure that they align with the values of the
organisation, its strategic direction and its appetite for risk.
Communicating the strategy

Who needs to know about the strategy?
As you will recall from R Edward Freeman in Video 12.1, every organisation
needs to influence a range of stakeholders, and unless a strategic
manager can achieve everything required entirely on their own, they will
need to find a way to align with the stakeholders to get their involvement
and support in a laser-focused fashion. And, while Sull, Homkes and Sull
(2015) highlighted that communication doesn’t equal understanding, that
isn’t to suggest that we don’t need to communicate. In fact, what they
went on to propose is that it is the effectiveness, clarity and content of
the communication that is vital. Particularly in many modern highly skilled
technology-based environments, stakeholders demand to know not just

what is required of them, but why it is required – as you will recall from the
Simon Sinek video in Unit 2, it’s about ‘Why – How – What’.
Suffice it to say, communicating the strategy, and having processes to
achieve stakeholder alignment are as absolutely vital as the strategy
formulation. How likely is it that any strategy would succeed if it were
known only to the people who developed it, and not by those who need
to implement it, or by those stakeholders whose investment is required to
secure the resources to implement it?
All of the stakeholders in our generic list earlier (Figure 12.1), and perhaps
others you can think of, are important audiences for the organisation’s
strategies. But not all of them need all the detail, or as much detail as those
who develop the strategy or those who are charged with implementing it.
Activity 12.2
Consider (from the list of stakeholders earlier in this Unit) who might need
to know:
• the organisation’s vision
• the organisation’s objectives (what it plans to achieve)
• the organisation’s strategies (how it plans to achieve it)
• the details of the implementation or action plans
• the organisation’s processes and approach to reviewing and monitoring
the strategic plan
• adjustments and changes to the plan over time

How should organisations communicate strategy?
Those of you who have completed the core marketing course as part of
your MBA will be familiar with these concepts. Armstrong et al (2015) tell us
that successful communication involves the following.
• Identifying the target audience – Who are they? What do they
need to know about the strategy? How do they prefer to receive
communications? Where and when is communication with them
most effective?
• Determining the response sought – What sort of alignment are we
looking for? How do we want them to engage with the strategy?
• Choosing the message – Develop a message whose content,
structure, format, style and delivery achieve the communication
outcome and obtains the response that is being sought.
• Choosing the media or communication method that will reach the
audience and convey the message most effectively. This might involve
written communication, electronic communication, websites, person-to-
person discussions, etc.
• Selecting a credible message source – Who is the individual or
group who can best convey this message?
• Collecting feedback on how well the communication succeeded in
conveying the message and achieving the desired alignment response
(and adjusting the communication strategy until the communication
outcome is achieved).

Measuring and monitoring
performance
Having developed the strategy, the next step is, of course, implementation.
You will recall from Unit 11 how significant the role of effective
implementation or execution is. You will also recall from Units 1 and 2 that
effective strategy has both financial and non-financial indicators of success
and ideally, it should produce shared value. So now we need to consider
once again ‘how will performance of the strategy be measured?’
An old management axiom proposes that ‘what gets measured gets done,
and what gets rewarded gets done even faster’. This raises three key
issues about the implementation and management of effective strategy.
1. It requires regular measurement of the effectiveness and progress of
the strategy towards its intended outcomes.
2. In order to get stakeholder alignment and focus on the strategy, it
should be linked to the organisation’s accountability and reward
systems.
3. Effective strategic management requires progressive monitoring and
review.
Measuring and monitoring strategy

There has been much written in strategic management research about
the need to move away from purely financial measures of success. Porter
and Kramer (2011) and R Edward Freeman (Video 12.1) highlighted the
reasons for this in referring to value, consistent with our discussions in
earlier Units of triple and quadruple bottom lines, and balanced scorecards.
Further, for plans to be effective, they must have a small, select range of
key performance indicators that:
• are measurable (the M in SMART)
• contain both lag indicators (telling you what has happened) and lead
indicators (indicating what is going to happen)
• are reported as close to real time as possible (delays in reporting
variations in KPIs hinders agility)
• ideally include intermediate indicators of progress for each strategy
(milestones along the path to final success) rather than only measures
of the final outcomes. These can either be expressed as intermediate
outcomes or as simple rules.
• includes a process for regularly monitoring performance against the
intermediate objectives, and adjusting the strategy as and when
required.

However, there is a danger that measuring too many things can lead to
‘paralysis by analysis’ – spending so much time and so many resources
measuring that there is not enough time or resources for ‘doing’. Hence, we
need to make sure that what we are measuring and monitoring is strategic.
Typically, this means that the few strategic measures we choose are those
that help us to effectively monitor progress against numerous objectives
and strategies. These measures are strategic key performance indicators
or KPIs.
Adjusting accountability and reward systems

Measurement is only the first part of the management axiom that we
referred to earlier. The other part, ‘what gets rewarded gets done even
faster’, highlights that it is clear who is accountable for what, and the
organisation rewards people for these things. So the incentives and
rewards (the things that people get paid, promoted or recognised for in the
organisation) must reinforce alignment to the organisation’s strategy.
It is critical that as well as measuring KPIs, the organisation puts in place
clear mechanisms to ensure key people take responsibility for managing
the strategy and ensuring it succeeds, and to appropriately recognise and
reward strategic effort and success.
Thompson, Peteraf, Gamble and Strickland (2016, pp. 331–332) identify
a set of actions they refer to as ‘strategy-facilitating motivational practices’
designed to stimulate effective employee and stakeholder engagement and
commitment to a strategy. These include:
• providing attractive payment regimes and fringe benefits. These
payments and incentives should be tied to strategy-reinforcing
behaviours.
• giving awards and public recognition to high performers, and
showcasing strategic success. This should be targeted specifically
at recognising and highlighting the sorts of strategic behaviours that
Bregman (2017) refers to in suggesting, ‘To deliver stellar results,
people need to be hyper-aligned and laser-focused on the highest-
impact actions that will drive the organization’s most important
outcomes’.
• promoting from within wherever possible (including recruiting or
appointing from among key external stakeholders)
• making sure that ideas and suggestions from key stakeholders are
encouraged, acknowledged, valued and credited
• creating a ‘sustainable’ organisational culture and working environment
– one that makes employees and identified strategic stakeholders feel
part of doing something worthwhile

• stating the strategic vision in inspirational terms that make stakeholders
feel that they are part of something that creates shared value
• sharing information with employees and identified key strategic
stakeholders about things like financial performance, market conditions,
strategies, operational measures, competitor actions, environmental
conditions, etc.
• being flexible about how the organisation manages its people and
relationships – particularly adapting to the differences outside the
‘home market’ (as discussed in Unit 10)
• developing organisational structures, job descriptions, recruiting
practices and training and development priorities that place high
emphasis on developing strategic competencies and adapting these as
the strategies change.
Further, Thompson, Peteraf, Gamble and Strickland (2016, pp. 332–

337) highlight some other key factors about the culture and rewards in
organisations that are effective at strategic management.
• They achieve an effective balance of reward and punishment. While
the use of encouragement should outweigh pressure and demands,
strategic managers in successful organisations are comfortable in
applying pressure to get results. There also needs to be judicious and
fair use of criticism and ‘corrective action’ for any under-performance or
unacceptable behaviours.
• Reward systems need to be linked directly to the strategically relevant
areas of performance. In particular, reward systems should be able
to identify who contributed most to performance, and each person or
stakeholder is rewarded appropriately based on their contribution.
Activity 12.3
Based on these principles of what an effective strategic measurement
and reward system should look like, how effective are the measures and
rewards in your workplace? What could be done to improve them?

Sustainability, CSR and
ethical issues and delivering
shared value
Research and thought-leadership increasingly emphasise that effective
stakeholder management, ethical practices, sustainable cultures and
behaviours play a critical part in strategic management. This was highlighted
in our earlier discussion about Porter and Kramer’s notion of shared value,
and in the issues of stakeholder management we have discussed earlier in
this Unit. To further make the point, consider the following:
Companies today dedicate considerable resources to alleviate the ills
of the world (e.g., illness, pollution, poverty, disasters). Much research
…points to the shared value created by such corporate social
responsibility (CSR) initiatives: these corporate actions not only help
make the world a better place but also garner positive reactions from
consumers, helping build or burnish a company’s reputation.
(Hildebrand et al, 2017, p. 738)
Our results suggest that, for socially responsible firms, there are
tangible financial benefits associated with releasing sustainability
reports. Surrounding the release of such reports, firms can expect
to witness abnormal stock returns that are positively related to
their sustainability performance. Over the longer term, release of
sustainability reports helps the stock market incorporate a firm’s
sustainability performance in a timely manner, resulting in a stronger
association between sustainability performance and stock prices…
Because sustainability reporting provides higher business returns
to good corporate citizens, in terms of positive abnormal stock
returns and higher value relevance of sustainability performance,
policy makers should use this information to educate firms about
the business value of achieving high sustainability performance and
publishing sustainability reports.
(Du, Bhattacharya & Sen 2017, pp. 327-328)
Or to draw again on Porter and Kramer’s (2011, pp. 64–65) findings:
The purpose of the corporation must be redefined as creating shared value,

not just profit per se. This will drive the next wave of innovation and productivity
growth in the global economy. It will also reshape capitalism and its relationship to
society. Perhaps most important of all, learning how to create shared value is our
best chance to legitimize business again.
continued

The concept of shared value, in contrast, recognizes that societal needs, not just
conventional economic needs, define markets. It also recognizes that social harms
or weaknesses frequently create internal costs for firms—such as wasted energy or
raw materials, costly accidents, and the need for remedial training to compensate
for inadequacies in education. And addressing societal harms and constraints
does not necessarily raise costs for firms, because they can innovate through
using new technologies, operating methods, and management approaches—and
as a result, increase their productivity and expand their markets.
Shared value, then, is not about personal values. Nor is it about “sharing” the
value already created by firms—a redistribution approach. Instead, it is about
expanding the total pool of economic and social value.
Porter and Kramer (2011, pp. 67–69) went on to cite a number of illustrative
examples of how shared value delivers valuable strategic outcomes for
the organisation and for the communities in which they operate. We will
consider a few of these here:
Society’s needs are huge—health, better housing, improved nutrition, help for the
aging, greater financial security, less environmental damage. Arguably, they are
the greatest unmet needs in the global economy. In business, we have spent
decades learning how to parse and manufacture demand while missing the
most important demand of all. Too many companies have lost sight of that most
basic of questions: Is our product good for our customers? Or for our customers’
customers?
The societal benefits of providing appropriate products to lower-income and
disadvantaged consumers can be profound, while the profits for companies can
be substantial. For example, low-priced cell phones that provide mobile banking
service are helping the poor save money securely and transforming the ability of
small farmers to produce and market their crops. In Kenya, Vodafone’s M-PESA
mobile banking service signed up 10 million customers in three years; the funds it
handles now represent 11% of that country’s GDP. In India, Thomson Reuters has
developed a promising monthly service for farmers who earn an average of $2,000
a year. For a fee of $5 a quarter, it provides weather and crop-pricing information
and agricultural advice. The service reaches an estimated 2 million farmers, and
early research indicates that it has helped increase the incomes of more than
60% of them—in some cases even tripling incomes. As capitalism begins to work
in poorer communities, new opportunities for economic development and social
progress increase exponentially.
A company’s value chain inevitably affects—and is affected by—numerous
societal issues, such as natural resource and water use, health and safety,
working conditions, and equal treatment in the workplace. Opportunities to create
shared value arise because societal problems can create economic costs in the
firm’s value chain. Many so-called externalities actually inflict internal costs on the
firm, even in the absence of regulation or resource taxes. Excess packaging of
products and greenhouse gases are not just costly to the environment but costly to
the business. Wal-Mart, for example, was able to address both issues by reducing
its packaging and rerouting its trucks to cut 100 million miles from its delivery
routes in 2009, saving $200 million even as it shipped more products. Innovation
in disposing of plastic used in stores has saved millions in lower disposal costs to
land fills

The key point here is that shared value is a mindset that recognises that
good strategy delivers value for the firm and the community, rather than
posing it in opposing terms – what Jim Collins and Jerry Poras (1994)
referred to as the embracing the genius of the ‘and’ (rather than the tyranny
of the ‘or’). However, to be able to act, a strategic manager needs some
sort of framework to shape a response to this ‘sustainability’ or shared
value mandate. Porter and Kramer (2011, p. 68) identified the following key
potential areas in which strategic managers could look for shared value.
Figure 12.2 The range of potential impacts of strategy
Environmental
Impact
Supplier
Energy
Access and
Use
Viability
Company
Water Productivity Employee
Use Skills
Employee Worker
Health Safety
However, shared value also includes the need to consider areas of

corporate social responsibility (CSR) more broadly. While we can reflect
briefly on the opportunities for creating shared value within the circles
of the diagram above, we certainly won’t try to define what your ethics
ought to be, or what ethical principles should guide your organisation’s
strategy. Standards of ethics and CSR are issues that each individual, and
organisation, must determine for themselves.
What we will do, however, is highlight that there is now a wealth of research
and evidence that declares that ethical practice and high standards of
CSR are strategically valuable attributes. Indeed, as the Kanji and Chopra
and Porter and Kramer quotes that we used to open this section suggest,
evidence is emerging that organisations with strong reputations for CSR
performance are attracting more and more investor support, tend to
attract the best people by becoming ‘employers of choice’, and are more
often supported and assisted by strategic allies and partners who want to

associate themselves with organisations they admire. In the terms of Porter
and Kramer (2011) and R. Edward Freeman (2013) in Video 12.1, they
create more shared value.
But Porter and Kramer (2011, p. 76) propose that creating shared value
goes even further than CSR; they suggest that it views the same issues
through a different set of lenses – summarised in the following table:
Table 12.2 How shared value differs from corporate social responsibility
HOW SHARED VALUE DIFFERS FROM CORPORATE SOCIAL RESPONSIBILITY
Creating shared value (CSV) should supersede corporate social responsibility (CSR) in guiding
the investments of companies in their communities. CSR programs focus mostly on reputation
and have only a limited connection to the business, making them hard to justify and maintain
over the long run. In contrast, CSV is integral to a company’s profitability and competitive
position. It leverages the unique resources and expertise of the company to create economic
value by creating social value.
CSR CSV
• Value: doing good • Value: economic and societal benefits
relative to cost
• Citizenship, philanthropy, sustainability
• Joint company and community value
• Discretionary or in response to external
creation
pressure
• Integral to competing
• Separate from profit maximization
• Integral to profit maximization
• Agenda is determined by external
reporting and personal preferences • Agenda is company specific and
internally generated
• Impact limited by corporate footprint
and CSR budget • Realigns the entire company budget
Example: Fair trade purchasing Example: Transforming procurement to

increase quality and yield
In both cases, compliance with laws and ethical standards

and reducing harm from corporate activities are assumed.
The brief ‘cases’ highlighted in the Porter and Kramer quote earlier
and our discussions in this section clearly suggest that communities,
including customers, governments and the public at large, want to relate
to organisations that behave in ways seen as appropriate, responsible and
ethical and that seek to create shared value. This is true also for suppliers,
strategic partners and employees who want to collaborate with and work for
organisations that they respect and trust.

Therefore, an essential question that needs to be canvassed by strategic
managers in their organisations when developing and implementing
strategy is, ‘What are the opportunities to create shared value that should
shape our strategies?’
In answering this question, it is important that the strategic management of
shared value, or the development of a culture of CSR in an organisation,
must be genuine. As the following finding identifies:
Hull and Rothenberg (2008) raise an interesting question in support
of this view. They argue that CSR tends to be pursued as a reaction
or even a response to pressure from stakeholders. In such a
context, the response would be ‘neither strategic nor operational but
cosmetic’. Frankental (2001) calls certain corporate initiatives in social
responsibility a ‘public relations exercise’.
(Melo & Galan 2011, p. 429)
The research then went on to demonstrate that organisations that adopted

such a ‘cosmetic’ approach to CSR gained few long-term benefits from
this, whereas organisations that demonstrated a genuine CSR culture
tended to outperform over the medium and long term and to generate
more shared value.
This research is further supported by the findings of former UNSW
Business School academic Peter Moran and former AGSM Professor
Grahame Dowling (2012), who observed:
We have outlined two models of reputation formation, namely, built-in and bolted-
on. The bolt-on model is where the desired organisational reputation is designed
around one or more tactics unrelated to strategy. The idea here is to convince
employees and outsiders that the organisation is of good character. Corporate
reputation is effectively managed by public relations. The primary goal is to
protect the organisation’s social licence to operate, and in the current low-trust
business climate, to deflect the wrath of legislators, regulators, and the public.
Many academics and managers implicitly support this model. They propose that
the metrics of a good reputation are perceptions of the organisation’s integrity,
fairness, ethics, vision, leadership, distinctiveness, visibility, authenticity,
transparency, consistency, and communication. The main weakness of this
approach is embedded in the inherent difficulty in achieving excellence in this long
list of attributes. A second weakness is highlighted by David Vogel, who argues
that while there is a market for corporate virtue, it is of limited scope.
The built-in model proposes that the strategy of the organisation is the DNA of its
reputation. Here the actions that reflect this strategy speak louder than any public
relations words about the organisation’s honorable intentions. They also act as the
points of proof and points of difference of strategy and reputation. Organisations
that play a two-reputation game (like BP) do themselves and their stakeholders no
favours. When reputation reflects the strategy of the organisation, it is an honest
and reliable signal of future behaviour. When reputation is designed around
non-core commitments, it lacks honesty and integrity – two ingredients vital to
enhancing trust.

The strategic insight that we gain from the research and the discussion
then is that for ethical behaviour and a genuine commitment to CSR and
the pursuit of shared value as part of strategic management to become
embedded in the organisation’s culture or ‘strategic DNA’, the following
issues must be addressed:
• economic sustainability – respecting the scarcity of resources and
managing them sustainably
• ecological sustainability – minimising harm to the natural environment
and ecosystems
• social justice – respect for human rights, minimising harm and seeking
to reduce or eliminate inequality and disadvantage
• moral philosophy – recognising the ‘moral responsibility’ to act within
the norms of a civil society
• stakeholder orientation – recognising and respecting the importance of
key stakeholder relationships
• legal sustainability – acting to ensure that the organisation is not
subjected to litigation or overly prescriptive and limiting regulation.
For this to succeed, there must be a genuine desire to be a ‘good corporate

citizen’ and to have principles and values guide the behaviour of all leaders,
employees and stakeholders.
Activity 12.4
You might like to reflect on your own organisation or one that you know well
and consider the ethical, corporate responsibility or shared value issues
that arise in developing strategy.
1. What guidelines does the organisation use on these issues in
developing strategy?
2. What would you suggest might be a better set of guidelines?

Summary
In this Unit, you should have gained an appreciation of the following.
• In order to effectively formulate and execute strategy, strategic
managers must look to hyper-align and focus the strategy with key
stakeholders through applying the following principles:
– recognise and monitor the portfolio of stakeholders relevant to their
strategies
– listen to their views and seek to understand their perspectives
– communicate with and update these stakeholders
– listen and communicate openly, honestly and appropriately
– recognise the impacts of strategies, initiatives or issues on them
– work cooperatively (along with other relevant entities) to minimise
any harm that the strategy may cause.
• Developing the strategy is only the first part of effective strategic
management. Just as important is how to communicate it to the various
stakeholders and audiences who need to know something about your
organisation’s strategic direction in order for it to work.
• There are various approaches to how you might document the strategy.
There is no one ‘right’ way to set out a strategic direction or plan. The
real test is whether the document, map, rules or whatever communicate
the information required to the target audiences who need to know it,
and whether it triggers the response needed from them. That means
that you may need to customise the communication of the strategy to
suit different audiences or stakeholders.
• Communicating the strategy involves recognising that different
stakeholders want and need different messages. First, you need to
think about the target audience. Depending on what response you
are seeking, choose your message and the media or communication
channels; select a credible source for the message; collect feedback;
and design your communication practices based on all this.
• Strategy is unlikely to succeed unless its progress and its success are
measured and monitored. This involves selecting or developing a range
of appropriate KPIs that allow you to monitor and adjust progress in a
timely and resource-efficient manner.
• Of equal importance, the organisation’s accountabilities and reporting
structures, reward and recognition systems must be adjusted to
emphasise that the strategy is central to the organisation, and that it
needs attention and focus.
• Finally, you need to recognise that the organisation doesn’t operate
in a vacuum. The strategies that your organisation adopts impact on
markets, industries, employees, suppliers, the community, states,
nations, environments, groups, etc. This raises ethical issues and
issues of corporate or organisational social responsibility. It also

provides the potential for strategy to deliver shared value, and value
for the organisation and the communities and stakeholders with whom
the organisation collaborates. These should be considered, debated,
resolved and some guidelines developed to make sure that the
impacts of strategy are deliberate choices and that the organisation’s
ethics and values guide strategic (and operational) management and
conduct. Only this sort of mindset and practice will ultimately create a
sustainable organisation.

Conclusion
As we are now at the end of our study of strategic management, it is
appropriate to pause and reflect on the learning journey. During our
studies, we have considered some vital concepts that contribute to
effective strategy.
Strategy is a process of identifying and implementing the results of strategic
thinking, which is, by its nature, about issues crucial to an organisation’s
efforts to get the better of an adversary, or to attain its ends. As you will
recall from Unit 1, it ‘deals with the major intended and emergent initiatives
taken by managers on behalf of the organisation’s key stakeholders,
involving utilisation of resources to enhance the performance of the
organisation in their external environments’.
Strategic managers need to address the four key questions:
1. Where are we now?
2. Where do we want or need to go?
3. How do we get there?
4. How will we know we are on track to get there?
There are some key principles suggested by Sun Tzu, Niccolo Machiavelli,
Igor Ansoff, Carl von Clausewitz, Michael Porter, Gary Hamel, and A. G.
Lafley and Roger Martin that underpin much of the strategic thinking on
which the strategic management of organisations is based.
Among more recent strategic thinkers, two alternative views have emerged
about how strategic management is driven:
• the planned or proactive view that strategy is about making deliberate
choices about where the organisation ought to be going and how it
should deploy its resources based on insight gained via environmental
analyses
• the emergent or reactive view that suggests that in uncertain and
fast-moving environments, the organisation ought to focus energies on
developing distinctive strategic resources and capabilities so that it can
respond to emerging opportunities and threats.
Strategy is about developing a plausible future for the organisation, and

communicating that to the people and other organisations needed to
make it happen. Strategy in many medium–large organisations fits within
a hierarchy – corporate strategy, business strategy, functional or sub-
unit strategy. These must be consistent so that the organisation doesn’t
waste scarce resources, confuse the key stakeholders and ‘fight with
itself’. While there are some particular issues that arise in non-competitive
environments (government, and the public and not-for-profit sectors) and
small businesses, the principles of strategic management are essentially
very much the same in any organisational setting.

There are five distinct questions that effective strategic management must
address. These are summarised by Lafley and Martin (2013. pp. 14–15) as:
• What is our winning aspiration?
• Where will we play (setting objectives)?
• How will we win (crafting a winning strategy)?
• What capabilities must be in place (implementing and executing the
strategy)?
• What management systems are required (evaluating and adjusting
performance)?
Strategy is about managing strategically valuable, rare, hard-to-imitate

resources, and supporting them with organisational policies and
procedures, in order to achieve a defined combination of financial and
non-financial outcomes. In sustainable organisations, these ought
to include outcomes from either the triple bottom line view (financial,
environmental, social) or a balanced scorecard focusing on financial,
learning and development, customer and internal process outcomes, and
ideally, the strategies should deliver shared value for the organisation
and its stakeholders (and not just economic value for managers and
shareholders).
Really effective strategy flows from the understanding and knowledge
developed from thorough analysis of the key environments in which the
organisation sits – internal and external, macro- and micro-environments.
Technology strategy is now considered as central to all organisations’
strategic thinking and strategic positioning – just as HR, finance, marketing
and operations are also critical. This requires that the organisation must
consider, develop and implement a clear technology strategy. For 21st
century organisations, innovation is vital in the strategic thinking, strategic
competencies and strategic advantages of strategic managers. In order to
find new ways to achieve the organisation’s aims and to win in the chosen
playing fields, stimulating and managing innovation is a critical strategic
activity. One of the key manifestations of this innovation is the development
of a stream of new products that help create strategic advantage,
and one of the key sources of innovation and strategic advantage is
knowledge and the effective management of the organisation’s intellectual
property. Competitive advantage in the post-industrial era is as much
to do with gathering, nurturing and protecting intellectual capital as it is
about amassing and deploying physical and financial assets. Managing
intellectual capital is crucial to the strategic management of successful agile
organisations.
Strategic agility and strategic resilience are two of the vital characteristics
of long-lasting organisations as global and local markets become more
complex, unpredictable and turbulent. Strategic success is as much, if not
more, to do with how well it is implemented or executed as with how well

it is researched, thought out and planned. Planning and managing the
implementation of strategy is as important as, if not more important than,
the analysis and development of the strategy in the first place. Particular
issues and concerns emerge if strategy is being applied across national
boundaries. Issues such as differences in culture, regulation, infrastructure
and exchange rates complicate how strategy works. These require different
thinking and approaches to recognise the impact of these issues.
You have now completed a wide-ranging trip through the area of strategic
management. There is a wealth of information, discussion and research on
each of these topics in the current literature. You may find that, in practice,
you need to read more broadly on topics that are of particular relevance to
your organisation and on strategy topics that we may not have covered in
this course that may be important or interesting to your organisation or to
you personally.
The area of strategic management is such a vast topic that it is impossible
to address all of it in exhaustive detail in the 12 Units of this postgraduate
course. However, what we have sought to do is introduce you to some of
the key areas and the most relevant and up-to-date thinking and practice in
developing, implementing and managing strategy.
Conventional thinking on these topics has changed over time and will
continue to do so. It will therefore be vital that you review a variety of
industry journals and literature, and keep yourself informed about ongoing
debates and new thinking, developments and advances in the practice of
strategy.
Good luck in being a strategic thinker and strategic manager – it is both
vital and central to your organisation’s survival, success and sustainability!
Craig Tapper (author and Course Coordinator)

1. Complete the following statement by selecting the most appropriate
response from the options that follow.
‘Stakeholders are defined as people or organisations with an interest in
the operations of the organisation and who are affected by or can affect
the organisation and its outcomes. From a strategic perspective, the
particularly significant thing is that they also have _______ the strategic
program and outcomes of the organisation.’
a. relationships and networks that understand
b. power or capacity to influence
c. knowledge and experiences relevant to
d. control of strategic resources important to
e. prior experience and expertise that can impact
f. the ability to exert control over
2. Which of the following statements is not one of the principles of

effective stakeholder management discussed in the course materials?
a. listen and communicate openly, honestly and appropriately with
them
b. recognise and monitor the portfolio of relevant stakeholders
c. work to embed a stakeholder orientation in the organisation
d. listen to their views and seek to understand their perspectives
e. do what they want rather than just trying to understand what they
want
f. communicate with and update these stakeholders as strategy
projects progress or initiatives emerge and new issues arise
g. recognise the impact(s) that strategies or initiatives will have on
them
h. work cooperatively to minimise any harm
3. Bregman (2017) proposed a process which we considered as a highly

effective approach for stakeholder management. From the list below,
what is the best description for what he described as ‘define the big
arrow’?
a. Game changer, the one thing that, if the person improves, will most
improve their ability to make their key contribution.
b. Build capabilities in how to communicate priorities
c. Identify the people (stakeholders) with highest impact

d. Identify the most important outcome to achieve over the following
12 months
e. Hold laser-focused coaching sessions
f. Collect and share data
g. Amplify performance.
4. One means by which strategy can be communicated is to simply

document the five tasks of strategic management as defined by
Thompson et al. Which of the following options is not one of the
five tasks?
a. means for evaluating performance
b. budgets and schedules
c. objectives
d. strategic vision
e. details of how to implement the strategy
5. Eisenhardt and Sull (2001) suggest that another means to

communicate strategy, particularly in turbulent environments, is to
set a series of five rules for managers at all levels to follow in making
decisions. Which of the following is not one of the five types of rules
that they suggest were needed?
a. timing rules
b. exit rules
c. resource rules
d. boundary rules
e. how to rules
f. priority rules
6. From the options that follow, select the one that best completes the
following statement: In order to communicate effectively, Armstrong
et al proposed a series of steps that all successful communication
requires, including:
• identify the target audience
• determine the response sought
• _______
• choose the media
• select a credible message source
• collect feedback

a. choose the message
b. choose the location
c. determine the budget
d. identify the source
e. review the purpose
7. In the discussion about measuring and monitoring strategy, we

proposed that there were a number of criteria that must be present
for an effective measurement and monitoring process. Which of the
following statements is not one of the criteria that we discussed?
a. a combination of financial and non-financial outcomes
b. objectives that are measurable
c. a set of purely historical measures of success
d. intermediate measures of strategic importance
e. a process for regularly monitoring performance against objectives
8. Porter and Kramer (2011) suggests that there are a number of distinct
differences between corporate social responsibility (CSR) and creating
shared value (CSV). From the list that follows, identify which of the
options is a characteristic of CSV rather than CSR:
a. discretionary or in response to external pressure
b. value: doing good
c. agenda is determined by external reporting and personal
preferences
d. joint company and community value creation
e. separate from profit maximisation
9. Research indicates that good corporate citizenship or CSR can

generate a series of benefits for the organisation. From the list below,
indicate which of these is not a benefit mentioned in our discussion of
CSR.
a. Increased investor support
b. Increased brand value
c. Attracting people as an employer of choice
d. Heightened political support
e. Support of strategic allies and partners

10. Research by Melo and Galan and Dowling and Moran suggested that
for the positive benefits of good corporate citizenship to be more than
cosmetic, and to deliver reputational benefits, it needed to be ‘built in’
not ‘bolt on’. Which of the following statements best captures the notion
of being ‘built in’?
a. PR programs targeting changes to perceptions of the organisation
b. A coordinated media campaign to protect the organisation’s social
licence to operate
c. Highlighting the organisation’s core and non-core commitments
d. A campaign in response to pressure from stakeholders
e. The strategy of the organisation reflects the DNA of its reputation

References
Armstrong, M, Adam, S, Denize, S & Kotler, P 2015, Principles of
marketing, 6th edn, Pearson, Sydney.
Bregman, P, 2017, ‘Execution is a people problem, not a strategy problem’,
Harvard Business Review, January 4
Collis, D & Rukstad, M G 2008, ‘Can you say what your strategy is?’
Collins, J & Poras, J, 1994, Built to last: Successful habits of visionary
companies, Harper Collins, New Jersey.
Dowling, G & Moran, P 2012, ‘Corporate reputations: Built in or bolt on?’,
California Management Review, vol. 54, no. 2, Winter, pp. 25–42.
Du S, Bhattacharya C & Sen S, 2017, ‘The Business Case for Sustainability
Reporting: Evidence from Stock Market Reactions’, Journal of Public Policy
& Marketing, September, pp. 313 – 330.
Eisenhardt, K M & Sull, D N 2001, ‘Strategy as simple rules’, Harvard
Ferrell, O C, Gonzalez-Padron, T L, Hult, T G M & Maignan, I 2010,
‘From market orientation to stakeholder orientation’, Journal of Public Policy
& Marketing, vol. 29, no. 1, Spring, pp. 93–96.
Hildebrand D, Demotta Y, Sen S & Valenzuela A, 2017, ‘Consumer
Responses to Corporate Social Responsibility (CSR) Contribution Type’,
Journal of Consumer Research, December, pp. 738-758
Kanji, G K & Chopra, P K, 2010, ‘Corporate social responsibility in a global
economy’, Total Quality Management, vol. 21, o. 2, February, 2010,
pp. 119–143.
Kaplan, R S & Norton, D P 2000, ‘Having trouble with your strategy?
Then map it!’ Harvard Business Review, vol. 78, no. 5, pp. 167–176.
Kaplan, R S & Norton, D P, 2007, ‘Using the balanced scorecard as a
strategic management system’, Harvard Business Review, vol. 85, no. 7/8,
pp. 150–161.
Lafley, A & Martin, R 2013, Playing to win, Harvard Business Review Press,
Boston.
Melo, T & Galan, J I, 2011, ‘Effects of corporate social responsibility on
brand value’, Journal of Brand Management, vol. 18, no. 6, pp. 423–437.
Porter, M & Kramer, M 2011, ‘Creating shared value’, Harvard Business
Review, January-February, pp. 63–77.
Smith, N C, Drumwright, M E & Gentile, M C 2010, ‘The new marketing
myopia’, Journal of Public Policy & Marketing, vol. 29, no. 1, Spring, 2010,
pp. 4–11.

Sull, D, Homkes, R & Sull, C 2015, ‘Why strategy execution unravels –
and what to do about it’, Harvard Business Review, March, pp. 58–66.
Sundin, H, Granlund, M & Brown, D A 2010, ‘Balancing multiple competing
objectives with a balanced scorecard’, European Accounting Review,
vol. 19, no. 2, pp. 203–246.
Crafting and executing strategy: The quest for competitive advantage, 20th
edn, McGraw-Hill Education, New York.
Wilson, M 2003, ‘Corporate responsibility: What is it and where does it
come from?’ Ivey Business Journal Online, vol. 1, pp. 1–5.

answers
1. b
2. e
3. d
4. b
5. c
6. a
7. c
8. d
9. d
10. e

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Unit 1

We welcome ideas to improve these course materials.

Please watch the video, and then read on.

As our opening quotation suggests, strategy is about understanding

Unit 1: Strategy in modern business organisations 1–1

1–2 Strategic Management

Unit 1: Strategy in modern business organisations 1–3

• How to attract and please customers.

• How to compete against rivals.

• How to position the company in the marketplace and capitalise on

• How to respond to changing economic and market conditions.

• How to manage each functional piece of the business (R&D, supply

• How to achieve the company’s performance targets.

In choosing a strategy, management is in effect saying, “Among all

The strategic choices a company makes are seldom easy decisions,

1–4 Strategic Management

(Thompson et al 2016, pp. 9–10)

As you can see, the purpose of strategic management in a commercial

An increasingly popular framework for understanding an organisation’s

Unit 1: Strategy in modern business organisations 1–5

And to identify an organisation’s cost structures, the framework suggests

1–6 Strategic Management

Unit 1: Strategy in modern business organisations 1–7

1–8 Strategic Management

If we then adapt and paraphrase this definition slightly to acknowledge the

Another concept that you need to clearly understand is ‘competitive

(Porter 1985, p. xv)

And more recently, A. G. Lafley and Roger Martin (2013, p. 3) suggested

Further, Lafley and Martin (2013, p. 5) point out that:

Unit 1: Strategy in modern business organisations 1–9

The solution lies in the principle of shared value, which involves

The purpose of the corporation must be redefined as creating shared

(Porter & Kramer 2011, pp. 64–65)

1–10 Strategic Management

This focus can be summarised as the answers to a set of simple questions:

Unit 1: Strategy in modern business organisations 1–11

2. Where do the managers want it to be, or think it needs to be, in three to

3. How do the managers propose to get it there?

4. How do the managers plan to track progress towards achieving the

1–12 Strategic Management

Strategic planning and strategic thinking

“Our strategy is to be the low-cost provider.”

“We’re pursuing a global strategy.”

“The company’s strategy is to integrate a set of regional acquisitions.”

“Our strategy is to provide un-rivalled customer service.”

“Our strategic intent is to always be the first mover.”

“Our strategy is to move from defence to industrial applications.”

What do these grand declarations have in common? Only that none

(Hambrick & Fredrickson 2005, pp. 51–52)

Unit 1: Strategy in modern business organisations 1–13

1–14 Strategic Management

(Collins 2001, p. 162)

Unit 1: Strategy in modern business organisations 1–15

Each of these authors attempted to summarise the principles of war (or

Niccolo Machiavelli was a student of politics rather than a military strategist

1–16 Strategic Management

Of the three, von Clausewitz is said to have most significantly influenced

Unit 1: Strategy in modern business organisations 1–17

• How to position the company in the marketplace and capitalise on

• How to respond to changing economic and market conditions.

• How to manage each functional piece of the business (R&D, supply

• How to achieve the company’s performance targets.

• …a continuous process of analysis, synthesis, action-taking and

strategic intent creates an extreme misfit between resources