GSL 2022 (3rd Ed)

CPA PROGRAM
GLOBAL STRATEGY
AND LEADERSHIP
THIRD EDITION
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Published 2020 by John Wiley & Sons Australia, Ltd,
42 McDougall Street, Milton Qld 4064,
on behalf of CPA Australia Ltd,
ABN 64 008 392 452
First published July 2010, reprinted January 2011, updated July 2011, January 2012 Reprinted with amendments July 2012,
January 2013, revised edition July 2013, updated January 2014, reprinted with amendments January 2015, revised July
2015, reprinted with amendments January 2016
Second edition published June 2017
Third edition published June 2020
© 2010–2020 CPA Australia Ltd (ABN 64 008 392 452). All rights reserved. This material is owned or licensed by CPA
Australia and is protected under Australian and international law. Except for personal and educational use in the CPA
Program, this material may not be reproduced or used in any other manner whatsoever without the express written
permission of CPA Australia. All reproduction requests should be made in writing and addressed to: Legal, CPA Australia,
Level 20, 28 Freshwater Place, Southbank, VIC 3006 or legal@cpaaustralia.com.au.
Edited and designed by John Wiley & Sons Australia, Ltd.
Printed by IVE Group
ISBN 978 0 7303 8543 1
Authors
Valentina Tripp KPMG Australia
Claire Sime KPMG Australia
Jessica Hovorka KPMG Australia
Third edition updates

Anne Gleeson Consultant
Margee Hume Torrens University
Janette Rowland University of Southern Queensland
Delyth Samuel Consultant and RMIT
Angelina Zubac Central Queensland University
Bella Butller Curtin University
Advisory panel
Anne Gleeson Consultant
Samantha Winter Consultant
Steve Jaynes Consultant
Joanne Flinn Consultant
Jacquetta Griggs Consultant
Ram Nagarajan Consultant
Seng Thiam Teh CPA Australia
CPA Program team

Yvette Absalom Mandy Herbet Shari Serjeant
David Baird Alex Lawrence Seng Thiam Teh
Shubala Barclay Elise Literski Alisa Stephens
James Cole Julie McArthur Tiffany Tan
Nicola Drury Ram Nagarajan Helen Willoughby
Jeannette Dyet Isha Nehru Joyce Wong
Yani Gouw Christel O’Connor Belinda Zohrab-McConnell
Kristy Grady Alana Penny Luke Xu
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ACKNOWLEDGEMENTS
MODULE 1
Figures 1.2 and 1.3: © McKinsey & Co; Figures 1.5 and 1.13: © John Wiley & Sons Inc; Figures 1.6
and 1.11: © Harvard Business Publishing; Figure 1.12: © Dr Sheng Lu; Figure 1.15: © Emerald Group
Publishing; Table 1.3: © McKinsey & Co; Extract: © RMIT University; Extract: © CPA Australia; Extract:
© John Wiley & Sons Inc; Extract: © Cotton On.
MODULE 2
Figures 2.3, 2.4 and 2.5: © McKinsey & Co; Figure 2.11: © IOS Press; Figure 2.14: © John Wiley
& Sons Inc; Figure 2.15: © George Tovstiga; Figure 2.16: © Alex Combessie; Figures 2.17 and 2.21:
© Benchmarking; Figure 2.18: © Australian Taxation Office; Figure 2.19: © Australian Government;
Figure 2.20: © National Australia Bank; Table 2.2: © Australian Taxation Office; Extract © McKinsey &
Co; Extract: © Benchmarking;
MODULE 3
Figure 3.13 © John Wiley & Sons Australia Ltd; Table 3.13: © McGraw Hill Education; Extracts: © Cancer
Council New South Wales; Extract: © Rio Tinto; Extracts: © John Wiley & Sons Australia Ltd; Extract:
© John Wiley & Sons Inc; Photo: © Commonwealth Bank.
MODULE 4
Figure 4.5: © Design Council UK; Figure 4.7: © Alan Klement; Figure 4.8: © Columbia Business School
Publishing; Figures 4.9–4.14, 4.20: © Harvard Business School Publishing; Figure 4.15: © Six Path
Consulting; Table 4.12: © IDEO; Tables 4.13 and 4.14: © Harvard Business Publishing; Tables 4.15 and
4.18: © Palgrave Macmillan; Table 4.17: © Emerald Group Publishing; Table 4.20: © Penguin Random
House; Extract: © Forbes; Extract: © Product Development and Management Association; Extract:
© Harvard Business Publishing; Extract: © IDEO; Extract: © Business Insider; Extract: © Coca-Cola
Company; Extract: © ExxonMobil; Extract: © Australian Government.
MODULE 6
Figure 6.2: © Emerald Group Publishing; Table 6.1: © Mind Tools Ltd.; Extract: © Mind Tools Ltd.;
Extract: © John Wiley & Sons Inc; Extract: © FedEx; Extract: © Creative Commons; Extract: © Conexus
Financial; Photo: © Qantas.
MODULE 7
Figure 7.2: © CPA Australia; Figures 7.3 and 7.10: © Harvard Business Publishing; Figures 7.4, 7.7
and 7.11: © John Wiley & Sons Inc; Figures 7.14 and 7.15: © McKinsey & Co; Table 7.3: © CSIRO;
Extract: © CPA Australia; Extract: © Austrade; Extracts: © John Wiley & Sons Inc; Extract: © Australian
Broadcasting Corporation.
These materials have been designed and prepared for the purpose of individual study and should not be
used as a substitute for professional advice. The materials are not, and are not intended to be, professional
advice. The materials may be updated and amended from time to time. Care has been taken in compiling
these materials but may not reflect the most recent developments and have been compiled to give a general
overview only. CPA Australia Ltd and John Wiley and Sons and the author(s) of the material expressly
exclude themselves from any contractual, tortious or any other form of liability on whatever basis to any
person, whether a participant in this subject or not, for any loss or damage sustained or for any consequence
which may be thought to arise either directly or indirectly from reliance on statements made in these
materials.
Any opinions expressed in these study materials for this subject are those of the author(s) and
not necessarily those of their affiliated organisations, CPA Australia Ltd or its members.
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ACKNOWLEDGMENTS iii
BRIEF CONTENTS
Subject Outline ix
Module 1: An Introduction to Strategy and Leadership 1

Module 2: Understanding the External Environment 69
Module 3: Understanding the Internal Environment 147
Module 4: Product, Service and Market Development 207
Module 5: Strategy Development 295
Module 6: Strategy Implementation 361
Module 7: Strategy and Leadership for Emerging Business Models 417
Appendix A 491
Appendix B 497
Glossary 499
Suggested Answers 504
Index 578
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CONTENTS
Subject Outline ix MODULE 2
MODULE 1 Understanding the External

An Introduction to Strategy Environment 69
Preview 70
and Leadership 1 2.1 Understanding the external environment 71
Preview 2 The role of the CPA in analysis 72
1.1 Introducing strategy and leadership 3 External environment analysis — analysing
The evolution of strategy 3 an industry 73
1.2 The strategy process 6 2.2 Defining the industry for analysis 79
The rational approach to strategy 8 The industry value chain 81
Strategy development in practice 10 Industry segmentation 87
1.3 Gaining competitive advantage 12 The industry life cycle 89
Purpose and strategy 13 2.3 Remote environment analysis — growth 99
Reshaping the value proposition 14 Future expectations 99
The productivity frontier and best Remote environment analysis process 100
practice 16 2.4 Industry environment analysis —
Differentiating strategy from tactics 17 industry profitability 115
Strategic fit and strategic stretch 17 Porter’s five forces 116
1.4 Organisational context for strategy 18 Power of suppliers to the industry 118
Industry and organisational maturity 19 2.5 Understanding customers and markets 125
Levels of strategy 21 What is a market? 126
Vision, mission, values and goals 24 2.6 Competition in the industry 129
Business models 27 Strategic competition 129
1.5 The global context of business 30 Basis of competition 129
Challenges of globalisation 33 Industry key success factors 131
Benefits of globalisation 35 Competitive position 132
1.6 Introduction to leadership 36 Identifying strategic groups 136
Leadership theories 37 2.7 Further implications for leadership and
Leadership versus management 38 management 138
Strategic leadership 40 Framing the external analysis 138
1.7 Leadership styles 45 Establishing a data management
Transformational and transactional approach 138
leadership 45 Responding to change 138
Balancing stability and change 47 Revisiting the role of the CPA 139
Leadership styles based on the intensity of From external to internal analysis 140
change 48
Review 144
Leadership styles based on team and
References 144
individual developmental stage 49
Leadership styles based on organisational MODULE 3
life cycle stage 50
Leadership styles and organisational Understanding the Internal
culture 50
Environment 147
1.8 The role of leaders in strategy 51
Preview 148
Communication 52
Role of the CPA in internal analysis 149
Decision making 53
3.1 Understanding key stakeholders 149
Business ethics 55
Step 1: Identify stakeholders and their
1.9 The role of the CPA in strategy and
needs 150
leadership 58
Step 2: Assess alignment of stakeholder
Review 64
needs 152
References 64
Step 3: Assess the relative power of
Optional reading 66 stakeholder groups 154
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Step 4: Develop techniques for interacting 4.3 New product development (NPD) 226
with stakeholder groups 155 The new product development
3.2 Assessing current performance 156 process 227
Internal analysis and data analytics 157 The role of market research 233
A framework for performance Focusing on strategically important
assessment 162 projects 233
3.3 Strategic drivers 163 4.4 New service development 236
Industry and markets 163 Components of service design 237
Customers 163 Embedding products into services with
Products and services 164 technology 239
Channels 167 4.5 Approaches to developing new
Competitive advantage and generic products and services 241
strategy 168 Design thinking and human-centred
3.4 Operational drivers 176 design 241
Effective measurement criteria 176 Blue Ocean strategy — new product and
Competitive business environment service offerings 244
benchmarks 178 Using it to support new product and service
The balanced scorecard 179 development 251
3.5 People and organisational drivers 185 Developing products to embed in a
Values 185 service 254
Innovation and learning — the importance 4.6 New market development 255
of looking ahead and managing Expanding into new customer markets 255
knowledge 185 Expanding into new geographic
3.6 The role of resources and capabilities markets 256
in strategy 187 Development of new geographic
Appraising resources and capabilities 191 markets 257
3.7 Combining external and internal Objectives of market entry 258
analysis 197 Market attractiveness 259
SWOT analysis 197 Market development resources 261
Gap analysis 199 Common modes of entry into new
3.8 Further leadership and management geographic markets 263
implications for internal analysis 202 Mergers and acquisitions 271
Review 205 Advantages and disadvantages of different
entry modes 274
References 205
Accounting issues associated with market
Optional reading 206
expansion 277
MODULE 4 4.7 Intellectual property 281
IP strategy 282
Product, Service and Market IP rights infringement 284
Development 207 Protecting IP rights 284
4.8 Leadership 286
Preview 208
Review 291
The role of the CPA in new product, service
and market development 208 Appendix 4.1 291
4.1 Innovation 209 References 292
Innovation in business 210
MODULE 5
Focusing innovation effort 213
4.2 New product, service and market Strategy Development 295
development 214 Preview 296
The Ansoff product/market matrix 216 Role of the CPA in strategy
Market penetration — growth in existing development 297
products and markets 217 5.1 Aligning vision, mission, values, goals
Product development — new products for and strategy 297
existing markets 219 Vision and strategy development 298
Is it a new or existing product? 219 Mission 299
Market development — existing products Values 300
for new markets 220
Goals 300
Diversification 222
Leadership and management roles in
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strategic alignment 301
vi CONTENTS
5.2 Strategic drivers and considerations 303 6.6 Further implications for leadership and
Strategic drivers 306 management 402
Operations 307 Common pitfalls in strategy
Organisation and people 309 implementation 403
Products, services and markets 310 The role of CPAs in strategy
The interaction of drivers and levers 311 implementation 408
5.3 Evaluating The strategic options A final point 411
and determining the strategic fit 314 Review 413
Value/effort assessment 314 References 413
Weighted criteria evaluation tool 315 Optional reading 416
Evaluation using business analytics 318
MODULE 7
5.4 Risk assessment 321
Risk management framework 322 Strategy and Leadership for
Risk treatment 326
Risk assessment using business
Emerging Business
analytics 326 Models 417
Quantifying costs and benefits 328 Preview 418
Timing risks 329 7.1 The changing business environment 419
5.5 Integrating strategic options 330 Change drivers 419
Evaluating strategic options using Rumelt’s Business ecosystems 426
criteria 332 Hypercompetition 426
5.6 Finalising strategy development 340 7.2 Business models and strategy 427
Setting key performance metrics 340 Business model innovation 427
Reviewing the strategy 342 Business model canvas 428
Review 344 Value co-creation in business
Appendix 5.1 345 ecosystems 431
References 359 Transformation and disruption 433
Optional reading 359 Hyperdisruptive business models 435
Linking new business models to rapid
MODULE 6 growth 438
Strategy 7.3 Implications for strategy 439
Alternative approaches to strategy 439
Implementation 361 Exploring emergent approaches to
Preview 362 strategy 440
6.1 Designing and developing The strategy compass 445
implementation plans 363 7.4 Strategic responses to new business
6.2 The 7-S framework 364 models 449
Structure 368 Value-based strategy in a business
Systems 374 ecosystem 449
Staff 377 Strategic partnerships and alliances 451
6.3 Change management 380 Disruption and strategic innovation 452
Key components of change Strategic options related to the change
management 381 drivers 455
A structured approach to managing Hypercompetition: a strategic
change 383 approach 461
Impact of change on an organisation 388 7.5 Shaping the organisation for new
6.4 Using projects to manage strategic business models 463
initiatives 389 Dynamic capabilities vs routine
Project and program management 389 capabilities 463
6.5 Monitoring implementation, perfor- Agile organisations 464
mance and the external environment 395 Entrepreneurial orientation 467
Performance measurement 396 Strategic innovation 468
Ongoing monitoring of the Intrapreneurship 468
environment 399 Open innovation and value creation 469
Reward systems 400
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CONTENTS vii
7.6 Leadership and management roles in Stakeholder management 481
strategy for emerging business Leadership and management
models 472 development 483
Leading business model innovation 472 Review 486
Leadership and management implications References 486
of technology-enabled business
models 473 Appendix A 491
Decision making 477 Appendix B 497
Glossary 499
Leadership for start-ups 479
Suggested Answers 504
Leadership for established businesses 479
Index 578
Start-ups versus incumbents 481
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viii CONTENTS
SUBJECT OUTLINE
INTRODUCTION
The purpose of this subject outline is to:
• provide important information to assist you in your studies
• define the aims, content and structure of the subject
• outline the learning materials and resources provided to support learning
• provide information about the exam and its structure.
The CPA Program is designed around five overarching learning objectives to produce future CPAs who
will be:
• technically skilled and solution driven
• strategic leaders and business partners in a global environment
• aware of the social impacts of accounting and business
• adaptable to change
• able to communicate and collaborate effectively.
BEFORE YOU BEGIN

Important Information
Please refer to the CPA Australia website for dates, fees, rules and regulations, and additional learning
support at www.cpaaustralia.com.au/cpaprogram.
SUBJECT DESCRIPTION
Global Strategy and Leadership: The CPA as a Value Driver
Global Strategy and Leadership is the capstone subject in the CPA Program. This subject consolidates
and builds on the learnings candidates have gained in the other three compulsory subjects: Ethics and
Governance, Financial Reporting and Strategic Management Accounting. In the increasingly complex
business environment in which organisations operate, characterised by change, uncertainty and escalating
competition, the disciplines of strategy and leadership have become critical to successful organisational
performance.
The aim of this subject is to link the knowledge expected of the future finance professional to the
concepts of strategy and leadership. The future finance professional is expected to use a range of technical
information to make decisions for the future of the business within an ethical framework of operation. This
subject demonstrates that accounting information, ethics, strategy and leadership are applicable to finance
professionals, in a global context and in diverse organisational settings. The subject materials address the
needs of candidates operating in different international markets in varying roles, including content on
current and emerging technologies and emerging business models.
This subject builds upon knowledge gained in the other three compulsory subjects of the CPA Program.
The concepts of professional ethics and good governance underpin the subject. Candidates who have
previously undertaken the Advanced Audit and Assurance or Strategic Management Accounting subjects
will be familiar with the use and application of Porter’s five forces model. Those candidates who have
studied Strategic Management Accounting will note a number of other concepts that are expanded upon in
this subject, including strategic analysis, performance measurement and the value chain. The international
focus of this subject acknowledges the importance of the reporting requirements under the International
Financial Reporting Standards (IFRSs).
Subject Aims
The subject has two key aims.
• The primary aim of this subject is to provide candidates with an understanding of the concepts and
principles that underpin the practices of strategy and leadership in the global economy, and the ability
to apply these concepts to real life business cases.
• The secondary aim of the subject is to consolidate the knowledge candidates have gained from their
study of the other three compulsory subjects: Ethics and Governance, Financial Reporting and Strategic
Management Accounting.
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SUBJECT OUTLINE ix
SUBJECT OVERVIEW
General Objectives
On completion of this subject, you should be able to:
• understand the role of the accountant in the development and implementation of strategy
• use analytical tools and models to analyse the industry and the market in which an organisation operates
• use analytical tools and models to understand and measure the performance of the organisation
• use business information for decision-making from an organisational perspective
• identify and explain the key challenges faced in the implementation of strategy and the role of the
accountant in the implementation and leadership functions
• consolidate the understanding of strategy and leadership concepts through the use of real world examples
integrated throughout the material, and apply these concepts to business case scenarios through the use
of case studies
• apply skills in thinking strategically and formulating broad strategies for consideration and application
in their organisational environment.
STUDY GUIDE
Module Descriptions
The subject is divided into seven modules. A brief outline of each module is provided below.
Module 1: An Introduction to Strategy and Leadership
Module 1 provides an overall introduction to the key concepts of strategy and leadership in the global
context. It illustrates the need for improved capabilities in both areas because of the rapidly changing and
uncertain business environment. The role of CPAs in such a changing environment becomes even more
crucial. Accounting is a dynamic role in the modern business environment, and as such, accountants are
contributing increasingly to the high-level decision-making process within organisations.
The need to craft and implement a strategy in order to translate a vision into reality is described in
module 1 as a key leadership function. The module provides an overview of various theories and
perspectives that inform the practices of strategy and leadership. Further, the module helps candidates
understand the basic concepts and principles that are elaborated upon in the later modules.
Module 2: Understanding the External Environment
The strategic analysis component of this subject begins in this module. Following the discussion of the
concept of strategy in module 1, modules 2 and 3 undertake the analysis component of strategy, focusing
on business strategy. These modules focus on approaches used in undertaking a strategic analysis of the
external industry and internal business environments. Module 2, in particular, provides tools for strategic
analysis of the external operating environment of the organisation.
Module 2 also provides a framework for analysing the external environment, focusing on an organ-
isation’s specific industry and markets. This involves evaluating social, technological, environmental,
economic, political, legal, ethical and other trends to provide an estimate of the level of future industry
growth. The industry analysis helps to examine the forces determining industry profitability and concludes
with market, competitor and customer analysis. In the era of ‘big data’, the analysis of the increasing
amount of data available about the external environment is an important role for CPAs.
Module 3: Understanding the Internal Environment
In this module, the focus is on the internal environment — that is, factors within the organisation’s control
that may affect its strategy choices in the future and the implementation of its strategic options.
Assessing the internal environment is critical in understanding whether the organisation is successful.
It helps to reveal whether the organisation’s strategy is appropriate not only in the context of the external
environment but also in relation to internal factors, such as key stakeholder requirements, organisational
performance and the organisation’s resources and capabilities. CPAs play an important role in measuring
and reporting on the organisation’s performance and capabilities.
Module 4: Product, Service and Market Development
After covering strategic analysis, this module turns to the use of this information to identify strategic
options for growth. In this module, candidates begin to combine the results of the external and internal
analysis (discussed in modules 2 and 3). There are a number of factors that must be considered by an
organisation before determining which, if any, growth strategy to pursue.
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x SUBJECT OUTLINE
In considering the concepts of product, service and market development as tools for organisational
growth, the module discusses a number of the resources available to inform strategic choices, as well
as the specific accounting impacts that may affect an organisation when it decides to enter a new market
or undertake a significant new product development. The consideration of accounting impacts is a key
factor in assessing organisational capability, particularly in terms of cost and resourcing implications of
any desired changes — and while some of the issues discussed may appear more operational than strategic
in nature, they are a vital part of an organisation’s capabilities and are thus key to achieving successful
implementation of strategy.
Module 5: Strategy Development
This module discusses approaches to evaluating strategic drivers and options so that an organisation can
decide which option or options to implement. The approaches used draw together information and analysis
from modules 2, 3 and 4 so recommendations can be made in the context of an organisation’s strategy for
options being evaluated.
The module explains various tools for evaluating options and presents a risk assessment framework so
risk can be understood and managed as part of developing the strategy.
The module emphasises the need to ensure strategic options chosen are cohesive and support the
organisation’s overall vision, mission, values and goals. The module concludes with the development of
key performance indicators and measures to support implementation.
Module 6: Strategy Implementation
Once the strategic plan has been prepared, the focus shifts to the challenging task of implementation.
Here, leaders and managers must endeavour to translate the talk of strategy into action in the business and
manage the change that goes with the implementation of the strategic plan.
Module 6 focuses on the culmination of the strategic process — implementation. This module covers
major aspects of strategy implementation including a framework for designing implementation plans, using
change management to create an environment that supports implementation of the strategy, using project
management, monitoring progress and taking corrective action, and the role of leaders and CPAs in strategy
implementation.
Module 7: Strategy and Leadership for Emerging Business Models
Module 7 focuses on the strategy and leadership in the context of a rapidly changing business environment
that both enables and requires business model innovation. Technology, sustainability and emerging national
markets are among the drivers of change in the business environment.
The module explores various transformative and disruptive business models and how these relate to
strategy development. The high degree of uncertainty and the pace of change mean an organisation may
need to adopt an emergent approach to strategy, which involves more learning, experimentation and
iteration than the rational approach to strategy. Specific strategy responses to emerging business models
are examined. The strategy implications for both start-up and established organisations are explored.
The module also examines the concept of a business ecosystem, in which value is co-created by a
network of cooperating organisations. Hypercompetition, in which organisations continually introduce
disruptive innovations, is also explored.
Finally, the module describes how organisations need to develop in order to thrive in the contemporary
dynamic business environment and the challenges and opportunities for leaders and managers within this
context.
Note
At the time of writing, the economic effects of COVID-19 were not well understood; however, future
updates will reflect the dynamic nature of the subject matter of Global Strategy and Leadership.
Module Weightings and Study Time Requirements

Total hours of study for this subject will vary depending on your prior knowledge and experience of the
course content, your individual learning pace and style, and the degree to which your work commitments
will allow you to work intensively or intermittently on the materials. You will need to work systematically
through the study guide, attempt all the questions, and revise the learning materials for the exam. The
workload for this subject is the equivalent of that for a one-semester postgraduate unit.
An estimated 15 hours of study per week through the semester will be required for an average candidate.
Additional time may be required for revision. The ‘Weighting’ column in the following table provides an
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SUBJECT OUTLINE xi
indication of the emphasis placed on each module in the exam, while the ‘Recommended proportion of
study time’ column is a guide for you to allocate your study time for each module.
Do not underestimate the amount of time it will take to complete the subject.
TABLE 1 Module weightings and study time
Recommended
proportion of study time Weighting
Module (%) (%)
1. An introduction to strategy and leadership 10 10
2. Understanding the external environment 15 15
3. Understanding the internal environment 15 15
4. Product, service and market development 15 15
5. Strategy development 15 15
6. Strategy implementation 15 15
7. Strategy and leadership for emerging business models 15 15
100 100
LEARNING MATERIALS
Module Structure
These study materials form your central reference in the Global Strategy and Leadership subject.
Learning Objectives
A set of learning objectives is included for each module in the study guide. These objectives provide
a framework for the learning materials and identify the main focus of the module. The objectives also
describe what candidates should be able to do after completing the module.
Assumed Knowledge
Any knowledge that a candidate is assumed to have before beginning study of the module is noted.
Preview
The preview outlines what will be covered in the module and how it relates to other modules in the subject.
Study Material
The study material is divided into sections and subsections which will help you to conceptualise the content
and study it in manageable portions. It is also important to appreciate the cumulative nature of the subject
and to follow the given sequence as closely as possible.
Examples
Examples are included throughout the study materials to demonstrate how concepts are applied to real-
world scenarios.
Study Material Activities
Activities are included throughout the study material. The purpose of the questions is to provide you with
the opportunity, as you progress through the subject, to assess your understanding of significant points,
to stimulate further thinking on particular issues and to use your knowledge to analyse and evaluate real-
world business problems. To be able to adequately address issues raised, a deep understanding of the
module content is required. Simply memorising definitions and lists of technical details is insufficient.
While issues may be relatively clear in some cases, it is important to realise that often the questions will
have no single correct/incorrect outcomes. The outcomes are quite possibly best expressed as different
viewpoints on problem situations, where viewpoints are supported by reference to relevant theoretical
principles. To obtain maximum benefit from your work, and to provide the best preparation for the subject
exam, it is important to allow adequate time for in-depth analysis of the questions and to thoroughly work
through the materials and prepare an extended response to question before you check your responses
against the answers provided.
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xii SUBJECT OUTLINE

These activities are an integral part of your study, and they should be fully utilised to support your
learning of the module content throughout the semester. You are encouraged to spend time reviewing and
analysing the module content. Utilising the activities should form one part of your revision for the exam.
It is evident that candidates who achieve good results in the program and in their careers are those who are
able to think, review and analyse situations, and solve problems.
Where applicable, sample answers are included at the end of each module. These provide immediate
feedback on your performance in comprehending the material covered. Your answers to these questions
do not contribute to your final result, and you are not required to submit your answers for marking.
Key Points
The key points feature relates the content covered in the section to the module’s learning objectives.
Review
The review section places the module in context with other modules studied and summarises the main
points of the module.
References
The reference list details all sources cited in the study guide. You are not expected to follow up this source
material.
Optional Reading
Provided for some modules, the resources in the optional reading list are useful if you wish to explore a
particular topic in more detail.
Glossary
The glossary contains a list of the key terms used throughout the study guide. Please refer to the glossary
for definitions of these terms.
Suggested Answers
These provide important feedback on the numbered questions included in the module learning materials.
Consider them as a model for your reference. To assess how well you have understood and applied the
material supplied in the text, it is important to write your answer before you compare it with the suggested
answer.
My Online Learning and your eBook

My Online Learning is CPA Australia’s online learning platform, which provides you with access to a
variety of resources to help you with your study.
You can access My Online Learning from the CPA Australia website: cpaaustralia.com.au/myonline
learning.
Help Desk
For help when accessing My Online Learning either:
• email myonlinelearning@cpaaustralia.com.au, or
• telephone 1300 73 73 73 (Australia) or +613 9606 9677 (International) between 8.30 am and 5.00 pm
AEST Monday to Friday during the semester.
eBook
An interactive eBook version of the study guide will be available through My Online Learning. The eBook
contains the full study guide and features instructional media and interactive questions embedded at the
point of learning. The media content includes animations of key diagrams from the study guide and video
interviews with leading business practitioners.
GENERAL EXAM INFORMATION

All information regarding the Global Strategy and Leadership exam can be found on My Online Learning.
The study guide is your central examinable resource. Where advised, relevant sections of the CPA
Australia Members’ Handbook and legislation are also examinable.
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SUBJECT OUTLINE xiii

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MODULE 1
AN INTRODUCTION TO
STRATEGY AND
LEADERSHIP
LEARNING OBJECTIVES
After completing this module, you should be able to:

1.1 explain the evolution of the practices of strategy and leadership
1.2 appraise the key concepts and practices applicable to the strategy process in the contemporary business
environment
1.3 appraise how the roles of management and leadership drive organisational strategy in the contemporary
business environment.
ASSUMED KNOWLEDGE
It is assumed that, before commencing your study in this module, you are able to:
• describe the principles of financial accounting
• describe the principles of management accounting
• describe ethics and governance in an organisational context.
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PREVIEW
A diverse range of knowledge and skills is required to inform and develop strategy and make decisions
in the modern business environment. This environment is characterised by a range of factors including
globalisation, rapid technological development, digital disruption, the pace of change, and increasing and
interrelated levels of business complexity — all of which need to be understood, managed and coordinated.
In a globalised, digitally connected world, the discipline and practice of strategy is crucial. Strategy
provides a set of techniques and tools for leading, managing, coordinating and decision making within
an organisation, in times of complexity and change.
Figure 1.1 provides an outline of the strategy development process presented in this study guide along
with some details of the content of this module.
FIGURE 1.1 A model for understanding the strategy development process in the global, digitally connected
business environment
Global strategy and leadership

(Module 1: An introduction to strategy and leadership)
Strategic analysis
(Module 2:
Understanding the Exploring
external environment) options Developing Implementation
(Module 4: strategy and monitoring
Product, (Module 5: (Module 6:
Strategic analysis service and Strategy Strategy
(Module 3: market development) implementation)
Understanding the development)
internal environment)
Emerging business models

(Module 7: Strategy and leadership for emerging business models)
Understanding the context of

strategy and leadership
• Introduction to strategy
• The strategy process
• Gaining competitive advantage
• Organisational context
• Global context
• Leadership
• The role of the CPA/finance
professional
Source: CPA Australia 2020.
Leadership and management are essential to transforming a strategic vision into reality. From the
initial strategic thinking required to initiate the process, to dealing with the troubles and resistance of
implementation, leaders and managers are involved in every aspect of strategy.
The study of strategy and leadership is valuable because it:
• provides an organising tool for leaders to use in dealing with uncertainty and change, both inside and
outside of their organisation
• offers a shared language for analysing and communicating the current position of an organisation —
its strategic capability and environment — and for choosing, developing and coordinating an optimal
strategic direction
• provides a logical process of analysis and evaluation.
In addition to the value provided by sound business strategy and leadership, there are a number of
challenges. While the strategy process provides a useful organising framework for analysing and planning
the direction of an organisation, evidence suggests that this alone is not sufficient. Strategies can fail for
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2 Global Strategy and Leadership

many reasons, often to do with inadequate or misguided implementation, or with ‘quick-fix’ formulas or
solutions that do not take account of changes, complexities and uncertainties in the marketplace.
This study guide provides an integrated focus on the concepts and tools of strategy and leadership in
the global environment, to inform and broaden the CPA’s perspective. This wider scope recognises the
organisational and business context in which CPAs work, embracing a focus on organisational dynamics
and performance, as well as the strategic relationship between an organisation and its marketplace.
Accountants have an increasing opportunity to create value for organisations by playing a more strategic
role that both incorporates and extends beyond traditional accounting functions. The contemporary
accountant’s role in organisational strategy implementation includes helping align the organisation’s
structure with its business strategy. This involves traditional accounting functions such as resource
and budget allocations to facilitate and fund the organisation’s strategic options and developing key
performance indicators (KPIs) to check the organisation’s performance against its strategy. Increasingly,
however, the accountant’s role as their career progresses is developing and growing as a decision partner
in strategic analysis and decision making.
It is therefore important for CPAs to develop an understanding and knowledge of the value and
challenges related to the practices of strategy and leadership so they can contribute to:
• formulation of strategy that utilises strengths inside the organisation and takes more effective advantage
of opportunities in the marketplace
• successful leadership, management and implementation of strategy throughout the organisation —
particularly in the case of large organisations operating in a number of markets
• recognise the integral role of management and leadership in these processes, as well as understanding
their own role in driving and leading aspects of the strategy process.
1.1 INTRODUCING STRATEGY AND LEADERSHIP

According to Hubbard et al. (2019), strategy is:
those decisions that have high medium-term to long-term impact on the activities of the organisation,
including analysis leading to the resourcing and implementation of those decisions, to create value for
key stakeholders and to outperform competitors.
Although relatively recently introduced and applied in a business context, the concepts and practices
of strategy have become central to the task of identifying and directing the potential of organisational
performance. The following section provides a brief overview of how that has come about.
THE EVOLUTION OF STRATEGY

‘Strategy’ derives from the Greek word strategos, meaning the art of planning and conducting a war.
Strategy was initially a tool used by the military, dating back to at least 500 BC. Leaders used strategies
of attack, defence, surprise and force to confront their enemies and defend their territory. Although the
concept of strategy has its origins in military conditions, it has evolved into civil, social and corporate
life and is now often associated with business objectives, efficiencies and outcomes, and, while often
involving competition, can also involve cooperation between competitors to achieve mutually beneficial
outcomes.
More than 200 years ago, the economist Adam Smith developed the idea of an ‘invisible hand’, where
self-interested behaviour self-regulated the market and was the core developmental and structuring impetus
of modern business. In the 1960s, Alfred Chandler, a professor at Harvard Business School, wrote Strategy
and Structure (Chandler 1962), in which he describes how capitalist function, administrative structure and
managerial coordination are now a ‘visible hand’ that has replaced Adam Smith’s notion of an ‘invisible
hand’ as the core developmental and structuring impetus of modern business. Chandler’s approach to
strategic planning involved the articulation of long-term goals and the allocation of resources to achieve
those goals.
In 1980, theorist Michael Porter wrote Competitive Strategy, in which he argued that a firm’s profitability
was determined by the characteristics of its industry and by its position in that industry, and these factors
determine the organisation’s overall strategy. This led to an organisation having two options — it could
be a low-cost producer, or it could differentiate its products or offerings in a unique way that would allow
it to command a higher profit margin. Porter explained that these options could be pursued either in a broad
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MODULE 1 An Introduction to Strategy and Leadership 3

market where cost efficiencies could be achieved through economies of scale, or with a specific focus that
was in some way different and better to competitor offers.
In 1978, Henry Mintzberg first introduced his ideas on strategy. Mintzberg’s ideas are still relevant to
modern organisations, and his work is still reflected in current thinking in strategy. Mintzberg is critical of
Porter’s analysis and rejects the deliberate and rigid approach to strategy. Mintzberg believes that strategy
should be flexible, develop continuously and emerge from ‘intuition and creativity’. In The Rise and Fall
of Strategic Planning, Mintzberg (1994) discusses what he believes are the misguided ways of strategic
planning:
According to the premises of strategic planning, the world is supposed to hold still while a plan is being
developed and then stay on the predicted course while that plan is being implemented (Mintzberg 1994,
pp. 111–12).
But the world around us is changing rapidly.

In 2010, the Blockbuster video rental company filed for bankruptcy, only six years after it achieved
its highest revenue in history. Ten years earlier, it had turned down an approach to partner with an early
start-up business. This start-up was Netflix, a company focused on on-demand streaming. By 2014,
Netflix had grown to be a US$28 billion company (which was over ten times what Blockbuster was
worth at its peak) (Satwell 2014). Netflix disrupted Blockbuster’s video rentals industry, but as other
competitors have entered the market, Netflix itself is being challenged to achieve further growth and
remain competitive and relevant. In July 2019, Netflix dropped US$26 billion in market value in one
week, after it issued a poor earnings outlook (Kirsch 2019). Where Netflix was once a unique offer,
customers today can choose from a wide range of streaming services, such as Stan, Disney+ and Apple,
often at lower prices than Netflix.
Organisations today cannot assume that business conditions and the competitive landscape will change
in an orderly or incremental fashion to suit them.
According to Jack Welch (former CEO of General Electric), ‘If change is happening on the outside
faster than on the inside, [then] the end is in sight’ (Beswick et al, 2918).
In the context of rapid technological advance and market disruption it is important to highlight how the
digitisation of almost every product and service, and the ‘big data’ phenomenon has not only led to the
emergence of new markets, but also new ways to gather business intelligence.
The world is becoming data-driven and the constant generation of big data, which is data created as a
result of products and services such as smart phones, sensors, internet searches and social media sites, has
made it necessary for organisations to innovate and compete from a data perspective. They must also use
data in new ways to become more productive because this is what their competitors are doing.
This has important implications for accountants, who must manage the huge volume, wide variety,
velocity and the veracity of the historical and real-time data now available to the organisation to use for
business intelligence purposes (Gamage 2016).
Critical to this is having the capability and capacity to understand technology and information flows and
the ability to deal with technology and information specialists. A key part of the CPA’s role is to find ways
to make big data manageable in order to use it to better value assets, make better and timelier operational
and strategic decisions, and anticipate and mitigate risks much more effectively.
Focusing on optimal and efficient decision making is critical to increasing organisational speed and
agility, and business intelligence and data is a critical input to that decision making. There is already
strong evidence to suggest that data and analytics initiatives are accounting for a growing proportion of
revenue in high-performing companies, as discussed in the technology insight 1.1
TECHNOLOGY INSIGHT 1.1
How Leaders in Data and Analytics Have Pulled Ahead

A large-scale McKinsey Analytics survey of executives and senior managers across the full range of
regions, industries, and company sizes found that changes to industries from the use of data and analytics
were increasing in magnitude and scope, but most organisations lacked distinct data and analytics
strategies and were instead implementing ad hoc initiatives and projects.
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The survey identified a widening gap between organisations that have a data and analytics strategy and
those that do not.
The survey suggested high-performing organisations were far more likely to attribute at least 20% of
earnings before interest and taxes (EBIT) over the past three years to their data and analytics initiatives.
Key factors explaining this enhanced performance include:
• the development of long-term strategies for data and analytics
• the creation of a data-driven organisational culture by making data a core part of workflows and decision
making
• investment in the requisite data and technology to support large-scale analytics initiatives.
Figure 1.2 shows industry perceptions of the effect of data and analytics on industry competition.
FIGURE 1.2 Data, analytics and industry competition
% of respondents reporting a change in nature of industry competition 2017 2018 % change,

brought about by data and analytics in past 3 years1 2017–18
Traditional Traditional Companies Traditional Companies Traditional New entrants
competitors competitors are forming competitors are extracting competitors are launching
are launching are pooling data-related are launching novel insights are gaining data and
new data and their respective partnerships new products from data that material edge analytics
analytics data into a along value that include were by using data businesses
businessess shared utility chain analytics traditionally and analytics that
services unrelated or to improve undermine
sitting in core business traditional
different competitors’
systems value
propositions
50 52
44
40 41 41 40
36 36
27
21
18 17
+144 +143 +91 +52 +14 +4

+11
1Question was not asked of respondents who said data and analytics have not changed nature of competition in their
industries in past 3 years, or those who said ‘don’t know’. In 2017, n = 496; in 2018, n = 548.
4Another 6% of respondents say their companies have not yet begun to address the competitive shifts due to data
and analytics.
Source: McKinsey & Company.
The survey found that organisations’ data practices (see figure 1.3) were an important enabler of
organisational performance and success, particularly leadership, data accessibility and a culture that
tolerates failure. In fact, employees at all levels of the organisation were better educated in data and
data analytics in high-performing organisations.
The role of leadership in driving the development of a long-term strategy and providing the infrastructure
and shaping organisational culture is pivotal to performance, regardless of the strategy focus. Integrating
data and analytics with strategy presents organisations with significant opportunities to enhance perfor-
mance and represents a major (and still emergent) development in the strategy development process in
recent years.
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FIGURE 1.3 Data practices
Current data practices at respondents’ organisations,1 At high-performing At all

% of respondents organisations2 organisations
70%
65%
46
43
75%
32
27 26 64% 60%
19 18
16
11 10
C-suite team Data are broadly Organisational culture Hiring criteria for Hiring criteria for
includes at least accessible to supports rapid testing non-management roles management
1 data leader frontline employees and iteration based include proficiency in roles include
whenever needed on data and tolerates data-related topics proficiency in
fast failure data-related topics
1
Out of 10 practices that were presented as answer choices. For respondents at high-performing organisations, n = 170, for all
other respondents, n = 405.
2
Respondents who said their organisations (a) have had an average annual organic growth rate of 10% or more over past three
years and (b) have had an average annual growth rate in earnings before interest and taxes of 10% or more over past three years.
Source: Exhibits from ‘Catch them if you can: How leaders in data and analytics have pulled ahead’, September 2019,
McKinsey & Company, www.mckinsey.com. Copyright © 2020 McKinsey & Company. All rights reserved. Reprinted by
permission.
The key points covered in section 1.1 of this module, and the learning objective they align to, are as
follows.
KEY POINTS
1.1 Explain the evolution of the practices of strategy and leadership.

• Strategy is those decisions that have high medium- to long-term impact on the activities of the
organisation, including analysis leading to the resourcing and implementation of those decisions,
to create value for key stakeholders and to outperform competitors.
• ‘Strategy’ derives from the Greek word strategos, meaning the art of planning and conducting a war.
• Strategy has evolved into civil, social and corporate life and is associated with business objectives,
efficiencies and outcomes.
• While often involving competition, strategy can also involve cooperation between competitors to
achieve mutually beneficial outcomes.
• The development of strategy has always relied on information to support decision making. In recent
years, a greater breadth and depth of information has become available and the ability to analyse
it has advanced greatly with technology, providing new (and still emerging) tools and resources for
strategy development.
1.2 Appraise the key concepts and practices applicable to the strategy process in the contem-
porary business environment.
• The development of strategy has always relied on information to support decision making. In recent
years, a greater breadth and depth of information has become available and the ability to analyse
it has advanced greatly with technology, providing new (and still emerging) tools and resources for
strategy development.
1.2 THE STRATEGY PROCESS

Through this study guide, we examine the process of developing and implementing business strategy. The
content of this subject is organised according to a typical strategy process, as shown in figure 1.4.
Although a structured approach to strategy development was criticised by Mintzberg, understanding
all the process steps and their purpose provides the critical foundations for responding to and leading an
organisation in making choices and decisions that will help an organisation stay relevant in today’s rapidly
evolving global business context. This may ultimately involve departing from the accepted process steps
to be responsive and agile.
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FIGURE 1.4 Strategy process and content structure

Setting the context for strategy
• Introduction to strategy
• The strategy process
• Gaining competitive advantage
• Organisational context
• Global context
• Leadership
• The role of the accountant
Strategic analysis:
external environment
(Module 2: Understanding
the external environment)
Strategic analysis: where
are we now?
• Collect data
• Remote environment
analysis
• Industry analysis
• Market analysis
• Competitive analysis
Exploring options Developing strategy Implementation and

(Module 4: Product, (Module 5: Strategy monitoring
service and market development) (Module 6: Strategy
development) Strategic implementation)
Defining the development: Strategic
future state: Where do we implementation: how
where do we want to go? How do we implement the
want to go? will get there? strategy?
• Create a culture of • Consider • Design and develop
innovation strategic drivers the implementation
Strategic analysis: • Identify stategic and tactics plan
internal environment options: • Perform a risk • Determine how to
(Module 3: Understanding – New products analysis on align the organisation
the internal environment) – New services strategic options to the plan
Strategic analysis: Where – New markets • Develop and • Manage change
are we now? evaluate strategic • Manage projects
• Assess stakeholders themes • Monitor
• Assess current • Develop strategic implementation and
performance initiatives performance
• Evaluate resources • Establish KPMs
and capabilities
• SWOT

(Module 7: Strategy and leadership for emerging models)
Ahead of the curve
• Business model change drivers
• Strategy for emerging business models
Regardless of the order that the steps in the strategy process are undertaken, each of the steps in the
process requires organisations to answer strategic questions and make decisions using data and intelligence
gathered about the organisation and its competitive context. Understanding and proficiency in the strategy
process provides the skills platform to deviate from the process, as Amazon has done.
This subject uses a structured approach to strategy development (the ‘rational’ approach, as described
in the following section) with the strategy process steps described in detail throughout modules 2–6.
Module 7 then presents new ways of thinking about the process, in acknowledgement of the importance
of new business models to the economy today.
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It is important to recognise that while this model presents the strategy process as a linear process, in
reality, strategy is developed and implemented in a dynamic environment and an organisation needs to
be flexible enough to review and refine the strategy to respond to changing circumstances or unexpected
outcomes.
THE RATIONAL APPROACH TO STRATEGY

The rational approach to strategy is based on a linear and mechanistic model, in which the conception
and execution of strategy are treated as discrete, sequential activities. Igor Ansoff, writing in 1965, noted
that in the preceding 10 years, the notion of strategy had received increasing attention. He believed this
was due to the ‘realisation that a firm needs a well-defined scope and growth direction, that objectives
alone do not meet this need and that additional decision rules are required if the firm is to have orderly and
profitable growth’ (Ansoff 1965, p. 103). Ansoff stated that it was all these components and rules that had
broadly defined strategy over the decade before 1965.
In establishing the necessity of strategy, Ansoff argued that without strategy, an organisation would be
without rules to guide the identification and analysis of new opportunities in the market. In another early
rational definition of strategy, Chandler (1962) defined strategy as a straightforward process made up of
two chronological activities:
1. setting the basic, long-term goals of an organisation, implementing courses of action
2. allocating the resources necessary to achieve those goals.
The essential purpose of this approach is to assess the organisation and its environment, achieve a fit
between the two and, based on this analysis, forecast and plan for the future.
The rational approach to strategy provides a logical process of analysis and evaluation. It:
• provides a way of talking, analysing and organising a complex set of issues
• is a means of communication and legitimisation to stakeholders
• is useful as an organising framework to analyse and plan strategy.
This study guide uses the rational approach to strategy, with the materials organised by module
as follows.
Module 2: Understanding the External Environment

A key task for an organisation’s senior management team is to make sense of uncertain and complex forces
in the environment. Diversity and complexity in the environment present both opportunities and challenges
in relation to the development of strategy and the future performance of the organisation. Understanding
the connections between forces in the environment and responding to the speed of change are challenging
management tasks.
The purpose of strategy tools for analysing the environment is to identify the key issues and ways of
managing complexity and change that are outside the organisation’s control and understanding the key
factors driving growth and profitability in the industry, the competitive landscape and what any organisation
would need to be successful in that context.
Leadership is necessary to ensure a consistent and disciplined approach to external analysis, which is
based on sound reasoning and a consideration of all major relevant factors. To avoid strategy becoming
ritualistic and pointless, unproven assumptions and far-fetched interpretations of environmental factors
must be challenged. Courage is essential because it may be necessary to challenge long-held assumptions
and beliefs that are no longer accurate. Discipline is also required to ensure the process is not completed
in an ad hoc manner.
Accountants are strongly qualified to lead in this area because they understand the need to justify
assertions with evidence and have the ability to provide objective analysis. The growing role of technology
in business and everyday life has led to the generation of enormous volumes of data, which, if they can be
analysed, can provide more timely and extensive insight into the external environment than has previously
been possible.
Module 3: Understanding the Internal Environment

Understanding how the organisation is performing across a range of factors is the focus of module 3.
Success for any organisation can be defined in many ways and is typically a function of key stakeholder
requirements. Identifying influential external stakeholders is essential, especially for public sector organ-
isations. By determining external stakeholders’ level of influence on the organisation and whether that
will positively or negatively affect future strategies, plans can be made to enhance, control or minimise
this influence. Both internal and external stakeholders need to be identified.
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Evaluation of an organisation’s performance and identification of organisational capabilities is also
relative to the industry and competitive landscape assessed in the external environment analysis
previously conducted, and in the context of the organisations vision, mission, values and goals.
An internal analysis ultimately results in conclusions about the organisation’s strengths, weaknesses,
opportunities and threats, which become a key input into developing options for the organisations
future growth and development.
The key role of leadership during internal analysis is to ensure that broad assumptions and claims are
challenged and verified. Honestly evaluating and challenging assessments, which may be provided by
biased personnel, is required. It may take courage to voice dissent but failure to do so will inevitably lead
towards strategic failure.
As with external analysis, technological advances have provided ways for organisations to capture and
analyse more information about themselves than has previously been possible.
Module 4: Product, Service and Market Development

After completing an organisation’s external and internal analyses, leadership should consider what the
organisation can do to create or exploit new opportunities. The main focus of module 4 is to develop options
for the organisation to achieve desired growth (acknowledging that organisations may have objectives other
than growth) in line with its vision, mission, values and goals and in response to the strengths, weakness,
opportunities and threats previously identified.
This involves innovation as a central concept and new product, service and market development as
options to pursue growth. Technology has become a major driver of innovation and enabled many new
products and services, as well as new ways of engaging with customers in existing markets and accessing
new markets. Intellectual property is a key consideration for protecting the value of innovations.
Based on the external and internal analyses performed, the strategic leadership team formulates and
develops new strategic options. This involves obtaining agreement about the desired approach to growth
and developing options to achieve growth outcomes. This may involve taking the organisation in a different
direction and/or stopping some activities.
Module 5: Strategy Development

The focus of module 5 is evaluating and prioritising the options that have been developed. Evaluation can
be against a range of criteria and evaluation approaches and various models have been developed to support
this, including evaluation of risk. Evaluation of options draws in data from both the external and internal
analyses previously performed. Decisions about what will be done is a key input to the organisations
strategic plan and may involve adjustment to the organisations vision, mission, values and goals.
A key leadership requirement for option evaluation is to ensure that there is a shared vision about
the strategic goals, gain agreement for the criteria against which possible options will be evaluated,
selected and prioritised and ensure appropriate risk assessment has been undertaken and factored into
implementation plans.
While all attempts should be made to make objective, rational decisions, it is important for the decision
makers to recognise key factors that will affect their decision-making abilities.
Module 6: Strategy Implementation

The leadership and management of change needed for strategy implementation varies depending on
the scope, scale and complexity of changes to be implemented. Plans for strategy implementation need
to address a multitude of organisational factors including the potential for resistance to change and
management of the risks associated with the options selected that have previously been identified.
Module 6 examines barriers to successful strategy implementation, provides frameworks and tools for
methodically working through the factors that needs to be addressed in implementation plans and proposed
ways that organisations can coordinate resources to effectively support strategy implementation.
The senior leadership team’s role is to determine who will be involved in the implementation process
and what tasks they will perform and ensure they are set up for success. The leadership team need to ensure
they have identified the barriers and the obstacles to successful implementation and put in place strategies
to give implementation the best chance of success.
This includes as a minimum:
• establishing a sense of urgency
• communicating the vision
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• empowering others to act
• making new approaches ingrained in the organisation.
Module 7: Strategy and Leadership for Emerging Business Models

Module 7 focuses on new and emerging business models in recognition of the rapidly changing competitive
landscape. The strategy process outlined in modules 2–6 is still applicable to emerging business models,
but various factors, including the pace of change and the threat and opportunity of disruption, present
special considerations for leaders and managers.
STRATEGY DEVELOPMENT IN PRACTICE

Strategic management is an ongoing and dynamic process that requires constant monitoring and adjust-
ment. The execution of strategy and the resulting performance needs to be evaluated to ensure operations
are on track. Thompson et al. (2007, p. 42) argue that implementation is the most challenging task of the
strategy process:
Converting strategic plans into actions and results tests a manager’s ability to direct organizational change,
motivate people, build and strengthen company competencies and competitive capabilities, create and
nurture a strategy-supportive work climate, and meet or beat performance targets. Initiatives to put the
strategy in place and execute it proficiently have to be launched and managed on many organizational
fronts.
While the rational approach is presented as a linear, step-by-step approach the process is iterative and
interdependent. Activities undertaken later in the process may lead to the need for change in the earlier
steps. For example, obstacles may occur that prevent implementation of the strategy, in which case it
might be necessary to consider a completely new direction and develop an updated strategy. Leaders and
managers need to:
• be sensitive to the environment for new ideas and challenges
• create context rather than plans, to encourage innovation and variety
• tolerate imperfection
• appreciate that the process of strategy is rarely a purely linear process, even if it makes it easier to act
as if it is
• be prepared to regularly review the performance of the strategy
• be prepared to refine or modify the strategy if it becomes evident change is required
• keep rules simple and build adaptive tension — in other words, provide sufficient order to make things
happen, but not stifle people with rigid controls.
An organisation’s strategy is therefore usually a mix of planned actions and ad hoc adaptations to
changing circumstances and demands. Strategy can therefore be understood as both planned and emergent,
representing a pattern of decisions intended to improve the performance and competitive position of the
organisation.
Example 1.1 describes how Amazon has adapted their planning processes to prioritise the most important
decisions, embed experimentation and innovation into the mindset of senior staff and constantly benchmark
and iterate plans to respond to the changes in their operating environment.
EXAMPLE 1.1
Amazon’s Six-Page Memo

PowerPoint presentations and brainstorming sessions have become many executives’ tools of choice
for presenting and developing ideas. It is interesting then that one of the most technology-based and
disruptive organisations, Amazon, banned the use of PowerPoint in 2004. The decision by chief executive
Jeff Bezos was intended to force the organisation’s senior leaders to properly develop their ideas and
expose them to scrutiny — something that PowerPoint’s bullet point presentations generally fail to do.
Bezos requires the company’s executives to write six pages of narrative text that presents:
• an objective
• an analysis of past ideas and initiatives related to the objective
• an explanation of why the new idea will succeed — demonstrating a customer focus
• the benefits for Amazon
• an assessment of and defence against potential objections.
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Rather than beginning planning meetings with brainstorming sessions, the group spends 20 minutes
reading the narrative memos — known as ‘six pagers’. That is followed by a detailed and robust discussion.
Bezos recognises that the quality of the memos varies considerably, but the best reflect the following
attributes.
• They have evolved through multiple drafts with input from a range of colleagues.
• They demonstrate that the business unit that produced the memo has already carefully considered and
made many of the most important decisions — and they have the autonomy to do so as part of the
planning process.
• They exhibit innovation and experimentation — often based around the concept of developing ideas
that could put Amazon out of business if introduced by a competitor.
• They force executives to give substantial attention to the idea and to make decisions about whether
and how to progress it.
• They are dynamic documents that can be revised as the organisation learns via experimentation,
iteration and feedback.
Products like e-book reader Kindle and home smart device Echo are the result of the six-pager
approach. More importantly, the approach means the company is constantly focused on innovation and
development of products years into the future.
Source: P Beswick, S Santhanam, T Furphy & J Marshall, 2018, Gaining a Competitive Edge In A Digi-
tal World: Why Is It Fundamentally Important For Companies To Increase Their Agility And Raise Their Speed
Limit?, p. 4, www.oliverwyman.com/our-expertise/insights/2018/jan/boardroom/agility-advantage/competitive-edge-in-a-
digital-world-.html; B Bashaw, 2019, ‘How Jeff Bezos turned narrative into Amazon’s competitive advantage’, Slab, blog,
5 February, https://slab.com/blog/jeff-bezos-writing-management-strategy; B Ladd 2019, ‘Amazon CEO Jeff Bezos belives
this is the best way to run meetings’, 10 June, Observer, https://observer.com/2019/06/amazon-ceo-jeff-bezos-meetings-
success-strategy; A Cain, 2009, ‘At Amazon, Jeff Bezos has strict instructions for crafting the perfect memo — and he said
it should take days to write’, 9 November, Business Insider Australia, www.businessinsider.com.au/amazon-ceo-jeff-bezos-
memo-advice-2018-4?r=US&IR=T.
QUESTION 1.1
Describe the strategy process in your own words. What do you think are the strengths and
weaknesses of the rational approach to the strategy process?
The key points covered in section 1.2 of this module, and the learning objective they align to, are
as follows.
KEY POINTS
1.2 Appraise the key concepts and practices applicable to the strategy process in the contempo-
rary business environment.
• The rational approach to strategy involves a linear, mechanistic model that provides a way of
organising and communicating about strategy.
• The strategy process involves:
– agreeing the strategy context
– analysing the operating and competitive environment
– assessing current performance against goals
– identifying and developing options for growth
– evaluating and selecting options and updating the strategy
– implementing and monitoring outcomes.
• In practice, strategy development is ongoing and dynamic, involving constant monitoring and
adjustment.
1.3 Appraise how the roles of management and leadership drive organisational strategy in the
contemporary business environment.
• Leaders and managers drive strategy by:
– being sensitive to the environment for new ideas and challenges
– creating context rather than plans
– tolerating imperfection
– regularly reviewing the performance of the strategy
– refining or modifying the strategy as required
– providing sufficient order without stifling people.
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1.3 GAINING COMPETITIVE ADVANTAGE
Competitive advantage is the ability of an organisation to outperform its competitors (Corporate Finance
Institute n.d.) and make more profits than its competitors do from an equivalent set of activities (Hubbard
& Beamish 2019). It can do this by being more efficient than competitors or undertaking different activities
that allow it to for example, charge higher prices or gain more market share and brand loyalty.
Competitive advantage is discussed in some detail in module 3, which looks at how organisations can
set themselves apart and examines what constitutes organisational capabilities and strategic capabilities —
those capabilities that are simultaneously valuable to customers, rare and difficult for competitors to copy.
Gaining and maintaining competitive advantage over a period of time is challenging for organisations
in the global economy with the speed of competition and information exchange possible today. There are
limited opportunities for the activities of an organisation to be unique. Patent protection is one mechanism
used to encourage, for example, new drug development in the pharmaceutical industry, and grants the
inventing organisation several years to capture all the benefits from their investment (which can run into
billions of dollars). Without such a mechanism to protect investment and exclusively capture the benefits,
no organisation would invest in new drug development. Licences can also provide exclusive ‘rights’ to
license holders that are also valuable and rare; for example, mining rights to land where mineral resources
can be extracted. However, licences that at one point in time may have been considered as valuable and rare
can also lose value. Consider Victorian taxi licences that were once issued by the Victorian Government,
and that became almost worthless with the arrival of ride-sharing apps like Uber and the subsequent
deregulation of the taxi industry.
Data is another source of potential competitive advantage for organisations. Where data can create
networks, it can create competitive advantage. For example, drivers use Google Maps in part because they
expect many others to use it too, and the more traffic data the software gathers from them, the better its
predictions on road conditions and travel times. This can create significant barriers to entry (as Apple Maps
has found), and meet the requirements of sustainable competitive advantage — that is, they are valuable
to customers, rare and difficult to imitate or replicate. Technology insight 1.2 presents a set of issues that
organisations can consider to assess the potential to leverage data to create a competitive advantage.
Building Competitive Advantage on Data

Organisations have always used customer information to guide their product and service offerings. Recent
advances related to data collection and analysis — internet-connected smart devices, cloud computing
and the technologies underlying advanced analytics — have created an opportunity for organisations to
understand and respond to customers in unprecedented ways. Table 1.1 describes criteria that determine
whether an organisation can achieve a competitive advantage based on customer data.
TABLE 1.1 Gaining competitive advantage from data
Issue Requirement for competitive advantage
1. Value-add from Customer data can contribute to competitive advantage if it adds

customer data significant value beyond the standard offering. For example, Mobileye
is the leading provider of intelligent safety systems and autonomous
driving technologies to vehicle manufacturers. Its widespread use provides
Mobileye with extensive near real-time data that enables its technologies
to respond more quickly and intelligently to the environment in which the
vehicle is operating thus creating high extra value. This contrasts with
efforts by manufacturers such as Philips to add value to smart televisions
by including ‘what to watch’ recommendation algorithms — customers
continue to value screen size and picture quality far above content
personalisation.
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2. Marginal value: add Data can contribute to competitive advantage if gathering additional
from data data continues to increase the value created. For example, Google uses
data from its various offerings to continually improve the value of its
search and map products and thus stay ahead of its competitors who
have been unable to catch and/or surpass Google’s data. If additional
data provides no further benefit, then it is easy for competitors to close
any temporary competitive advantage achieved. For example, smart
lighting systems quickly learn household or office routines and little
further value can be created with additional data. Hence the data-
enabled aspect of the technology does not provide a sustainable
competitive advantage.
3. Data depreciation If data remains useful over time, then an organisation can continue to
leverage it while it collects more data. This is the case with Google’s
search and maps applications. If data loses its value over time, then it
does not represent an obstacle to competitors.
4. Data non-substitutability Data that cannot be accessed from other sources or easily created/
obtained can be a source of competitive advantage. For example,
Google’s data sets are based on years of customer interactions. It is not
possible to acquire that data in any other way.
5. Product imitation Data cannot be a source of competitive advantage if the extra value added
to the product or service can simply be copied without requiring access
to the data. For example, user interfaces for software may be developed
based on customer data, but once released can be easily copied. Such
imitation can be difficult if the data is deeply embedded in a process or
the product or service is responsive to changes in customer data. For
example, the traffic conditions feature of Google Maps.
6. Use of individual Customisation of a product or service driven by unique user data creates
customer data to switching costs for that user (they have to give something up to choose
improve the product a competitor). Individual user data can also drive improvement for other
users (helping attract new customers).
7. Speed to market Data-enabled improvements that can be quickly developed and

implemented provide potential competitive advantage, whereas long
delays between data-enabled insights and implementation undermine
the data’s ability to create unique value for customers.
Source: Adapted from A Hagiu & J Wright, 2020, ‘When data creates competitive advantage’, Harvard Business Review,
January–February, https://hbr.org/2020/01/when-data-creates-competitive-advantage.
With digital disruption in the globalised economy now a reality of business, organisations must embrace
change and operate in a more complex environment. The ubiquity of the Internet challenges the activities
that many established companies have considered as central to their businesses, as they are offered by new,
specialised competitors that are better, faster, and more efficient products, services and solutions in their
area of focus.
It is critically important for organisations to understand that what has set them apart from competitors at
one point in time will become commonplace and less valuable over time. The challenge for organisations
is how to respond before and when this happens and why organisational speed, agility and innovation are
imperative for continued growth and competitiveness.
PURPOSE AND STRATEGY

‘Creating new markets’, ‘serving broader stakeholder needs’ and ‘changing the rules of the game’
are strategies commonly used by high-growth organisations. Malnight, Buche and Dhanaraj (2019)
identified purpose as a fourth central factor present in high-growth companies. Their research suggests
that competing based on current competitive conditions means that competitive advantage becomes
commoditised. They found that high-growth companies avoid limiting themselves in this way; instead
they pursue opportunities that are consistent with their purpose. Using purpose to guide strategy enables
organisations to redefine the competitive landscape and their value proposition (discussed in the next
section). Example 1.2 describes how Mars Petcare used purpose to redefine its basis of competition.
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EXAMPLE 1.2
Letting Purpose be the Guide — Mars Petcare

The Mars company may be best known for its confectionery products, but its petcare business is
the world’s leading pet-food company, with brands such as Pedigree, Schmackos and Whiskas. Its
trademarked vision of ‘A better world for pets’ is consistent with its extensive range of pet foods and
similar to competitors, such as Nestlé Purina PetCare’s ‘Better with pets’.
In practice, Mars Petcare has defined its purpose to be ‘preventing health problems for pets’. This
immediately suggests a range of areas in which Mars can seek business opportunities and extends its
basis of competition beyond pet food. This is evident in Mars’s:
• move into veterinary services — the acquisition of the Banfield Pet Hospital, BluePearl emergency
clinics, VCA animal hospitals, Swedish veterinary company AniCura and British veterinary services
company Linnaeus
• Pet Insight Project — a study using smart pet fitness trackers (worn on the collar) that record data
viewable through an app and that can be used by Mars vets to identify appropriate preventive healthcare
measures for pets (Mars acquired Whistle, which also sells the devices to owners)
• introduction of pet DNA testing services
• establishment of a venture fund for pet-related technologies.
In making such moves, Mars Petcare broadened its orientation beyond pet-food products to services,
requiring it to adopt a new organisational structure and develop new key capabilities. Such a transforma-
tion clearly involves risk, but Mars Petcare successfully managed the risks by ensuring all of its actions
were aligned with its stated purpose.
Source: Adapted from T Malnight, I Buche, C Dhanaraj, 2019, ‘Put purpose at the core of your strategy’, Harvard
Business Review, September–October; Mars, 2018, ‘Mars Petcare launches one of the largest tech-enabled pet health
studies seeking to uncover early signs of illness’, www.mars.com/news-and-stories/press-releases/mars-pet-insight-project;
Mars, n.d., www.mars.com/made-by-mars/petcare; Whistle, n.d., www.whistle.com; L Kolodny, 2018, ‘The world’s largest
pet-food company is starting a $100 million venture fund’, www.cnbc.com/2018/03/08/mars-petcare-unit-is-starting-100-
million-venture-fund.html.
As mentioned in example 1.2, adopting a purpose-driven strategy may present various challenges for an
organisation. The ways some of these challenges may be addressed are discussed in this and subsequent
modules. For example, Blue Ocean strategy, discussed in module 4, provides a systematic approach to
changing the accepted basis of competition in an industry to create new value.
RESHAPING THE VALUE PROPOSITION

A value proposition describes the target customer, the problem that is solved for the customer and why
what is being offered is distinctly better than available alternatives.
Creating a robust value proposition involves understanding customer wants and needs and matching that
to products and services that the organisation develops to create value for the customer.
Developed by Osterwalder and Pigneur (2014) as a tool to assist organisations develop value proposi-
tions, the Value Proposition Canvas, shown in figure 1.5, has two sides.
1. The customer profile articulates customer understanding for specific customer segments in terms of what
the customer needs to get done, what is currently difficult or challenging for them (the pain points) and
ways that pain could be addressed to create value for that particular customer segment. In this setting:
– pains describes obstacles that get in the way of jobs to be done
– gains describes the outcomes customers are trying to achieve and the benefits they are looking for.
2. The value map articulates the ways an organisation describes how it will create value for the customer
by describing the products and services that will be offered, how they will address current pain points
for customers and how they will create value for customers. In this setting:
– pain relievers describes how products and services could address customer pain points
– gain creators describe how products and services could help customers achieve the outcome and
benefits they are looking for.
Fit between the customer profile and value map is achieved when customers respond positively to the
proposed value proposition; for example, the value proposition helps them achieve what they want to
achieve, relieves current pain points and/or creates new value that they are willing to pay for.
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Achieving fit involves experimentation, iteration, testing and validation with customers, which is critical
to reduce the risks of creating a value proposition that does not in fact have value and/or resonate with the
intended customer. The approach of iteration, testing and validation is aligned with human-centred design
and new service design, which are discussed in module 4.
FIGURE 1.5 The Value Proposition Canvas
Value proposition Customer segment
Gain creators Gains
Products Customer
& services job(s)
Pain relievers Pains
Source: A Osterwalder, Y Pigneur, G Bernarda & A Smith, 2014, Value Proposition Design, Wiley, Hoboken.
Example 1.3 examines how a mountain bike company changed its value proposition by adopting an
e-commerce approach.
EXAMPLE 1.3
Moving from Traditional Retail to Online

One of the key challenges facing traditional physical retail stores is that the potential customer base is
largely limited to the geographical area around the store. Adding an online shop, combined with a sound
approach to efficient and cost-effective delivery of goods, creates the potential to reach customers all
over the country and indeed all over the world.
The founders of Mountain Bikes Direct, Jen and Michael Geale and Tim and Mylene McCullough, have
taken the online model a step further, deciding to operate wholly online without a physical shopfront
(though Michael and Tim had previously operated a successful physical store in Brisbane). They opened
their online shop,www.mtbdirect.com.au, in 2012, with the aim of supplying customers Australia-wide
with a range of mountain bike equipment including bikes, parts, protective gear, clothing and accessories.
Co-founder Jen Geale said the online model and treating the entire Australian mountain bike community
as their customer base meant they could hold a larger range of products in stock, including far more niche
and specialty items, than physical stores. Customers would find Mountain Bikes Direct more often had an
item in stock than did their local bike shops. The business also benefits from savings on rent compared
to physical retailers.
The online model was not without its challenges, however. In the early days, in particular, some suppliers
refused to deal with an online-only business, fearing a backlash from other dealers based on fears of price
under-cutting. Mountain Bikes Direct pointed out that customers were already buying online, but from
overseas. The store represented an opportunity to bring those sales back to Australia. Eventually suppliers
came on board. The store also faced profitability issues in its first couple of years of operation, but
managed to turn its performance around in 2014 by controlling costs. This turnaround enabled Mountain
Bikes Direct to focus on customer service and customer experience in the following years.
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Mountain Bikes Direct has adopted a cloud-based approach to its technology systems. Apart from
being able to outsource the management of the technology that hosts the online store, another benefit
is that the business can hire the best staff to log in and work for them from anywhere in the world.
Consequently, there’s always someone available to answer customer queries, no matter what time of
day or night customers happen to need assistance — and many of their enquiries do arrive at night via the
chat facility on their website. Having staff located around the world also means the business gets access
to information about emerging trends, products and concepts ahead of their Australian competitors. The
business can then monitor those developments and decide to introduce new products as appropriate,
ahead of the competition.
This is all part of the business’s drive to provide exceptional customer service — the kind of expert
advice and service that customers might traditionally seek out in a physical store. Among its team values
are ‘straight talk’, ‘inclusive and professional’, ‘time is valuable’ and ‘continuous improvement’.
In 2017, the business decided to step up its marketing efforts. Over its first five years, it had largely
relied on customers finding the store by searching for particular products online. As part of ramping
up marketing, Mountain Bikes Direct overhauled its website to clearly focus on the value it offered to
customers through expert advice and service. It included short biographies of the key personnel and
used actual photos and names of staff communicating via the chat facility, email or social media rather
than the cartoon or stock photographs used by most businesses for their online chat. While staff of course
have titles such as ‘customer service manager’, when they present to customers it is through job titles
such as ‘mountain bike expert’.
The business has won a SmartCompany Smart50 Award and a Telstra Business Award. It uses these
awards on its website to demonstrate credibility and commitment to potential customers. The business’s
marketing efforts consistently promote the expertise of the business and its staff.
Jen Geale says that it is when customers interact directly with the business that the marketing message
becomes reality — ‘it’s when [customers] actually experience it for themselves that they go, “Wow, you
guys really know your stuff.”’ The business avoids the depersonalising approach that characterises many
online stores — it actively encourages customers to interact, and in particular to ask questions and seek
advice. This provides the staff with the opportunity to demonstrate their expertise.
Jen says ‘Being online allows us to respond quickly and really get on top of communication, which is
why customers come back to us’ 6 am and 10 pm. You can’t do that with phone support or face-to-face.
Being online allows us to respond quickly and really get on top of communication, which is why customers
come back to us’.
Source: Adapted from SmartCompany, 2017, Smart50 Awards, www.smartcompany.com.au/lists/smart50-awards-
2017/mountain-bikes-direct-2; Telstra Faster Business, 2018, ‘The switch to e-commerce changed everything for this bike
retailer’, www.businessinsider.com.au/switch-to-e-commerce-bike-retailer-telstra-2018-3; Mountain Bikes Direct, 2020,
www.mtbdirect.com.au.
QUESTION 1.2
The decision to go purely online has helped Mountain Bikes Direct grow their business. Using the
information in example 1.3, complete a customer profile and value map for the business’s Value
Proposition Canvas.
THE PRODUCTIVITY FRONTIER AND BEST PRACTICE

The productivity frontier shown in figure 1.6. is an economic concept that represents the current level of
best practice. It is the curve where the most efficient performers in the industry are placed. Porter defines
this as the ‘maximum value a company can deliver at a given cost, given the best available technology,
skills and management techniques’ (Porter 1996, p. 1).
If an organisation was as efficient and effective as it could be, then it would be sitting at the productivity
frontier. Most organisations, however, sit below the ‘productivity frontier’ and strive to improve their
performance within known parameters of performance to improve the efficiency and effectiveness of what
they do with the resources they have available and as they gradually improve through the adoption of new
practices and technologies that are available to competitors in the industry.
Being at the productivity frontier means that organisations are operating efficiently and effectively,
however it does not deliver sustainable strategic advantage. This can only be achieved when organisations
do something different by identifying and investing in unique activities that are not factored into the
industry’s productivity frontier.
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FIGURE 1.6 Operational effectiveness versus strategic positioning
Non-price buyer value delivered

High Productivity
frontier
(state of best
practice)
Low
High Low
Relative cost position
Source: M Porter, 1996, ‘What is strategy?’, Harvard Business Review, vol. 74, no. 6, pp. 61–78. Reproduced by permission of
Harvard Business Review. Copyright © 1996 by Harvard Business Publishing. All rights reserved.
DIFFERENTIATING STRATEGY FROM TACTICS

It is important to differentiate strategy from the focus on improving day-to-day activities or operations.
Improving operational effectiveness or increasing efficiency is important, but it is not the same as a true
competitive strategy.
A true competitive strategy attempts to transform the activities performed, so that they differ from rivals
or are completed in a different manner to standard practice in the market.
According to Porter (1996), operational improvements are required, but they are not sufficient as they do
not provide long-term organisational sustainability. Over time, other organisations match the improvements
that have been made, and the benefit is eroded. Porter suggests that an organisation needs to make itself
distinct and different, as opposed to trying to do the same thing as its competitors in a better or faster
manner. In order to differentiate itself from its competitors, an organisation must do activities that are
similar to competitors in a different way or do completely different activities.
Porter provides examples of being distinct, including organisations that only service customers in a
specific market niche, or focusing on particular geographic locations, or providing a specific type of
product, rather than a broad range of products. An important part of this approach is saying ‘no’ to new
products, services or types of customers that do not match the overall strategy. The discipline to focus on
what differentiates an organisation is a critical part of effective and competitive strategy.
Strategy is the ‘bigger picture’. Organisations can describe their strategic positioning in terms of their
customers and the industry in which they operate. However, the activities performed and the organisation’s
direction and process in performing them, form the foundation of strategy.
STRATEGIC FIT AND STRATEGIC STRETCH

According to Grant (2008), strategic fit is fundamental to strategy. It involves matching the organisation’s
goals, values, assets and capabilities, structures and systems to the external environment and market needs.
Strategic fit is ensuring that the organisation can meet the challenges associated with its environment and
markets and the changes occurring within it.
Strategic stretch, on the other hand, is resource-led and based on leaders and managers challenging
how organisational resources and capabilities can be leveraged (‘stretched’) to create new opportunities.
Table 1.2, adapted from Hamel and Prahalad (cited in Johnson & Scholes 2002), illustrates
various implications of strategic fit between the external environment and organisational resources
and/or capabilities.
In practice, the operations of organisations reflect elements of both strategic fit and strategic stretch and
leadership that drive these elements. The strategy needs to have enough stretch in it so that it extends upon
the ‘fit’ that can currently be achieved with the organisation’s present structure and offerings, creating a
gap to where it wants to be as it is this ‘stretch’ that is most likely to create competitive advantage for
an organisation.
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TABLE 1.2 The leading edge of strategy: fit or stretch
Aspect of strategy Fit Stretch
Underlying basis Strategic fit between market Leverage of resources to improve

opportunities and organisation’s value for money
resources
Competitive advantage through Differentiation directed by Differentiation based on

correct positioning market need competences suited to or creating
market need
How small players survive Find and defend a niche Change the ‘rules of the game’
Risk-reduction through portfolio Products/businesses Competencies
Investments by corporate centre Strategies of business units or Strategic capabilities or core

subsidiaries competencies
Source: G Johnson & K Scholes, 2002, Exploring Corporate Strategy, 6th edn, Pearson Education, London, p. 8. Adapted from
G Hamel & CK Prahalad, 1994, Competing for the Future, Harvard Business School Press, Boston.
as follows.
KEY POINTS

• A relatively recent concept for pursuing competitive advantage is to put purpose at the core of
strategy. Purpose extends the focus of the organisation across a network of connected interests
and relationships.
1.2 Appraise the key concepts and practices applicable to the strategy process in the
• Competitive advantage is the ability of an organisation to outperform its competitors and make
more profits than its competitors do from an equivalent set of activities.
• Innovation, intellectual property and data can all serve as important sources of competitive
advantage.
• Value proposition is a concept that describes how an organisation’s offering solves a problem for
a customer better than alternatives.
• The productivity frontier describes the most efficient use of resources to deliver value to a buyer —
organisations operating on the productivity frontier must find a new way to do something if they
are to improve competitiveness.
• Strategic stretch involves leveraging resources and capabilities to create new opportunities and
create competitive advantage.
1.4 ORGANISATIONAL CONTEXT FOR STRATEGY

Different types of organisations (from sole traders, through to government organisations and large
multinational corporations) exist and operate for a range of reasons. Their success is evaluated by their
key stakeholders who have their own perspectives of what constitutes success. For example, a hospital is
likely to be concerned with efficiency of resource use and effectively treating as many patients as it can
with the budget and other resources it has available, while a listed business is likely to be more strongly
focused on growth financial performance for investors and a social venture is likely to be focused on a
specific cause.
Key stakeholders and performance evaluation are discussed in module 3.
The size and scale of an organisation also influence its structure and how it is organised for the purposes
of management. For example, where are the organisation’s operations located and to what extent is decision
making centralised or de-centralised?
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Similarly, industry life cycle stage and organisational maturity impact how strategy development is
approached, and the time and resources allocated. These and other factors that provide context for the
strategy development process are discussed in the following sections.
INDUSTRY AND ORGANISATIONAL MATURITY

Organisations operate within industries that differ according to the maturity of the industry and its stage in
the industry life cycle. Similarly, organisations within a given industry can also vary in terms of the stage
of the organisational life cycle and organisational maturity.
Industries and organisations both go through life cycle stages from start-up through to decline (and
possible renewal). Different factors are relatively more important for organisational competitiveness and
success, depending on the industry life cycle stage and the size and maturity of the organisation.
Figure 1.7 describes the typical considerations for organisations at different stages of the industry life
cycle.
FIGURE 1.7 Organisation size and industry life cycle
Management
approach Renewal
Organisation size
Continued
decline
Management
challenge
Start-up Growth Maturity Shakeout Decline or

renewal
Industry life cycle
Source: Adapted from G Hubbard & P Beamish, 2011, Strategic Management: Thinking, Analysis, Action, 4th edn, Pearson,
Sydney, p. 89 and RM Grant, 2018, Contemporary Strategy Analysis, 10th edn, John Wiley & Sons Inc., Hoboken.
They also influence the leadership type and style that would be most effective. Very different strategies
and leadership styles and experience would be effective in, for example, a start-up company seeking to
establish a foothold in an emerging industry compared with a company that is having to make decisions to
reduce the size of an organisation to remain in business. These leadership and management considerations
are discussed later in this module.
Similarly, a start-up business will be focused on cashflow to pay its bills, while the organisation develops
and proves its products and services in the marketplace. The organisation is typically still learning what
products and services work and what doesn’t work and winning customers and getting paid almost always
will take priority over perfecting organisational systems and processes. On the other hand, an established
organisation is likely to be more focused on the efficiency of its systems and processes and avoiding
unnecessary costs in order to maximise profit margins from what it currently does. These differences are
illustrated in figure 1.8, which shows the typical revenue, cash and profit implications of different industry
life cycle stages.
The negative cash flow experienced during the start-up stage is often referred to as the ‘valley of death’,
which describes the period of time where a start-up has commenced operations but is not yet generating
revenue. It funds operations from either its own or investor equity capital, with the aim of managing the rate
that it uses cash (the cash burn rate) to last until revenue is earned in sufficient amounts to cover operating
expenses.
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FIGURE 1.8 Revenue, cash and profit at different industry life cycle stages
Revenue
$
Cash
Profit
Start-up Growth Maturity Shakeout Decline

Stage
(not necessarily temporary)
Source: Adapted from The Corporate Finance Institute, n.d., Industry Life Cycle, https://corporatefinanceinstitute.com/resources/
knowledge/strategy/industry-life-cycle.
QUESTION 1.3
Prospa launched in 2011, when co-founders Beau Bertoli and Greg Moshal saw an opportunity
to build a strong online platform to assist small business owners who wanted funding but were
struggling with the time and requirements of the mainstream banking system. In 2013–14, the
operation generated AU$1.8 million in revenue. In 2015–16 this was up to AU$22.3 million. Bertoli
said 2016–17 would see Prospa solidifying its slice of the small business lending space, as
well as expanding into the credit information space to also give small businesses access to
credit information.
In 2015–16, at what stage in the organisational life cycle would you evaluate Prospa to be? Provide
two examples to support your evaluation.
Identify and explain two key challenges for Prospa over its next 12 months of operations.
Organisational Maturity and the Capability Maturity Model (CMM)

Organisations follow the same maturity cycle from start-up through to decline (as so products and
services), and organisational capabilities vary according to the organisation’s relative maturity and different
businesses at different stages of the organisational life cycle typically have different levels of maturity.
The Capability Maturity Model (CMM) was originally developed to assist in the development of
software. However, it evolved to become a useful tool in describing the overall capability and maturity
of an organisation according to five levels.
1. Level 1: Initial. Ad hoc systems and processes, with success largely dependent on the efforts of capable
individuals, but if they leave there is no inbuilt continuity and as a consequence the business could
collapse because there is not replication or repeatability of what it done.
2. Level 2: Repeatable. Some systems and processes are documented, which enables successful activities
to be repeated, as long as they are similar to past activities.
3. Level 3: Defined. Standard processes are in place for documenting procedures and management systems
with processes widely integrated into the decision-making processes of the organisation.
4. Level 4: Managed. Decisions are made using formal management processes. This includes resource
and decision planning, context setting, risk identification and management and monitoring of outcomes
for feedback.
5. Level 5: Optimised. Continuous improvement is possible due to the capture of quantitative information
and feedback form decision implementation. New ideas and technologies can be trialled and risk
associated with doing new things managed. Review processes provide information that is used to
improve current systems and processes.
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Understanding the organisation’s context in terms of organisation type, industry and organisational
maturity is critical knowledge for adapting and adjusting the strategy development, planning and imple-
mentation processes that are described in this subject.
A large multinational and listed business will invest significantly more time and resources in strategy
development than an SME, and their approach to strategy development is likely to be more structured and
planned than for example, the iterative and learning on the run approach a start-up might take. However,
the process steps and goals they can apply are the same.
LEVELS OF STRATEGY
Strategy can be developed at three different organisational levels, with all three levels used for large
diversified organisations. It is useful to be aware of the different levels and understand the differences
between them.
1. Corporate strategy pertains to that of the organisation and its businesses overall; this is most relevant
for large diversified organisations.
2. Business strategy is for individual businesses or each area of business into which the organisation has
diversified (the focus of this subject).
3. Functional strategy pertains to each of the functions in an organisation, such as marketing, production
and human resources, the strategies for which have to be consistent with the overall business and/or
corporate strategy.
Corporate Strategy
Corporate strategy embraces all a diversified organisation’s businesses and determines how the scope of
these businesses are managed and coordinated to contribute to corporate performance. Thompson et al.
(2007) identified the following initiatives of corporate strategy:
• establish business positions across a number of industries
• boost the combined performance of the businesses and improve competitive position
• capture and use the synergy among the businesses to improve competitive advantage
• effectively allocate corporate resources, prioritising growth businesses within the portfolio.
Business Strategy
For a single business organisation, corporate and business strategy are one and the same. The distinction
between the two is relevant only for diversified organisations. As with corporate strategy, but focusing on
one business only, business strategy aims to build and strengthen the long-term competitive position in the
market. Developing a business strategy that provides sustainable competitive advantage requires deciding
in what market competitive advantage can be achieved, determining what product or service attributes will
distinguish the business from its rivals, and countering the moves of competitors.
In large and diversified organisations, there may be too many business units for one CEO to adequately
control. In this situation, related businesses are grouped and authority over them is delegated to a senior
manager. The grouping of businesses is often referred to as a strategic business unit (SBU). The advantage
of the SBU concept is that it provides the benefits of rationalising and achieving strategic fit across a range
of similar businesses.
Functional Strategy
Functional strategy operates at the level of the department or functional activity in the business (for
example, marketing, finance, operations, research and development, human resources) and adds detail
to the overall business strategy. Department heads need to coordinate their respective functional strategies
so that they are working together to achieve the goals set out in the business strategy.
The tendency for departments to focus on their own goals and activities can result in conflict
between departments and weaken organisational performance. A classic conflict is between the marketing
department that typically pursues product innovation and differentiation to exploit niche markets, and the
production and operations department that prefers stable product lines and long production runs. The role
of functional strategy is to ensure coordination and reduce conflict between the departments or functions,
so that their combined efforts provide the optimum contribution to business strategy.
Figure 1.9 illustrates a typical structure for a corporation that has two divisions, each of which presides
over two businesses.
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FIGURE 1.9 Typical corporate structure
Corporate head office
Operations SBU Retail SBU
Production Distribution Retail Retail

Business 1 Business 2
HR R&D Finance Operations HR Marketing Finance Admin
The focus of this subject is business level strategy, which is synonymous with corporate strategy in
undiversified organisations. Notwithstanding this, the job of leaders and managers is to ensure all levels
of strategy are aligned.
Core Business Types

Hagel and Singer (2000) propose that there are three core business types that co-exist within a single
organisation.
1. A customer relationship business — finding customers, building relationships with them and keeping
them as customers.
2. A product innovation business — coming up with new product and service ideas and bringing them
to market.
3. An infrastructure business — building and managing facilities for high volume, efficient transactions,
such as physical assets, systems, processes and logistics.
Table 1.3 describes the characteristics of the three core business types.
TABLE 1.3 The three core business types
Rethinking the traditional organisation
Customer relationship Product innovation Infrastructure
Economics High cost of customer Early market entry allows for High fixed costs make large
acquisition makes it a premium price and large volumes essential to achieve
imperative to gain large market share; speed is the key low unit costs; economies of
wallet share; economies scale are the key
of scope are the key
Competition Battle for scope; rapid Battle for talent; low barriers Battle for scale; rapid
consolidation; a few big to entry; many small players consolidation; a few big
players dominate thrive players dominate
Culture Highly service oriented; Employee centered; coddling Cost focused; stress
customer-comes-first the creative stars standardisation, predictability,
mentality and efficiency
Source: J Hagel & M Singer, 2000, Unbundling the Corporation, McKinsey.com, www.mckinsey.com/business-functions/
strategy-and-corporate-finance/our-insights/unbundling-the-corporation, p. 3.
Interaction costs represent the money and time expended whenever people and companies exchange
goods, services, or ideas, and Hagel and Singer propose these costs determine the way companies
organise themselves and form relationships with other parties, and that a company will organise in
Pdf_Folio:22

whatever way minimises overall interaction costs. This, in turn, can impact how industries are organised.
Understanding the core business types and the implications of the costs of interactions are shaping and
driving new business models and challenging existing industries. Example 1.4 examines Apple’s role in
the transformation of the computer industry in the 1970s.
EXAMPLE 1.4
How Apple Reshaped the Computer Industry

The arrival of Apple in the 1970s upended the computer industry, within a decade ending the dominance
of the enormous, vertically integrated IBM and Digital Equipment and their peers. The key turning point
was Apple’s Apple II personal computer, which was based on open architecture, creating opportunities for
small, specialist suppliers to provide hardware and software for the new platform. Almost immediately the
seemingly entrenched size, reputation and integration advantages of the big players began to fail against
the creativity, flexibility and speed of the many specialists that entered the market to provide an ecosystem
of complementary products.
Adherence to well-documented standards greatly reduced interaction costs — the costs that arise
whenever there is an exchange of products, services or knowledge between different parties. As a result,
companies such as Adobe Systems, Intel, Microsoft, Novell, and Sun Microsystems could compete
effectively against the entrenched players.
By upending the way interaction costs operated in the industry, Apple caused the entire industry to
undergo a rapid shift.
Source: Adapted from ‘Unbundling the corporation’, June 2000, McKinsey Quarterly, www.mckinsey.com. Copyright ©
2020 McKinsey & Company. All rights reserved. Reprinted by permission.
Hagel and Singer propose that thee core business types don’t map neatly to organisational structure but
are coordinated within the business through core processes. Key leadership and management challenges
are how to most efficiently manage the interactions across the three core business types, especially for
larger organisations that may run interdependent activities within distinct business units that have their
own performance targets to achieve.
Depending on the core focus of the overall business, there is considerable potential for tension between
organisational units based on the different economic, competition and culture drivers for each core business
type (see table 1.4).
TABLE 1.4 Core business type typical focus and conflicts
Business
Core business type drivers Typical focus Potential conflicts
Customer Scope • Offering customers products and • Asking the infrastructure

relationship services to keep them, even if it business to customise to win
isn’t profitable to do so or keep customers
• Spending too much on customer • Asking the product innovation
acquisition relative to customer business to adapt products for
spend specific customer
Product innovation Speed • Focusing on letting internal talent • Not creating customer/market
create what interests them rather relevant products and services
than responding to customer • Creating products and services
requirements that are uneconomic to
• Avoiding necessary administration produce
(continued)
Pdf_Folio:23

TABLE 1.4 (continued)
Business
Core business type drivers Typical focus Potential conflicts
Infrastructure Scale • Standardising as much as possible • Unwillingness to change or

business to enable higher throughput and adapt processes — one-size-
efficiency (commodity focus and fits-all
lowest cost per unit) • No customisation and special
• Lack of flexibility and agility as this treatment
reduces efficiency and increases
costs
Source: Adapted from ‘Unbundling the corporation’, June 2000, McKinsey Quarterly, www.mckinsey.com. Copyright © 2020
McKinsey & Company. All rights reserved. Reprinted by permission.
QUESTION 1.4
Few companies’ products are as visible everyday as those of DIC. Our core business is the manu-
facture and sale of printing inks and coatings, applied to form the printed word and to decorate and
protect packaging.
DIC Australia/New Zealand is committed to being recognised by customers as the very best
supplier. This means we will find out our customers’ needs today and for the future do all that is
possible to satisfy these needs at the lowest cost and continually improve the value of our product.
Every individual in the organisation has a role to play in managing for quality. Our products are
strongly branded as DIC in line with our heritage.
The headquarters and main factory of DIC Australia/New Zealand is situated in Sydney. Printing
ink and other surface coatings for the full range of printing and packaging applications are supplied
through a network of service factories in Sydney, Perth, Adelaide, Brisbane, Melbourne, Auckland,
Wellington and Christchurch.
In addition to its ink products, DIC Australia/New Zealand markets adhesives, Sun press
chemicals, a range of world class printing blankets, as well as Kodak printing plates. The trading
division sells a wide range of DIC and non-DIC chemicals and pigments into the coatings industry.
DIC Australia/New Zealand has an annual sales turnover in excess of $AU100 million and employs
approximately 150 people across both countries. Much of our success and reputation is due to the
strength of our technological expertise and nearly 30% of our staff are employed in a technical
capacity.
DIC Australia and New Zealand, being part of the largest ink group in the world, have a true global
network covering market trends, product development and service-related initiatives. We actively
participate in intercompany knowledge transfer and industry associations to retain our industry
position as a driver of technology.
The company is dedicated to the provision of a safe and healthy working environment for its
employees, contractors and visitors and in protecting the integrity of the surrounding environment.
Health, safety and environmental policies and procedures are developed in consultation with the
Occupational Health, Safety and Environment Committee and are designed to ensure safe work
practices which comply with legislation in both Australia and New Zealand Standards.
Identify and describe the components of the DIC Australia/New Zealand Business that relate to
the three core business types.
If revenue from manufacturing was declining, select and explain two of the potential business
conflicts described in table 1.4 that this organisation could experience.
Source: DIC Australia, 2020, Company Profile, www.dic.com.au/profile/about-us.aspx.
VISION, MISSION, VALUES AND GOALS

Many organisations articulate who they are and what they stand for through their vision, mission and value
statements and goals, shown in figure 1.10.
An organisation’s vision, mission, values and goals are inextricably linked. The organisation’s vision is
realised through the development and achievement of its mission. Goals provide the stepping stones that
lead to the realisation of a mission. These four elements are used to develop the strategy and measure the
progress of the strategy’s implementation.
Pdf_Folio:24

FIGURE 1.10 Vision, mission, values and goals
A guiding concept that contains aspirations

Vision
Reason for operating; how to achieve vision

Mission
Guiding principles that direct and prioritise goals

Values
Targets and outcomes needed to meet vision and mission

Goals
It is not imperative that organisations have both a vision and a mission or articulate it in a specific order.
The most important thing is that an organisation, its employees and all other stakeholders are aware of the
organisation’s vision, mission, core values and direction.
John Kotter, an influential author and professor of leadership and strategy, suggests seven questions that
an organisation should ask in order to ensure that the vision it develops is comprehensive, achievable and
closely linked to the goals and strategy of the organisation (LSIS 2009, based on Kotter 1996, p. 67):
1. Does it convey a picture of what the future will look like?
2. Does it appeal to the long-term interests of members, employees, customers, partners and other
stakeholders?
3. Does it comprise realistic, attainable goals?
4. Is it clear enough to provide guidance in decision making?
5. Is it general enough to allow individual initiatives and alternative responses in light of changing
conditions?
6. Is it easy to communicate; can it be clearly explained in five minutes?
7. Is it ambitious enough to force people out of comfortable routines?
Vision
An organisation’s vision answers the questions of what an organisation does and why it does it. It describes
where the organisation wants to be in the future and offers a set of priorities and ideals. It is a guiding
concept that contains aspirations and does not include the specifics of how the organisation will achieve
this state.
Mission
The mission captures its fundamental purpose or reason for operating and explains how the organisation
will achieve its vision. The organisation’s mission should focus on underlying or basic customer needs
and how these needs are being met. The mission should not describe the organisation’s current offerings
of particular products and services as change and innovation may make particular products and services
redundant. An organisation’s mission and vision should complement each other.
Values
Values support the mission by guiding behaviour, positioning ethical conduct and the organisation’s
management and leadership philosophy. They are the guiding principles that direct and prioritise goals
and help managers to make trade-off decisions about the organisation’s direction when faced with
competing interests.
Pdf_Folio:25

Goals
An organisation’s goals are specific outcomes the organisation seeks so it can achieve its mission. People
work most effectively when they focus on a well-defined goal. Goals are valuable tools to improve
employee motivation and gain support for achieving tasks. The most useful and achievable goals are those
that have SMART characteristics, that is, they are:
• specific
• measurable
• achievable
• relevant
• timely.
Example 1.5 summarises RMIT University’s vision, mission, values and goals to 2020.
EXAMPLE 1.5
RMIT University’s Vision, Mission, Values and Goals

Our Vision
A global university of technology, design and enterprise.
Our Mission
RMIT exists to create transformative experiences for our students, getting them ready for life and work,
and to help shape the world with research, innovation, teaching and engagement.
Our Values
• Passion. We take pride in RMIT and its achievements and we are deeply committed to extending and
deepening RMIT’s positive impact.
• Impact. RMIT achieves impact through an applied, practice-based approach to meeting contemporary
needs. We shape the world for the better through collaborative design, research, learning and problem
solving.
• Courage. We are honest and fair in our conduct and relationships. We embrace new thinking and
evidence, test it rigorously and apply it to our own learning. We are strongly committed to performance,
accountability and value for money. We speak out on issues of importance to our community and our
world. We respect the rights of others and our obligations to the health of the planet.
• Inclusion. RMIT creates life-changing opportunities for all, welcomes students and staff from diverse
backgrounds, honours the identity and knowledge of Aboriginal and Torres Strait Islander nations, and
is an accessible and open institution dedicated to serving the needs of the whole community.
• Agility. We are forward-looking, balanced and sustainable in our approach to organisation and
resourcing. We are able to adapt quickly and effectively to new pressures and opportunities.
• Imagination. We value innovation and creativity as essential qualities of our work and resources
for the economy and society. We are committed to developing, applying and sharing new ideas
and perspectives.
Our Goals
Goal 1
A transformative student experience.
Priority 1: Graduating ready for life and work.
Priority 2: Inspiring teaching.
Priority 3: Learning through work and enterprise.
Priority 4: Valuing and growing our diversity.
Priority 5: A digitally enabled experience.
Goal 2
Connected pathways.
Priority 1: A distinctive form of connected education.
Priority 2: Supporting access, progression and pathways.
Priority 3: A trailblazing approach to assessment and credentials.
Priority 4: A dynamic community of alumni.
Priority 5: Enterprise-ready.
Goal 3
Supporting and empowering our people with clearer, smarter, simpler systems.
Priority 1: Our people focused on outcomes and positive impact.
Pdf_Folio:26

Priority 2: A team approach to work.
Priority 3: Simpler, more supportive processes and systems.
Priority 4: A positive culture of service and support.
Priority 5: Intelligent, timely use of information and analytics.
Goal 4
Managing resources for long-term value.
Priority 1: Financial performance to support our goals.
Priority 2: Places and spaces for creativity and collaboration.
Priority 3: Digital infrastructure supporting everything we do.
Priority 4: Improve environmental sustainability.
Goal 5
Research and innovation: creating impact through collaboration.
Priority 1: Using our strengths to drive impact in research and innovation.
Priority 2: Solving public policy problems.
Priority 3: Research embedded in teaching and engagement.
Priority 4: Effective research training.
Goal 6
Industry and enterprise embedded in everything we do.
Priority 1: Meeting global demand with strategic partnership.
Priority 2: Connected with industry and community throughout the student journey.
Goal 7
Global reach and outlook.
Priority 1: Preparing students for the globalised world of work.
Priority 2: A global contribution to research and innovation.
Priority 3: Global operations that contribute to RMIT’s reputation and financial performance.
Source: Derived from RMIT’s strategic plan to 2020, www.rmit.edu.au/news/all-news/2015/november/our-strategic-plan-to-
2020.
QUESTION 1.5
RMIT’s University’s vision, mission, values and goals are described in example 1.5. Evaluate how
well RMIT’s vision, mission, value and goals satisfy the seven questions that Kotter suggests an
organisation should ask in order to ensure that its vision is comprehensive, achievable and closely
linked to the goals and strategy of the organisation.
BUSINESS MODELS
A business model explains how a business works and the economic logic behind it. It is a way of
representing and communicating how an organisation creates and delivers value and makes explicit the
assumptions it is making and testing about the economic logic of the model.
Business models emerged in the 1960s when it became possible (through computing) to ‘model’
different business scenarios. Margretta (cited in Ovens 2015) proposed that a business model should
include two key components.
1. All the activities associated with making something: designing it, purchasing raw materials, manufac-
turing, and so on.
2. All the activities associated with selling something: finding and reaching customers, transacting a sale,
distributing the product, or delivering the service.
Johnson et al (2008) extended this to propose that a business model also needs a value proposition
resulting in three key components.
1. Customer value proposition: that helps customers perform a specific ‘job’ that alternative offerings
don’t address.
2. Profit formula: how value is generated through factors such as revenue model, cost structure, margins,
and inventory turnover.
Pdf_Folio:27

3. Key resources and processes: what costs are required with regard to people, technology, products,
facilities, equipment and brand to deliver the value proposition to the target customers.
QUESTION 1.6
Australians have a long history of valuing motor vehicle ownership for the freedom and convenience
it provides. Some research suggests, however, that many Australians find car ownership a
significant financial burden — with purchase, depreciation, loan costs, maintenance and running
costs often adding up to several thousand dollars every year. Dr Parvinder Kler, Director of the
Sustainable Energy Policy Cluster (SEPC) at Griffith University, suggests one of the easiest ways
to save money is to give up car ownership.
In 2004, a group of university students commenced a pilot for a membership-based car-sharing
business known as Flo Carshare. The company received a number of grants and in 2006 changed its
name to Flexicar. Hertz Australia purchased Flexicar in December 2010. Flexicar’s vision is ‘For car-
sharing to become a mainstream public transport option for urban Australians; providing a cheap,
green and easy alternative to car ownership’.
Flexicar’s fleet comprises economy cars, prestige vehicles, light commercial vehicles and people
movers. All are new, reliable and energy-efficient, and can be hired from as little as AU$8.50 per hour,
inclusive of petrol. Flexicar operates from accessible car parking spaces in Melbourne, Sydney,
Brisbane and Perth, including locations at the Sydney and Melbourne airports. Customers can find
the closest available cars using an app or website that integrates with GPS tracking and maps.
Flexicar customers pay an annual membership fee and can join as business, student or personal
members with varying benefits. All memberships include damage cover and roadside assist. Stu-
dent membership costs just AU$35 a year. Members then choose a plan that suits their preferences
for the level of excess paid in the event of an accident, the trade-off between membership fee and
rental fees, whether they will rent by the hour or day, the type of vehicle and how they expect to
use the service. Security of the vehicles is managed by a PIN that provides entry to the vehicle.
Like many clubs, special offers, vouchers and discounts are provided to members throughout
the year and referral bonuses are paid as driving credits when a new member signs up based on
their referral.
Using Johnson’s definition of the three components of a business model and the case facts,
explain how the Flexicar business works and the economic logic behind it.
Source: Adapted from Flexicar, n.d., https://flexicar.com.au; W Jolly, 2019, ‘We’re wasting thousands on cars we don’t even
drive’, Savings.com, 8 July, www.savings.com.au/car-loans/were-wasting-thousands-on-cars-we-dont-even-drive.
The Business Model Canvas

Osterwalder (2013) further developed Johnson’s three components to propose a business model canvas
with nine key elements represented, with four cost and four revenue elements connected by the ninth
element, the value proposition.
The business model canvas was designed to help organisations conduct structured, tangible, and strategic
conversations to map existing or create new business models (Osterwalder 2013). Central to the business
model canvas is the customer value proposition (which was discussed earlier in this module).
Elements that relate to cost (partners, activities, resources and cost structure) are on the left of the canvas
and the elements that relate to revenue (customer relationships, channels, customer segments and revenue)
on the right side of the canvas, as shown in figure 1.11.
The business model canvas is a valuable tool for communicating on one page how an organisation
operates and makes money that is consistent with the organisation’s strategy.
Example 1.6 describes how the Apple iPod was introduced using a different business model, and was
able to become the industry leader, despite not being the first in the market with a digital music player.
Pdf_Folio:28

FIGURE 1.11 The business model canvas
CUSTOMER CUSTOMER
KEY PARTNERS KEY ACTIVITIES VALUE PROPOSITIONS
RELATIONSHIP SEGMENTS
Who are our What key activities What value do we deliver How do we get, keep, and For whom are we
partners? do our value to the customer? grow customers? creating value?
propositions require?
Who are our key Which one of our Which customer Who are our most
suppliers? Our distribution customers’ problems are relationships have we important
channels? we helping to solve? established? customers?
Which key
resources are we Customer What bundles of How are they integrated What are the
acquiring from our relationships? products and services with the rest of our customer
partners? Revenue streams?
are we offering to each business models? archetypes?
segement?
Which key activities How costly are they?
do partners Which is the minimum
perform? viable products? CHANNELS
KEY RESOURCES Through which channels

do our customer segments
What key resources want to be reached?
do our value
How do other companies
reach them now?
Our distribution
Which ones work best?
channels?
Which ones are most
Customer cost-efficient?
relationship?
How are we integrating
Revenue streams? them with customer
routines?
COST STRUCTURE REVENUE STREAMS
What are the most important costs inherent to our For what value are our customers really willing to pay?
business model? For what do they currently pay?
Which key resources are most expensive? What is the revenue model?
Which key activities are most expensive? What are the pricing tactics?
Source: A Osterwalder, 2013, ‘A better way to think about your business model’, Harvard Business Review, May,
https://hbr.org/2013/05/a-better-way-to-think-about-yo.
EXAMPLE 1.6
Changing the Business Model and Revolutionising an Industry

The return of cofounder Steve Jobs to Apple in 1997 marked the start of a remarkable string of successes
for the company. Revitalised by the success of the iMac and OSX, Apple introduced its iPod digital
music player in 2001. Following slow sales, in 2003 Apple introduced a new model with a touch interface
alongside the new iTunes store. This combination created a new market for portable media content and
transformed Apple — within three years, the iPod and iTunes store were the source of almost half of the
company’s revenue. Apple’s market capitalisation grew from about US$1 billion before the 2003 iTunes
store launch, to be more than US$150 billion by the end of 2007.
Other digital music players had been marketed by various companies some years ahead of Apple. Sae-
han Information Systems’ MPMan was launched in 1997. Audible.com’s player and Diamond Multimedia’s
Rio device both went on sale 1998 and Best Data launched its Cabo 64 two years later. Other companies
had also tried variations on portable digital media players as well.
What made Apple’s offering so compelling?
The simple answer is that Apple made downloading digital music easy. Apple’s hardware was high
quality and beautifully designed, but the real innovation was the business model that combined the
device: the software and the download service. Purchasing music via the online iTunes store was cheap,
easy and fast — and peoples’ desire to take advantage of this drove sales of the iPod hardware, which
reached 100 million units within four years of the iTunes store launch and reached around 400 million units
by 2015.
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Providing cheap content to drive sales of the high-margin hardware created a business model that
redefined value.
Source: Adapted from MW Johnson, M Clayton, C Christensen & H Kagermann, 2008, ’Reinventing your business
model’, Harvard Business Review, December, p. 2; S Costello, 2019, ‘This is the number of iPods sold all-time’, 23
December, Lifewire, www.lifewire.com/number-of-ipods-sold-all-time-1999515; M Weinberger, 2018, ’39 photos that show
how Steve Jobs saved Apple from disaster and set it on the path to a $1 trillion valuation’, 4 August, Business Insider,
www.businessinsider.com/steve-jobs-apple-photos-2017-1?r=AU&IR=T.
According to Johnson et al (2008), while there is great interest in new business models, many companies
find business model innovation difficult. Three steps are suggested to help managers understand their
current business model so that they are better positioned to know whether it might need changing.
1. Map your existing business model and make explicit what makes it successful. For example, what
customer problems does it solve? How does it make money for the organisation?
2. Monitor the external environment for signs that the model might need changing (e.g. new technologies,
a shift in the basis of competition).
3. Evaluate whether changing business model is worth the effort, that is if a new model will change the
industry or market.
as follows.
KEY POINTS
• The organisational context in which organisations develop strategy is defined by industry life cycle
and organisational life cycle.
• Businesses are usually one of the following: a customer relationship business; a product innovation
business; or an infrastructure business.
• A business model describes and explains how a business works and the economic logic behind it.
It is a way of representing and communicating how an organisation creates and delivers value and
makes explicit the assumptions it is making and testing about the economic logic of the model.
• Strategy may be developed at the corporate, business or functional level. Large organisations have
strategies at each level.
• Leaders and managers are responsible for ensuring the strategy at their level supports higher level
strategies and for achieving successful implementation.
• Leaders and managers establish, provide context for and promote the organisation’s vision,
mission, values and goals.
• A Business Model Canvas helps decision makers in organisations conduct structured, tangible,
and strategic conversations to map existing or create new business models as part of strategy
development.
1.5 THE GLOBAL CONTEXT OF BUSINESS

The term ‘globalisation’ in the business context refers to international organisations with operations in
many countries that are integrated in some way through finance, production, marketing or sales activities,
and can take the form of import/export businesses, entering into licensing or franchising, joint venture
arrangements with a local organisation, strategic alliances and/or by operating a wholly owned foreign
subsidiary in the local market. (Modes of entry are discussed in module 4.)
The global operating environment has been largely driven by four primary and converging forces (see
table 1.5).
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TABLE 1.5 Driving forces of globalisation
Driving force Description
Competitive The arrival in the 1960s of Japanese manufacturers competing in markets that were previously
dominated by American or European companies marked an escalation in globalisation. As trade
barriers were opening up, the Japanese, Koreans and Chinese engaged in rapid international
expansion, exporting products designed for global markets. They created global brands such
as Sony and Panasonic and raised quality standards (with quality production systems) and
lowered prices simultaneously. As US and European manufacturers lost market share in their
home markets and internationally, they realised they had to become more globally competitive
if they were to survive.
Technological A series of breakthroughs, particularly rapid advances in transport and communication,

provided a technological platform for global activity. These advances, in turn, enabled
economies of scale (since goods produced centrally could be distributed around the world)
and outsourcing of component supplies to low-cost countries (since the logistical costs of
transporting components across long distances could now be afforded). The cost of shipping
goods by air or sea has decreased substantially and advances in telecommunications have
dramatically reduced the cost of international business communication.
Today, much of the integrative activity that characterises globalisation is technologically driven
and supported and this technological infrastructure provides the platform for
globally integrated organisations engaged in different elements of production across
many countries.
Social At the same time that competitive and technological changes occurred, there appeared
to be a convergence in global consumer tastes, as mass markets were created for new
global products. The diffusion of lifestyle by Hollywood movies, television, advertising and
music increased the awareness of consumer brands worldwide. This convergence of tastes
was compounded by the extension of urbanisation and industrialisation across the world,
with populations adapting quickly to new products such as consumer electronics, personal
computers and mobile phones.
Political The General Agreement on Tariffs and Trade (GATT), founded in 1946, which developed into the
World Trade Organization (WTO) in 1995, has proved central to the advancement and growth in
world trade. Regional economic and trade organisations have become increasingly prominent.
The aim has been, and continues to be, to lower trade barriers and extend the benefits of
globalisation to all countries.
World trade should not be thought of as solely the domain of large organisations. In most
countries, SMEs constitute the majority of organisations, that is, around 95% on average. They
are also major employers. Although participation of SMEs in world trade is still weak compared
to larger organisations, this is beginning to change as a result of efforts by governments to
increase the participation of smaller organisations in trade and changes in technology making
trade much more accessible.
Globalisation has integrated international economic activity and created global production systems that
serve global markets. These global markets have presented greater business opportunities compared to
domestic markets. While McDonald’s, Coca-Cola and Citibank were some of the first organisations to
expand their operations throughout the world, the majority of businesses regardless of their size, now
have some aspects of their operations undertaken in other places around the world. Example 1.7 examines
aerospace company Boeing’s manufacturing and assembly strategy for its Boeing 787 ‘Dreamliner’ jet.
EXAMPLE 1.7
Building the Boeing 787

Traditionally, aircraft companies manufacture and assemble their planes in a single location. For its 787
Dreamliner jet, Boeing decided on an alternative approach in which components would be made by
numerous suppliers located around the world, other contractors would assemble the components into
‘sub-assemblies’ and Boeing would use its US factory in Everett, Washington State to put together the
the various completed ‘sub-assemblies’ and integrate the jet’s systems to create the finished jet made
elsewhere. Boeing’s intention was to streamline production and inventory overall. The table below presents
a selection of 787 components, highlighting the distributed nature of the manufacture of the Boeing 787.
Pdf_Folio:31

Component Manufacturer Location
Rudder Chengdu Aircraft Industrial Group China
Vertical fin leading edge Shenyang Aircraft Group China
Wing to body fairing Hafei Aviation Industries China
Midfuselage sections Kawasaki Heavy Industries Japan
Midfuselage sections Leonardo Italy
Fixed trailing edge Kawasaki Heavy Industries Japan
Wing box Mitsubishi Heavy Industries Japan
Wing tips Korean Air South Korea
Tail cone Korean Air South Korea
Movable trailing edges Boeing Australia
Inboard flaps Boeing Australia
Cargo doors Saab Sweden
Passenger doors Latecoere France
Landing gear Safran England
Landing gear doors Boeing Canada
Engines Rolls Royce England
Nose section Spirit Aerosystems USA
Engines GE USA
Source: Information from Boeing Media 2006, ‘Boeing unveils 787 final assembly factory flow’, 6 December,
http://boeingmedia.com; D Gates, 2007, ’Boeing backs ”border adjustment” tax overhaul, though critics fear it could stir
up trade wars’, Seattle Times, 8 April, www.seattletimes.com/business/boeing-aerospace/boeing-backs-border-adjustment-
tax-overhaul-though-critics-fear-it-could-stir-up-trade-wars.
The Boeing 787 example is, of course, a significant business and a significant ‘product’. Although
globalisation is often seen through multinationals operating cross-geographically, it is also important to
note that sole proprietors and small business owners can transact and operate across borders with relative
ease. The same applies to many products and services. For example, consider the clothes you are currently
wearing. They could easily have been designed in one location, the fabric created in another location,
the garments cut and assembled in yet another location and then sold here in Australia. Zara, a Spanish
clothing retailer, uses the ability or organise its manufacturing operations for business advantage in this
way. You will read more about Zara in later modules.
JCPenney is one of the largest retailers in the United States. Their operations are supported by a variety
of US and internationally based support facilities, including a head office in Plano, Texas; a network of
11 supply chain facilities; a New York City design studio; nine international buying offices; nine quality
assurance offices in multiple cities across the world and a global in-house centre located in Bangalore,
India (JCPenney, n.d.). The locations around the world responsible for sourcing are shown in figure 1.12.
The ability to do this has been facilitated by the developments in manufacturing and communication
technologies, harnessing economies of scale, benefiting from (and helping to shape) the convergence or
homogenisation of consumer needs, and the breakthrough of technological platforms such as the internet.
Equally, a small manufacturer in Australia can produce their product here, sell their product online and
ship sales anywhere around the world.
Operating in a global context today is a given. Decisions about how to organise and optimise operations
in a global environment involve complex strategic leadership and management analysis, evaluation and
decision making and management of distinct challenges, discussed in the following section.
Pdf_Folio:32

FIGURE 1.12 JCPenney’s strategic sourcing locations
Hong Kong Shanghai

Regional Office Sourcing, Design & QC
Sourcing & QC Center of Excellence
Center of Excellence Home
Intimates
New York
Sourcing, Design & QC Korea
Sourcing
Guangzhou
QC
Bangladesh
Sourcing & QC
Mexico
QC
Pakistan
Sourcing & QC
Guatemala Vietnam
Sourcing & QC QC
India
Regional Office Indonesia
Sourcing, Design & QC QC
Honduras
QC
Taiwan
Sourcing & QC
Center of Excellence
Shoes
Source: JCPenney, n.d., Global Sourcing Practices, https://shenglufashion.com/2015/10/11/jcpenneys-global-sourcing-practices.
CHALLENGES OF GLOBALISATION
While globalisation has presented new opportunities and advantages for organisations, it has also intro-
duced specific risks that need to be managed. The risks of globalisation include the standard risks faced
in market competition, but they are compounded by the additional risks associated with different political
and legal regimes, unfamiliar markets, new suppliers and distributors, and employees and customers who
may be more difficult to understand. Globalisation involves managing these challenges in many overseas
markets simultaneously, which are summarised in table 1.6.
TABLE 1.6 Globalisation risks and considerations for leaders and managers
Risk Factors and considerations for leaders and managers
Competition • There are likely to be more competitors and different types of competitors
• Existing competitors in the market will have experience in that market and better market
knowledge and understanding
• Competitors in the market already will have established relationships with suppliers and
distributors and it may be difficult for a new entrant to find suitable suppliers and distributors
Distribution • Specific and different distribution arrangements are often in place in different markets i.e. it
may not be possible to directly apply approaches successful in one market into another
• There will be an increased need for management and coordination of logistics
• It will be necessary to invest in building and developing local relationships
Macro- • Different markets will have different economic drivers so it will be important to understand
economic the macro-economic trends of multiple regions and markets
• Similarly, it will be important to understand what’s driving growth and consumption patterns
in different markets and whether relevant consumer segments can afford the goods/services
being offered and will choose to buy them
(continued)
Pdf_Folio:33

Risk Factors and considerations for leaders and managers
Socio- • In each country, social, economic and business practices differ for a range of cultural and
economic historical reasons, e.g. relationship development and reward structures, and these need to
be understood
• Leadership and management styles vary across regions and countries
• To what extent products and services need to be adapted for the local market
Financial • Different countries may have different financial systems and variances in interest rates,
inflation rates and taxation systems
• How businesses are structured in different countries can vary as can tax rates and regimes
and interest rates
• Exchange rate variations need to be managed
• Any costs associated with customising products and services to the local market need to be
factored in
Legal • Businesses need to understand and comply with different laws and regulations in different
countries
• Debt collection arrangements may be different and more difficult in unfamiliar jurisdictions
Physical • Different time zones may challenge communications and logistics

• Operations in remote locations may be inaccessible at times, especially in less developed
countries
• Similarly, there may be inadequate local infrastructure such as roads for transport and poor
energy and water supply continuity
• Different power sources and standards (e.g. electrical) may mean equipment has to be
modified for specific countries
Political • Businesses need to understand and work with different political systems, governments and
international agencies
Sociocultural • Different regions and countries have their own cultures, values, beliefs and ways of doing
business that need to be understood and respected
• Language differences may cause difficulties
Labour • Employment and industrial relations institutions and practices are likely to be different
Technological • The potential for leakage of intellectual property and know-how needs to be managed
• Cyber security threats from online business activities need to be managed
Localisation • Understanding what degree of standardisation versus customisation is optimal for growth
versus and profitability
standardisation
QUESTION 1.7
The decision to make and assemble the Boeing 787 in several locations around the world took three
years longer than planned. The delay cost Boeing billions of dollars. Using table 1.6 as a framework,
identify and explain the reasons this happened.
Deciding what aspects of a business to either outsource and/or locate in other parts of the world and the
best approach to market entry for optimal business outcomes is a complex challenge.
Leaders and managers need to not only understand the risks described in table 1.6, they need to
understand and respond to challenges and changes in different macro-economic environments, including,
for example, GDP trends, labour costs and consumption patterns. The economy of every country and region
differs in its fundamental economic characteristics, not with standing the increasing impact of international
capital markets and other manifestations of globalisation. The specific reasons for economic growth or
Pdf_Folio:34

contraction, the trajectory of labour costs and what people value in terms of consumption are all factors
that influence the possibility of success when entering new markets. Consumption patterns vary according
to the level of disposable income.
Consider the case of Germany-based retailer Kaufland, described in example 1.8, and the leadership
and management decisions associated with the strategy, planning and investment in entering and exiting
the Australian market over a three-year period. While not explicitly stated or announced by the company
itself, it is strongly implied that the macro-economic and competitive environment were the key factors in
both their market entry and market exit decisions.
EXAMPLE 1.8
Kaufland Deciding to Enter and Exit Australia
2016 Germany’s Schwarz Group’s discount supermarket operator, Lidl, explores possibility of
entering the Australian supermarket sector.
Lidl abandons interest in Australia, due to concentration in the Australian supermarket

sector, and focuses on US market instead.
Schwarz Group decides to enter Australian market via its discount department store
Kaufland instead, believing Costco’s slow Australian rollout in the hypermarket (combined
supermarket and department store) sector had opened an opportunity.
2017 Kaufland in talks with Victorian Government about its plans.
Schwarz Group enters contracts to purchase land in Australia. It is expected to require at

least 15 stores to be viable.
Schwarz Group completes purchase of AU$16.4 million former Bunnings site in Dandenong,
Melbourne.
Schwarz Group completes purchase of AU$25 million Adelaide site.
2018 Kaufland launches online recruitment campaign and successfully headhunts executives
from Australian retailers.
Wins approval for its first Australian hypermarket (in the Adelaide suburb of Forestville).
2019 Kaufland announced plans to open at least 20 Australian stores.
2020 Before opening any stores, Kaufland announces that after ‘careful consideration and
though’ it will make an ‘orderly withdrawal’ from the Australian market to focus its interests
on Europe, where it saw ‘a great deal of growth potential’.
At the time of its exit announcement, Kaufland had spent more than half a billion dollars on property,
logistics and hiring (at least 200 employees) related to its Australian expansion. It pledged to work with its
Australian employees, suppliers, partners and other stakeholders as part of its orderly withdrawal.
Sources: Adapted from M Heffernan, 2019, ‘German retailer Kaufland inks Australian land deals’, Sydney Morning
Herald, 25 June, www.smh.com.au/business/companies/german-retailer-kaufland-inks-australian-land-deals-20170623-
gwxeyb.html; A Carey, 2018, ‘German discount supermarket Kaufland beefs-up recruitment drive ahead of local launch’,
news.com.au, 8 March, www.news.com.au/finance/business/retail/german-discount-supermarket-kaufland-beefs-up-recruit
ment-drive-ahead-of-local-launch/news-story/ffbc7fea8ac13daeace77fa0a73c8304; C Theakstone, 2020, ‘Kaufland
staff break silence on company’s shock exit’, ChannelNews, ww.channelnews.com.au/kaufland-staff-break-silence-on-
companys-shock-exit; Kaufland, n.d., www.kaufland.com.au; D Powell and S Johanson, 2020, “Gobsmacked”: German
retail giant Kaufland abandons Australia, adding to retail woes’, 22 January, Sydney Morning Herald,
www.smh.com.au/business/companies/german-retail-giant-kaufland-abandons-australia-despite-millions-in-investment-
20200122-p53tqe.html.
BENEFITS OF GLOBALISATION
Notwithstanding the challenges of globalisation previously discussed, globalisation and expanding inter-
nationally offers benefits in business and competition as well as potential benefits on a social and economic
level. The benefits are summarised in table 1.7.
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TABLE 1.7 Benefits of globalisation
Benefit type Description
Cost Cost benefits arise when standardisation of products and processes enable economies of scale
that increase purchasing power over suppliers, increase efficiency of production and lower overall
production costs.
Timing Product or service development and launch can be coordinated on a global basis, providing net
efficiencies compared with launching at different times in different markets. The costs incurred
for logistics and planning are offset by greater efficiency and the prevention of piracy, imitation or
espionage (global launches are a barrier to copying).
Learning Coordination of information sharing across countries and subsidiaries eliminates national ‘silos’
of knowledge and leads to higher overall learning and knowledge sharing (meaning different
subsidiaries do not waste resources independently confronting problems already
solved elsewhere).
Arbitrage Use of resources in subsidiaries in different countries can be coordinated to achieve lowest
possible cost. As currencies fluctuate and the price of raw materials, components and finished
goods varies in different markets, it can be worthwhile locating specific functions to achieve
greater returns on investment and improved competitive positioning.
Source: Adapted from P Lasserre, 2003, Global Strategic Management, Palgrave Macmillan, Basingstoke, Hampshire.
All these potential benefits are contingent on other conditions such as market growth, technological
developments and customer responsiveness. However, when these benefits coincide, globalisation can
provide significant returns that would not be possible in a localised approach.
QUESTION 1.8
Example 1.3 described how the decision to go purely online has helped Mountain Bikes Direct grow
their business. Using table 1.7 as a framework, explain what has supported Mountain Bike Direct’s
growth.
Further discussion of new market development, what is required for successful market entry and
implementation considerations is provided in modules 4, 5 and 6 respectively.
follows.
KEY POINTS

• Over the past several decades, competitive, technological, social and political forces have driven
globalisation, meaning most organisations must now develop strategy in the context of global
markets.
• Deciding how to best organise a business and its operations in a global context is a complex
leadership and management challenge.
1.6 INTRODUCTION TO LEADERSHIP

Based on our definition of strategy being ‘decisions that have high medium- to long-term impact on the
activities of the organisation, including analysis leading to the resourcing and implementation of those
decisions, to create value for key stakeholders and to outperform competitors’, and our decisions of the
strategy development process, is clear that many, often complex, decisions have to be made, often in short
timeframes.
Decisions must be made at every stage of the strategy development process, and leadership is needed at
every stage to ensure that the right direction is being taken, stakeholders are appropriately consulted and
Pdf_Folio:36

effectively communicated with, difficult decisions are made, and the organisation has the support of key
stakeholders.
Leadership is commonly observed at five levels in an organisation:
1. the Board
2. the CEO
3. senior management
4. general management
5. project management.
However, any number of employees can perform leadership roles in their position. In some cases,
great leaders are not great managers, and must instead seek out other managers to fill this role in their
organisations. Effective managers may also have to develop their leadership skills in order to fulfil their
roles more effectively.
As with strategy, there are different viewpoints about what actually constitutes leadership, the qualities
required and its level of importance. We start with an overview of some of the prominent leadership theories
that shape our understanding of leadership today and then discuss the differences between leadership and
management.
LEADERSHIP THEORIES
The Leadership Institute at Harvard College defines leadership as ‘the skill of motivating, guiding,
and empowering a team towards a socially responsible vision’ (LIHC 2008). The fundamental basis of
leadership is to lead in a way that brings about positive change in people, allowing them to follow wherever
the leader needs them to go.
Over the years, many theories of leadership have been researched and studied. There is a wide range
of literature on what approach to leadership is most successful, and what makes a great leader. The
results are ambiguous, illustrating that no single set of instructions or methodology can assure successful
leadership. However, it is important to understand some of the prominent leadership theories that shape
our understanding of leadership today. The traits approach suggests that leaders are born with certain traits
and qualities that will make them successful leaders, whereas the behavioural approach argues that great
leadership qualities can be taught and developed
The Traits Approach

The traits approach is based on the theory that leaders are born with particular qualities that will produce
patterns of behaviour to make them successful leaders over time. It argues that there is a biological
basis for leadership. Personality, intellectual ability and physical factors were examined. Traits that were
associated with leaders included ambition and high energy levels, the desire to lead, self-confidence,
task-relevant knowledge and emotional intelligence. Emotional intelligence consists of sensitivity to
employees’ feelings and views and the ability to manage one’s own emotional reactions.
Decades of research on the question of whether there are natural leaders failed to provide conclusive
evidence that general qualities or abilities could be identified. Specifically, the research:
• failed to find any traits that would explain or predict leader behaviour
• overlooked the needs of followers
• failed to clarify the relative importance of traits
• did not separate cause and effect — are leaders self-confident or does leadership breed self-confidence?
The shortcomings of the traits approach led to a shift towards researching leadership styles — from
investigating ‘what leaders have’ to ‘what leaders do’.
The Behavioural Approach

The behavioural approach suggests that leaders can be trained, as opposed to the traits approach,
which assumes that leaders are born (so the right person must be selected for the leadership role). The
distinction between the behavioural and traits approaches is that traits represent physical and psychological
characteristics, whereas behavioural styles are consistent behaviours or actions that describe a leader’s
style. Research in this area has focused on the impact of leader behaviour on group attitudes and
performance. Leaders who are concerned with achieving outcomes and with their employees are more
likely to achieve buy-in to their strategic vision. The growth in professional leadership development
programs is a consequence of this approach, with executives being trained on how to improve their
leadership style.
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Major studies (Robbins et al. 2001) at Ohio State University and the University of Michigan in the
United States reveal a contrast in leadership and managerial styles. The two most common styles were
characterised by either an employee orientation or a task orientation. These orientations describe styles
that have, respectively, a high concern for people and a high concern for operational issues. These styles
were not viewed as mutually exclusive, in that a leader could have both an employee and a task orientation.
Figure 1.13 summarises the behavioural approach and suggests that a team leadership style is the most
effective.
FIGURE 1.13 Managerial styles in the Blake and Mouton leadership grid
Country club manager Team manager

High
Focuses on people’s needs, Focuses on building

building relationships commitments to
shared purpose
Concerns for people
Middle-of-the-road
manager
Focuses on balancing
Impoverished manager Authority-obedience manager

Focuses on minimum Focuses on efficiency
effort to get work done of tasks and operations
Low
Low Concerns for production High
Source: J Schermerhorn, P Davidson, A Factor, D Poole, P Woods, A Simon & E McBarron, 2017, Management, 6th Asia–Pacific
edn, John Wiley & Sons, Milton, Queensland.
By themselves, the traits and behavioural approaches to leadership provide insufficient guidance for
determining what makes a great leader. However, a combination of both the inherent traits of an individual
and the behaviours that the individual develops and learns over time will together create some of the
necessary attributes of a great leader.
Another major criticism of the behavioural approach was that situational factors were overlooked; this
led to the development of a third and comparatively recent contingency approach.
The Contingency Approach

The contingency approach suggests matching leadership style to the situation. Here the argument is that
leaders, like leopards, cannot change their spots. Hence the leadership style needs to suit the circumstances.
The contingency approach also considers substitutes for leadership. If a task is routine, then not much
in the way of leadership would be required which leaves leaders free to focus on other big-picture matters
that require their attention.
Later in this module we discuss the concept of the strategic leadership style, Rothschild’s model, where
the style of leadership is linked to the organisational life cycle position. This is an example of how the
contingency approach can be applied.
LEADERSHIP VERSUS MANAGEMENT

There is a fundamental distinction between leadership and management. Kotter (1990) states that
leadership is about coping with change, whereas management is about coping with complexity. For Kotter,
the leadership process involves:
• developing a vision for the organisation
• aligning people with that vision through communication
• motivating people to action through empowerment and through basic need fulfilment. The leadership
process creates uncertainty and change in the organisation.
In contrast, the management process involves:
• planning and budgeting
• organising and staffing
• controlling and problem solving.
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The management process reduces uncertainty and stabilises the organisation and consists of implement-
ing the vision and direction provided by leaders, coordinating and staffing the organisation, and handling
day-to-day problems. These differences are illustrated in table 1.8.
TABLE 1.8 Dual roles of managing and leading
Managing (stability) Leading (change)
Plan, allocate resources and assign tasks Inspire and influence
Performance reporting and control Build confidence and enthusiasm
Communicate Develop future leaders
Coordinate Promote culture
Make decisions Role model
Evaluate Communicate
Establish networks and relationships
Catalyst for change
Accept the status quo Challenge the status quo
Do not ask difficult questions Ask what and why questions
Rely on control Inspire trust
A short-range view A long-range strategic view
Example 1.9 looks at how leadership and management roles can interact and combine.
EXAMPLE 1.9
Grasping the Big Picture, While Still Focusing on the Details

Jeffrey Chan is the finance director of Triumph International, a lingerie-maker headquartered in Switzerland
and operating in over 120 countries, with more than 35 000 employees.
Chan’s role is complex, encompassing regional financial control in Asia and South Africa, and finance
support for the Hong Kong-based global innovation and quality assurance functions. This part of the role
is closely linked to the managing and stability role highlighted in table 1.8.
Chan describes the combination of leading and managing:
Nowadays strategic leadership is imperative, and with my experience I’m able to quickly grasp what
a company needs, how to drive added value and bring in changes to manage the dynamics. I remain
diligent, not just in strategic overview, but also into the details.
Chan also needs to continually monitor the global economy and review the organisation’s budget to
make sure it is realistic. Identifying and responding to patterns in the economy is an important part of
his role.
Chan describes the importance of learning about different cultures: ‘We have to be very aware of
cultural and human aspects in order to collaborate and bring out the best in the team’. This part of Chan’s
position can be linked to the ‘Leading’ role in table 1.8, which describes the roles that help lead his team
to excellence.
Source: Adapted from P Robinson, 2014, ‘Meet the CFO: Jeffrey Chan FCPA’, INTHEBLACK, 12 August, CPA Australia,
www.intheblack.com/articles/2014/08/12/meet-the-cfo-jeffrey-chan-fcpa.
It is desirable that the activities of leadership and management are successfully performed by the same
person, as highlighted by Jeffrey Chan in example 1.9. However, in some cases, great leaders are not
great managers, and must instead seek out other managers to fill this role in their organisations. Effective
managers may also have to develop their leadership skills in order to fulfil their roles more effectively.
Example 1.10 illustrates the effective management of Facebook by Sheryl Sandberg, and the insight of
Mark Zuckerberg, a great leader who recognised the need for a great manager to balance out his leadership.
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EXAMPLE 1.10
Great Leader, Poor Manager

Facebook founder and CEO Mark Zuckerberg had a vision for his organisation, but realised that he did
not possess the skills necessary to manage the organisation’s rapid growth. Zuckerberg believed that
Facebook needed strong management and control to continue functioning efficiently through its rapid
growth period. Zuckerberg hired Sheryl Sandberg as Chief Operating Officer to fill this gap.
Sandberg has an excellent reputation for her management abilities. According to Adam Freed,
Sandberg’s former Google colleague:
Sheryl had to make decisions very quickly based on reasonable but imperfect data. The annals of
business history, especially in Silicon Valley, are littered with the wreckage of companies that started
to experience hyper-growth and mismanaged it. But Sheryl was able to see way down the highway,
very quickly, to judge what the outcomes of her decisions would be (Conley 2010).
Sources: Adapted from D Clark, 2013, ‘Why great leaders make bad managers — and that’s OK’, Forbes,
www.forbes.com/sites/dorieclark/2013/01/10/why-great-leaders-make-bad-managers-and-thats-ok; K Conley, 2010, ‘Sheryl
Sandberg: What she saw at the revolution’, Vogue, 15 April, www.vogue.com/article/sheryl-sandberg-what-she-saw-at-the-
revolution.
The Facebook example illustrates that a successful leader must perform both roles or recognise that
they need assistance to ensure both roles are fulfilled at an executive level in the organisation. Certainly,
Zuckerberg did this by hiring Sandberg.
This example also illustrates how a manager can also display leadership attributes. Sandberg is now
a best-selling author and is routinely sought out by other organisations for her leadership expertise. For
example, she sits on Disney’s board of directors.
In this subject we support the idea that leadership is an essential part of the strategic process. However,
there is an opposing view that the importance of leadership is overstated. Table 1.9 articulates the arguments
in support of and against leadership.
TABLE 1.9 Arguments in support of and against leadership
For Against
The leader’s style determines the success or otherwise Organisational structure and culture determine success
of the strategy. or failure of the strategy.
The leader’s predictive capacity determines the Outcomes result from external or internal events, not
success or otherwise of the strategy. the leader’s strategy.
The leader’s values determine the success or otherwise Educated, experienced staff are substitutes for
of the strategy. leadership.
A strategic leader is able to coordinate the internal Routine tasks do not require much in the way
dynamics and groups in an organisation. of leadership.
STRATEGIC LEADERSHIP
The core tasks of strategic leaders are summarised in figure 1.14. Leaders are proactive. They do what
is required to achieve the strategic objectives of the organisation, ensuring everyone in the organisation
understands what they need to do to contribute to the strategy: leaders make things happen. Leaders also
need to set goals that everyone in the organisation can understand and use to achieve the strategy: leaders
set goals that direct and shape. They champion the strategy and make sure everyone else becomes a
champion of it too: leaders champion the organisation’s strategy and direction. Leaders must also draw
on the critical thinking skills within the organisation to identify and commit to the strategic options that
will achieve the strategy: leaders make complex decisions. Finally, leaders define and innovate the business
model to ensure the organisation can meet the changing demands of the market: leaders identify the right
business model.
Pdf_Folio:40

FIGURE 1.14 Core tasks in strategic leadership
Make things
happen
Identify the Set goals that

right business direct and
model shape
Strategic
leaders
Champion the
Make
organisation’s
complex
strategy and
decisions
direction
Strategic leadership is described by Daft (1999) as encompassing the vision, mission, strategy and
structure of an organisation. Daft describes strategic leaders as having the ability to match the strategic
choices, vision and mission of the organisation with the external environment. In other words, they
ensure the organisation can change as appropriate to meet the changing demands of customers and the
marketplace. Table 1.10 captures key elements in the strategic leadership role. All elements are critical for
successful change.
TABLE 1.10 Key elements in the role of the strategic leader
Role Key elements
1. Strategic thinking • Translate a vision into reality.

• Question current wisdom.
• Consider the big picture.
2. Strategic decision • Use a rational approach to decision making whenever possible.

making • Use eight-step decision-making model.
• Four key ways of making decisions are command, collaborative, consensus and
convenience.
• Use data to assist strategy formulation.
3. Strategic external • Challenge unproven assumptions and far-fetched interpretations of environmental

and internal factors.
analysis • Determine external stakeholders’ level of influence on the organisation and make plans
to minimise or control this influence.
• Evaluate and challenge assessments which might be provided by biased employees.
• Include key internal stakeholders in internal analysis and assess their ability to adapt to
strategic change.
4. Setting direction • Focus on results and have an agenda.

• Realistic and credible vision of an attractive future that is acceptable to employees.
5. Strategy • Ensure that there is a shared vision about the strategic goals.
formulation • Determine who will be involved and their tasks in the process.
(continued)
Pdf_Folio:41

Role Key elements
6. Strategy • Develop projects to support the strategy.

implementation • Ensure that resources are effectively used.
• Establish a sense of urgency, communicate the vision.
• Empower staff to act and cement the new approaches in the organisation.
7. Communication • Communicate the need for change, vision and strategy.

• Communicate the new strategy with actions as well as words.
• Address what works in the current situation and outline the benefits and risks in the
changed situation.
Strategic Thinking
The concepts and practices of strategy, rather than being static and fixed, are dynamic and subject to
continual change. Strategic thinking is about linking concepts to operational practices and being able to
understand and articulate the ‘big picture’ in terms of an organisation’s potential strategic directions and
developments.
Strategic thinking is considered to be one of the four most important dynamic capabilities that enable an
organisation to quickly reconfigure its physical, financial and human resources in order to adapt to major
exogenous environmental shocks. The other three critical dynamic capabilities are flexible leadership,
flexible organisational culture and strategic alliances (Simon et al. 2015).
An important part of the managerial and leadership roles is to think and act more strategically in relation
to solving problems or taking advantage of opportunities in the market. The challenge of strategic thinking
is often one of time. Typically, managers are preoccupied with ‘getting the job done’ on a day-to-day basis,
that little time is left to ‘step back’ and think creatively and innovatively.
Effective leaders should be able to conceptualise and articulate in clear terms their organisation’s
strategic position and direction. This conceptualisation requires an understanding of two dynamics.
1. The integration and alignment of the people and functions inside the organisation (strategy needs to
be supported by an organisation’s culture, information systems, structure, performance systems and its
various operational areas).
2. The relationship between the organisation and its environment — the degree to which an organisation
is meeting or exceeding the needs of its external stakeholders (including customers and the general
community).
An effective leader needs to be capable of seeing the ‘big picture’ and understanding how that picture
is changing, in order to conceive the current and future contexts in which their organisation is and will be
operating. Too much focus on the specifics of the situation faced today can constrain strategic thinking.
A challenge is that employees lower down in the organisational hierarchy may view the strategy process
as a leadership exercise disconnected from the operational realities of the organisation. As a result, these
employees may resist the implementation of the strategic plan. In light of this criticism, it is vital that the
planning process is well communicated and invites input of employees, particularly those affected by the
strategic plan, or those who will have an impact on the execution of the plan. It is important that the senior
management team works to ensure that the key employees gain an understanding of, and commitment to,
the strategic plan and the changes associated with its implementation.
Example 1.11 describes the turnaround of Japan Airlines and will be used to study leadership aspects
related to strategy throughout the rest of the module.
EXAMPLE 1.11
Japan Airlines — The Power of Strategic Leadership

Japan Airlines (JAL) was established in 1951 and operated as Japan’s government-owned national airline
from 1953 until it was privatised in 1987. The 1980s was a time of extraordinary success for JAL — it was
the world’s best-performing freight and passenger airline for five years in a row.
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From the mid-1980s through the 2000s, however, the company lost its way. It had pursued an overly
ambitious and unfocused diversification plan that saw JAL purchase an extensive, largely unprofitable
portfolio of international properties. A downturn in the Japanese economy saw JAL record a loss in 1992 —
and a loss in each of the following six years.
Having returned to a small profit by the end of the 1990s, the 2000s then presented a series of disasters
that saw passenger numbers collapse: the 9/11 terror attacks in the USA, the Gulf War in 2003 and the
outbreak of Severe Acute Respiratory Syndrome (SARS) that same year.
JAL obtained a support grant after the 9/11 attacks and took out a further loan of 90 billion yen, taking
JAL’s debts above 240 billion yen.
This was to support a strategy to compete more effectively with the leading domestic airline All Nippon
Airways. JAL felt that merging with domestic carrier Japan Air System could generate more domestic
revenue. The merger went ahead in 2002, but brought a new set of inefficiencies into the company. Japan’s
aviation industry regulations forbid personnel to be accredited for more than one type of aircraft. The JAL
board had not understood that Japan Air System’s fleet would require their own separate flight crews,
maintenance teams and an entirely different stock of spare parts. This also prevented JAL from using
smaller planes on routes where it could not sell all the seats available in its large planes. It was flying Boeing
747s with empty seats while start-up competitors were filling smaller planes with cheaper operating costs.
When the global financial crisis hit in 2008, JAL again turned to the government for a loan of ¥100 billion.
The growing debt highlighted the airline’s inefficiencies, and customer and employee confidence tumbled.
Professor Jochen Wirtz, the Vice Dean (Graduate Studies) of the National University of Singapore
Business School, described the company’s problems as follows:
‘There was a lot of bureaucracy (and) complacency, very slow decision-making and not really the guts
and the energy to make deep-seated changes to the airline.’
Despite cost-cutting measures, including scaling back marketing expenditure and reducing the size of
its workforce, and the sale of part of its property portfolio and other assets, on 19 January 2010 JAL filed
for ‘reorganisation proceedings’ — bankruptcy protection. Its debts totalled ¥2.32 trillion.
Rather than signalling the end of JAL, this marked the beginning of an extraordinary turnaround. On
8 February 2010, the Enterprise Turnaround Initiative Corporation of Japan appointed retired Kyocera
founder Kazuo Inamori as chairman. A rehabilitation plan was approved for JAL late in 2010, requiring
the company to terminate almost one-third of its workforce and reduce salaries by up to 30%. In return it
was given a ¥900 billion loan and some of its debts were written off. The reorganisation proceedings were
completed in March 2011.
Within two years, under Inamori’s leadership, the company became the world’s most profitable airline.
Former Enterprise Turnaround Initiative Corporation of Japan committee chairman Hideo Seto explained
that the company needed a new style of leadership that could break away from the semi-government
style of management that had long been in place and could establish motivation and commitment among
JAL’s staff.
Inamori — a scientist by education, a billionaire thanks to the success of Kyocera, and an ordained Zen
Buddhist priest — came to JAL with a reputation for putting people ahead of profit. He said he accepted
the position for three reasons:
1. to avert an economic disaster for Japan by ensuring JAL did not become bankrupt
2. to protect the jobs of the remaining JAL staff
3. to maintain fair competition in the airline market and thus benefit the public.
Inamori adapted the management philosophy he had developed at Kyocera and introduced his
managerial accounting system known as ‘amoeba management’.
The management philosophy was intended to break down the rigid, bureaucratic corporate culture at
JAL, establish common values among employees and make their welfare the number one priority. This is
based on the idea that they will then do their best and thus contribute to society. Inamori says ‘My simple
philosophy is to make all the staff happy . . . Not to make shareholders happy but simply to create the
company that every employee is proud to work for.’ One of his approaches involved having a few drinks
with employees working late so they could talk informally.
The amoeba management system uses profit centres (such as manufacturing or sales units) as its basic
unit of operation — these consist of 5 to 50 people. Each unit is known as an amoeba and has responsibility
for planning, decision making and administration. Each amoeba is tasked with improving revenues and
lowering costs. This ‘management by all’ approach places responsibility on staff and gives them a sense
of ownership of outcomes, and at the same establishes transparency and accountability. Staff become
more aware of the connection between their work performance and the company’s profitability, shifting
the way they view their jobs from ‘serving bosses’ to ‘contributing to the company’s performance’. The
system also helps identify and develop leaders. The amoeba approach is a stark contrast to traditional
Japanese business practice whereby decisions are made by the senior management and handed down to
staff to be implemented. It does include a strong element of scrutiny, however. Staff are trusted to deliver,
and they are left with little way to conceal underperformance.
Pdf_Folio:43

Inamori says the staff could see that he was desperate to rebuild the company. His sincerity was backed
up by his decision to decline a salary. Seto said Inamori brought an analytical mind to understanding the
company’s figures and exhibited confidence and commitment.
In 2011–12, JAL was the world’s most profitable airline with a profit of more than ¥180 billion, three
times its target of ¥60 billion.
Investor confidence in the future of JAL was evident when it returned to the Tokyo Stock Exchange in
2012 with an IPO that raised ¥663 billion. The only larger IPO that year was Facebook. Having transformed
JAL, Inamori moved into an advisory role.
By 2019, the airline group had a fleet of 235 aircraft, flying almost 35 million domestic passengers and
more than 9 million international passengers to 66 international destinations. It employed 34 000 people
across its 83 subsidiaries and 58 affiliated companies. Its 2018–19 revenue was ¥1487.2 billion and its
net income was ¥176.1 billion.
JAL has maintained the systems and philosophy Inamori introduced. As of 2019, JAL begins to describe
its philosophy with the statement:
We believe that it is important to create a unified consciousness among our staff. The JAL philosophy
has been established as a mindset, a set of values or an attitude that everyone working on JAL
services and products should share have in their minds.
The airline industry involves intense competition and is strongly influenced by a number of external fac-
tors, including oil prices and pressure to reduce greenhouse gas emissions. With a committed workforce
and strong systems of accountability in place, JAL is well positioned to tackle future opportunities and
threats, including competition from low-cost carriers moving into the medium- and long-distance flight
market and JAL’s launch of a new international budget airline
Source: Adapted from Japan Airlines, 2020, www.jal.com/en; DA Paulo, 2018, Channel News Asia,
www.channelnewsasia.com/news/cnainsider/buddhist-monk-ceo-kazuo-inamori-save-japan-airlines-jal-bankrupt-
11033866, R Cooper, 2012, ‘Case study: Kyocera Corp: The amoeba management system’, 25 August, Harvard Business
Review; Kyocera, 2020, ‘Official website of Kazuo Inamori’, https://global.kyocera.com/inamori/profile/; M Oi, 2012, ‘Beer
with boss Kazuo Inamori helps Japan Airlines revival’, BBC News, 15 November www.bbc.com/news/business-20293487.
QUESTION 1.9
Mr Inamori can be considered as a strategic leader. With reference to example 1.11, examine
how Mr Inamori has demonstrated the role of strategic leadership.
as follows.
KEY POINTS
• Leaders and managers in an organisation are responsible for creating an environment in which the
strategy process can work.
• Leaders and managers are responsible for many of the decisions related to the strategy process.
• Leadership is commonly observed at five levels in an organisation:
1. the Board
2. the CEO
3. senior management
4. general management
5. project management.
• Leadership can occur at any level of the organisation regardless of formal appointment.
• Leadership may be viewed through various theories.
– The traits approach is a theory that leaders are born with particular qualities that lend themselves
to successful leadership.
– The behavioural approach is a theory that individuals can learn leadership behaviours.
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– The contingency approach is a theory that there is no single set of suitable leadership behaviours,
but rather what constitutes an effective leadership style depends on the situation.
• Leadership and management are different. Leaders develop a vision, align people with that vision
and motivate people to contribute to achieving the vision. Managers plan, budget, organise, staff,
control and solve problems.
• In some cases, great leaders are not great managers and vice versa.
• Strategic leaders make things happen, set goals, champion the organisation’s strategy, make
complex decisions, identify the right business model.
• Strategic thinking is the practice of linking big-picture concepts to actionable practices.
1.7 LEADERSHIP STYLES

Formulating and implementing strategy is extremely complex. At the same time, organisations are
increasingly using the strategy process as an approach to stay in front of the competition, and to be
innovative and ethically responsible. Because strategic success is complex, it requires a coordinated effort
from the organisation, and this means it needs an effective strategic leader. Successful strategies require
commitment, not just acceptance. Therefore, one of the roles of leaders is to inspire everyone in the
organisation to commit to the strategy, and to provide a workable framework for going forward.
The next section describes different leadership styles in strategy implementation.
TRANSFORMATIONAL AND TRANSACTIONAL LEADERSHIP

When most people are asked to describe the characteristics of a leader, they typically describe the
very visible characteristics of well-known leaders that have charisma and presence, that can inspire and
motivate change. They have the ability to transform and lead major change and are typically described
as transformational leaders. They are well suited to the start-up, growth and renewal stages of the
organisational life cycle. Transactional leaders on the other hand are more concerned with maintenance
of current activities and better suited to the maturity and decline stages of the organisational life cycle.
While many organisations may need complete transformation, there are also those whose strategy
requires only some fine-tuning of existing arrangements. Therefore, it is important to think of leadership as
being on a continuum from transactional to transformational. On one side is the need for minor adjustments
and fine-tuning, and on the other is a complete overhaul of the current organisation.
Transactional Leadership
Transactional leadership involves maintaining the flow and processes within the organisation. Transac-
tional leaders use incentives and rewards to encourage team members’ performance and successful day-to-
day activities. Unlike transformational leadership, transactional leadership is focused on current activities
and maintaining efficiencies in the current environment.
Transactional leadership is more than management, however, as it is about setting the direction and
moving the organisation forward in regard to the current activities, and about providing a long-term
view to inspire employees. It is also about building their trust. In today’s business environment however,
transactional leadership is not enough on its own to achieve strategic success and maintain relevance in the
longer term. Where a change in the mindset of the organisation is required, or where the shared beliefs,
values and culture of an organisation need to be completely transformed, transformational leadership
is required.
Transformational Leadership
Organisations in the contemporary business environment need to be capable of continuous transformation.
This in turn requires transformational leaders whose role is to creatively rebuild and remake the organisa-
tion. Tichy and Devanna (1990) identify three key phases of transformational leadership.
Phase 1
Phase 1 of transformation starts when a need for change is felt. This may be the result of strategic thinking
and an intuitive understanding of the environment. Alternatively, it may arise after a detailed analysis of the
internal and external environment reveals considerable gaps between the current performance and potential
opportunities — this process is detailed in modules 2 and 3, with option development outlined in module 4.
Pdf_Folio:45

This need may even be manufactured or created to convince people that complacency about the current
situation is unacceptable. Once the need to transform is identified, it must be communicated to people in
the organisation.
Phase 2
Phase 2 is where a transformational leader is required to provide an alternative vision for the future. A
vision needs to be idealistic yet based in reality to encourage people to commit to implementing it. Without
vision, people may realise the current situation is not viable in the long term, but not know where to turn.
The vision phase combines the creation of a vision with mobilisation of the organisation to pursue the
vision with vigour. This relates to the development of a strategy and the strategic plan. Leadership of
Phase 2 is essentially the leadership that is required when conducting the activities and processes discussed
in modules 5 and 6.
Phase 3
Once selected, strategies must be implemented, and the final phase of transformation embeds the change
into the organisation and makes it permanent. Although this concept is simple enough, it is not an easy
task and is considered to be a major reason for the failure of change management (Kotter 1995). In large
organisations, it may take over five years for change to be embedded. If the change is not reinforced
continually over this period, it often slowly unwinds, especially if the leadership team that implemented it
has moved on and been replaced.
Table 1.11 demonstrates how different aspects of transformational leadership are loosely matched to
various parts of the strategic process.
TABLE 1.11 Matching the strategy process with transformational leadership
Strategic activity Transformational leadership
Strategic thinking Creating the foundation for Phase 1
Internal/external analysis Informs Phase 1 by establishing the need for change based on the
information
Need for change Phase 1
Development of strategy Phase 2
Implementation Phases 2 and 3
Impact of Transformational Leadership on Individuals

While the overall organisation experiences the different phases of transformation, there is also an impact on
individuals within the organisation, who need to respond in certain ways. They must end their association
with the existing situation, and this requires disengagement from the past. The transition may invoke
strong feelings within employees, as their lives, identity and self-esteem are often intertwined with the
organisation.
The current situation may have satisfied their needs and any change (even if positive and necessary to the
overall organisation) may be unsettling until employees can link their identity with the new situation. This
generally occurs as individuals gradually accept that what worked in the past is no longer appropriate.
People are both drawn to and hope for change yet are still fearful about leaving the present behind.
Consequently, this process takes time, and trying to rush it may have a detrimental effect. There is likely
to be a period of disorientation that, if not resolved, will lead to disillusionment and hinder the change
management process.
QUESTION 1.10
With reference to example 1.11, examine how Mr Inamori has demonstrated transformational
leadership to disengage individuals from the past at JAL.
Pdf_Folio:46

Disillusionment is also likely to occur if the vision of the future is either inadequate or not communicated
effectively. This is discussed in Kotter’s eight-step change process (see module 6) with the importance
of communicating the change vision. As Kotter (1995) points out, a transformational leader must be
able to influence an organisation and its employees to change, rather than attempting to drive the
change coercively.
Kotter’s key concepts are illustrated in table 1.12, which shows the key phases and the actions that occur
at both the organisational and individual level, and how they align to Kotter’s eight-step change process
(discussed in more detail in module 6).
TABLE 1.12 Impact of transformational leadership
Transformational leadership
Alignment to Kotter’s eight-step

Phase Organisation level change process Individual level
1. Setting the strategy: 1. Establishing a sense of urgency Disengaging from the

• creating the need to revitalise 2. Creating a guiding powerful past
• establishing a powerful group to coalition
achieve change.
2. Implementing the strategy: 3. Creating a vision Experiencing

• forming and communicating a 4. Communicating the vision disorientation and
new vision 5. Empowering others to act, and possible disillusionment
• empowering others and eliminating obstacles
eliminating obstacles 6. Planning for and creating short-
• planning and achieving short- term wins
term goals.
3. Business as usual after 7. Consolidating improvements and Accepting change or

implementation: producing still more change becoming disillusioned
• consolidating and building on 8. Institutionalising new approaches
improvements
• institutionalising change.
Source: CPA Australia 2020. Column 3, ‘Alignment to Kotter’s eight-step change process’ based on JP Kotter, 1995, ‘Leading change:
Why transformation efforts fail’, Harvard Business Review, vol. 73, no. 2, March–April, p. 61.
BALANCING STABILITY AND CHANGE

Leadership is essential to make sure that today’s core competencies and strategic capabilities do not
become tomorrow’s core rigidities. The roles of both manager and leader must be successfully balanced
to satisfy current objectives effectively, without stifling future change and development. The following
phases outline a way to visualise the balancing act between stability and change in the transformational
leadership stages discussed earlier.
• Phase 1 — the need for change is felt, so the leader must ensure there is enough flexibility within the
organisation to bring about change. However, stability is also required to allow current performance and
work to continue through the change process.
• Phase 2 — the vision and strategy are developed. The leader must ensure that the organisation’s
capabilities are stable enough to provide a framework for going forward yet flexible enough to ensure
the organisation can adapt to changes in the future. The organisation’s vision is crucial at this phase as
it is all about designing the future. This is also where growth of the organisation can occur, in order to
increase performance and success.
• Phase 3 — the strategy is implemented. It is important to implement change right through until it is
embedded, to the point that the change is stable in the organisation and has become a streamlined and
efficient way of behaviour.
Effectively combining flexibility and stability allows smaller organisations to exploit the weaknesses
of more entrenched organisations. Often, these organisations are flexible and less set in their ways when
compared with larger organisations. There is often a trade-off between the benefits of scale that large
organisations achieve and the inflexibility that this larger size can engender. A similar trade-off occurs for
smaller firms that may be very flexible, but struggle to maintain control of processes.
Pdf_Folio:47

Being large usually provides economies of scale in terms of production runs, pooling economic resources
and grouping talented people together. Several weaknesses can also arise, including a growing indifference
to customers (and other departments) if employees perceive themselves as insignificant components of a
giant machine. The rules required to maintain control can become stifling and inflexible and may prevent
innovation and quality customer service.
Being a small organisation may facilitate immediate responses to customer requirements but having
fewer controls and procedures may lead to errors and quality control issues. Small companies are often
damaged by too much growth that is not properly managed. Staff shortages, lack of infrastructure, inability
to supply products or a failure to maintain quality may then result.
Strong leadership is required to ensure enough time is devoted to strategic thinking, and that attention
is not focused on managing the present without considering the future.
LEADERSHIP STYLES BASED ON THE INTENSITY OF CHANGE

According to Dunphy and Stace (1994), change can be categorised into four different types that have
different leadership implications:
1. fine-tuning — minor change akin to continuous improvement
2. modular transformation — a major change but only for part of the organisation
3. incremental adjustment — relatively minor change but has impacts across the whole organisation
4. corporate transformation — major change that impacts the whole organisation.
Figure 1.15 illustrates the four change categories and how the type of leadership that is best suited to
the category of change.
FIGURE 1.15 The Dunphy and Stace Intensity of Change Model
Stace & Dunphy Modular Corporate

Finetuning Incremental
(1994) transformation transformation
Collaborative
Developmental transitions
(Constant change) Charismatic transformations
Consultative Taylorism (Inspirational change)
(Avoiding Turnarounds
change) (Frame breaking change)
Directive Task-focused transitions
(Constant change)
Coercive
Source: D A Stace & D C Dunphy, 1994, Beyond the Boundaries: Leading and Recreating the Successful Enterprise, McGraw
Hill, Sydney.
Different change management styles should be applied depending on the category of change to
be implemented.
1. Collaborative style: involves significant participation from employees in important decisions related
to the future and organisational change will be implemented. This style of change management is
appropriate when knowledge relevant to the change is distributed throughout the organisation.
2. Consultative style: employees are consulted before implementing organisational change and are
involved in the process of goal setting related to their area of expertise. This style of change is
appropriate when management has developed a plan but there is value in getting perspectives and
feedback from others in the organisation.
3. Directive style: involves limited participation from the employees in the decision-making process and
uses authority for important decisions related to the organisational change. This style is appropriate
when knowledge is held centrally within the organisation and benefits of discussion are limited to the
perspective of consultation. It can also be appropriate when the leadership is trying to change the culture
of an organisation.
4. Coercive style: forces organisational change on employees either by involving the outside parties or
involving the managers/executives in the process. This style is appropriate when an organisation is in
crisis and has limited time and resources. Top-down leadership has to make decisions in the short-term
to get through the immediate crisis, and often involved retrenchments and downsizing.
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QUESTION 1.11
Based on the Dunphy and Stace Intensity of Change Model and information from example 1.11.
1. What category of change was required at JAL?
2. What style of leadership is best suited to that category of change?
Support your response by identifying and explaining how the style of leadership was
demonstrated.
Strategic leadership encompasses several approaches to how leadership is described and defined, based
on style and situation, some of which are discussed in the following sections.
LEADERSHIP STYLES BASED ON TEAM AND

INDIVIDUAL DEVELOPMENTAL STAGE
Blanchard et al. (1985) describe four main leadership styles used when interacting with individuals in
specific situations during strategy implementation, to enable support for teams or individuals that are at
different developmental stages in their area of work.
1. Directing — an authoritarian style characterised by specific instructions and close supervision.
2. Coaching — while specific instructions and supervision are still provided, there are also clear
explanations of what is occurring, and suggestions offered by employees may be accepted; coaching is
still regarded as being authoritarian but takes tentative steps towards collaboration.
3. Supporting — employee efforts are facilitated, and employees share decision-making responsibility.
4. Delegating — responsibility for both decision making and problem solving is transferred to employees.
Good leaders are able to identify individual’s needs and use different approaches depending on what is
needed for the situation.
You will notice from figure 1.16 that these four styles represent stages on a continuum between
authoritarian and collaborative leadership. None of these styles is considered to always be the most
effective and the most appropriate style must be chosen for each situation. If a junior member of staff
is new to a role and inexperienced then directing them may be appropriate, while directing an experienced
person is a quick way to demotivate them. Be aware that a delegating approach that is effective with
an experienced person may be ineffective for a new employee who may feel abandoned to deal with a
complex task.
FIGURE 1.16 Continuum of authoritarian and collaborative leadership
Authoritarian Collaborative
Directing Coaching Supporting Delegating
Source: Adapted from K Blanchard, P Zigarmi & D Zigarmi, 1985, Leadership and the One Minute Manager, Fontana/
Collins, Glasgow.
The inability to use the appropriate leadership style for each situation does not just prevent leadership
from being successful but may lead to a significant reduction in performance. By evaluating each
employee’s competence and commitment in a specific role, the appropriate leadership style may be
enacted. Clearly, sound understanding of your employees is required to ensure the effectiveness of
this approach.
QUESTION 1.12
Based on Blanchard and Ziagarmi’s continuum of authoritarian and collaborative leadership and
information from example 1.11, examine how each style was used by Mr Inamori at JAL.
Pdf_Folio:49

LEADERSHIP STYLES BASED ON ORGANISATIONAL
LIFE CYCLE STAGE
As with industry life cycles, organisations follow a pattern of start-up, growth, maturity, shake-out and
decline. Organisations in different stages of the organisation and industry life cycle will need to make
different decisions based on their situation and this will influence the style of leadership needed to be
successful at a specific point in time.
A simple model for understanding this approach is provided by Rothschild (1993) who characterises
the four styles of strategic leadership as risktakers, caretakers, surgeons and undertakers.
• Risktakers — often the founder of an organisation. Their original vision makes the firm what it is today.
They are a good match with the start-up and growth phases of an organisation but may not be appropriate
during maturity.
• Caretakers — help an organisation move from the growth phase into the maturity phase.
• Surgeons — ensure future success or to fight against current problems; they have an ability to prune
or sever parts of the organisation that, although they may once have been valuable, have become a
hindrance.
• Undertakers — when an organisation has approached the end of its life, it is time to harvest or salvage
what is viable and shut down the rest. This style is required to prevent prolonging losses.
Figure 1.17 illustrates how these styles of strategic leadership may be matched to the various life cycle
stages of an organisation
FIGURE 1.17 Organisational life cycle and strategic leadership
Stage: Start-up Growth Maturity Shake-out Decline

Style: Risktaker Caretaker Surgeon Undertaker
Source: Adapted from W Rothschild, 1993, Risktaker, Caretaker, Surgeon, Undertaker: The Four Faces of Strategic Leadership,
John Wiley & Sons, New York.
Certain styles may not be beneficial at certain times, and if key leaders are unable to adapt, the
organisation’s performance may be hindered. For example, consolidating a firm’s position may require
the elimination of less profitable areas; major changes to current processes; and the creation of detailed
systems and control structures. These needs may be ignored or rejected by a risk-taking leader who has a
personal investment of both money and identity with the current situation.
QUESTION 1.13
Based on Rothschild’s model of organisational life cycle and strategic leadership, and information
from example 1.11, examine how Mr Inamori has demonstrated the leadership style of a ‘surgeon’.
LEADERSHIP STYLES AND ORGANISATIONAL CULTURE

The culture of any social unit includes group norms, shared perceptions, espoused values, and consensus
around goals and objectives. It includes the way people interact with each other, how they solve problems,
and how they justify themselves. Culture is strongly tied to values and values is strongly tied to the type of
organisation and principles of ‘cui bono — who benefits’ that were discussed previously in this module,
and impacts how work gets done and how decisions are made.
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Example 1.1 discussed how success in the age of data and analytics was supported not only by leadership
and a data and analytics strategy focused on the longer term, but also by a culture that tolerates failure. The
risk appetite and values of an organisation are strong drivers of an organisations culture and will mean one
organisation might do things quite differently to another on the basis of that difference alone. A culture
that values learning and applies feedback rapidly so that iteration is possible is one of the key capabilities
underpinning innovation and is growing in importance for organisations success and sustainability.
What are often deemed soft skills, such as understanding employee work styles and preferences is critical
to putting teams together that complement each other’s skills and can achieve high levels of performance.
Being able to put together teams across borders adds a further layer of complexity for leadership and
management, as it is not only technical skills that explain team success.
Strategy implementation often entails management of projects and activities around the world, where
different values and cultural beliefs can influence the style needed to support successful strategy imple-
mentation. In a globalised economy, the ability to work harmoniously with different cultures has increasing
significance. Leaders not only need to understand the cultures in the geographic markets where their
organisation has their operations, but they must also be able to work with these cultures. An ability to
develop an understanding of culture that transcends national boundaries is essential for effective leadership
and strategy implementation.
Power distance refers to the way in which power is distributed in society and in organisations, and the
extent to which the less powerful accept that it is distributed unequally. Asian employees generally accept
greater directive authority from senior managers and leaders (Lam & O’Higgins 2013). Chinese employees
are more likely to suppress their emotions and remain silent when their bosses make unreasonable demands
(Lam & Higgins 2013). As a result, there are considerable differences between the leadership styles of
Australian executives and their often older counterparts in China and other Asian countries. Importantly,
Chinese business leaders remain more relationship-oriented than rule-based. Guanxi is the term for good
connections. Here most attention is paid to a network of social relationships as a way of reducing
uncertainty and achieving business success (Berger & Herstein 2014).
QUESTION 1.14
Based on information from example 1.11, examine the organisational cultural issues that Mr Inamori
had to overcome in order to turn around JAL’s performance. Support your answer with discussion
of information from example 1.11.
as follows.
KEY POINTS
• Leaders may seek to implement strategy using a variety of styles.
• Transactional leadership involves using incentives and rewards to maintain the activities within
the organisation.
• Transformational leadership involves leading major change.
• Leaders and managers must balance stability and change in order to ensure current objectives are
met while enabling future development.
• Different leadership styles are suited to different individual, team and organisational characteristics
and circumstances.
1.8 THE ROLE OF LEADERS IN STRATEGY

Leadership is required to develop an organisations strategy, drive the change and align the organisation’s
structure, resources and culture with the strategy.
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Strong leadership is required to turn plans into reality. We revisit several of the key points presented by
Kotter (1995) to reiterate the importance of strategic leadership during implementation, and the necessary
minimum requirements for success:
• establish a sense of urgency
• communicate the vision
• empower others to act
• make new approaches ingrained in the organisation.
Even if all of these requirements are achieved in some measure, implementation will still become a
mixture of both planned activities and adaptations due to changing circumstances. Leaders are required to
drive the strategy, as well as monitor and modify its implementation while still successfully completing
day-to-day operations.
The role of leaders in implementing the strategy is largely in developing the projects that will support it.
Leaders are required to deal with the changes that result, and with any issues that may arise along the way.
Strong leadership is necessary to make sure policies are enforced; changes are accepted both culturally and
behaviourally; and resources are effectively used. Without effective leadership and discipline, members of
the organisation will not participate willingly in the change.
QUESTION 1.15
Based on information from example 1.11, identify and explain how Mr Inamori empowered others
to act.
COMMUNICATION
One of the most important roles of leaders throughout the strategy process is to communicate and share
their understanding and vision with the whole organisation. This is a continual process that must use all
informal and formal communication channels and include actions as well as words. Only by effectively
communicating their strategic objectives and goals are leaders able to receive support and acceptance for
their strategy. Communication is therefore vital to successful strategic implementation.
Communicating the need for change must be effectively combined with communicating the vision and
strategy that will lead to a better future. This allows for the transformational effect of disengaging from the
past and preparing for the transition to the future. Failure to think of the emotional as well as the physical
aspects of the change may mean that physical changes (e.g. new systems, structures and processes), are
implemented without the necessary transitions in the behaviour and motivation of individuals.
To avoid resistance to change by stakeholders, leaders must communicate effectively to increase the
alignment of people with leaders’ vision and strategy.
To ensure effective communication, leaders have to present information that addresses the:
• current situation
– what currently works
– problems, or future problems (identifying the need for change)
• recommended change
– outline and benefits
– risks and problems.
By systematically addressing each of these key areas, the likelihood of success is increased. Jumping
immediately from problems with the current situation to the benefits of the recommended change, without
clearly outlining the changes, may seem to speed up the process, but could prove to be problematic in
the future. Resistance is likely to occur as people hold onto the advantages and benefits of the current
situation and focus on the risks and problems of the recommended change. Trying to force through these
points instead of actively identifying and dealing with issues will only create further problems.
It is also important to consider issues relating to the phases of transformation, starting with the rejection
of the old, followed by transition and turmoil, and concluding with the new beginning. Therefore, leading
decisively can sometimes mean doing nothing for a short period of time, even when there is pressure to
be active at all times. To assess whether each phase has been given adequate time, consider the following
questions.
• Have people been given the opportunity to express their feelings in an open and protected manner?
• Have concerns raised formally or informally been acknowledged and discussed?
Pdf_Folio:52

• Has there been recognition of what was achieved in the past, while marking or celebrating that change
towards the new direction has been embraced?
• Have the requirements and expectations of the new direction been understood clearly to avoid unneces-
sary fear and disruption?
Communication involves more than sending out messages — it includes listening. The essential
leadership skill of understanding other people can be enhanced by actively listening to them. Listening
only to be able to reply is not good enough. The purpose of active listening is understanding. Paying
attention to people’s body language and tone of voice, as well as to what they say, provides valuable
insight into what people are actually trying to communicate.
The new strategy needs to be communicated with actions as well as words. Techniques such as
management by walking around (MBWA) are helpful. The CEO of Toyota Manufacturing, Kentucky, in
an address to a Quality Circles conference in Mauritius, said that the logo at the bottom right hand corner
of every slide in his presentation was a pair of binoculars. This meant that managers must walk around
the plant with their eyes and their ears wide open. In every interaction, formal and informal, conversations
and actions should reinforce the need for change, the value of the future direction and the success that
will result. Kotter’s eight steps of change highlights the importance of communicating the change vision.
Technology insight 1.3 discusses learning and development in the digital age.
QUESTION 1.16
Based on information from example 1.11, identify and explain the specific actions that Mr Inamori
took to communicate his strategy.
Learning and Development in the Technology Age

In the age of data and analytics the leadership skills and capabilities necessary for success are changing.
Along with it, approaches to educating the next generation of leaders are changing too.
Online learning and networking are becoming more important and prevalent, and an attitude of lifelong
learning is essential. The emergence of Personal Learning Clouds (PLC’s) provides the opportunity for
organisations to customise learning and development of individuals and teams, selecting learning and
development opportunities from a far wider range of traditional providers of executive education such as
business schools and universities and relative newcomers in the learning and development space, such
as large management consulting firms, HR consulting firms and digital platforms such as Coursera and
Udacity (Moldoveanu & Narayandas 2019).
Data and analytics are disrupting the learning and development industry and expanding the opportu-
nities for organisational learning and development that can be much more targeted in terms of its design
and in the tracking of user-specific learner outcomes.
DECISION MAKING
The strategy process provides a framework for systematically working through the choices that individual
organisations and their leaders and managers need to make based on their specific context. All the factors
discussed previously in this module, such as the type of organisation, its size, industry, level of maturity,
vision, mission and goals complicate the process. They also influence the requirements for leadership.
Decision making is required in every step of the strategy development process. Deciding what to
do should be the result of clear, transparent and rigorous internal processes: rational decision making.
However, decisions are often far from rational in an organisation, and so it is important to consider how
decisions are actually made.
Rational Approach to Decision Making

Rational decisions have the following criteria. They:
• are conscious, explicit and deliberate
• are internally consistent and logical
• are fully informed
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• aim at achieving the end goal
• allow for independent means and ends
• involve choice between alternative ends and alternative means, choices which aim to maximise the end
results achieved
• assume a causal relationship between the means taken and the end results achieved (Harsanyi 1986,
p. 84).
Members of the senior management and leadership team need to ensure that they reach agreed decisions
that are as rational or objective as possible and that individual viewpoints, issues, perspectives and
situations are understood and taken into account during the process.
Why Decision Making can Vary from the ‘Rational’ in Practice
It is well-accepted that a rational model of decision making should be applied. However, it is equally
well-understood that this rational model is often deviated from in practice. The following sections looks
at the reasons behind this. For example, many organisations tend to jump straight from analysis to
recommendation without considering any other alternatives. This can occur due to:
• enthusiasm to quickly get to the end of the analysis process
• readily agreeing with the leader’s proposal
• having prior views about the ‘best’ solution (Harsanyi 1986, p. 86).
One of the most difficult tasks for leaders is making effective decisions, often while in a high-stress and
fast-paced environment — that is, in the actual practice of their organisation. The organisation’s strategy
is a result of decisions that leaders have made along the strategy development process, and then during its
final formulation and implementation.
Making decisions is part of everyday life but making decisions in highly volatile, stressful situations with
limited information can be challenging. Brent Gleeson (2012), CEO of Internet Marketing Inc., describes
four approaches that can be used to make decisions.
1. Command — this is where decisions are made by leaders without consultation with their team. This
occurs in organisations where things are moving quickly, and there is no time for consultation. When
a crisis arises, it is often unexpected and requires immediate attention to avert damage. It is here when
command decisions are most utilised and the most effective.
2. Collaborative — decisions are made collaboratively with the team. This leadership style allows the
team to provide opinions, insight and knowledge. The leader can consider each perspective and is then
well-informed to make the final decision. Where the particular situation allows for it (not in a crisis
situation where a decision is required instantly), this is considered the most effective leadership style
when leading in an organisation.
3. Consensus — this is a ‘majority rules’ style of leadership, where leaders and their teams take a vote in
order to determine a decision. When the entire team is affected, this can be seen as a fair and efficient
way to make a decision, allowing every team member to have a voice. However, this is often not possible
in a fast-paced business environment where strategy development is taking place, and many decisions
need to be made throughout the process.
4. Convenience — this is essentially a delegation of decision making by the leader, whereby they allocate
a trusted team member to make the ultimate decision. This is useful in allowing your team members to
develop their decision-making skills and confidence. However, in strategy thinking, it is important that
decision makers remain stable through the process, to ensure the same alignment and direction of the
organisation is understood by all those involved (Gleeson 2012).
This aligns with the contingency approach to leadership — that leadership style is situational and must
be assessed against the particular situation where a decision needs to be made. It cannot be said that one
style is better than the other, because it depends on the time allowed, the people involved and the importance
of the decision that needs to be made.
QUESTION 1.17
Based on information from example 1.11, analyse and explain the style of decision making involved
in the performance turnaround at JAL.
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BUSINESS ETHICS
Business ethics is the study of the rules of conduct, basic values and ethical principles of an organisation
and its practices. Aligned with business ethics is the term ‘corporate social responsibility’ (CSR). CSR is
organisations’ obligation to minimise their negative effects on society, and to account for their economic,
social and environmental outputs. A socially responsible organisation is accountable for its actions in
society. The key to distinguishing between CSR and business ethics is that CSR refers to the effects that an
organisation’s actions have on society, while business ethics is about the guidance and formation behind
the decisions that shape those actions.
In formulating and developing strategy, leaders in the senior management team are making significant
and far-reaching decisions that influence what an organisation does. Moreover, the most fundamental
questions about the values and resources of a business are managed at the strategic level, articulated in
vision and mission statements, values and goals. Relevant questions to ask include the following.
• How are we going to get there?
• What values will guide the process of change?
• What limits should be placed on the methods and means used to achieve the end outcomes and strategies?
Leaders in organisations are influential role models for the behaviour of employees, for both establishing
and maintaining the ethical climate in their organisation. The strategies that leaders formulate and
implement determine the fundamental goals of an organisation. In determining how the organisation will
achieve its goals, leaders establish or shape the ethics and values that guide the activities of the organisation
and set the limits or the extent to which the ‘means justifies the ends’.
Competitive and profit-maximising organisations may well be efficient, but an overriding focus on
efficiency and profit can lead to ethical issues and dilemmas such as unequal income distribution or damage
to the environment. In a purely profit-maximising economy, leaders of organisations may overlook the
social costs of their actions. The obligation to act ethically requires leaders to internalise the negative side
effects or by-products of their organisation’s activities (e.g. by taking steps to minimise their organisation’s
pollution of the local environment) and take proactive measures to be a valued part of their community, such
as for example creating employment opportunities, developing the local workforce skills, and supporting
causes that are important to the local community.
QUESTION 1.18
Based on information from example 1.11, examine how Mr Inamori acted as a role model and took
proactive measures to demonstrate the importance of JAL and its activities.
Values and Ethics

The importance placed on making a large profit in business is one reason why leaders are faced with
ethical dilemmas. The pressure to succeed in a competitive market is significant. To counterbalance
this, however, organisations are increasingly under scrutiny by the regulators to ensure the welfare of
employees, the environment and society in general. There is often a trade-off, because increased profits
may be achieved at the expense of what is accepted as good corporate citizenship, with evidence suggesting
that an organisations reputation is strongly linked to its performance. Ethics and morals can guide leaders,
while rules and laws can restrict their behaviour and help ensure that they act appropriately. Leaders need
to be aware, as they guide employees and coordinate activities, that they have a strong influence over the
ethical issues that emerge in their organisations.
Classical View of Ethics

The classical view of ethics proposes that for an organisation to pursue values other than profit, it is
confronted with a threat to survival and therefore the intentions of its owners may be undermined.
Milton Friedman, an economist and leading exponent of the classical view, argued that the primary
obligation of senior management is to provide a return on investment to the owners (shareholders) of the
organisations for which they work. Friedman argued that the only social responsibility of an organisation is
to utilise its resources and engage in profit-maximising activities, as long as those activities are conducted
without fraud or deception. From the classical perspective, seeking socially responsible goals is not only
likely to incur costs, but may also de-focus the efforts of the firm, which may lead to decreased productivity
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(Friedman 1962). Ultimately, according to Friedman and the classical view, the only responsibility of a
firm is to increase its profits through open competition (Bejou 2011).
Example 1.12 examines an instance in which a media investigation suggested the franchise business
7-Eleven was underpaying many of its workers, both an ethical and a legal issue.
EXAMPLE 1.12
7-Eleven’s Labour Cost Woes

Russell Withers, a long-time member of the Australian Olympic Committee, and his sister, Beverley Barlow,
two of the wealthiest people in Australia, brought the franchise licence to establish 7-Eleven outlets in
Australia in 1977. By 2015 there were more than 600 stores in New South Wales, Victoria, Queensland,
Western Australia and the ACT. The stores are open 24 hours, seven days a week, making salaries a huge
expense, especially when accounting for late night and weekend penalty rates. Most of the 4000 workers
employed in the stores are students, many of them from overseas, in particular from India.
A joint Fairfax Media and ABC Four Corners investigation in mid-2015 obtained explosive internal
documents, and its review of 225 stores found that almost 70% of franchisees manipulated their rosters
and had payroll compliance issues. When rosters were cross-checked against CCTV footage, it could be
seen that several workers were not actually on the roster. Instead they were international students who
were paid in cash but well below the legal minimum Australian wage. Many were being paid between
AU$11 and AU$15 an hour, when the legal minimum wage at the time was AU$24.69 during the week
and AU$28.49 on weekends. Tess Hardy notes the investigation reported that approximately two-thirds of
7-Eleven employees have been ‘severely underpaid and grossly overworked in deliberate contravention of
key employment standards’. Laura Hayes reported that ‘a 7-Eleven franchisee with several convenience
stores was investigated for several counts of immigration fraud. The immigration investigation regarding
allegations against one set of owners caused 7-Eleven franchisees to be investigated nationwide. 7-Eleven
was subjected to significant negative publicity, and some of the news articles likened the convenience
stores to modern-day plantations.’
In the wake of this report, Professor Alan Fels, the first chairperson of Australian Competition and
Consumer Commission (ACCC) was appointed head of a two-person panel, supported by independent
assistants from Deloitte Australia, to receive and examine claims of underpayment to 7-Eleven employees.
On its website, 7-Eleven stated that past and present staff should come forward and give evidence to the
Fels enquiry and that the results of their work, but not the names of individual claimants, would be made
public. In May 2016, 7-Eleven fired Fels and the independent panel, taking the investigation in-house.
There is, however, another side to the story. It could be argued that these students are at least getting
some money to help them make ends meet. This is the same argument often used to justify sweatshop
labour for a dollar a day in China, namely, that a bowl of rice is better than no rice at all. This argument is
unlikely to gain much sympathy in Australia, however, as these workers could be much better paid working
for another employer that compensated them with the minimum wage. More convincingly, however,
Hardy writes that once the 7-Eleven franchisee ‘covers labour costs, meets interest repayments and pays
the necessary royalty fees to the head franchisor, the store owner — which is often a small business
operator — may make only a modest profit of about AU$40 000 a year’. For this reason, many of the
franchisees have put their stores up for sale. ‘Since the Four Corners-Fairfax Media investigation into
7-Eleven began, the number of stores for sale by franchisees ballooned from 50 to 76’ (Ferguson et al.
2015).
Source: J Schermerhorn, P Davidson, A Factor, D Poole, P Woods, A Simon & E McBarron, 2017, Management, 6th Asia–
Pacific edn, John Wiley & Sons, Milton, Queensland, pp. 143–44.
Socio-Economic View of Ethics

In contrast to the classical view, the socio-economic view argues that the leaders of organisations
have a responsibility to the society that creates and sustains them. This responsibility goes beyond
the profit imperative to include protecting and improving society’s welfare. Leaders should ensure that
their organisations refrain from socially undesirable behaviour and act in the public good, maximising
their positive impact on society. The reason behind this view is that organisations, in particular large
corporations, have significant economic and social power, so in return for granting organisations a separate
legal entity, society is entitled to expect from them a significant net positive contribution to the general
good (Ferrell & Fraedrich 1997).
Cotton On, discussed in example 1.13, exemplifies this approach.
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EXAMPLE 1.13
Cotton On and the Cotton On Foundation

Cotton On is Australia’s largest global retailer. It states its purpose as wanting to ‘make a positive difference
in the lives of everyone we touch; whether that’s in our backyard or on the other side of the world’.
The Cotton On Group operates over 1500 stores across seven brands (Cotton On, Cotton On Kids,
Cotton On Body, Factorie, Rubi, Typo and Supre) around the world.
Hong Kong
5
Vietnam
UK 1
25
Thailand
Jordan 14
2
Malaysia
82
USA
154 UAE Philippines
Namibia 35 36
6
Brazil Singapore
8 77
South Africa Oman

168 1
Botswana Australia
Indonesia New Zealand
1 Saudi Arabia 676
32 124
3
The Cotton On Foundation is the Cotton On Group’s philanthropic arm dedicated to empowering youth,
globally underpinned by the belief that quality education is critical to ending extreme global poverty.
The Foundation exists to empower youth globally through the delivery of quality education projects
across Uganda, South Africa, Thailand and in Australia and has invested over $AU13.3 million into inter-
national development and indigenous education in 2019. Through a unique partnership with customers
and team members, the Cotton On Foundation markets products such as tote bags and bottles of water
in over 1500 Cotton On Group stores, where 100% of the proceeds contribute towards empowering youth
through quality education.
Since 2007 the Cotton On Foundation has raised over AU$100 million to help reduce global poverty
and in 2019 was recognised as Australia’s 22nd highest giving corporate for 2019 and the highest ranking
private contributor in the country according to the Australian Financial Review (AFR).
According to the Deloitte Global Millennial Survey 2019, 32% of millennials believe companies should
be trying to improve society — by improving education or reducing inequality, for example — but only
16% believe companies are actually achieving that.
Source: Cotton On Group, n.d., https://cottonongroup.com.au/cotton-on-foundation.
Examples 1.12 and 1.13 highlight very different approaches to doing business based on different
organisational values and ethics.
QUESTION 1.19
Organisations that purse the classical view of ethics and the socio-economic view of ethics
approach business differently. Identify and explain the leadership decisions that have been made
differently by 7-Eleven and Cotton On (using information in examples 1.12 and 1.13) with regard
the welfare of employees, the environment and society based on their respective approaches to
organisational values and ethics.
Example 1.14 describes how public sentiment is driving changes from the long-held view that, as a core
principle, ‘the paramount duty of management and boards of directors is to the corporation’s stockholders’.
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EXAMPLE 1.14
Value for all Stakeholders

On 19 August 2019, all but 12 of the 193 member companies of the Business Roundtable in the US
endorsed new principles of corporate governance, recognising that the idea that corporations exist
principally to serve shareholders is no longer an accurate reflection of how CEOs seek to create value
for all organisational stakeholders.
In releasing the statement, the Business Roundtable highlighted issues such as the natural environment,
social inclusion and diversity. They said the long-term interests of all stakeholders (customers, employees,
suppliers, communities, shareholders and others) were inseparable.
It is important to realise that such a position is not inconsistent with the interests of shareholders or
the company itself. It is merely recognition that the company’s long-term interests are better served by
adopting a broader perspective on key stakeholders than has often been practice in the past.
In today’s business environment, most organisational leaders recognise that their company is best
served by treating all stakeholders fairly and that a narrow focus on shareholders can damage the
business. An example is the reputational damage and increased regulatory oversight impose on Australia’s
major banks following investigations into their conduct, particularly their treatment of customers.
Increasingly, businesses must better balance all stakeholders’ needs in order to maintain their social
licence to operate and avoid increasing disruption of and interference in their business.
Source: Adapted from Business Roundtable, 2019, https://opportunity.businessroundtable.org/ourcommitment;
S Bartholomeusz, 2019, ‘Listen up! Shareholder value no longer everything for big business’, The Age, 21 August,
www.smh.com.au/business/companies/listen-up-shareholder-value-no-longer-everything-for-big-business-20190821-
p52jau.html.
as follows.
KEY POINTS
• Leaders play an important communication role in the strategy process, ensuring information flows
through the organisation and that it supports the organisation’s strategy.
• Leaders are responsible for most strategic decisions.
• A rational approach to decision making involves being fully informed to make decisions that will
result in desired outcomes. In practice, leaders often deviate from the rational approach due to the
realities of the contexts in which decisions are required.
• Leaders are responsible for setting an ethical role model for the conduct of the organisation — the
principles upon which the organisation goes about pursuing its objectives.
1.9 THE ROLE OF THE CPA IN STRATEGY

AND LEADERSHIP
The role of a CPA is becoming increasingly integrated with the discipline of strategic analysis and strategic
decision making. CPAs are extending their responsibilities beyond traditional accounting functions to
emerge as a future finance professional.
CPAs, rather than being housed only in the traditional accounting department, are more likely to be
located throughout an organisation’s operations, working on strategic analysis, planning and implementa-
tion activities. In this respect, CPAs are working more as business and strategic partners, challenging them
to broaden their traditional perspective and to acquire new skills to operate and contribute successfully in
a new environment.
With the developments in information technologies automating the traditional accounting task, CPAs are
increasingly able to use new accounting and performance models that integrate financial and non-financial
information, as well as acting as strategic partners with line managers in decision making. In this respect,
accountants are required to take a more proactive role in strategic decision making.
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Effective decision-making processes are critical for strategy execution. In this respect, CPAs play an
important role in clarifying responsibilities and decision-making processes concerning finance and budget
allocations, and in providing financial data to inform and shape strategic decisions. How people make
decisions and the way in which people are held accountable are important determinants of performance.
CPAs have a key role to play in influencing and facilitating strategy through resource and budget
allocations, and in translating higher level strategic goals into specific growth and earnings targets and
measures for operating managers.
The traditional role of accountants in managing an organisation’s finances is a key factor in strategic
success. This applies to the private sector in terms of generating cash to pay employee and shareholder
returns, and to reinvest for future growth. In the public sector, there is a need to manage within budgets
to deliver the optimal product or service value under the financial limits, and in order to secure ongoing
government funding.
Value creation is about delivering products and/or services that provide superior benefits to customers
and other stakeholders and is therefore fundamental to achieving long-term strategic success. Value
creation can occur anywhere along an organisation’s value chain. In respect of ‘financing’, for example,
value creation relates to the cash-generating and capital-raising abilities of an organisation, which are key
to its ability to pay shareholder dividends and to reinvest for future growth. In the case of a public sector
organisation, managing for value relates to the optimal use of public moneys.
CPAs must be able to describe their organisation’s business model in strategic terms. Whereas a
strategy focuses on the long-term evolution and goals of the organisation, the business model describes the
organisation’s current state, albeit in an abbreviated form. It is essentially the ‘blueprint’ of the business.
Whenever the strategy changes, the business model of the business must change and vice versa. The
more dynamic the market environment, the more necessary it is to strategise and, as a consequence, fine-
tune or innovate the business model as a normal part of the strategy process. This means that CPAs must
develop a strong appreciation of the implications associated with changing any part of the existing business
model or innovating it. This includes the way in which the financial performance of the organisation could
be impacted.
The CPA’s role in organisational strategy implementation includes aligning functional strategy with
the organisation’s business strategy, the re-allocation of resources and budgets to facilitate and fund
the organisation’s strategic options, and the development of key performance measures to monitor the
organisation’s performance against its strategy. Although these extra functions are now expected of
accountants, it is important to note that the traditional role still applies. The primary focus should be
on accounting standards and regulations with the ideas and frameworks of strategic thinking guiding the
peripheral and over-arching direction.
Table 1.13 describes a range of roles for accountants in the strategy development process.
TABLE 1.13 The role of the finance professional in strategy
External/internal Develop Implement

analysis strategic plan strategic plan Review
Accountant Gather finance, Provide support in Support Gather finance,

enterprise and business modelling implementation, enterprise and
big data analysis of interim big data
performance
Senior Gather finance, Offer insights, Support Gather and interpret

Accountant enterprise and big collaborate to implementation, finance, enterprise
data, and interpret and develop ideas, analysis of interim and big data,
analyse results and produce forecasts, performance, and including ensuring the
performance metrics active role in business strategic project sound management
(e.g. SWOT, ROI) from modelling, and re-scoping efforts if of large volumes,
an organisational business case these are necessary varieties, and
context and trend generation and velocities of data with
perspective, and act analysis a focus on veracity
as an intermediary (ensure data validity
between the finance, and reliability)
technology and
information functions
of the organisation
Pdf_Folio:59
(continued)

External/internal Develop Implement

analysis strategic plan strategic plan Review
Financial Interpret finance, Develop resource Champion change Identify and analyse
Controller enterprise and requirements, and plan for information and help
big data, analysis challenge assumption contingencies, identify if and when
results, performance in business models, actively mitigate risks, the strategic plan and
metrics and any conceptualise ideas, and strategic project business model(s) of
other information of anticipate future re-scoping efforts if the organisation need
relevance to better trends, develop these are necessary to be changed
value assets, make strategic options and
operational and help develop budgets
strategic decisions
and manage and
mitigate risk effectively
CFO Analyse the Ensure the decisions Be a role model for Identify strategic
operational and made across the change, drive and and business
strategic implications organisation are lead the change, model issues,
of all the asset based on sound and any project and consult with
valuation, operational judgement and re-scoping efforts if the organisation’s
and strategic and risk could lead to the and when required leaders to identify
information made development of a through consensus
available to the coherent corporate the next logical
senior management strategic plan, steps to ensure the
team, including their including aligned organisation is to
implications for business and remain relevant,
strategic decision functional plans and including staying
making at every level communicate/gain competitive,
of the organisation support of key innovative and
stakeholders, productive into the
including the Board future
Internal Identify suitable Contribute to the Monitor the Review dashboards

Auditor dashboards of strategic plan with a performance of the of performances and
finance, enterprise focus on improving implementation plan key metrics and
and big data and other performance at with an emphasis on other data across
relevant performance all levels of the identifying risks and the organisation,
and risk mitigation organisation and the mitigating risk including the progress
related information to effective mitigation of the strategy
monitor periodically of risk implementation
and/or in real-time plans, and identify
issues for senior
management and
the Board to consider
Globalisation has seen a move away from centralised accounting operations to decentralised arrange-
ments in organisations. CPAs are more likely to work in partnership with local and/or international cross-
functional teams, dealing with different cultures and business practices. Within this context, they are
increasingly required to manage the intricacies associated with transacting intra- and inter-organisationally
across the globe, and the problems associated with integrating the organisation’s value chain with those of
partners based in other countries.
Understanding and managing the dynamics of a global economy is important in developing the CPA’s
contribution to the decision-making processes and performance of the organisation. Whether working for a
large multinational corporation, a small local firm, or in their own business, the CPA will most likely have
involvement with international buyers and suppliers, with foreign corporations entering the local market,
or be trading in markets around the world. In these contexts, the CPA’s strategy knowledge is important to
career success, and will also enhance prospects for gaining international work experience.
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QUESTION 1.20
CPAs have an important role to play in strategy process. Provide two actions that reflect a
management behaviour that drives strategy and two actions that reflect a leadership behaviour
that drives strategy that are relevant to finance professionals.
Some key questions candidates should be able to answer using the concepts, models and approaches
described in module 1 are included in table 1.14.
TABLE 1.14 Key questions for CPA candidates to consider and answer
Concepts/models/approaches that can be used

Key questions to answer the key questions
What is strategy? • Decisions that have high medium- to long -term impact on the
activities of the organisation, including analysis leading to the
resourcing and implementation of those decisions, to create value
for key stakeholders and to outperform competitors
Why is the rational approach • Strategic fit and stretch

considered a good way to approach • Role of the accountant, analysis of data
the strategy process?
What is included in a strategy • Defining organisational purpose

development process and strategic • Vision, mission and values
planning? • Value proposition
• Business model
• External and internal environment analyses
• SWOT analyses
• Formulating and implementing strategy (How do we get there?
And what are the financial aspects of value creation?)
What is the difference between • Strategy is the ‘bigger picture’

strategy and tactics? • The productivity frontier
• Competitive advantage
• Strategic thinking, fit and stretch
What are the forces behind • Competitive forces

globalisation? • Technological forces
• Social forces
• Political forces
What are the challenges and benefits • Challenges (competition, distribution, macro-economic, socio-
of globalisation? economic, financial, legal, physical, political, sociocultural, labour,
globalisation of risk)
• Benefits (cost, timing, learning, arbitrage)
• Role of the accountant
What are the organisational factors • Level of strategy (corporate, business, functional)
that influence strategy? • Organisation type and stakeholder requirements
• Organisational size and industry life cycle stage
• Organisational maturity (CMM)
• Core business type (customer relationship, product innovation,
infrastructure)
How do organisations articulate who • Vision, mission, values

they are and what they stand for? • Purpose
• Value proposition
(continued)
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Concepts/models/approaches that can be used

Key questions to answer the key questions
Why do organisations face ethical • Business ethics

dilemmas? • Classical view of ethics
• Socio-economic view of ethics
How do businesses explain and • Business models

communicate how a business works • Value proposition
and the economic logic behind the • Business model canvas
business?
What is leadership? • The skill of motivating, guiding, and empowering a team towards a
socially responsible vision
What are some of the main • Traits, behavioural and contingency approach
approaches to leadership that have
been researched and described?
Where is leadership typically found in • The Board

an organisation? • The CEO
• Senior management
• General management
• Project management
What’s the difference between • Dual roles of leading and managing

leadership and management? • Transactional and transformational leadership
What’s needed to ensure the • Strategic leadership

organisation can change to meet the • Strategic thinking
changing demands of customers and • Strategic fit and stretch
the marketplace?
What are the impacts of organisational • Kotter’s eight-step change model

change on individuals? • Balancing stability and change
• Visionary leadership
Why is decision making in strategy • Definition of strategy

so important? • Rational approach to decision making
• Decision-making approaches (command, collaborative, consensus,
convenience)
What other factors impact the type • Intensity of Change Model (Dunphy and Stace)
and style of leadership for strategy • Situational Leadership Model (Blanchard and Zigarmi)
implementation? • Industry Lifecycle Stage Model (Rothschild)
• Organisational culture
What is the role of leaders in strategic • External analysis

analysis? • Key external stakeholder analysis
• Internal analysis
• Key internal stakeholder analysis
What is the role of leaders in setting • Visionary leadership — setting the (right) direction; acting as change
direction? agent; communicating as spokesperson; coaching others
What is the role of leaders in • Kotter’s eight-step model

strategy formulation, selection and • Risk assessment
implementation? • Communication
What is the role of the accountant in • Table 1.13 — the role of the accountant in strategy and leadership
strategy and leadership? • Understanding the dynamics of a global economy
• Understanding technology and dealing with it specialists
• Identifying, verifying and analysing data as inputs to decision making
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as follows.
KEY POINTS
• CPAs have a growing opportunity to draw on and extend their skills to participate in strategy
development and become decision partners in the strategic management of the organisation.
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REVIEW
Strategy refers to those decisions that have high medium-term to long-term impact on the activities of the
organisation, including analysis leading to the resourcing and implementation of those decisions, to create
value for key stakeholders and to outperform competitors.
This module introduced the concept of strategy and then presented a rational approach to strategy based
on a formal process of external environment analysis, internal environment analysis, exploring options for
new product, service and market development, evaluating and developing options and finally implementing
the strategy. In practice, strategy is a dynamic process where each stage is interdependent. This means the
strategy process will revisit earlier stages as it proceeds.
Most organisations have a vision, mission, values and goals. These basic components are used to develop
the strategy and gauge its effectiveness. One of the purposes of strategy is to establish a competitive
advantage whereby the organisation does something better than its competitors and thus outperforms them.
In an increasingly globalised, competitive and changing business environment, it is difficult to sustain a
competitive advantage over long periods of time.
The strategy process requires numerous decisions to be made and thus strategy development is a key
matter for organisational leaders and managers. To implement a strategy often involves changes to the
organisation’s structure, resources, capabilities and culture. It is a key task of leaders and managers to guide
the strategy process to ensure it and its implementation are aligned towards achieving the organisation’s
goals.
The next five modules describe each stage of the strategy process in detail, beginning with module 2,
which explores analysis of the external environment. Module 7 looks at some alternative business models
and approaches to building strategy that reflect.
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MODULE 2
UNDERSTANDING THE
EXTERNAL
ENVIRONMENT
LEARNING OBJECTIVES

2.1 select the key concepts, factors and frameworks that relate to understanding the influence of the external
environment on organisational strategy
2.2 evaluate the key factors related to external environment that impact growth, profitability and competition
2.3 appraise how the roles of management and leadership drive the organisational strategy in relation to the
external environment.
ASSUMED KNOWLEDGE
• explain strategic management
• explain the principles of governance and ethics
• describe the key tasks of financial accounting
• describe the overall strategic process, the contemporary business context and the role of leadership
in strategy.
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PREVIEW
In module 1, we identified the stages of the process used in the rational approach to strategy. These stages
were explained in figure 1.4 and are shown again in figure 2.1.
FIGURE 2.1 Strategy process: analysis of the internal environment

(Module 1)
Strategic analysis:
(Module 2) Exploring Developing Implementation
options strategy and monitoring
Strategic analysis: (Module 4) (Module 5) (Module 6)
internal environment
(Module 3)

(Module 7)
Strategic analysis: Where are we now?

• Data collection
• Remote environment analysis
• Industry analysis
• Market analysis
• Competitive analysis
We will systematically work through the strategy process stages in modules 2–6, beginning with the
strategic analysis stage. Conventionally, a strategic analysis is undertaken annually with data captured
and collected on a more regular cycle to be used in decision making. It is important to recognise that
while strategic analysis is a discrete stage of the strategy model, the internal and external environments are
constantly monitored to ensure the organisation is aware of and can respond to changes. This has become
increasingly important and possible due to the increasing pace of change and complexity of the business
environment and advances in the ability to collect and analyse data grown.
We can separate strategic analysis into two main parts: analysis of those aspects outside or external to the
organisation, and those areas within the organisation or the internal environment. The focus in this module
is on understanding the external environment; module 3 considers the internal resources and capabilities
of the organisation.
To enable organisational leaders and managers to develop a strategy and direction for an organisation,
an analysis of external and internal influences is required to determine their effects on the organisation’s
performance. Each category of external and internal influences is illustrated in figure 2.2 (referred to as
‘the framework’), including the outputs of the organisation — the product or service that proceeds through
a range of distribution channels to the end customer.
This module provides concepts and frameworks for strategic analysis of the external operating envi-
ronment of an organisation, including an exploration of how information technology can support this
analysis. The main tools we consider are STEEPLE analysis, Porter’s five forces analysis, and competitive
positioning, which are shown in figure 2.2. The major topics covered are:
• defining an industry
• evaluating an industry’s attractiveness using tools such as STEEPLE to assess growth, Porter’s five
forces analysis to assess profitability, and the competitive environment to assess the competitive
landscape of the industry
• considering the key issues that might affect the industry’s growth, profitability, competitiveness and
sustainability
• analysing the data, gathering insights and integrating the expected effects these complex issues may have
on the organisation’s strategy, since many issues are qualitative and subjective, rather than quantitative
and objective.
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FIGURE 2.2 Framework for strategy analysis
External business drivers

Political, regulatory and legal environment, market characteristics, competition, substitutes, demand
for services, increasing complexity, technological changes and advances,
environmental factors, stakeholder expectations
EXTERNAL INFLUENCES
INTERNAL INFLUENCES
Operational drivers Strategic drivers

Markets/ Stakeholders
Industries
Products/ Channels Customers
STEEPLE Internal and Services
SWOT
external BCG matrix
Porter’s
five forces
Competitive People and organisational

positioning drivers
matrix
Source: KPMG and CPA Australia 2020.
The first challenge in undertaking strategic analysis is to define the scope of the external environment
and industry to be analysed. This challenge extends to finding or sourcing meaningful data for analysis
and considering its meaning and influence on the organisation. This data analysis informs the organisation
effectively and efficiently about its current position and helps shape decisions about where it wants to be
in the future.
The external environment includes the specific industry the organisation competes within, its competi-
tive position within this industry, as well as the broader macro-environment (i.e. the remote environment).
It is important to understand that an external factor (e.g. changing foreign exchange rates) that has a
negative effect on one industry may have a positive effect on another industry due to the nature of the
organisations within that industry. It is also important to recognise the potential for an environmental
factor (usually technology based) that has such a profound impact on the industry landscape that it creates a
‘disruption’. Disruptions change the market and value network within an industry, and have the potential to
displace existing players (no matter their size and influence). Understanding both the remote and industry
environments helps clarify what drives growth and profitability in the industry, identify how competitors
are acting and create awareness of disruptive technologies. This analysis informs what an organisation
needs to have in place to be competitive and successful in this operating context now and in the future.
The organisation can then develop its strategic plan in the context of what is happening around it.
Leaders and managers take an active role in the structure, development and implementation of the
external analysis in order to optimise its relevance to the organisation by:
• providing insights into the type of forces that are most relevant to the industry and therefore should
be assessed
• providing resources to enable the collection and analysis of relevant data
• being open to new ideas and initiatives derived from this analysis
• being prepared to make difficult strategic decisions to support these.
2.1 UNDERSTANDING THE EXTERNAL

ENVIRONMENT
It is important to differentiate between industry, market and the external environment of an organisation.
Often these terms are used interchangeably; however, in this module, they broadly refer to the following.
• Industry is the grouping of similar economic or commercial activities. For example, the clothing retail
industry is made up of all organisations that manufacture and/or distribute clothing.
• Market is the grouping of all organisations and their buyers. So the retail clothing market consists of the
providers, listed above, and the consumers of these products.
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MODULE 2 Understanding the External Environment 71

• External environment refers to factors external to the organisation that influence the organisation’s
strategy, including but not limited to: industries and markets, societal issues, technological changes,
economic drivers, environmental issues, political forces, laws, ethical considerations and a variety of
other factors.
In an analysis of the external environment, we are interested in identifying factors that will have led the
industry to its current state and that are expected to affect its future growth and profitability. This analysis
is an important foundation in strategy development, as the environment provides the context within which
the organisation operates and competes. From this analysis it is then possible to define key success factors
for the industry, which form the basis for understanding an organisation’s competitive position.
By starting with the external environment in strategy analysis, leaders and managers are forced to look
outside their organisation and consider issues that are not normally part of their day-to-day world. This
results in a more critical analysis of the organisation in terms of how its strategy, stakeholders, capabilities
and performance fit in the context of the external environment and how this fit may need to change and
evolve over time.
The analysis of the external environment is considered a difficult component of strategic analysis for
the reasons listed below. Focusing on the corresponding questions may help you to navigate these.
1. Difficulties in framing the scope of analysis, including industry and market definition due to the breadth
of the analysis required — what information do we need?
2. Difficulties in sourcing reliable data to analyse — where do we find this information?
3. Uncertain and ambiguous signals produced by the environment make interpretation difficult — what
does it mean?
4. Focusing on the past may not help predict the future — what has changed?
5. Factors that have shaped the industry’s growth, profitability or competitiveness to date will not
necessarily have the same impact on the industry’s future state — what is the impact of the change?
6. Many of the factors in external environment analysis are outside the control of the organisation and
difficult to predict — what can we do to protect our organisation from external forces?
7. Often disruptive factors and technologies are not anticipated by organisations and thus their impact is
not assessed and planned for and the organisation is caught off guard — is our competitive position
sustainable in the long term?
While leaders and managers can help frame the scope of external analysis based on their expertise and
experience, they need to resist falling into the trap of believing that they already know all there is to know.
Instead, they need to be open to the potential opportunities and threats that may be uncovered by the
external analysis and be prepared to act on them, through strategic decisions that secure the organisation’s
future growth and profitability.
THE ROLE OF THE CPA IN ANALYSIS

Data analysis, business intelligence, and ultimately advice and decision making, are at the core of analysis.
It follows then that finance professionals such as CPAs are deeply involved in many aspects of the
strategic analysis process. This involves both conventional financial and management accounting roles and
increasingly responsibilities related to issues such as measuring social and environmental performance and
shaping the organisation’s approach to data analytics.
An essential part of the external environment assessment process is the analysis of financial and
economic influences on the organisation and its operations. Engaging finance professionals (such as a
CPA) to capture, collect and analyse the contribution of data to decision making improves the value and
appropriateness of the analysis of that data for rigorous decisions. The STEEPLE, Porter’s and competitive
assessments include key areas of analysis and the CPA regularly contributes to analysis of this type. The
CPA is also qualified to offer judgement on analysis of industry sectors and the influence of economic
drivers such as currency fluctuations and legislative changes such as taxation and superannuation rules
may have on sectors and organisations.
External analysis of market uncertainties and impact on risk, financial regulatory compliance, and
economic impact is vital in ascertaining and forecasting for the future market landscape and understanding
the causes and effects of those risks. Many functional areas and business units need to manage the level of
tax liability undertaken in conducting business and understand that mitigating risk will improve a firm’s
financial position and the converse is also true. Industry initiatives, acquisitions and new product development
projects must be analysed while considering the financial implications and influence on the competitive
environment, while monitoring competitor activities. The CPA is the most knowledgeable member of the
planning team to conduct this assessment and advise at both an industry and organisational level.
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Financial metrics have long been the standard for assessing an organisation, market and industry
performance. These traditional financial metrics report on the information recorded and processed in
accounting or tax accounting systems in order to translate these into growth and profitability — ‘the
language of money’ (Nikolaevich, Yurievna, Vladimirovich & Agüero 2019) — and are focused on the
needs of shareholders. The CPA must be familiar with these metrics, the data that informs them, where to
find this data and how to assess and measure performance against financial goals and metrics.
In modern organisations, it is no longer reasonable to only consider shareholders in strategic decisions
and reporting. More recent expectations require a broader approach where accounting information covers
any information flows and data to all relevant stakeholders. Stakeholders are both internal (shareholders,
employees) and external (customers, suppliers, community groups). Stakeholder analysis (discussed in
module 3) assesses the relationship of the various stakeholders to the organisation, their relative position,
their attitudes and expectations and how these may impact on profitability, performance and strategy.
This approach integrates financial information with the information on the environment, society and
governance and shapes the type of data that is gathered and how it is used. For example, many stakeholders
are placing more importance on corporate social responsibility and sustainable practices. As a result,
CPAs may need to report on emissions targets and offsets and even the payment of suppliers, etc.
Other activities that may be reported on include resource conservation, environmental activities and
initiatives, occupational health and safety, community relationships and the overall economic impact of the
organisation. To adopt this approach, CPAs need to understand their stakeholders and their expectations
and adapt their practices accordingly.
These sustainability accounting and reporting practices identify and interlink the social, environmental
and economic costs and benefits of an organisation’s strategies and actions and embeds them into future
strategic decision making.
EXTERNAL ENVIRONMENT ANALYSIS — ANALYSING

AN INDUSTRY
An industry analysis process considers factors that affect both the growth and profitability of an industry,
which in turn will affect an industry’s level of competition.
The process includes an understanding of:
• the definition of the ‘industry’ to be analysed, its value chain and its various segments the life cycle
stage of the industry
• how the industry has evolved to its current state, and the key factors that have driven historical growth
and profitability
• how the factors may change, and their impact on future growth and profitability
• what drives customer demand for the products and services offered by the industry the industry key
success factors and how competitors in the industry compete
• any technological innovations that may create a significant disruption in the industry.
A thorough analysis of these steps should enable us to draw conclusions about the relative position of an
organisation in the context of current competitive factors in the external operating environment and how
well placed it is to remain competitive in the future.
Gathering Data for Industry External Environment Analysis
We have already determined that some of the biggest issues in conducting an external analysis are
as follows.
1. Difficulties in framing the scope of analysis, including industry and market definition due to the breadth
of the analysis required — what information do we need?
2. Difficulties in sourcing reliable data to analyse — where do we find this information?
Sustainable reporting practices have changed the scope of the information that needs to be collected, with
environmental, social and governance issues playing an increasingly important role in strategic decisions.
These factors also require new approaches to gathering information. When integrated into decision making,
this is referred to as business intelligence (BI).
There is now, more than ever, a vast amount of data available for organisations to consider. Technology
means that more data is available to more people more often. Although this offers obvious advantages in
external environmental analysis, it is not without risk. It is more important than ever to have a structured
approach to BI. Clearly understanding what information, your organisation needs is essential to avoid
an information overload and the potentially greater danger of ‘boiling the ocean’, where you are so
overwhelmed by data, that rather than being enhanced, decision making is actually stifled.
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Once the organisation has decided what information is needed, the next step is to decide where to
find that information. Is it relevant, reliable and viable? Data comes in various different forms, including
quantitative and qualitative, structured and unstructured. Recent technological advances have allowed for
unprecedented combinations of these types of data.
Big data is an all-encompassing term for the volume, velocity and variety of data that is now available.
The majority of this data comes from three sources: social data — for example, likes, comments, and
shares; machine data — for example, scanners, logs and tracking; and transactional data — for example,
invoices and receipts. Big data is expected to rise exponentially with the growth of artificial intelligence
and the Internet of Things. The nature and scale of big data means that it requires considerable resources
and particular skill sets to make sense of it and gain the insights necessary for strategic decision making.
As many organisations do not have these capabilities in-house, the collection and reporting of this type of
data is often outsourced, creating a new expense.
Big data analytics are technologies that have been developed to help organisations make sense of this
vast amount of information. These services can be used to flag risks, benchmark an organisations’ activities
relative to their competitors, monitor any reference to the organisation and analyse best practices. Consider
social media analytics. The key benefit of obtaining search and social media data is that it is often a forward or
leading indicator of customer behaviour and patterns. Issues or opportunities that analysts or organisations
would previously have taken months to observe can now be identified much earlier. A powerful example
is the ability of health departments to identify potential disease outbreaks earlier by tracking searches for
particular symptoms rather than waiting for collated data from hospitals, which could take weeks or even
months to report. This early knowledge can lead to substantial savings in healthcare management.
Analytics can also be used in a materiality assessment to identify the most relevant issues for their
sustainability strategies. Traditionally, stakeholders would be approached by a member or agent for the
organisation to gauge their expectations. This is a resource and time-consuming exercise. Analytics such
as datamaran can be used to review multiple sources such as company report, news and social media
sites that act as proxies for stakeholder groups. It tracks the amount of space given to each topic and
the context in which it is mentioned. It can then offer insights into concerns in the industry or market,
competitor or supply chain issues, changes in the regulatory environment and stakeholder attitudes and
behaviours offering a more comprehensive and large-scale materiality assessment than can be done through
traditional methods.
The risk to the organisation is choosing the best and most relevant analytics for their situation. In order
to ensure best ‘bang for your buck’, it is more important than ever for the leaders and managers to be clear
on what information they need and why.
Developing a BI methodology should not be an ad-hoc exercise. Instead, organisations should adopt a
structured approach, which combines internal data collection, storage and collation and the procurement
of external research from subscription-based services that provide collated statistics, share-analyst pre-
dictions, industry reports, online analytics and third-party data management services. The following list
includes some sources for gathering information about an industry and the external environment in which
it operates.
• Public agency and statutory authority reports from organisations that are rigorous in publishing
accurate data. Statistics produced by government departments are a reliable source of information. Two
Australian examples are the Productivity Commission and the Australian Bureau of Statistics (ABS).
• Commercial research from private research companies, such as IBISWorld, that collate a large amount
of publicly available information and combine it with their own analysis to prepare succinct summaries
of specific industries and companies.
• Reports of trending topics and purchased data and analysis of social media discussions from external
providers.
• Many industry associations collect statistics and monitor project trends, although some of this infor-
mation is available to members only. Market research firms investigate sociocultural attitudes, both
specifically and generally. While much of this information may be a couple of years old, this is generally
not a problem as the analysis focuses on understanding trends.
• Public company annual reports, analyst presentations and initial public offering (IPO) documents can
prove a valuable source of information on an industry and the forces affecting it. In particular, IPO
documents provide a good summary of what factors the company’s directors believe will affect growth
and profitability in the future as these forms the basis of the company’s forecast financials.
• Lobbying organisations monitor political trends and the specifics of planned legislation.
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• Universities are repositories of research information and employ researchers who are looking for real-
life problems to address.
• Consultancy firms often issue industry updates in areas where they have consulting business. Up-to-date
and accurate industry information is also embedded in investor briefings that listed companies make to
the market.
With so many options, it is becoming more and more difficult for organisations to decide the most
relevant data to collect and the most viable sources. The smaller the organisation, the more likely it is to rely
on publicly available industry and market information. Larger businesses are more likely to commission
third parties and/or undertake their own research to ensure they have reliable and up-to-date information
for decision making, as quality industry information is a powerful investment in risk management. In either
situation, the organisation will often need to reformat or restructure data so that it can be manipulated and
analysed effectively. The organisation may also need to make some assumptions. In preparing analyses
of industries in Australia, similar markets can be observed. For example, the agricultural industry in New
Zealand could be considered a close proxy in many respects to the agricultural industry in Australia. Where
information on an industry is not available locally, it is acceptable to make intelligent assumptions — as
long as the assumptions are explicitly stated.
Strategic leaders and managers need to consider how their organisation will manage this increasingly
complex and dynamic information landscape. Many organisations today are taking a cross-functional
approach to this, with input from marketing, finance, legal, operations and other relevant functions as
to their data and reporting requirements. Organisations with strong technical capabilities can utilise these
in the procurement of data. New functions and industries have also evolved around data management and
are another option to be explored. Some organisations hire internal ‘data curators’, who are responsible for
matching data requests from throughout the business to the most relevant and reliable sources. Alternately,
a slew of third-party data and consulting services have emerged and can be contracted to help organisations
navigate the minefield of data available and optimise their BI systems. It is important to note that although
these third-party suppliers have capabilities and expertise in data management, and may even have some
industry insights, organisations need to work in partnership with these services, providing the input and
strategic direction which guides the data collection and presentation.
The success of organisational strategy depends heavily on the quality and utilisation of their environmen-
tal research. Organisations need a well-planned approach to data collection, storage and use in order to keep
up with changes in the broader economy, their specific industry and stakeholder behaviour. Developing
a quality BI system enables the organisation to answer the initial questions of, what information do we
need, and where do we find this information? Once collected, the data needs to be presented to clearly
show what has changed in the industry/environment and the impact of that change on the organisation. IT
is increasingly being used in gathering, collating and presenting the data, and understanding the availability
and use of these techniques is an essential role for the BI coordinator. The quality of the research presented
allows for true insights be gathered, and strategic decisions made on how to protect the organisation from
external forces (where possible) and ensure a sustainable competitive advantage.
Example 2.1 provides an overview of the fisheries industry and describes how advanced analytics can
be used to support the industry to make more informed decisions.
EXAMPLE 2.1
Advanced Analytics in the Fisheries Industry

The fisheries industry is significant to the economies of many countries. Ensuring that the industry remains
sustainable is essential to its long-term viability. There are a number of sectors that need to work together
in order to make this happen, each with competing motivations.
Demand for seafood has increased an average of 3.2% annually between 1961 and 2016 and is
predicted to increase by 20% from 2016 to 2030. This increase is driven by global population growth,
the expansion of the middle class and greater urbanisation (giving more people more access to seafood,
as well as the electricity and refrigeration needed to store it). On the other hand, consumption of terrestrial
mammals has risen by only 2.8%, representing a change in consumption patterns as more people are
choosing fish as a good alternative to red meat.
As demand continues to increase, fishing companies are putting unprecedented pressure on marine
environments and ecosystems. In order to manage reduced hauls in traditional fishing areas, fishing
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companies are expanding their footprint in the ocean as well as targeting new species. As a result, 90% of
the world’s oceans are now fished commercially and about half of the world’s fish populations are classified
as collapsed, rebuilding or overexploited (see figure 2.3). Balancing fishery interests with environmental
concerns is a continuous challenge. Advanced analytics (AA) may provide a solution to this problem by
using sophisticated methods to collect, process and interpret big data.
FIGURE 2.3 Nearly half the world’s fish stocks are overexploited, rebuilding or collapsed
Status of global wild-fish stock, %
100
Underexploited
75 Fully exploited
50
Overexploited
25
Rebuilding
Collapsed
0
1950 1960 1970 1980 1990 2000 2010
Fishing is not the only threat to the sustainability of this industry. It is predicted that by 2025, there will
be 250 million metric tons of plastic in the ocean — one ton for every three tons of fish! Coupled with
this are the effects of climate change — acidification, warming and deoxygenation processes — which
will have a profound impact on all marine ecosystems. These are global issues with many stakeholders
involved in their management.
In response to these varying issues, some countries and regions have already taken action to improve
their fisheries management. For example, 69% of stocks managed by the Australian Fisheries Manage-
ment Authority were sustainably fished in 2015. However, these measures are negated by unsustainable
practices in other markets. However, regulation alone cannot eliminate overfishing and both national and
international collaboration is needed to ensure a sustainable industry. Technology has enabled data to
be collected and made available globally on issues such as catch reporting, trade-information sharing,
subsidies, tariff policies and regulation enforcement. Advanced analytics can then be used to manage this
data and make them meaningful to all stakeholders.
Figure 2.4 describes how both fisheries and seafood consumers can benefit from AA.
FIGURE 2.4 Potential use for AA in the fisheries industry
Advanced analytics is ... driving improvements ... and creating benefits

now more viable because of ... for fisheries with ... for seafood consumers with ...
• Increased data availability through • Better decision-making • Increased sustainability of the

sensors, satellite imagery, cameras, tools to achieve complex and world’s fish stocks, which will
drones, and other technologies sometimes conflicting goals, improve global food security and
• Better tools for deploying and such as profitability and maintain the economic and
communicating information, such as sustainability social benefits of fisheries
smartphones and the Internet of Things • New tools that address • More efficient monitoring,
biological variability, capture control, and surveillance
• Improved data-ingestion capabilities
uncertainty, and manage instruments, which will reduce
resulting from machine learning, artificial
revenue volatility and risks illegal fishing (as well as the
intelligence, better data storage,
poor labour conditions and
increased computational power, and • Better methods for reporting
human-rights abuses often
other technological advances to public authorities
found at companies that engage
in such practices)
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There have been a number of key developments relevant to fisheries which include:
1. sensing platforms via satellites, drones and onboard or underwater devices
2. improved data-transmission technologies
3. more insightful data analysis.
Data Acquisition Through Sensing Platforms
Sensors for collecting data have become more common, compact and cost effective in recent years and
the information gained from these have become freely available through a number of public agencies. The
types of sensors and their relevance to fisheries include the following.
• Satellite optical and radar sensors. Optical sensors measure sea temperature and turbidity, while radar
sensors measure ocean topography, winds, sea ice and the movement of vessels.
• Drones cover a smaller area than satellites, but provide more detailed images.
• Onboard or underwater devices record exhaustive and reliable data on vessel location, gear types and
catch, species, volume, biophysical characteristics and discards. Some authorities require large fishing
vessels to be equipped with these systems.
Improved Data-Transmission Technologies
Technology has enabled data collected from any of the above devices to be easily transmitted for analysis.
This data can now be collected in real time via wireless mobile networks and satellites.
More Insightful Data Analysis
More powerful software and tools have meant that more detailed information can be recorded in real time.
Also, the rise of artificial intelligence and machine learning has increased the scope and power of data
analysis, enabling the identification of hidden relationships in large amounts of data.
Advanced analytics are now being incorporated into all parts of the value chain with a variety of actions
being taken at each stage as seen in figure 2.5.
FIGURE 2.5 The adoption of analytics in fisheries requires a shift to data-informed, tech-enabled
processes
Key operational process
From To
Fisheries Data-scarce vision of fisheries based A data-rich environment that provides

management on landed catches and observer data more reliable assessments
Static management with yearly stock Dynamic management in which fishing

assessment stock is continually assessed
Detection and Detection driven by intuition, Detection supported by high-

capture experience, and short-range or resolution models and daily forecasts
immediate observations over the entire fishing territory
Navigation according to experience Internet of Things sensors that monitor

navigation parameters, helping to
define the most optimal routes and
energy-efficient navigation strategies
Low visibility on net contents Automatic and continuous detection of

catch parameters, such as fish size
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Processing Manual catch sorting Automatic scanning and control of
seafood-product quality through
cameras and intelligent sorting
systems
Reporting Recording of captured species and Reporting assisted by onboard camera

their biological parameters and artificial-intelligence recognition
via logbooks software
Surveillance and Surveillance based on partial and Real-time vision of fishing activities
control uncertain information about that assist with the design of efficient
fishing activities surveillance plans
Lack of transparency because of the Decentralised and reliable information-

multiple stakeholders involved management systems requiring little
human intervention
Few certification bodies to guarantee New sources of data that identify

sustainability and conduct regular violations in almost real time
reassessments
The data being collected above can then be used to address a number of issues in the industry:
1. monitoring illegal, unreported and unregulated fishing
2. improving the detection of fish
3. reporting to authorities and management
4. enabling traceability.
Monitoring Illegal, Unreported, and Unregulated Fishing
AA can identify a fishing vessel’s activities and location to show whether they are in a restricted zone and
whether they are actively engaged in fishing or carrying out other (potentially illegal) activities.
Improving the Detection of Fish
AA provide a more dynamic, reliable view of the ocean environment including fish aggregation and
migration, temperature change, wave height, sea ice and other ocean conditions. This information coupled
with vessel location and catch can help determine the distribution and migratory patterns of target species
to aid in resource management and improve overall efficiency.
Reporting to Authorities and Management
AA automates the process of monitoring and reporting fishing activities. This is not only more time efficient
but also leads to more exhaustive and reliable data.
Traceability
Transparency and traceability are becoming more and more important in all industries as consumers
choose to be more informed about all aspects of the items and companies they are involved with. The
fisheries industry has traditionally struggled in this area as many stakeholders have a culture of closely
guarding their information, leading to corruption within the industry. AA and similar technologies can be
used to track seafood all along the supply chain, allowing for unprecedented transparency and labelling
that will help consumers make a more informed decision about their seafood purchase.
These actions show how AA are being used in the fisheries industry. However, many stakeholders are
still not using them to their full advantage. The greater affordability of the technology and availability of
the data collected means that all stakeholders have the ability to either implement or use AA to improve
their own operations and improve the efficiency and sustainability of the entire industry.
Source: Exhibits from ‘Precision fisheries: Navigating a sea of troubles with advanced analytics’, December 2019, McKinsey
& Company, www.mckinsey.com. Copyright © 2020 McKinsey & Company. All rights reserved. Reprinted by permission.
QUESTION 2.1
Consider example 2.1. Evaluate and explain the value of analytics to improve performance and
sustainability outcomes for the following stakeholders in the fisheries industry:
1. fishing companies
2. government agencies
3. food companies.
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The key points covered in section 2.1 of this module, and the learning objectives they align to, are
as follows.
KEY POINTS
2.1 Select the key concepts, factors and frameworks that relate to understanding the influence of
the external environment on organisational strategy.
• The external environment refers to factors external to the organisation that influence the organisa-
tion’s strategy, including industries and markets, societal issues, technological changes, economic
drivers, environmental issues, political forces, laws, ethical considerations and other factors.
• The external environment is the context in which the organisation operates and competes.
• Industry analysis seeks to identify factors that have led to the industry’s current state and that will
affect its future growth and profitability. This enables key success factors to be identified and thus
informs the organisation’s strategic options.
• Analysis of the external environment increasingly involves large volumes of unstructured data.
Organisations require a structured approach to using this data to ensure decision making
is enhanced.
• Advanced analytics enable the use of big data to better inform decisions.
2.3 Appraise how the roles of management and leadership drive the organisational strategy in
relation to the external environment.
• Leaders and managers use their experience and expertise to frame the scope of the external
analysis, but must be open to recognising and responding to unexpected opportunities and threats.
• CPAs play an important role in analysis of the external environment and the provision of information
and advice that informs the development of strategy.
• Leaders and managers must clearly communicate what information they need and how it will
be used.
2.2 DEFINING THE INDUSTRY FOR ANALYSIS

It is important that any strategic analysis begins by defining the industry in which the organisation operates.
However, a key practical problem that often occurs in strategic analysis is that the people involved fail to
agree on a definition of the industry within which their organisation operates and that they wish to analyse.
Another problem is the omission of industry analysis entirely and focusing only on the organisation itself.
In addition, an industry is sometimes defined by the purely practical factor of ease of access to quality and
reliable data on which to base the analysis.
We define ‘industry’ as a group of organisations or business units participating in similar economic
or commercial activities, producing similar products or services. When thinking about industry from the
viewpoint of a specific organisation, the definition of ‘industry’ should also include a geographic element
(e.g. Australia, Asia–Pacific, Canada). This leads to tighter scoping of the analysis and clearer thinking
about the organisation’s real competitors. An organisation like Guzman y Gomez, which operates Mexican-
style fast-food restaurants, operated entirely in Australia for its first seven years. During that time it would
confine its industry to take-away food in Australia. However, once Guzman y Gomez decided to target
international expansion into other geographic markets, an analysis of the fast-food industry in the potential
market was required in order to understand the industry in that country, its competitors, and so on. Hence,
the company expanded its industry analysis to Singapore, then a couple of years later to Japan and recently
to the United States.
The concept of ‘industry’ is actually defined by the firm in the competitive market the firm sees itself
operating in. For instance, a global computer software supplier might define itself as being in the ‘global
software’ industry. A specialist software company supplying retail management systems in Australia
might define itself as being in the ‘Australian retail computer software manufacturing’ industry. These
organisations might compete with each other on occasion (such as in Australian retail software marketing),
but each has quite a different view of the ‘industry’ in which it operates.
These differing wide and narrow definitions are both very reasonable views about industries. A narrow
definition may make analysis more manageable, but a definition that is too narrow may exclude relevant
products or services, geographic regions, substitutes or disruptive influences. A wide definition of the
industry can help avoid these issues, but will make analysis more time-consuming and difficult. These
wide and narrow views are illustrated in figure 2.6.
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FIGURE 2.6 An example of the wide and narrow definitions of ‘industry’
Global
software
Firm
Australian retail
computer software
manufacturing
For instance, an analysis of the ‘global software’ industry includes all organisations producing any
kind of software wherever they operate in the world — clearly a much more complicated analysis than
if the focus were on only those firms that produce software in Australia. However, this wider definition
minimises the risk of missing new trends, which often come from new entrants and substitutes. A narrow
definition, such as the ‘Australian retail computer software manufacturing’ industry, makes it much easier
to analyse, but also increases the likelihood that new trends may be missed, especially those developing in
overseas markets. For example, many bookstores closed because of rising online book purchases and the
move to e-readers, tablets and e-books. Many bookstores did not include online sales in their definition
of their industry, thereby noticing the trend too late to recover. The same can be said for the Blockbuster
video rental chain. They believed they had an unbeatable position within the home entertainment industry
and completely underestimated the impact streaming services, such as Netflix, would have on their future
viability. Within just a few years, Blockbuster went from an expanding multinational operation with
billions of dollars of revenue to bankruptcy and liquidation. Ironically, Blockbuster had turned down the
opportunity to purchase Netflix for just US$50 million in 2000.
It can be very tempting to define the scope of an industry narrowly in geographic terms, especially if the
majority of an organisation’s sales are based in that region. The potential pitfall here is that competitors
from outside this region may have included your region in their industry scope. If that is the case, you
will be on their radar, but they will not be on yours. You could miss an important industry development or
move, purely because of how the industry being analysed has been narrowly defined.
Similarly, an industry definition can sometimes be too focused on what is being produced now, and
in doing so fails to recognise the overarching customer need that is ultimately being satisfied with the
product or service. Such an oversight can have drastic consequences for an organisation. For example,
the automobile industry long ignored inputs from environmentalists, scientists and politicians advocating
the need to develop the use of alternative energy sources. Many automobile companies overlooked this
need to consider the societal context of their products, and now find themselves perceived as a symbol
of rampant energy consumption. Additionally, the industry needs to be viewed in the context of customer
groupings so that each target market can be identified and a strategy developed accordingly.
Some companies have very few competitors globally and it is therefore quite appropriate to define the
industry as being global. These companies are often characterised by high barriers to entry (barriers to entry
are discussed in more depth later in this module), limited markets for what they produce and proprietary
know-how (such as patents). For example, Cochlear is an Australian company with 60% world market share
for implants that enable severely deaf people to hear (Intelligent Investor 2018). It spends approximately
13% of its revenue of more than AU$1.4 billion on research and development (R&D) (approximately
AU$180 million) to protect and improve its technology and stay ahead of competitors (Cochlear Limited
2019). It only has two main rivals, the Advanced Bionics Corporation in California (a unit of Boston
Scientific Corporation) and Med-El Corporation in Austria, as well as a number of smaller competitors
around the world. Cochlear must think about and define its industry on a global scale.
It is important to note that there is no ‘right’ or ‘wrong’ way to define an industry. The definition simply
determines what information is analysed under each particular heading. Under a narrow definition of the
industry, competing products or services from outside that definition are not ignored, but can be handled as
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substitutes or new entrants in the industry analysis framework, which we will discuss later in this module.
The important issue is to be consistent throughout the analysis.
Typically, a CPA will work in an organisation that has a clear idea of the industry (and markets) within
which it operates. As you work through this module, you will note that all industries change over time.
However, the industries that prosper in the longer term are those that are perceptive enough to recognise the
changes taking place in their environment and markets, and have the capabilities to put in place strategies
to respond to these changes. The challenge for strategic leaders is to be open to shifting parameters in
regard to the industries in which they operate.
QUESTION 2.2
Consider the table below and identify the industry each organisation would be associated with.
Organisation description Industry
Ride-share operator
Subscription air travel service
Provider of ‘smart’ technology for household devices
Vegan restaurant
Vegetarian clothing manufacturer
Car parts manufacturer
R&D facility
IT service
THE INDUSTRY VALUE CHAIN

Having considered the industry definition, the next step is to determine the position of the industry
in the industry value chain. The value chain for an industry comprises the business processes, people,
organisations, intellectual property, technology and physical infrastructure that transform raw materials
or talents into finished goods and services, which are offered and distributed to the consumer to satisfy
demand. For service industries the value chain concept is the same, but rather than converting a physical
product it could be the conversion of ‘know-how’ into a format, such as advice that is offered to clients.
Understanding the value chain is an essential part of analysing and understanding an industry. Different
industries have different value chains, and each stage of the chain can comprise a number of competitors,
each of whom may have operations in one or more stages of the chain. It is important that an organisation
understands where it is positioned in the value chain, and what activities are taking place both upstream
and downstream from where it is positioned.
Again, as with the definition of industry, there are no wrong or right answers to defining an industry’s
value chain. A generic value chain is shown in figure 2.7. It shows how a raw material can progress through
the value chain, finishing with sales to the end consumer.
FIGURE 2.7 A generic value chain
Supply Demand
Raw Logistics Sales to

Raw Product
material Purchasing Manufacturing and Merchandising end
materials design
processing distribution and retailing consumer
Upstream Downstream

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Example 2.2 includes a value chain constructed for the fresh food industry.
EXAMPLE 2.2
Fresh Food Industry Value Chain

Figure 2.8 is a value chain for the fresh food industry. Once the value chain is agreed upon, it is much
easier to understand and assess the future opportunities that the industry might offer or any aspect of the
value chain that might require further education and training.
FIGURE 2.8 A value chain for the fresh food industry
Food
service
Mass
retail
Inputs
(pesticides, Farming Packaging Distributing Consumer
labour)
Grocery
Land Milking Selection Road
Soil Feeding Packing Rail Exporting
Climate Dipping Cutting Sea
Water Seeding Labelling Air
Drainage Harvesting Size
Ploughing Load
Fertilising
Spraying
The value chain in example 2.2 has been broadly applied to the fresh food industry around the world;
however, it can also be narrowed down to focus on a particular region and its specific geographic value
chain. Individual organisations can be much more targeted about their industry value chain, building a value
chain that is specifically targeted to their activities and operating context. This also includes deciding on
locations around the world where components and activities of the value chain may be carried out.
A key proposition of value chains is that new ‘value’ is created at each stage of the chain from the
activities and processes undertaken in that component of the chain.
Value is typically judged from the traditional perspective of economic value — that is, value created by
taking a resource or set of inputs, providing additional inputs or processes that increase the value of those
inputs, and thereby generating a product or service that has greater market value in the next component
of the value chain. Measures of economic value creation have been refined over centuries, resulting in a
host of performance measures, including return on investment, debt–equity ratios, price–earnings ratios
and numerous others.
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QUESTION 2.3
Draw a value chain that shows the main activities in the value chain for coffee. In your diagram,
consider the following.
• What are the inputs?
• What processes are involved?
• What products are made?
• How are they distributed?
Consider the simplified production value chain for a pair of fine-wool trousers shown in figure 2.9.
FIGURE 2.9 A value chain for a pair of fine-wool trousers
Estimated returns Dirty Wool Woven

Yarn = Trousers =
per kg at each stage wool= tops = fabric =
@$28/kg @$700/kg
of the value chain @$7/kg @$11/kg @$70/kg
Design,
Cost process at Scouring, garment
Sheep
each stage of the Shearing carding and Spinning Weaving making,
farming
value chain top-making retailing
etc.
Source: Adapted from R Wallace & P McSweeney, 2006, Case Study 1: Supply Chain Innovation 1, Australian Wool Education
Trust, Sydney, figures 1 and 4, pp. 4, 7, www.woolwise.com/AWET_Resources/Case_01_Supply_chain_innovation.pdf.
It can be seen from figure 2.9 that the cost processes at each stage of the value chain result in increasing
returns per kilogram at each stage of the industry’s value chain. At the same time, however, the quantum of
investment (and therefore risk) for the organisations operating in the various value chain components also
experience increasingly higher costs as the chain progresses towards product or service consumption. The
capital investment in textile processing machinery for processes such as spinning and weaving is very high,
as are the costs associated with, for example, brand creation and maintenance. It is easy to see how the
initial AU$7 per kilogram of wool transformed to a AU$700 per kilogram pair of fine-wool trousers that
retailed for AU$200. However, what is less easy to see and understand are the costs and risks associated
with the value chain processes undertaken between these two end points — this is a common complaint of
the producer of the initial raw materials who thinks they are being exploited by those involved in the later
stages of the chain. As you will see later in the module, this could in fact be because the initial suppliers
of the raw, dirty wool simply have low supplier power.
Value chains for different industries take varying amounts of time and investment. For example, new
drug development takes much longer and requires significantly more investment — estimated at 15 years
and up to several billion dollars — than the manufacture and sale of a pair of woollen trousers. Profes-
sional services organisations offer a number of technical services to assist in improving the customer’s
operational and organisational performance.
As shown in figure 2.10, the value chain can be similarly applied to the supply of services as it is to
the manufacturing and supply of products. Where, in manufacturing, the supplier takes wool and ‘adds
value’ to eventually produce a pair of trousers to satisfy consumer demand, service industries add value
with knowledge sharing, time and personal skill sets. Professional services are often provided by a team
of various people, all of whom undertake differing tasks. The value chain is based on activities that
the service providers undertake in order to deliver their particular service. The list beneath each activity
shows the particular tasks which add value to the activities and in turn, the customer. Collaborating with
the whole team and discussing the most value-adding activities will assist in creating the most accurate
value chain.
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FIGURE 2.10 A professional services value chain
Identify Deliver Maintain

Develop Sell service Close the
target service client
proposal to client account
client product relationship
• Conduct • Discuss and • Meet with • Fulfil • Make final • Follow up with
research identify client client to obligations changes as per client six
• Identify client needs discuss set out in client request months on
in need of • Propose single concerns or statement • Hand over • Identify any
assistance or numerous questions of work deliverables other areas of
• Approach client solutions • Develop • Work • Hold a closing inefficiency or
professionally • Organise contract terms collaboratively meeting with requiring
client service fair to both with client client and assistance
through
any prior
team to the parties • Respond to service team • On-sell further
satisfaction • Clearly set out client needs services
relationship/
contacts of client budget and • Implement any
• Prepare timelines required change
proposal
for client
information
sharing
Ideally, returns for each component of the chain should be similar (e.g. for every dollar invested there is a
similar return on investment for each component of the chain). Benefits need to be experienced and shared
by all of the components in the chain, or the chain could become dysfunctional and inefficient. However,
in reality, the forces of competition in a global industry mean that this is not always the case. Example 2.3
illustrates how the value in a chain can move between components over time, and this is influenced by the
interplay of myriad complex factors.
Where limited or reducing value is being experienced by any component in the chain, competitors in
that component of the chain either go out of business or switch to alternative enterprises if they can.
Generally, the unique capabilities required to be successful in each component of the value chain
provide a protection mechanism against being subsumed into the previous or subsequent component of
the chain. Where this is not the case, that component of the value chain is likely to cease or be absorbed by
organisations active in upstream or downstream components of the value chain through vertical integration.
For example, the wholesaling function in many value chains has suffered in recent years because this
capability is not seen as being particularly difficult to acquire and does not add significant value to either
manufacturers or retailers. Apple has opened up various channels for product sales, specifically focusing on
retailing at Apple stores, where the experience of the store draws in customers, reducing customer demand
at Apple distributors. Although Apple remains as a wholesaler to other retailers, it closely manages these
retailers through tight pricing and margin controls to avoid any competitive pricing.
The decline in wholesaling has been compounded by the trend for large wholesaler customers to seek
to purchase directly from manufacturers, thus saving some of the costs and capturing some of the profits
associated with the wholesaling function. The bricks-and-mortar retail industry has had to compete with
online stores, which have few overhead expenses. One way this has occurred has been by purchasing
products straight from the designer, as opposed to using agency and wholesale providers. For example, after
suffering financial hardship and minimal profits, major retailer Kmart Australia now sources the majority
of its stock directly from the manufacturing source, entirely eliminating the ‘middle-man’ suppliers and
distributors. Children’s wear and intimate apparel have seen price reductions of up to 50% as a result of this
direct sourcing strategy, passing on price cuts to customers while attracting more customers and increasing
revenue. (You will note further in this module how the concepts of an industry value chain are linked to
the factors that drive industry profitability.)
Consequently, while a value chain can be drawn as a simple series of components, in reality the
interrelationships are complex and each component represents an ‘industry’ in its own right. Example 2.3
illustrates aspects of this in relation to the value chain for the pharmaceutical industry.
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EXAMPLE 2.3
The Global Pharmaceutical Value Chain

The value of the global pharmaceutical industry in 2018 is estimated to be greater than $AU1.1 trillion and
has grown at an annual growth rate of more than 4.5% over the last four years. It is estimated that the
rate of growth will accelerate over the next five years due to a significant boom in spending from emerging
countries such as China, reaching a total value of $AU1.4 trillion by the end of 2023. Geographically, the
United States, China and Japan are the largest markets, followed by Western Europe (Market Industry
Profile 2019).
The number of medicines available has steadily risen over the last century. At the present time there are
over 1000 medicines under development, with companies investing large proportions of their revenue in
R&D, the primary driver of competitiveness in the industry.
Figure 2.11 shows a value chain for drug discovery.
FIGURE 2.11 A value chain for drug discovery
Illustrative Manufacturing
Distribution Dispensing
of drug
• R&D manufacturing • Medicine acquisition • Medicine

costs • Handling & delivery acquisition
• Import duties and • Obsolescence costs • Labour, facilities,
Cost incurred taxes • Capital costs equipment
• Promotion and • Promotion and • Medicine wastage
education education • Capital costs
• Education
• Innovation • Ensuring continuous • Medicine

• Regulatory medicine supply availability
documentation • Waste management • Pharmacist advice
Value added • Quality assured • Order processing • Patient
manufacturing • Education convenience
• Education • Additional health
services
Source: M Aitken, 2016, ‘Understanding the pharmaceutical value chain’, Pharmaceuticals Policy and Law, 18,
pp. 55–56.
In the drug development value chain, there is really only one valuable product: the drug or vaccine
that the patient takes. The majority of promising molecules (called leads) never make it through testing.
Research, testing and delivery have defined the industry’s value chain since the industry started, and
the major pharmaceutical companies generally participate in each of these activities, either directly or, in
the case of research, often through partnerships with research organisations, such as universities. There
is significant cost associated with these activities, from drug discovery to testing and clinical trials, the
submission of applications to regulatory agencies as well as promotion and education to stakeholders.
The ‘reward’ for incurring these costs is a ‘grace period’ where the original manufacturers enjoy exclusive
access to the market (through patents). Once the patent expires, other manufacturers can produce generic
products based on the original. As they have not incurred the front-end costs, their manufacturing costs
are much lower, resulting in lower prices. The value they add is to provide competition in the marketplace
and access to price-sensitive consumers.
The distribution of pharmaceuticals is largely carried out by importers and wholesalers. They act as
conduits between the manufacturers and the retailers to ensure continuity of supply. It is a complex
distribution process with a variety of products, from many manufacturers to a number of pharmacies,
often requiring short timeframes and passing rigid handling standards. Distributors are then subject to
warehouse costs, retail credit cycles and currency fluctuations.
Retailers are tasked with dispensing the right drug, to the right patient, at the right dosage. Other value
added at this stage include, labelling, advising and educating the consumer on the correct use of the drug.
Many pharmaceutical companies and even countries are now trying to capitalise on the value that
each stakeholder is already bringing to the healthcare system, and exploring how efficiencies can be
gained in the overall system. For example, increasing costs for R&D have compelled major pharmaceutical
companies worldwide to outsource part of their research and manufacturing activities to lower-cost,
developing nations such as India and China. A further trend is that in recent years, smaller pharmaceutical
companies in Asia, particularly in China, South Korea and India, have been able to successfully undertake
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some components of the drug discovery value chain due to their ability to retain their cost advantage
while matching the quality standards of the more mature manufacturing countries.
The drug development process today has a sequence of rigorous and highly defined stages subject
to stringent rules and regulations that enable progression to the next stage. These ‘rules’ can vary
across different geographic jurisdictions, and there are significant efforts to ‘harmonise’ these rules and
regulations around the world. The aim is to develop global policies that strike a balance between preserving
the viability of each component in the value chain and making medicines available and affordable
to patients.
Globalisation of value chains adds a level of complexity when the components of the chain may be
carried out in different parts of the world. Multinational and global organisations often organise for
different functions in their own internal value chain to be carried out at different locations around the
world, taking advantage of differences in factors of production in those locations. Consider the automotive
industry, for example, where engines may be manufactured in one location, car body parts in another
and so on. Similarly, industry value chains can be organised in multiple configurations. The textile
industry was one of the first industries in which globalisation occurred, and today the Australian textile
industry imports and exports along the entire value chain. For example, the ‘spinning industry’ (spinning
of fibres into yarn for weaving or knitting fabric) is almost non-existent in Australia today compared to
30 years ago.
Another trend associated with the changing landscape of the value chain is the concept of ‘offshoring’.
Offshoring is when an organisation sends certain functions overseas, often to countries where labour is
cheap in order to cut costs. Offshoring has been facilitated by IT and telecommunications development,
allowing those offshore to communicate and operate easily with their foreign counterparts. Often it is the
support functions of an organisation which are subject to offshoring, including human resources (HR),
customer service (call centres) and finance. To a limited degree, core activities of an organisation have
also been subject to overseas relocations. Fifarek and Veloso (2010) discussed this in regard to innovation
activities, such as R&D, as they are more frequently being redistributed to global locations. There has
been an increasing geographic dispersion of R&D despite its status as a more highly valued component
of the value chain. However, highly technological R&D remains prominent in high-income regions, with
more offshoring occurring with low technological R&D work where cost reductions outweigh the value
of potential developments. Offshoring comes with many challenges as it also exposes the organisation to
the many external forces of the offshore destinations.
Another option for organisations is to completely outsource components of the value chain. This decision
may be in order to optimise current operations, or due to changes in the value chain that require capabilities
not currently available within the organisation. Not surprisingly, the types of capabilities often outsourced
include technology. Technology insight 2.1 provides some data on IT outsourcing.
IT Outsourcing
A recent study found that many companies are outsourcing their IT budgets, with the total percentage
of IT budget being spent on outsourcing increasing from 9.4% in 2018 to 12.7% in 2019 and 34% of
companies now outsourcing some of their network operations (Sprouse 2019). This could be for various
reasons, but it is likely companies are simply becoming more comfortable with outsourcing IT functions
and perhaps realising that their own IT capabilities cannot keep up with the pace of technology as well as
specialist providers can. Interestingly, small companies are adopting cloud technology faster than large
companies, and are often used as indicators of changes in technology use. Cloud-based computing is
particularly attractive to smaller businesses as they can avoid the potentially substantial cost of buying IT
infrastructure and people to run it
While application development accounts for 56% of outsourced IT functions, other areas for outsourcing
include application maintenance, data centre operations, database administration, desktop support,
disaster recovery services, help desk services, IT security, network operation, system implementation/
integration and web operations.
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Leaders and managers need to consider the risks and benefits before deciding to offshore or outsource
components of the value chain. They need to ensure that the organisation has the capabilities to manage
the change and to address any potential challenges associated with it.
QUESTION 2.4
Consider the value chain in the pharmaceutical industry (see figure 2.11).
• Explain which of these components could be taken offshore or outsourced.
• Explain the advantages and/or disadvantages of this change.
INDUSTRY SEGMENTATION
Once the industry and its value chain have been defined, the industry can then be broken down into
segments. Segmentation refers to breaking things into groups based on their characteristics.
Typically, segments are based on the characteristics of products or services offered, and there can be
several of these within an industry.
As with industry definition, segment definition is often a function of the availability of data to analyse.
However, this analysis often reveals important insights into industry trends, as most segments grow at
different rates and have different profitability profiles. Analysing and understanding this data provides
information to support the external and industry environment analysis.
Figure 2.12 provides an example of particular product segments that exist within the retail clothing
industry. Some organisations may choose to be involved in all segments within an industry, while others
may focus on only one. A disruption in an industry can also lead to the introduction of completely new
segments. An example would be the ‘ride-sharing’ segment of the transport industry.
FIGURE 2.12 Segmentation of the retail clothing industry
Accessories: 12.0%
Infants’
apparel: 6.9%
Childrens’
apparel: 10.7%
Women’s
apparel: 49.6%
Men’s
apparel: 20.8%
Source: Data from IBISWorld 2018.
When analysing a segment the type of information needed includes:

• segment definition — what it does and does not include
• total segment size — volume and value broken down where appropriate
• average annual growth rate for the past five years (10 years if possible) — preferably, this should be real
growth (after inflation has been taken out, if this figure is known)
• long-term potential — competitive and disruptive forces that may impact long-term viability
• an explanation of the data.
Industry segmentation analysis allows the organisation to clearly understand the industry within which
it operates, its profitability and growth potential as well as its long-term viability. Example 2.4 examines
one segmentation approach to the Australian domestic airline industry prior to the COVID-19 crisis.
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EXAMPLE 2.4
Segments in the Australian Domestic Airline Industry

By late March 2020, the federal government had committed AU$715 million to prop up Australia’s airline
industry, crippled by the closing of national and even state borders as part of international efforts to
manage the COVID-19 crisis. Even so, Australia’s second major airline Virgin Australia approached the
federal government seeking a AU$1.4 billion bailout. Qantas, having taken a AU$1.05 billion loan secured
against its fleet of planes, was not seeking a bailout, but said to keep the competitive landscape even and
fair, such a bailout for Virgin would need to be matched by a loan to Qantas of AU$4.2 billion. This figure
reflected the relative revenues of the two airlines.
The Australian domestic airline industry can be regarded as a duopoly of these two companies. Qantas
also owns and operates budget carrier Jetstar. Virgin Australia also owns and operates budget carrier
Tiger Air. A number of small airlines service particular routes in regional Australia and do not directly
compete with the major players. Regional airlines had been significantly affected when the downturn in
the resources sector led to a decrease in demand for flights by FIFO workers. This was exacerbated by
the COVID-19 crisis, and the federal government was forced to intervene to save the regional airlines and
thus secure the future of air services in regional Australia.
Table 2.1 lists a selection of the licensed airlines operating at the end of 2019.
TABLE 2.1 Australian domestic airlines
Home state Airlines
Northern Territory Airnorth

Fly Tiwi
Hardy Aviation
Queensland Alliance Airlines

Fly Corporate
Hevlift Australia
Hinterland Aviation
Pacific Air Express
Qantas
Skytrans
Sunstate Airlines
Toll Aviation
Virgin Australia
West Wing Aviation
South Australia Cobham Aviation Services Australia
New South Wales Airlink

Eastern Australia Airlines
Express Freighters Australia
Fly Pelican
Pel Air
Qantas
Qantas Freight
Regional Express Airlines
Sydney Seaplanes
Tasman Cargo Airlines
Toll Aviation
Virgin Australia
Victoria Jetstar Airways

King Island Airlines
Qantas
Qantas Freight
Regional Express Airlines
Sharp Airlines
Tigerair Australia
Virgin Australia
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Western Australia Maroomba Airlines
Network Aviation
Skippers Aviation
Virgin Australia Regional Airlines
Tasmania Par Avion

Skytraders
Beyond the major operators and regional airlines, small operator Airly’s business plan focuses on
subscription-based private flights — payment of a monthly fee entitling customers to unlimited flights on
several important domestic routes. This innovative business model appeals to corporate travellers seeking
to minimise the time involved in air travel — it is much quicker to board and disembark private flights.
Industry Segmentation
There are various ways to segment an industry. One useful way to understand the Australian airline industry
is to segment it according to the type of service offered. For example, on the left of figure 2.13, the industry
is segmented by passenger, freight and other services. On the right side, the passenger segment is further
broken down into budget-fare and full-fare segments.
FIGURE 2.13 Industry segmentation of the Australian domestic airline industry
Supplementary Supplementary
services: 7.8% services: 7.8%
Freight: Freight:
2.6% 2.6%
Passenger:
89.6% Full-fare
passenger:
67.0%
Budget-fare
passenger:
22.6%

It can be seen from figure 2.13 that most industry revenue arises from passenger transport. A small
amount arises from freight and supplementary services (e.g. booking fees and in-flight catering). Each
segment has unique characteristics. Full-fare passengers services are often the choice of business
travellers seeking convenience, the ability to change flights and the overall higher level of service.
Operators have reduced capacity dedicated to business travel over the past several years even though
business travel itself has grown. The profitability of the segment per passenger has grown, but the decline
in capacity means revenue overall has decreased. The budget segment targets money-conscious personal
travellers. The major operators Qantas and Jetstar have targeted this segment with their Jetstar and Tiger
Air operations respectively. The budget carriers tend to charge extra for things that are included in the
full-fare segment (e.g. choice of seat and on-board drinks and meals). They also minimise costs by having
less variety in aircraft — thus reducing maintenance and parts costs. The freight sector competes with
road and rail freight services. It often carries time-sensitive, high-value goods.
QUESTION 2.5
Which segment(s) do you think Airly’s business model would impact on the most? Why do you think
this? What do you think the impact will be?
THE INDUSTRY LIFE CYCLE

As introduced in module 1, most industries have a life cycle — the industry life cycle goes through a
start-up phase, a growth phase, a maturity phase (usually by far the largest phase), a shake-out and a
decline phase. However, many industries tend to renew themselves and regrow through the use of different
technologies, new strategies and product and service innovation, rather than decline. This distinguishes the
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industry life cycle from a product life cycle (in which specific products and services tend to eventually enter
terminal decline). The life cycle position of the industry is an important factor in formulating organisational
strategy, so it is relevant to understand the life cycle stage of the industry.
Different strategies are required at different points in an industry’s life cycle phase or stage and, as
mentioned in module 1, different styles of leadership and management are also often required at each of
the stages. Throughout the life cycle, the structure and environmental and competitive forces that influence
an industry change. As such, an organisation needs to be adaptable.
Figure 2.14 summarises the impact on the industry of these strategies against the industry life cycle,
which are explained in more detail in the following sections.
FIGURE 2.14 Industry life cycle
Revenue
$
Cash
Profit
Start-up Growth Maturity Shakeout Decline

or
renewal
Industry life cycle
Source: Adapted from WE Rothschild, 1993, Risktaker, Caretaker, Surgeon, Undertaker: The Four Faces of Strategic Leadership,
John Wiley & Sons, New York, figure 3.1, p. 32.
Start-Up
In the start-up phase, the industry is new and there are few competitors, and nor is there any threat of
substitutes. The power of buyers is low because there are few alternatives. The power of suppliers, however,
is relatively high as the industry is yet to have a significant impact. Typically, at this point of the life cycle,
there will be many different visions (from the organisations) as to how the industry will develop and many
different approaches to the industry, in terms of product type, features, performance and target markets.
In the introduction stage, leaders and managers need to be innovators. They need to be nurturing
relationships with both suppliers and early adaptor buyers. Resources are often limited and need to be
invested in R&D. This often leads to negative cash flow as they aim to build market share at the expanse of
short-term profitability. The organisations that optimise this phase often become leaders in the industry.
An example of an industry in its introduction phase is Internet of Things (IoT). This industry allows a
network of automated devices to work together to turn a normal house into a ‘smart’ home. This industry
provides exciting opportunities for both new organisations and existing ones to expand the products and
services offered. Lighting, thermostat, home security, appliances and even toilet seats can be modified to
use ‘smart’ technologies and connect to a home network.
Growth
Once an industry becomes established and grows rapidly, it enters the growth stage. This phase sees a
surge in new competitors, as new players enter the growing industry. As they are yet to gain market share,
however, rivalry is low. The power of buyers is still relatively low as there is a supply shortfall — that is,
demand still exceeds supply.
High-growth rates enable most organisations to survive. Although cashflow improves at this stage, cash
remains short as funds are needed for investment to cater for the high-growth rates and expansion plans.
Leaders and managers will be primarily concerned with keeping up with current demand, not looking
towards the future. Because the industry is growing quickly, competitive differentiation is not of critical
importance at this stage and there is ‘enough room for everyone’ in the industry. However, now is the time
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for the leaders and managers to support product expansion and improve distribution in order to position
themselves for the more competitive landscape of the mature stage.
The ride-share industry is now in its growth stage in Australia with annual growth over the past five
years of 51.7%. The number of businesses in the industry has also grown by over 50%, with Uber now
joined by other organisations such as Ola and Bolt. Uber, as the first mover, has since expanded into new
territories and new segments with UberEats (IBISWorld 2019).
Maturity
As growth rates reduce towards more normal rates, the industry enters the maturity stage. Rivalry is
intensified, and some companies may consolidate through mergers. During the maturity phase, supply
will start to match demand (supply reaches the level of demand). As such, buyers will start to have greater
power than before. This is the stage in which a majority of industries stay for most of their lives. Customers
become more knowledgeable and demanding and not all of the original products, organisations or strategies
will survive.
At this stage, cash flow should be positive. Leaders and managers focus on efficiency, cost control and
market segmentation. Strategic management concepts come to the fore in this stage as it is no longer a case
of simply producing to meet ever increasing demand. Strategies are developed to defend market position
and maximise profits.
The sportswear industry can be classified as mature. Although new products are constantly being
developed by key players in the industry such as Nike and Adidas, this is to penetrate more of the existing
market, rather than ‘grow’ with the rest of the industry.
Shake-Out
It is inevitable that a shake-out stage will occur. This stage is characterised by a plateau and a possible
decline of growth and profitability in the industry. Many organisations in this stage will leave the industry
due to their low returns, thereby reducing rivalry and competitiveness. The remaining, small group of
organisations then dominates the industry, through mergers, acquisitions and takeovers, dominating with
their own products. It becomes imperative that organisations in this stage protect their positions and
maintain profitable operations.
The challenge for leaders and manager at this stage is whether to leave or stay and defend their position.
Both options are viable and depend on what is happening in the external environment as well as the
organisations’ own capabilities.
The retail industry is going through this phase at the moment with the of many stores closing and going
into liquidation and large chains consolidating and closing low performing stores (New Daily 2019). 2019
saw the closure of Jeanswest, TopShop, Ed Harry, Napoleon Perdis, Gap, Esprit, ToysRUs, Roger David
and Shoes of Prey in Australia alone. Many retailers who have survived are consolidating and closing
unprofitable stores (EB Games closed 19 stores in January 2020, while Harris Scarfe and Bardot plan to
close 21 and 58 stores respectively during 2020). The rise of online shopping (a new, disruptive segment
within the industry), has challenged the traditional bricks-and-mortar model of retailing. This coupled with
a new ‘discount driven’ focus of customers has made it difficult for all retailers to remain competitive.
Decline or Renewal
The industry enters the decline stage once growth and profitability are in clear decline. The threat of
substitutes at this stage is not only high, but can also be a catalyst for an industry’s decline. At this time, a
large number of organisations may leave the industry as the return on investment (ROI) is unsatisfactory.
Domination of the industry by a few large competitors no longer yields sufficient returns and even these
companies leave the industry. The industry’s products or services may no longer be useful to consumers as
they have been replaced by newer technology. Consider an abacus-manufacturing industry that lost product
relevance when slide rules and calculators were invented. There are still companies that make the abacus
today, but the industry is very small and has been in decline for a very long time.
If the industry enters the decline stage — and here industry life cycles differ from product life cycles
in that industries survive for much longer than any individual product as technological changes enhance
industry products — the full use of strategic management concepts becomes even more important to the
leaders and managers as they decide how to maintain a unique position in a win–lose environment. Sales
for one organisation can only be achieved at the expense of other organisations in the industry, unless
profitable new niche opportunities are found. However, an organisation’s strategy is about being creative,
not simply following others in the same industry. Consequently, even in declining industries there are many
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opportunities for leaders and managers to create niches or even to revolutionise the industry. For instance,
low-cost airlines have revolutionised the global airline industry, while Australian wines are growing rapidly
in the international wine industry due to innovative winemaking styles, flavour and value for money, despite
the decline in total wine consumption around the world.
It is also important to note that not all industries move through the life cycle stages at the same rate.
Some industries, for example, may experience a rapid introduction and growth rate, then decline quite
suddenly with little maturity phase.
Disrupting the Industry Life Cycle

Disruptions are defined as sudden occurrences that emerge out of nowhere to upset established industries
or markets (Gilbert 2003). Contrary to popular belief, disruptions are not necessarily a death nell for
an industry and all its players. It can in fact be an opportunity for organisational and industry growth.
Disruptions are usually associated with technology — think about smart phones, Netflix, Airbnb and Uber.
Figure 2.15 shows the impact of disruptive innovation on the industry life cycle. Technology insight 2.2
examines why established organisations often fail to make the most of disruptive technologies and suggests
how they can avoid this pitfall.
FIGURE 2.15 Disruption and the industry life cycle
Discontinuity
Performance/value offering
Decline New growth

Maturity
Breakthrough
Growth Innovation
Start-up
Effort/time
Source: G Tovstiga & D Birchall, 2004, ‘Capturing opportunity in disruption: strategic capabilities and organization factors’,
https://warwick.ac.uk/fac/soc/wbs/conf/olkc/archive/oklc5/papers/a-3_tovstiga.pdf.
Mature Organisations’ Response to Disruptive Technologies

Disruptive technologies often cause established leaders in an industry to fail as established thinking
prevents them from noticing, or taking the new technologies seriously. Think of the video/DVD industry.
Home streaming technology existed before Netflix was created. Had major players like Blockbuster
acknowledged the potential threat of this technology, they could have either bought a streaming service
(Netflix was offered to Blockbuster in 2000), or used their extensive resources and supplier influence to
expand their own offering to include a streaming service. Instead, by ignoring the technology, they paved
the way for Netflix and its followers to carve out a whole new market. Frequently this occurs because
adoption of completely new technologies is slow, and thus not as lucrative as established products and
services. It is not until the new technology matures to its most efficient format that it begins to truly impact
on the market leaders. It is then usually too late for the established players to begin investing in these
technologies or capabilities.
Figure 2.16 graphically represents stages in the industry life cycle where existing businesses can
potentially mitigate the impact of disruptive technologies. Organisations that successfully navigate this
cycle understand that even though a new technology may be clunky or unpopular, the potential it has to
serve segments of their current market, or even other, unserved markets. Recognising this, they then invest
in capabilities to manage the introduction of these new technologies in their firm. As established players,
they are often in the best position to capitalise on these new technologies as they have more resources to
invest in them than the new start-ups. They typically have three options in building capabilities: 1) in-house
development — assuming that the organisation has the resources and expertise required; 2) independent
spin-out — outsourcing the innovation to another entity with the required expertise; 3) acquisition — buying
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the start-ups is another way to ensure you gain the relevant capabilities and future proof yourself against
the disruption.
In the retail clothing market, established players that embraced the e-commerce environment in its early
stages have more successfully navigated the change than those that arrogantly believed that their physical
presence and position was all the strength they needed to remain competitive.
FIGURE 2.16 Why organisations fail to take advantage of disruptive technologies
3.1 Incumbents begin

2. The media to realise the threat
coverage
creates inflated
expectations Tipping
point
Expectations
3.2 Incumbents
Invest in small
experiment
4. The technology
and the start-up Too late!
1. The technology 3.3 Experiments ecosysteam reach
and the ecosystem of do not live up to early maturity
start-ups emerge expectations
Incumbents Direct threat Call for
slow down to the core action
0. R&D projects business
investment
Time
Source: A Combessie, 2015, ‘Resistance to disruption: interpretation of the hype cycle’, Medium, 1 May,
https://medium.com/@alex_combessie/resistance-to-disruption-interpretation-of-the-hype-cycle-8393f7fb3bf8.
In order to navigate a world where disruptions are becoming more and more prevalent even in the most
mature, established industries, organisations need to change their entire way of working. The need to
move from a highly structured optimisation focus to one that is ‘flexible’. This requires strategic and
decision making, where organisations focus on their capabilities first and how best to develop and use
these capabilities to maintain a competitive advantage. By effectively analysing their internal and external
environments, they are not only aware of new technologies, but invest in new capabilities in order to use
the disruption to create growth for themselves and the industry as a whole.
Example 2.5 describes changes occurring in the accounting industry. This example will form the basis
of various questions throughout the rest of the module.
EXAMPLE 2.5
The Silent Disruption of the Accounting Services Industry

Amid the protest of taxi drivers against ridesharing, the headlines of more manufacturing companies
closing and uproar over telecommunications jobs moving overseas, the mature accounting services
industry is quietly undergoing a dramatic innovation transition. And, the $AU1 billion Australian FinTech
industry is not the only one to blame.
‘Disruptive technology’ has been commonplace business language since it was first coined in 1995
by CM Christensen. Twenty-five years later, there are not many industries which have been immune to
innovation. The accounting services industry is no exception. In fact, it was one of the first Australian
industries to innovate online systems. In 1999, the ATO launched its first online tax submission for
individuals, followed by the first business portal in 2004.
Yet disruption has not (yet) impacted the core role of the industry to provide accounting services
such as auditing of accounting records, preparing financial statements, preparing tax returns and
bookkeeping. This is because financial technology (FinTech) has always been designed for accountants to
do ‘accounting’. Therefore, the accounting services industry has required minimal reinvention and remains
a necessary obligation for Australians.
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In 2018, the NAB Key Insights into the Australian Accounting Industry Report highlighted that 96% of
small to medium businesses (SMEs) use accounting services. And the ATO Statistics Division showed an
increase in businesses utilising tax agents to lodge tax returns and Business Activity Statements (BAS).
TABLE 2.2 Businesses which utilise a tax agent to submit tax and BAS
Financial year Agent Self preparer Total
2013–14 1 630 000 1 870 000 3 500 000
2014–15 1 770 000 1 770 000 3 540 000
2015–16 1 910 000 1 730 000 3 640 000
2016–17 2 050 000 1 680 000 3 730 000
2017–18 2 140 000 1 680 000 3 820 000
Source: ATO Taxation Statistics, April 2019.

In addition to this, the ATO estimated that in 2016, 74% of Australians still consulted a tax agent to
lodge their tax returns.
There is arguably no other Australian industry that can boast such market dominance. But hidden behind
these impressive figures are signs the accounting services industry is already amid a major transition.
The Accounting Services Industry Success Façade
Research released by benchmarking.com.au has uncovered the accounting services industry has lost its
growth momentum and is now losing its value proposition. The firm’s findings, which analyses a sample
of 184 accounting firms across Australia, showed average net profit for SME accounting firms in Australia
decreased by 41% from 2013–18; revealing the industry is well into its mature life cycle.
FIGURE 2.17 Australian accounting firms’ average net profit
45.0%
40.0%
35.0%
30.0%
25.0%
20.0%
15.0%
10.0%
5.0%
0.0%
2013 2014 2015 2016 2017 2018 2019 2020
Australian Bureau of Statistics data also reveals that the five-year average annual growth rate of the
accounting services industry has slowed to just 0.97%, compared to the Australian average of 2.18%.
Benchmarking.com.au, an online comparison tool that analyses the financial performance and produc-
tivity output of thousands of Australian businesses, further highlighted that on average, accounting firm
spends 39.51% of their total income on wages and can expect their fee earners to generate AU$3.25 to
every AU$1 the firm invests in their salary. Benchmarking.com.au research analyst Tim Chamberlain said
the industry is starting to move to quality over quantity and ‘The take home message is — the more you
can leverage high-quality staff the more you can drive profits’.
In addition to the benchmarking.com.au findings, a new report by recruitment consultancy Robert Half
highlights that skilled accountants will be in high demand in the next 12 months, with experts forecast
to earn in excess of AU$160 000 p.a. While this may be good news for highly skilled accountants, for
business owners, increase in wages is just one cause in the decline of average net profit.
In addition to higher business costs, the demand for high level skills and big pay packages means a
growth-decline of overall jobs in the industry is imminent.
Despite being resilient to change over the past decade, administration and repetitive positions within
the accounting services industry are forecast to decline the next five years. The Department of Jobs and
Small Business predict accountants and payroll clerk positions will only increase by approximately 4% by
2023, with accounting clerk positions forecast to decrease by 1.1%. The total growth gain across the four
employment categories is just 2.2%, compared to the Australian average of 7.1% for all industries.
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FIGURE 2.18 Number of accounting businesses in Australia by revenue
35 000 4.00%
3.50%
30 000
3.00%
25 000 2.50%
20 000 2.00%
15 000 1.50%
1.00%
10 000
0.50%
5 000 0.00%
0 –0.50%
2013 2014 2015 2016 2017 2018
Zero to less than AU$50k % Change in total AU$2m or more
AU$200k to less than AU$2m AU$50k to less than AU$200k % Change in all industries in Australia
FIGURE 2.19 Five-year growth forecast compared to Australian average (%)
8.0
7.0
6.0
5.0
4.0
3.0
2.0
1.0
0.0
–1.0
–2.0
Accountants Accounting clerks Bookkeepers Payroll clerks
Increase (%) Australian average increase for all industries (%)
‘Our research proves what many already know: the accounting services industry is — and has been — in
the mature stage life-cycle for more than a decade,’ said benchmarking.com.au CEO Markus Hugen-
schmidt. ‘The stagnated climate of the industry means firms really have two options: innovate and create
a competitive advantage or continue the status quo and watch net profits decline.’
The Long Road to a Rapid Disruption
The accounting services industry is primed for disruption. A 2015 Deloitte Report argued there are five key
catalysts serving as a sign for disruption; enabling technologies, customer mindset, platforms, economy
and public policy. The accounting services industry has all in abundance.
1. Enabling Technologies
Financial technology (FinTech) in Australia is booming. The average business growth in 2017–18 was 125%
and it is forecast the industry will add AU$1billion of value to the Australian economy in 2020. FinTech
dropped to second place in 2018 on Start-up Muster’s most common start-up industry in Australia, only
behind artificial intelligence. FinTech is still being designed for accountants, but it is now focused heavily on
automation and artificial learning. All popular accounting software includes a range of automated systems
including the following.
• Simple BAS reporting via Xero, MYOB and QuickBooks: enabling businesses to report and lodge BAS
quickly (and for free) online.
• Single touch payroll: accounting systems are now integrated with the ATO regarding payroll and all
businesses were required to report via the new ATO single touch payroll system by 1 July 2019.
• Real-time reporting: online payments, automated bank feeds and automated cost reconciliation is
streamlining general accounting processes.
• Super stream: businesses can utilise accounting software to automatically pay and reconcile employee
super payments, reducing time and hassle.
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Despite these features, it’s artificial intelligence (AI) that will replace large quantities of human accounting
work. A report conducted by the World Economic Forum on how AI is transforming the financial ecosystem
shows that it will shift the value proposition and customer expectation of financial management. Key
findings of the report include the following.
• Increased competition for accounting firms: banks and institutions are forecast to develop AI-enabled
back-office operations into external services for financial management.
• Pricing wars: a ‘race to the bottom’ style price competition will be introduced with firms and institutions
buying customer loyalty at the cost of revenue.
• Automated finance: consumers will have (and expect) real-time, continuous, automated financial
outcomes which will continually improve their financial position.
• Bifurcation of market structure: it is forecast that AI drive a market divide as firms attempt to define
themselves as industry innovators.
FIGURE 2.20 What additional service would SMEs most value/like to receive? The view from SMEs and
accountants*
Service SMEs Accountants
Advice on financial future and growth opportunities 20% 22%
Audit 7% 2%
Bookkeeping 6% 5%
Budgeting/forecasting 10% 4%
Business analytics 17% 10%
Business planning 12% 5%
Business process engineering 11% 16%
Business strategy 21% 9%
Company secretarial services 2% 1%
Financial planning 7% 28%
GST/FBT preparation 6% 0%
Insolvency 2% 4%
Insurance advice 8% 11%
Insurance broking 4% 9%
Legal services 6% 23%
Leasing 5% 5%
Payroll 7% 2%
Property services/advice 5% 19%
Tax return preparation 6% 0%
Tax planning 6% 0%
Technology/IT services 13% 31%
Other 1% 10%
None of these 21% 0%
* The responses from accountants are their perception of what their SME customers want.
2. Customer Mindset
A change in demanded services from business customers is waging new competition between firms
to remain relevant in today’s business climate. The aforementioned NAB Report highlights a disparity
in what additional services SMEs want from accountants and what accountants think SMEs want. This
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shows that SMEs value services surrounding business strategy, business analytics and advice on growth
opportunities. However, accountants believe value is in financial planning, legal services and IT services.
The report confirms that accountants need to dramatically diversify their business offerings to remain
relevant.
It’s important that accountants don’t stand still. The overriding reason SMEs change their professional
services firm is that their business needs have altered. This means accountants need to move with the
times and modify their service offerings to their business clients as they grow and evolve (NAB 2018.)
3. Platform
Streamlined automated processes, via new platforms, are forecast to have dramatic impacts on industry
employment. The Financial Services IRC’s 2018 Skills Forecast revealed accounting clerk and bookkeeper
positions are poised for disruption with a 97.5% probability of automation for these occupations by
2020. Further, automation of platforms is supporting e-commerce growth across the nation. From
2015–17, the ABS reports that internet income increased from AU$285 billion to AU$394 billion. Online
payments platforms streamline accounting processes by offering automatic stocktaking, reconciliation
and reporting, thusminimising cash lost via theft and human error.
4. Economy
While it can be argued that the accounting services industry has remained stable due to the necessity
of accountants for tax and compliance purposes, the industry is currently experiencing a wave of new
customer expectations which is shifting the demand curve left and, reducing pricing. This is combined
with a slight increase in supply of accounting firms resulting in a reduced value for traditional services. The
mature life cycle of the industry also represents that the industry is reaching market saturation; therefore,
the introduction of any new firms will only decrease shared industry revenues and net profits.
FIGURE 2.21 Supply demand for the Australian accounting services industry
Price level
Aggregate supply (AS1)

(number of firms)
AS2 Increased
number of
firms
P1
new price
level
P2
Aggregate Demand (AD1)
(for traditional accounting services)
AD2 — reduced demand

for traditional services
0 Q1 Qty of firms
5. Public policy
The accounting services industry is greatly driven by ATO policy and compliance requirements. The ATO
is continuing to invest in streamlining and standardising reporting and this includes working closely with
FinTech companies to ensure Australians can remain compliant. In addition, the government invests in its
own technology. The new ATO myTax usage has increased from 1.7 million people lodging their tax return
online in 2014–15 to over 3.5 million in 2017–18. Since 2010, the treasury has also invested in driving
standard business reporting to simplify the process for businesses.
While AI FinTech will greatly impact the industry’s processes, the greater force disrupting the industry will
be the increased intensive competition among SME accounting firms. While less than 1% of businesses
currently change accounting firms each year, 31% of businesses said they would leave their incumbent
services provider if their business needs changed. This is compared to only 5% wanting to change firms
because they didn’t use the latest state-of-the-art technology.
There will always be a requirement for businesses to use an accountant for tax, but as the value earned
per ‘business tax return’ decreases; firms need to look at how they increase value per client — not
necessarily the number of clients.
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Getting Ready to Rumble
For the foreseeable future, accounting firms will be required to continue to undertake traditional account-
ing. But in order to remain competitive, firms will need to rapidly diversify offerings and revenue streams.
Put simply, the future of the accounting services industry is no longer about offering the basic accounting
and tax service.
Benchmarking.com.au research identified three key success factors accountants will need to implement
to remain competitive and relevant through the disruption.
1. Build customer relationships to increase customer satisfaction. Understanding business customer
needs and demands is just the beginning of the industry transformation. Accountants need to build
relevant products and services for business customers to increase customer satisfaction. This will
support in retaining customer; even when their business needs change.
2. Invest in value added services. Firms need to consider how to increase the perceived value offering
to customers. The research shows net profit is being diluted and this can be rectified with diversifying
services and providing product packages. Firms need to consider how they can add services such as
business strategy, growth strategies and detailed analytics.
3. Improving brand reputation. Memberships and associations are key for the accounting services industry
as they create credibility and confirm compliance. With disruption brewing, firms now need to look
beyond traditional brand associations (such as the CPA) and build relationships with brands that focus
on business growth.
The Future is in the Black
An Accountants Daily survey revealed that while 38% of accountants view new technology as a threat to
their profession, 96% are confident about the future of accounting.
Accountants are, and should be, positive about the future. It is an opportune time for innovative SME
firms to lead the transition and show that accounting firms can be much more than tax agents.
‘In this industry, disruption is not just about inventing new technology systems,’ said Hugenschmidt.
‘The accounting and finance industries have always been privileged with heavy investment into FinTech
(Financial Technology). Real innovation and disruption in this industry will come from re-inventing the value
proposition, and showing that accountants are, and always will be relevant for businesses.’
Source: The Benchmarking Group, 2019, ‘The silent disruption of the accounting industry’, Adviser Voice, www.adviser
voice.com.au/2019/06/the-silent-disruption-of-the-accounting-industry.
QUESTION 2.6
With reference to example 2.5:

• Explain how you would segment the Australian accounting services industry.
• Analyse what are the markets within each segment.
• Assess and provide a conclusion about the industry life cycle stage of the accounting services
industry in Australia.
• Explain why you reached this conclusion.
as follows.
KEY POINTS
• Any strategic analysis must begin by defining the industry.
• An industry value chain comprises the activities, organisations, infrastructure, processes, technol-
ogy and IP that transforms raw materials or talents to finished products or services that meet a
customer need.
• Organisations must understand where they exist within the industry value chain.
• To analyse an industry, the industry is often broken down into segments based on various
characteristics.
• The way in which the external environment impacts on the organisation varies with the industry life
cycle stage.
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• In the start-up stage of an industry, leaders and managers need to be innovators, tolerant of
negative cash flow and able to build relationships with suppliers and customers.
• In the growth phase, managers are primarily concerned with meeting current demand, but must also
make preparations for the mature stage, including expanding products and improving distribution.
• In the mature phase, managers focus on efficiency, cost control and market segmentation. Strategic
management becomes the primary approach.
• In the shake-out phase, leaders and managers need to choose whether to defend their position in
the industry or exit.
• In the decline or renewal stage, leaders and managers continue to take a strategic management
approach to create niche opportunities or find ways to revolutionise the industry.
• If an organisation is to survive disruptive technologies, its leaders and managers need to be
able to see the potential of new technologies and invest in capabilities to manage them within
their organisation.
2.3 REMOTE ENVIRONMENT ANALYSIS — GROWTH

Having defined the industry, its value chain, relevant segments and life cycle stage, the environment is then
broken down into two categories for further analysis:
• the remote environment
• the industry operating environment including the competitive environment.
The section of the module discusses the remote environment, which includes those general influences
that affect an industry and are out of the organisation’s control. These include current and expected social,
technological, environmental economic, political, legal and ethical factors. Remote environment issues
affect many industries, but leaders and managers need to understand the effect of these factors on the
growth of the particular industry the organisation is operating in and analysing. For instance, the setting of
interest rates is a macro-economic policy tool designed to influence the general level of economic activity.
However, for the housing industry, interest rates are a prime determinant of the demand for new housing.
Hence, organisations in the residential housing construction industry carefully monitor and forecast interest
rates, and particularly the home loan mortgage rate, to predict future housing demand.
An example of recent external remote environment influence that is becoming more important is
government environmental legislation attempting to counter the effects of climate change. For example,
all home properties being built, bought, sold or rented in many countries including Australia must have
an Energy Performance Certificate that contains information on a home’s energy use and carbon dioxide
emissions. It is not inconceivable that in the future, by government regulation, new homes and commercial
properties can only be built subject to being below maximum carbon emission standards. This, in turn,
could considerably affect the cost or sale price of such properties in the market and become a significant
new factor affecting market demand (Pitt & Sherry 2016). A further issue with the construction industry is
the impact of the Grenfell Tower fire. Buildings containing combustible cladding are no longer insurable.
Building regulations have been developed to audit the use of this type of cladding in existing buildings and
bans have been put in place for new constructions. These external factors have significant impact on the
entire industry from manufacturers to architects, engineers as well as consumers (Create 2019).
In the remote industry environment analysis it is vital to consider all factors within the industry that affect
profitability and the competitive position of organisations within it. There is no question that new business
models resulting from new technologies and applications are changing many industries. Consideration of
the ‘industry’ includes not only the organisation and its competitors, but also their buyers and suppliers,
substitutes, potential new entrants and many other aspects as shown in figure 2.22.
FUTURE EXPECTATIONS
While most of the analysis to date has focused on historical trends, sometimes history does not provide
insights into future performance or trends. When conducting the remote environment and industry
analysis, consideration of how trends and external factors have developed will assist in hypothesising
what might happen in the future. It is essential to strategy development that future growth, profitability
and opportunities can be anticipated or, at the least, estimated based on past experience and data.
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FIGURE 2.22 The remote and industry environments
External environment
Define industry
Remote environment Industry environment
• Social • History
• Technological • Markets
• Environmental • New entrants
• Ethical • Suppliers
• Political • Buyers
• Legal • Industry rivalry
• Economic • Substitutes
• Governments
• Life cycle
• Suppliers’ suppliers
• Buyers’ buyers
• Competitors
• Strategic groups
• Customers
Although it cannot always occur, the more information available about the history of the industry, and
the more that is known about developing trends and technologies, the more anticipation and foresight the
organisation will hold. This can place the organisation at an advantage when it comes to planning its future
strategy. Any discrepancies between what has been predicted and what actually occurs should be mitigated
by plans already in place. The risk of predicting future expectations and growth is thereby reduced by the
organisation’s planned ability to quickly and effectively redirect the strategy in line with the actual industry
trend. It is for this reason that managers and leaders need to be open to challenging the status quo and acting
on, or having contingencies to act on, the insights gained through external analysis
REMOTE ENVIRONMENT ANALYSIS PROCESS

Understanding how an industry has evolved to its current state and being able to explain how it has changed
over time is important. This helps the organisation to anticipate changes that are likely to happen in the
future, including the size and nature of future growth opportunities that exist in the industry. A strong
growth rate in the future provides opportunities for many organisations to do well, whereas a negative
growth rate would mean that growth can only occur for a few organisations at the expense of others.
The time frame for future growth is an important factor for consideration. This can vary from as little as
two years to as long as 20 years. The important thing is that the time frame of analysis should be consistent
with the definition of ‘long term’ for the particular industry. Typical organisations now consider three to
five years as their ‘long term’, but this varies from two years in high-tech industries to 10 to 20 years in
industries such as forestry, education and biotechnology.
Another important factor to consider, and agree upon, is the ‘average’ growth for a particular industry.
Most industry growth is a combination of:
• population growth
• price inflation (selling the same volume of goods at higher prices).
Another factor to consider is the likelihood of a disruptive technology impacting on the industry. This is
typically difficult to predict, which makes a careful analysis of the external environment more important
than ever.
Factors Influencing Growth
A number of factors shape and influence how industries evolve, and they can be broadly grouped under
the following areas:
• social
• technological
• economic
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• environmental
• political
• legal
• ethical.
Industry analysis was conventionally performed using the PEST (Political, Economic, Social and
Technology) framework, but this approach has evolved to reflect changes in the business environment,
first to PESTEL (adding environment and legal issues) and more recently to STEEPLE (adding ‘ethical’
forces). STEEPLE analysis provides a contemporary analysis tool (see figure 2.23).
FIGURE 2.23 STEEPLE — factors influencing industry growth
Ethical
• Adhering to industry
regulations Social
• Acceptable internal
conditions and • Trends in customer base
behaviours and behaviour
• Safe products • General social trends
Technological
• Processes and
technologies
• Level of infrastructure
• Waste utilisation
• New technology
and recycling
Legal Economic
Industry
• Regulations • National factors
• Changing laws and • State factors
frameworks affecting • Regional factors
industry • Industry factors
Political Environmental
• National government • Impacts of the

• State government environment on the
• Local government industry
• Governing bodies
• Lobby groups/interest
groups
• Organisational politics
A STEEPLE analysis provides an approach to consider and identify the key drivers of historical and
future growth in an efficient and systematic way. The framework can assist in gaining a greater knowledge
of an industry, which in turn helps us be more specific in identifying factors that have affected growth to
date and those that are likely to affect future growth. It considers the macro-environment of an industry —
those uncontrollable factors that influence industry growth. It also allows an organisation to make strategic
decisions while mitigating some of the risks identified in STEEPLE. An analysis of the factors can help
identify current and future trends while recognising areas of possible instability or unrest. These findings
are critical to strategy and decision making in order to place the organisation in the best position to play
the external factors to their highest benefit.
By summarising these findings, it becomes clear what patterns are forming and what implications these
may have. Following this analysis, strategic decision-makers are able to assess the effect of each individual
force, the likelihood of change and the strength of impact it will have on the organisation. This information
can guide strategic managers to make plans and direct the company in a way that considers the most
relevant, likely and highly detrimental forces.
When investigating these factors, two questions should be considered.
1. How has this particular factor contributed to shaping the industry into its current state (e.g. what has
been its impact on historical industry growth)?
2. Will this change in the future and if so, what impact will the factor have on industry growth in the future?
Table 2.3 provides a template that you can use to undertake remote environment analysis. For each
factor, you are expected to consider issues within that factor that have affected or will affect the industry in
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the future. You also need to consider whether the effect of that issue and the factor on the industry growth
will be positive, neutral or negative.
This component analysis is about the industry and understanding the context in which the organi-
sation operates. How the organisation is positioned and can position itself within that industry will be
addressed later.
The following sections discuss each of the trends or factors identified here and also provide examples
of how these affect various industries.
TABLE 2.3 Remote environment analysis worksheet
Issues, insights and patterns likely to

Factor affect the industry Overall effect on industry growth (+, =, –)
Social
Technological
Environmental
Economic
Political
Legal
Ethical
Social Factors
Changes in society are a combination of changes in demographic and sociographic factors. Demographics
are the easiest to measure yet are often overlooked in strategic analysis. Organisations tend to assume that
their industry will simply grow each year. Earlier in this section it was mentioned that most industry
growth is a combination of population growth and price inflation. Therefore, a key driver of growth
in most industries is population increase. In most developed countries, population growth is very low
(0–2% per annum) and some countries, such as Italy, project substantial negative population growth for
the foreseeable future. On the other hand, in most Asian, African and South American countries, population
growth is projected to be quite high (4% per annum or higher).
In terms of their impact on the growth of different industries, consider the following predictions that the
ABS (2018) has made about the Australian population.
• Australia is experiencing an ageing of its population. The median age is expected to increase from 37.2
years as at June 2017 to between 39.5 and 43.0 years in 2066.
• The number of people over 65 expected to grow from 15% to between 21 and 23% of the total population,
while the number of people over 85 is expected to double within 20 years, and double again in the next
20 to account for 4.4% of the population.
• The number of lone-person households is projected to increase to between 24 and 27% by 2041.
• By 2041, the average household size in Australia is projected to be between 2.6 and 2.7 persons which
is equivalent to the findings in 2016.
• Australia’s population is projected to grow by 40% by 2041. The population is projected at grow from
24.2 to 34 million.
Growth in the general population may not translate to growth in the specific population for a particular
industry. For instance, a reducing birth rate and immigration program will result in less demand for
primary schools (and eventually high schools and universities) and products associated with children.
On the other hand, in most countries the number of elderly people is rapidly expanding as life expectancy
increases. This implies higher growth rates for hospitals, retirement villages and medical industries, to
name just a few.
Much of the demographic data needed for this area of analysis is readily available, so its influence, if it is
important for an industry, should be quite predictable. It then needs to be put into the context of an industry
to understand its implications. For the government, the ageing population in Australia is a major concern
in terms of being able to contain the cost of healthcare services. Over 30% of health services revenue in
Australia were for people aged over 65, which is not proportional to this group’s 15% representation in
Australia’s population (IBISWorld 2019). This also impacts Australia’s revenue base as having a higher
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percentage of population retired or working less and paying less tax means the government then has less
income with which to support the ageing population.
The ageing population continues to rise, and is significantly increasing demand for pharmaceuticals
and health services in an attempt to cure degenerative diseases such as cancer, cardiovascular and
neurodegenerative conditions. This prediction, combined with an increasing average price of prescrip-
tions, points to the urgent need for the federal government to develop strategies that contain these
increasing costs.
Sociocultural trends change almost imperceptibly, so they are often difficult to capture in strategic
analysis. Nevertheless, identifying trends and understanding new attitudes is important for being able to
adapt for future success. Technology has made it easier than ever before to communicate with stakeholders
and monitor and analyse sociocultural attitudes, behaviours and trends.
Cultural issues reflect the fact that, as a society becomes more multicultural and more open to external
influences through global communications, assumptions about what is ‘normal’ or ‘acceptable’ become
less clear. For instance, previously it was assumed that food was specific to one area or country. Yet,
Western fast-food chains have been quite successful in penetrating parts of the developed and developing
world. Simultaneously, ‘exotic’ foods from regions as far apart as Thailand, Mexico, Morocco and
Korea are increasingly popular in developed economies as consumers seek variety. Cultural awareness
is a key success factor in successful leadership particularly when working in multinational and global
organisations. Cultural differences can impact on many aspects of society from values and beliefs to tastes
and even behaviour.
One of the most significant social trends, like many of the other factors being examined, has largely
been brought about through technology. Access to information at your fingertips in real time means
that consumers are more informed (or misinformed) than ever before. As such their expectations of
organisations, their behaviours and service provided is high, and organisations that do not meet these
expectations are held to account, often on a global scale. Some of the key social trends for 2019 included
online network communication — through gaming, and so on. This creates a powerful tool to organisations
to specifically target niche groups, their thought leaders and followers. The ‘me-too’ movement and the
reciprocal issue of ‘toxic masculinity’ continues to grow. Organisations ignoring these platforms may be
targeted by powerful lobby groups — think ‘mad witches’ and their continuous targeting of Alan Jones,
his radio network and advertisers in the wake of his comments about Jacinda Ardern. Individual members
from this social media activist organisation called, emailed and direct messaged companies to encourage
them to stop advertising with 2GB, specifically during Alan Jones’ program, and compiled a list of those
that were still in with Jones and those that were out. This resulted in significant revenue losses for 2GB.
‘Authenticity’ is the key. This is largely a backlash to ‘fake news’ and sees consumers wanted more real-
time responses to individual concerns and issues and less curated content. Artificial intelligence is creating
changes in both industries and social behaviour. Finding, using and sharing information is becoming more
simple and intuitive, meaning that even the most un-tech-savvy consumers can now be involved. This will
not only open up new industries and growth in existing industries but also change consumer expectations
regarding ease of access to information and resources. Artificial intelligence influencers are characters who
are developed with personalities, values and storylines. The possibilities for organisations to build brand
value and loyalty with this technology are endless. How can we forget Greta Thunberg? Her influence on
the youth of today and the importance of taking action on climate continue to influence social behaviour
and expectations globally.
The effective use of technology and social analytics enables organisations to communicate with their
stakeholders, involve them in decision making, respond to their feedback and customise their products and
services to satisfy individual needs. This will help build loyalty and a sustainable competitive advantage.
QUESTION 2.7
Use the reading from example 2.5 and the worksheet from table 2.3 to answer the following
questions on the accounting services industry in Australia. Some issues for consideration are listed
in the following box.
1. Explain the key social issues that have affected the growth of the accounting services industry
to date.
2. Examine the social issues that will affect the future growth of the industry.
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ISSUES FOR CONSIDERATION
Issues for Consideration Under Social Factors

Hint: Not all questions or issues may be relevant to your analysis, and you may think of additional questions
or issues that are industry specific.
• How is the population profile changing?
• How is the profile of work changing (e.g. part-time, full-time, contract, male and female participation)?
• How is the cultural profile changing?
• How are families changing (e.g. marriage, divorce, age of having children)?
• How is the education profile changing?
• What are the key social trends and issues (e.g. security, work–life balance, eating out)?
• What key behavioural trends are emerging (e.g. recycling)?
• Has technology impacted on the collection of social information or its effect on the industry?
Technological Factorss
Technology is one of the most significant factors for analysis as it potentially affects all the other factors
in your STEEPLE analysis. Organisations need to determine how to optimise the management of these
technologies in order to create value and ultimately future proof themselves and their industry. Figure 2.24
provides a brief overview of nine key technology trends that have evolved over the past decade and three
emerging technologies that may shape the future.
These technological developments have influenced the globalisation of markets, the introduction of
new products, markets and services, and increased competition through online stores. It is unclear how
quickly this globalisation would have been realised without technological advances. For example, the
power of specific and localised media companies is now greatly reduced because the global use of the
internet has led to a fragmentation of information sources. The internet has changed expectations about
access to real-time information and has totally disrupted the print-based newspaper industry and, as a
consequence, many businesses have either shut down or are losing money rapidly. Most revenue in this
industry is from advertising rather than from the purchase price of a newspaper. Losses for traditional print
media companies increased significantly when large portions of advertising moved to online providers.
This combined with declining circulation of physical newspapers, as people took their news from
other sources.
It is interesting to note the behavioural and organisational responses that competitors displayed during
this disruption, which took over 10 years to unfold. Senior managers often rejected the possibility that the
internet could devastate their industry and that consumers would be interested in reading online or from a
computer or tablet. They therefore avoided entering the online marketplace to minimise cannibalisation of
their own paper-based revenues. However as online suppliers had much lower cost-bases, they were able to
give away the news for ‘free’. This hit established media organisations quite hard. By the time they moved
to adopting the online forum, a paid subscription was not acceptable to the market. They then moved to a
‘freemium’ model, but continue to struggle for survival.
Not only is technology changing, but how people access and use it is also evolving. Previously, people
went to a specific location (e.g. desktop computer or monitoring station) that was physically connected
to IT infrastructure. Now, they have smartphones, wireless and near-field technology so they are able to
consume, create and transfer more data across a much wider range of activities.
Some organisations use technology in a supporting role to help streamline their operations. Others rely
on it to help them understand their customers better so they can design products and services to suit their
exact needs. For some organisations, technology is the main component of the products or services they
deliver — providing data and information services to customers in real time on tablets and smartphones.
New roles such as Chief Information Officers (CIOs) have evolved to revaluate how organisations manage
data, build partner ecosystems, train employees and generally manage information both internally and
externally. Competitors that fail to keep pace with these technologies run the risk of no longer being able
to compete with more nimble organisations.
An example of the specialised use of technology is linked to trading organisations in the finance industry.
High-frequency trading algorithms and ultra-fast internet connections are used to create and process trades
faster than other market participants are able to. Trading a fraction of a second earlier than competitors
enables companies to take advantage of price movements before anyone else. Some companies have gone
to great lengths to install their internet servers as close as possible to the servers at the securities exchanges
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so that the communication lines travel less distance. This, combined with specialist computer programs
designed by physicists and mathematicians, demonstrates technology’s role in creating a completely new
form of competition in the finance industry.
FIGURE 2.24 Technological forces that impact on global industries
• Focus on experience. Technology has driven a shift away from traditional marketing towards the creation of
human-centric digital experiences that are sensitive and responsive to each individual.
• Analytics. Advances in data generation, capture, storage and analysis provide decision makers with
unprecedented insights into their organisation, their customers and their industry. Trust and ethics have
emerged as key challenges in the use of analytics.
• Cloud computing. There has been an overwhelming migration away from in-house IT towards cloud services,
and consequently a reimagining of the role of IT in the organisation.
• Convergence of business and IT. Technology and strategy are increasingly integrated, with technology
supporting agile business approaches, responsiveness and value creation through collaborative approaches
with customers and business partners.
• Risk. Technology has greatly expanded the scope of risk management beyond regulatory, operational and
financial risks to disruption, reputation, culture, ethics and relationship risks.
• Modernising core technology. The speed of change in the capabilities of technology and the speed of
innovation in how those capabilities are used in business has driven ongoing business investment in core
technologies.
• Augmented and virtual reality. Augmented and virtual reality technology, while still emerging, is extending
human-centric experience further — allowing people to move beyond keyboards and screens into new forms
of hyper-engagement and hyper-immersion.
• Cognitive computing. Advances in machine learning, automation and artificial intelligence are increasingly
enabling computers to engage in human-like communication and decision making, but with the advantage of
computer precision and speed.
• Blockchain. The potential for blockchain technology to establish security and trust on a distributed network
has been prioritised as a critical area for exploration by the majority of large businesses. It is seen as one of
the most potentially transformative technologies of recent years.
• Ambient experience. Building on the increasing focus on experience (see above), ambient experience
describes an emerging future where technology is fully integrated into the environment and human-
technology interaction is natural, constant and organic.
• Exponential intelligence. Building on analytics, cognitive computing and other advances, exponential
intelligence refers to a future in which technology can learn, discover and interact far beyond adherence to
programmed rules — to recognise and adapt to changeable human needs.
• Quantum computing. The development of quantum computing promises a future with vastly superior
processing capabilities where technological limitations cease to exist — technology applications become
limited only be human ideas, innovation and ingenuity.
Source: Developed from ideas in Deloitte Insights, 2020, ‘Tech Trends 2020’, www2.deloitte.com/content/dam/insights/us/
articles/techtrends-2020/DI_TechTrends2020.pdf; B Briggs, S Buchholz & SK Sharma, 2019, ‘Macro technology forces at work’,
Deloitte, 16 January, www2.deloitte.com/us/en/insights/focus/tech-trends/2019/macro-technology-trends-forces-at-work.html.
Digital twins are allowing organisations to use sophisticated modelling and simulations that are more
detailed and dynamic than ever before to optimise processes, products or services. To date, digital twins
have been used to increase efficiency in manufacturing, supply chain, predictive field maintenance, traffic
congestion and remediation. The limits to the use of this technology are as yet unknown.
‘Affective computing’ or ‘emotion AI’ are changing the way technology is experienced. These platforms
combine AI, human-centred design techniques and even technologies currently being used in neurological
research to enable organisations to ‘understand’ a human’s emotional state and the context behind it
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and can therefore respond appropriately. The opportunities for organisations to utilise these benefits are
also endless.
A recent realisation is that for every aspect that is disrupted by technology, organisations have an
opportunity to build (or lose) trust. Even ‘ethical technology’ is being incorporated into organisation to
help employees understand company values and expectations and recognise ethical dilemmas in decision
making. These initiatives are helping to demonstrate an organisations commitment to ‘doing the right
thing’ and builds trust with its stakeholders.
As technology management has now become a key part of corporate strategy, it is essential that IT and
finance leaders work together to optimise strategic outcomes. IT will need the support of finance to build
capabilities in digital architecture and beyond, support innovation, defend against disruption and enable
digital transformation. Organisations that understand the importance of building capabilities to support
technology and innovation across many platforms will be the first to realise the benefits and competitive
advantage that embracing new technologies can bring. Leading organisations have disciplined, measured
innovation programs that align innovation with business strategy.
QUESTION 2.8
1. Explain the key technological issues that have affected the growth of the Australian accounting
services industry to date.
2. Examine the technological issues that will affect the future growth of the industry.
Issues for Consideration in Technology

Hint: Not all issues or questions may be relevant to your analysis, and you may think of additional issues
or questions that are industry specific.
• How dependent is the industry on technology?
• Will technological changes in the industry change the way it works with, for example, customers,
suppliers and employees?
• Is technology changing distribution for the industry’s products and services? Think about storage,
transport, distribution, the internet, online banking, new medicines or treatments, and new plant and
crop breeds.
• Is technology affecting the frequency or speed with which the industry has to change your products
and services?
• Is technology reducing the industry’s costs of production? Will it make what is sold cheaper and
therefore available to a larger consumer market?
• Will technological breakthroughs render what the industry does obsolete or change the way the
industry operates?
Economic Factors
The growth or decline of the general economy can significantly affect an industry’s growth. Some of the
economic factors that could affect an industry include changes in gross domestic product (GDP), inflation
rates, unemployment levels, interest rates, exchange rates, taxation rates and wage rates. These indicators
are broad and, where possible, it is preferable to identify more specific indicators that link directly to the
industry under analysis. For example, interest rates would be a more specific indicator for the housing
and construction industry and exchange rates would be closely monitored by companies that specialise in
importing goods.
One issue to consider at a macro level is that economies generally go through the ‘boom’ and ‘bust’
of business cycles. There is often a desire to predict that what is currently occurring will continue, but
neither booms nor recessions last forever. For instance, if the economy has declined in the past year or two
because it is in recession, the probability is that a recovery will occur in the near future. Conversely, if the
economy is growing at 8% per annum, it would be unwise to assume such a growth rate can be sustained
over the next three to five years.
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The ABS is the main source of economic statistics in Australia. It publishes data on a regular basis
about prices, wages, economic growth, trade, the labour market and investment. Its website (www.abs.
gov.au) provides access to its publications and data, free of charge, on the day of publication. The ‘Key
economic indicators, 2019’ page (ABS 2019) contains a one-page summary of the latest data. In addition,
government budget papers provide a huge amount of quality data and, importantly, predictions about future
growth. These predictions do not necessarily apply to any particular industry, but industry associations
often provide summaries of implications for specific industries.
QUESTION 2.9
1. Explain the key economic issues that have affected the growth of the accounting industry
to date.
2. Examine the economic issues that will affect the future growth of the industry.
Issues for Consideration Under Economic Factors

• How reliant is the industry on overall economic growth and prosperity?
• How will changes in key economic indicators affect the industry (e.g. employment figures, inflation,
interest rates)?
• What impact does the economic climate have on finance availability for the industry? Consider this
issue in terms of both the industry’s ability to produce and the customer’s ability to buy.
• Are exchange rates making imports or exports more attractive/less attractive? Does this apply to all
trading partners?
• How will rising or declining consumer spending affect the industry?
• What are the trends in terms of labour costs relative to other countries with the same industry?
• Has technology impacted on the collection of economic information or its effect on the industry?
Environmental Factors
Growing concern about climate change and the detrimental effects that particular industries like mining,
forestry and oil have on the environment have all influenced the addition of environmental factors
in an external analysis. The negative image that is associated with producing these products and the
environmental effects that many other manufacturing processes are creating has led to the flourishing of
new industries such as renewable energy and ‘green’ biodegradable product substitutes. Climate change,
more variable and extreme weather patterns and natural disasters have changed the farming and tourism
industry, as seen by flooding in the high-density Australian farming areas of Queensland and Victoria and
the horrendous fire conditions experienced in summer 2019–20.
Our planet is plagued with environmental issues that are impacting on every individual, community,
organisation and country. The scale and complexity of these factors mean that they effect all industries
and required all organisations to consider the environmental impact that they make and to take action
to not only meet regulations and compliance needs but minimise their harm to the planet. Some of the
issues of primary concern for businesses include pollution, waste disposal, water quality and supply and
climate change.
Pollution is one of the most obvious and tangible environmental issues for an organisation to deal with.
Being responsible for polluting air or waterways will have a negative impact on employees, consumers
and the community at large. All Australian manufacturers are subject to strict environmental regulations
regarding pollution. It is important to acknowledge though that not all countries have similar policies. It
then becomes an ethical issue for Australian organisations operating in these countries, whether to adhere
to the Australian standard of pollution guidelines or not.
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Climate change is a much more intangible, as is evident by the constant debate playing out in the media
regarding this issue. It would be remiss of organisations to ignore the potential implications of climate
change on their operations and profitability.
Recent years have seen the exponential growth of the influence of environmental factors on organisations
and their stakeholders. The development of ‘green’ investments and investors and increasing legislation
that reflects changing social needs (e.g. recycling, water preservation and usage, energy efficiency and
waste management) are just two examples of this. As a consequence, many organisations are now
producing sustainability reports as a part of their annual reporting processes. These include information
on economic and community measures of performance rather than purely economic ones.
In addition to changing reporting to meet environmental expectations, organisations need to demonstrate
that they are taking action to improve environmental conditions (or at least do no harm). Business leaders
are expected to take action to mitigate environmental risks and actively promote responsible and sustainable
business practices. This focus has led retailers like Coles and Woolworths to act as key drivers in reducing
the use of plastic bags.
The fashion industry, not always known to be the most progressive, has seen some of the most significant
change in this area with large fashion houses finally stepping up and taking action to enact positive
change across the entire supply chain. Historically, the industry has been known for human rights abuses,
gender inequality and environmental degradation. For example, global textile production emits 1.2 billion
tonnes of greenhouses gases annually, more than international flights and maritime shipping combined
(Vogue 2019). In 2019, Stella McCartney launched the UN Sustainable Industry Charter for Climate.
Other signatories include Burberry, GAP, H&M, Kering, Levi’s and Inditex, who have all pledged a series
of industry wide commitments, including a target of 30% reduction in green house emission by 2030.
Other innovations in the industry include new fabrics such as spider silk and leather made from discarded
grapeskins to fabrics grown from bacteria. ‘Circular design’ has become a buzz word, which means that
the entire life cycle of the product needs to be considered at the design and sourcing stage. These initiatives
have also led to new industry segments with start-ups aiming to use all renewable energy, fair paid labour
and transparent supply chains and even entirely new industries in related areas such as fabric innovation,
recycling and disposal.
These initiatives are a win/win for the organisation as they not only representing responsible business
practices, but also offer opportunities for the organisation to improve productivity, reducing waste, and
profitability, as consumers align themselves (and their subsequent purchases) with organisations who share
their values and behaviours and have a strong positive environmental message.
QUESTION 2.10
1. Explain the key environmental issues that have affected the growth of the accounting industry
to date.
2. Examine the environmental issues that will affect the future growth of the industry.
Issues for Consideration Under Environmental Factors

• What are the key environmental issues that are affecting the industry?
• How are environmental considerations affecting the industry’s value chain — in terms of, for example,
supply sourcing, manufacturing and marketing?
• What legislation is in place or is likely to be implemented with regard to environmental issues?
• Does disposal of what the industry produces have environmental implications?
• Is recycling an option for the industry?
• Is the industry reliant on resources that contribute to environmental problems?
• Are there factors which may impact on the sustainability of the industry into the future?
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Political Factors
Industries in many countries are often affected by political influence and government legislation. In the
STEEPLE model (figure 2.23) we identified legal issues as an independent factor, but they are usually very
closely linked to political factors. For example, the issue of reduction in trade barriers due to encouragement
by the World Trade Organization is a political trend that has to be recognised by many industries. This issue
is not directed at any particular industry, yet it is having profound effects on various industries in many
countries. This issue is also one that is often covered by legislation.
Most political changes result from changes in the economy or in social and cultural shifts. Thus, although
tax rates are generally decided by politicians, tax decisions take into account economic considerations such
as the state of the economy. Technological change also affects political decisions. Technology has made
cross-border purchases much more common with online shopping accounting for 10% of Australian retail
sales, with the result that even small businesses can now serve a global market. Politicians are still coming
to grips with the tax issues involved. As discussed earlier, the retail industry is currently feeling the pressure
from this with major receiverships and closures of many brick and mortar stores as previously discussed.
QUESTION 2.11
1. Explain the key political issues that have affected the growth of the accounting industry.
2. Examine the political issues that will affect the future growth of the industry.
Issues for Consideration Under Political Factors

• How reliant is the industry on government or other policy makers for future growth?
• What has been or what will be the extent of the impact of political factors on the industry?
• What key legislative changes are under review?
• Will changes in tax policy affect the industry (more than any other industry) such as R&D tax
concessions?
• What are the steps that the government is likely to take in relation to tariffs and international trade
in general?
• If a new government came into power, what changes might affect the industry?
• How could political changes in countries that are your suppliers/buyers affect the industry?
• Does your industry receive any rebates or subsidies, and will this continue?
• How might competition policy influence the industry?
• Has technology impacted on the collection of political information or its effect on the industry?
Legal Factors
Similarly, legal drivers have become prominent in characterising industry conditions and affecting growth,
whether it is negative or positive. Not only are local and national laws relevant, but international law and
customs now affect most industries. Multinational companies working on a global scale must consider
the local laws of their multiple operating locations in conjunction with the regulations of working cross-
regionally. Legal regulations are increasing, and the consequences are significant for affected industries.
In Australia, the tobacco industry has been significantly affected over the past two decades, most recently
in 2012 by the introduction of new regulations banning labelled packaging. Globalisation means that
international laws and treaties need to be observed in conjunction with the local laws of the country in
which the organisation operates.
Regulation and compliance can increase the costs and complexity of doing business. Changes in this
area are often in response to public opinion and the organisation’s goal of reducing the risks associated with
claims for malpractice. It can also serve to protect an industry and define its terms and conditions of trade.
An example is what’s happening with the increase in scrutiny and focus on the audit profession. Audit
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companies are seeing an increase in review from external regulators such as ASIC and the PCAOB (the
US regulator), which in turn is resulting in audit firms issuing transparency reports to the market/public
and investing more in audit quality. The recent Royal Commission into the banking sector also resulted in
increased regulations around lending applications, etc that will have ongoing impacts on the banking and
finance industry.
Governments influence business not only through legislation but also through government agencies
and administrative regulation. For instance, the Australian Competition and Consumer Commission
(ACCC) closely monitors industry practices that might lead to substantially reducing competition among
organisations. This has resulted in significant changes in many industry structures and practices, as well as
preventing a number of planned industry consolidations that, in the ACCC’s opinion, would have reduced
competition and thereby disadvantaged consumers.
Apart from specific legislation that derives from political influences, developments in the legal system
itself can also have an important influence on an industry. For instance, the increased willingness of
courts to award damages against professionals for malpractice has led directly to professionals opting
for corporate structures that provide limited liability as opposed to partnership structures with unlimited
personal liability. The introduction of US-style class action lawsuits in Australia and other countries has
made it easier for individuals to pursue actions against organisations, particularly those in the consumer
products area. For example, lawsuits relating to asbestos, utility-supply interruption and food poisoning
have had a major impact on the operations of many industries. Interestingly, new disruptive models are
also attracting substantial legal action due to their transformation of many industries. The introduction of
the ride-share model in the transport industry, has seen substantial legal implications in Australia. Initially,
legislation was slow to respond to the disruption that the service caused. The system was initially deemed
illegal as privately- owned vehicles were being used for business purposes. However, technology used by
Uber made it difficult to police these laws and by 2017, Uber was legal in every state. New South Wales
were the first to offer a compensation package to taxi-plate holders who had suffered financial losses.
This was later rolled out across other states (ABC News 2019). A recent Australian ruling found that Uber
drivers are not employees, and therefore are not entitled to minimum wage laws, holiday pay and so on.
This was contrary to a similar ruling in the UK that found that they were in fact employees of Uber. This
paves the way for Uber to appeal the UK ruling (Financial Times 2019). This ruling does not necessarily
refer to all ‘gig-economy’ situations and Australia is liked to see more court cases related to this as this
industry expands.
QUESTION 2.12
1. Explain the key legal issues that have affected the growth of the accounting services industry
to date.
2. Examine the legal issues that will affect the future growth of the industry.
Issues for Consideration Under Legal Factors

• How does legislation (e.g. employment, intellectual property, environmental, health and safety law) affect
the industry?
• Does existing legislation protect the industry from competition? Is this likely to change?
• Does existing legislation restrict ownership in the industry and how likely is this to change?
• Is anything that the industry does or produces likely to be banned?
• Are there any class actions for the industry, based on what it has done in the past?
• Has technology impacted on the collection of legal information or its effect on the industry?
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Ethical Factors
Ethical considerations are one of the most recent additions to the external analysis. They impact on
all processes and actions that influence the behaviour or management and employees both within the
organisation and with external stakeholders such as customers, suppliers and competitors. In a world where
consumers and stakeholders have greater access to information about organisations than ever before (and
vice versa), there are much higher expectations on organisations to behave responsibly both internally and
externally. This has many implications for organisations and their strategic decisions.
When assessing the external environment, organisations need to consider any processes and actions
that may impact on the organisation’s ability to conduct its practices in an ethically acceptable manner.
Things to consider include the working conditions and wages of suppliers, the safety standards within the
industry and its suppliers, the emissions, waste, bi-products or side effects of the industry and its suppliers
and how ethical the products and services provided actually are. These considerations may have significant
implications for organisations and their strategic decisions. Think of the problems faced by companies like
Nike when they were found to be using sweatshops in Asia to make their products. Once exposed, they
were forced to change their manufacturing and operating processes to address the issue. More recently
Volkswagen were caught out in regard to their emissions calculations. This led to US$2.8 billion worth of
fines imposed in the United States alone.
The 2008 financial crisis highlighted unethical business practices. The results were felt around the world,
with some economies still in recovery. This event had knock on effects to regulations across a number of
industries and social expectations, with organisations now expected to behave in ways that have no negative
influence on their employees, the community or society as a whole. One example in the accounting services
industry is the introduction of mandatory audit firm rotation and restrictions on other services which has
now been implemented in Europe.
Finance leaders and managers are expected to balance, protect and preserve all stakeholder interests. As
such, they are tasked not only with acting with personal integrity, but also providing accurate, objective
and meaningful information, disclosure and transparency, secure handling of sensitive information and
confidentiality as well as compliance with any relevant rules and regulations. In an organisational context it
is important that individual ethical behaviours are not compromised by unethical practices. If for example,
organisations reward finance managers for making decisions that benefit the company rather than the
customers or other stakeholders, this could create an ethical dilemma. Navigating these ethical minefields
are now an important skill for leaders to develop.
QUESTION 2.13
1. Explain the key ethical issues that have affected the growth of the accounting services industry
to date.
2. Examine the ethical issues that will affect the future growth of the industry.
Issues for Consideration Under Ethical Factors

• Does the industry adhere to compliance and regulations?
• Is communication truthful and transparent to all stakeholders?
• Does the industry have safe work conditions, avoiding processes and technologies that harm employees
or the public?
• Is performance prioritised over employee/stakeholder well-being?
• Are all stakeholders in the supply chain held to the same ethical standards?
• Has technology impacted on the collection of ethical information or its effect on the industry?
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Summarising the Remote Environment Analysis
By working systematically through each of the remote environment elements you should have a compre-
hensive list of factors that have shaped the historical growth of the industry and are likely to affect the future
growth of the industry. This now needs to be summarised to capture the key factors. This is a difficult
(and often subjective) task because the issues cannot easily be ‘added’ or even compared. Example 2.3
provides an example. The following can be used as a guide to developing an environmental analysis
summary.
1. Assess each issue you have identified and retain those you have identified as having a significant positive
(+), neutral (=) or significant negative (–) impact on the growth of the industry as compared with the
average growth of industries in general. For instance, if the ‘average’ industry growth is expected to
be 3% per annum over the next three to five years, and a particular factor in the industry that is being
examined is expected to make it grow faster than this average rate, assess the factor as (+).
2. Summarise each (+) and (–). You should give due consideration to the relative importance of each
factor. For instance, there may be an equal number of (+)s and (–)s, but if all the major factors are
(+), the conclusion would be that the industry would be expected to grow faster than average. Different
factors will have different weightings so it is not a matter of simply adding up all of the positives and
negatives and seeing which one has more. There may be many positive factors, but one negative factor
may outweigh all of those so you will need to use some professional judgement in coming up with your
overall conclusion.
3. Write down this summary, identifying the major reasons for your conclusion.
This summary analysis helps to integrate the factors that have the potential for industry growth. It also
assists in examining the information that is missing or is perceived to be important. Unless these steps are
followed, the analysis simply results in a long list of factors that cannot be easily understood by others.
From this analysis it should be possible to summarise the key factors in terms of importance and the
extent of the impact that these factors may have on future industry growth. This will help you to conclude
whether the industry you are analysing is likely to grow at:
• faster than average rates (+)
• average rates (=) or
• slower than average rates (–).
Within each factor there are likely to be a mixture of positive and negative issues that will impact on
future growth. Not all factors are equal, so simply ‘adding’ all the pluses and minuses is not a foolproof
way of arriving at a conclusion — you must use your judgement.
Some factors will have a greater impact than others, so you need to take an overall position for each
of the factors and then develop an overall position for the industry once all the factors are put together.
Generally, however, where there are more positive factors than negative factors, growth is likely to be
positive in the future and vice versa. It is always useful to add a statement of just how strong positive
or negative growth will be (i.e. lower than average, about average or greater than average if positive, or
perhaps slightly negative to strongly negative).
You should be able to support your conclusion, drawing from the analysis you have completed using
the STEEPLE framework and from analysis of the key industry data.
The purpose of the analysis is to understand whether the industry is attractive for future investment, or
if new competitors will enter because growth is more attractive or exit where it is not. The answers to these
questions, and many others, are important in making strategic decisions about what to do — something
we look at again in module 5 where we explore options and decision making frameworks.
Example 2.6 provides a remote environment summary for the luxury goods industry (retailing).
EXAMPLE 2.6
Remote Environment Summary for the Luxury Goods Industry

Luxury goods are those traditionally associated with affluence, quality, reputation and exclusivity. Though
these goods are inessential, they are made desirable by the exclusivity of the product and the image
it portrays. The luxury goods market operates over a number of industries, including clothing, footwear,
fashion accessories, automobiles, alcohol, cosmetics, watches and jewellery. They are high tiered in terms
of both price and quality.
According to a report by Bain & Company (2016), the global personal luxury goods industry in 2016
will mirror the low, single-digit real growth of 2015, even as internal market dynamics are reshuffled by
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geopolitical turmoil and luxury brands’ emerging strategies. Despite initial growth in 2012, after the GFC,
the industry has since declined. The year 2015 marked the beginning of a new era of slower but steady
growth globally for the industry — which includes leather accessories, fashion, hard luxury, and fragrance
and cosmetics — and reached EUR253 billion in revenue. This was up 1% in real growth terms. Decreased
tourism across Europe and a slow holiday season in the United States, instability in the Middle East and
a downturn in China are all suggested as causes for this decline. According to Bain & Company (2016),
the 2015 slowdown seeped into the first quarter of 2016 with only 1% growth — a trend that is expected
to continue.
‘The luxury goods industry is stuck in a holding pattern for the foreseeable future,’ said Claudia
D’Arpizio, a Bain partner and lead author of the study. ‘All eyes are again on Mainland China, which
is the key to unlock recovery around the world, and the United States, where local consumption is failing
to offset decreased tourism. Consumers’ changing purchase patterns, including a reshuffling of tourism
and revitalised local spending in Europe, will likely do little to drive luxury brand growth much beyond the
low single digits’ (Bain & Company 2016).
This recent decline in growth rate in the luxury goods industry can be used as a key example of how
the remote environment has impacted on the industry, and how this environment is likely to affect its
future growth.
Usually a remote environment summary only presents the analysis of these issues and their expected
effect on the industry. However, table 2.4 also indicates how a competitor in the luxury goods industry
may be directly affected by these factors’ influence on the growth of the industry.
TABLE 2.4 Remote environment of the luxury goods industry
What are the likely issues that have affected and will affect Effect on industry
Factor the global luxury goods industry? growth (+, = , –)
Political Breaking into new, developing markets is often problematic. For –

example, India has high restrictions on entry into its market, and
political instability.
Political Political unrest such as in the Middle East has been proposed –
as a cause for the decline in the industry.
Economic Luxury goods are tightly linked to economic conditions. The –

downturn in China is evidence of how economic conditions can
impact on a market.
Economic Brexit has led to reduced spending in this industry as –

disposable income is a key factor in the choice to purchase
luxury goods and has changed as a result of reduced
exchange rates.
Social Tourism has become increasingly intertwined with luxury goods –

spending. It accounts for 40% of sales in the luxury goods
industry. The slow US holiday season has been suggested as
a cause of decline in growth in the sector.
Social Tourism expands the market for luxury goods, with a focus on –
Chinese tourists with high disposable incomes. As noted this
market has experienced a downturn.
Technological E-commerce is growing at an average 14.6% per year. +
Technological The transformational shift towards online platforms has –

increased consumer choice and competition and the
emergence of pirated brands.
Environmental The issue of climate change has put the focus on negative –
environmental impact, especially consumption of unnecessary
goods. This can result in consumer boycotts of an organisa-
tion’s products as protest.
(continued)
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What are the likely issues that have affected and will affect Effect on industry
Factor the global luxury goods industry? growth (+, = , –)
Legal The expensive price tags associated with prestigious goods –

have led to the proliferation of counterfeit luxury products.
The market for fake products has expanded exponentially,
with China and other Asian countries responsible for a large
proportion of the production of counterfeits.
Ethical Manufacturing processes for many luxury goods including the

sourcing of materials and working conditions may affect the
reputation of the brand.
Ethical Does sustainability align with the fundamental luxury

characteristics of heritage, quality, longevity and timelessness?
Overall On the basis of this analysis, the future growth of the global –
luxury goods industry is predicted to decline slightly.
Key factors supporting this conclusion are:
• competition created by e-commerce providing easier access
to such products and counterfeits
• consumers’ disposable incomes are continuously decreasing
based on a downturn in large markets such as China
• slower tourism, especially in large markets such as the United
States and China
• a social backlash against consumerism and unsustainable
manufacturing practices.
QUESTION 2.14
For the remote environment analysis, you should have now considered each of the components of
the STEEPLE model (see questions 2.7 to 2.13).
1. Bring this information together to form an overall summary as to what has shaped the global
accounting to date and what will affect its future growth.
Then respond to the following questions based on your analysis.
2. Explain the major issues you think will influence the future of the accounting services industry.
3. Considering all the issues together, examine whether the industry likely to experience positive,
neutral or negative growth in the future.
4. Examine the implications for an organisation within this industry based on your assessed level
of growth.
as follows.
KEY POINTS
• The remote environment analysis process uses a STEEPLE analysis (or a variation such as PEST
or PESTEL).
• A STEEPLE analysis provides an efficient and systematic way to consider the key drivers of
historical and future growth.
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2.2 Evaluate the key factors related to external environment that impact growth, profitability
and competition.
• The remote environment includes general influences that are out of an organisation’s control and
may relate to social, technological, environmental, economic, political, legal and ethical factors.
These factors influence all industries, but the remote environment analysis focuses on how they
affect the growth of the organisation’s specific industry.
2.4 INDUSTRY ENVIRONMENT ANALYSIS —

INDUSTRY PROFITABILITY
Once the remote environment has been analysed to determine the current situation and future growth
potential of the industry, the second stage of external environment analysis is to analyse the industry in
order to determine profitability. The aim of industry analysis is to answer the following questions.
• What are the forces within the industry that determine the profitability of the industry?
• Based on these forces, what is the current and expected future profitability of the industry?
• How are the forces changing and how are they expected to change over time?
Michael Porter developed a technique for analysing forces that affect industry profitability. Known
as the ‘five forces model’, it is analytically superior to the conventional idea of considering only the
organisation’s competitive position. The position of competitors is only one of the five elements in Porter’s
model. (Porter [1980] terms this element ‘industry rivalry’.) Five forces analysis is designed to explain why
certain industries are more profitable than others. Porter (1980) found that, by analysing these five forces,
consistent differences in industry profitability could be explained. The five forces are the:
1. threat of new entrants to the industry
2. power of suppliers to the industry
3. power of buyers from the industry
4. power of substitutes for the industry’s products and services
5. intensity of industry rivalry between competitors.
Although this model has been utilised for many years, the analysis remains relevant. As well as analysing
the level of current profitability, the five forces analysis should be used to understand the likely changes that
will occur in the industry and the expected level of future profitability that will flow from these changes. For
instance, an industry with many competitors and low profitability, but where the competitors are merging
or leaving the industry, is likely to become much more profitable in the medium term.
While not every factor of the five forces will be important in any particular industry, the lists developed
cover not only well-known economic factors, but also many factors that reflect the competitive behaviour,
psychological make-up and values of the organisations in the industry.
In general, the lower the impact of forces, the lower the level of industry rivalry (i.e. the level of
competition between industry participants) and the higher the level of profitability. Likewise, where forces
are assessed as high, there is generally a higher level of industry rivalry and a lower level of profitability.
WhilePorter’sisanessentialtheoryincorporatestrategy,ithasnotbeenunchallenged.Grant2019discusses
someofthepotentialextensionstoPorter’sanalysisthatmayincreaserelevanceforspecificindustries.Thefirst
istoinclude‘complements’.Thesehavetheoppositeeffectto‘substitutes’asratherfromdetractingfrom,they
add value to the industry. If complement power is high, they can devalue or even commoditise your product or
service.Ontheotherhand,ifyoucanown,controlorsupportaspectsofthecomplementaryproductsorservice,
lessening their power, you can take advantage of the growth and profitability that they bring to the industry.
Example 2.7 examines the five forces and complements in relation to the online retail industry.
EXAMPLE 2.7
Industry Analysis and the Online Retail Industry

• Threat of new entrants is high. There is little expertise required to enter the online industry, low cost of
entry and easy access to products.
• Supplier power varies. Suppliers, if they have a product or design in high demand, have a number of
avenues to pursue, potentially driving the price up. However, the market is quite large, so entrants to
the industry have a wide range of suppliers to work with.
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• Buyer power is high as buyers have alternative channels for the product, are easily able to compare
prices due to the availability of information on the internet, and can, with similar ease, locate the product
elsewhere.
• Substitute power is high as there are no geographic barriers on the internet, allowing international as
well as local outlets to offer their product to the buyer. A product that is designed and made locally can
be offered for a cheaper price internationally, yet delivered to the local region. Additionally, traditional
bricks-and-mortar stores are an alternative to online retailers.
• Complement power is moderate. There are a number of new finance methods available to retail
shoppers. These include AfterPay, ZipPay Splitit and Bundll. These platforms add options, safety
and convenience to customers and add value to the retail industry by encouraging more purchasing.
Organisations not taking advantage of these platforms may find that they are no longer preferred outlets
for their target market and may encourage them to switch to their competitors.
• Industry rivalry is high due to the demand for products, and the many competitors in the online retail
industry that do not operate from physical stores (e.g. ASOS, The Iconic). Price competitiveness drives
rivalry, and, due to the ease of comparing prices online, price competitiveness is high and therefore
industry rivalry is also high.
Source: Adapted from M Porter, 2001, ‘Strategy and the internet’, Harvard Business Review, March, pp. 63–7.
There are a number of conclusions that could be drawn from this analysis. Firstly, as all forces on the
industry are considered to be high, there is intense rivalry making it inherently an unattractive industry.
If you were looking at entering this industry, the decision would probably be no. If however you are
already involved in the industry there are a number of strategic options. As buyer power is high, with
many online retail options, objectives should be developed on ways to improve the customer experience
and build loyalty. Offering some of the complementation products, such as AfterPay, may be one method
of doing this. Threat of substitution is also high with virtually limitless options for consumers in regard to
sourcing products. One strategic option here it to either be involved in a number of alternate sources (for
example brick and mortar stores that also offer online retailing), or optimising your value chain to provide
the best variety at the lowest price to the most people. Amazon are currently managing this well, building
strong relationships with suppliers to offer a wide scope of products and keep prices low and strategically
positioning warehouses to offer transport costs. However, Amazon Australia is not doing quite as well as
its global counterparts. As a late entrant into the Australian market, it lacks the power over suppliers that
their parent company has, making it difficult to compete with other more established online retailers in
scope and price and has not yet found profitability (AFR, April 2019).
Each of the five forces, and complementary forces are now described in more depth.
PORTER’S FIVE FORCES

Threat of New Entrants to the Industry
‘Threat of new entrants’ relates to the likelihood of new firms entering the industry. If there is a significant
threat of new entrants, the profitability of the existing industry may be eroded because new firms will enter
the market and compete for available profits. Where it is easy for new competitors to enter the industry,
the threat of new entrants will be high. This is in contrast to situations where specific laws prevent new
competitors from entering, where patents exist in key industry products or technologies, or where there
are high barriers to entry, in which case the threat of new entrants will be low.
It is also important to take into account how significant a new entrant will be in this analysis. For example,
it may be easy for a company to enter the market as a very small or niche competitor, in which case this
will not have a high impact on overall industry competitiveness. However, if a major multinational enters
the industry and takes a significant amount of market share from existing competitors, this would be a high
force and would have a high impact on overall industry profitability.
‘New entrants to an industry’ refers to any threat to the current competitors’ ability to generate the
desired financial returns. Typically, a new entrant will need to capture market share and this could
be achieved through strategies such as price discounting, introducing new product features, improving
services and delivery, and introducing new technology. However, the number and profitability of new
entrants is often determined through consideration of barriers to entry to the industry.
Entry barriers make it difficult for a potential competitor to enter an industry. Some typical barriers to
entry are listed here.
• Industry size. Where the overall value or volume of the industry is small it may not be attractive to
new entrants as there is insufficient size to allow a new competitor to enter and gain market share from
existing competitors.
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• Economies of scale. The need for a large volume of production and sales to reach the cost level per
unit of production for profitability is a barrier to entry. High-volume competitors have the ability to
generate cost reductions through volume discounts from suppliers, efficient capacity utilisation and
learning effects that reduce labour costs. New entrants with little market share will not enjoy the cost
advantages of those already established competitors.
• Product differentiation. Industries dominated by branded products are difficult to enter due to the large
amount of time and money required to create a competing branded product. Well-established brand
names and trademarks make it difficult for a new entrant to establish brand awareness, secure shelf
space in retail outlets and thereby capture sales.
• Intellectual property. Patents and other types of proprietary intellectual property are very effective in
limiting industry entry.
• Capital requirements. A large capital investment per unit of output in facilities tends to limit industry
entry. Some industries require high capital investment to be able to deliver a product or service. For
example, this has proven to be a barrier to entry in industries such as airlines (due to the high cost of
planes) and pharmaceuticals (due to the high cost of R&D).
• Switching costs. The tendency for buyers of an industry’s products to be reticent about switching to a
new supplier tends to limit entry. In many cases, if customers have committed to the current competitors’
products, there are high costs of changing to alternatives. Examples include the installation of specific
software such as SAP or Windows, or obtaining a complete system from one supplier where after-sales
service is guaranteed, so changing components has implications other than cost.
• Access to distribution channels. New entrants may have difficulty distributing their goods and services
through established distribution channels as those have already been locked in by existing competitors.
Examples include exclusive distribution policies, such as KFC only having Pepsi soft drinks available
or the space allocation on supermarket shelves where well-known brands are given priority.
• Government policy. Governments may restrict new entrants through licensing restrictions and policies
such as limiting foreign investment. Industries where permits and licences are required to establish
production tend to have limited entry; for example, limited licences are issued in Australia in telecom-
munications, radio and TV broadcasting and taxis. Similarly, industries where rigid industry standards
exist tend to have limited entry.
When there is a disruption in an industry, it is usually because the new technology/product/service has
allowed the new entrant to by-pass one or all of these barriers. Consider Uber’s entrance into the taxi
industry. The licencing restrictions and costs associate with regulated taxi services were two of the key
barriers to entering the industry. Uber’s ride-share model meant that both of these barriers were by-passed,
and once legalised, allowed easy entry into this otherwise protected industry.
QUESTION 2.15
Use the reading from example 2.5 and your industry analysis to answer the following questions
on the accounting services industry in Australia. Some issues for consideration are listed in the
following box.
1. How would you describe the threat of new entrants to the accounting industry? Refer to the
issues listed in the box to structure your answer.
2. Provide reasons for your answers to question 1.
Issues for Consideration on Threat of New Entrants

• Is the industry large enough to be attractive to new entrants?
• Are economies of scale needed to be competitive in this industry?
• How much capital investment is required to set up?
• How easy or hard will it be for new entrants to get the appropriate qualifications?
• What government policy restrictions are there?
• How onerous is compliance in the industry?
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• Are there proprietary product differences for existing products and services in the industry?
• How strong are the brands in the industry?
• How hard or easy is it for customers to switch their business between competitors in the industry?
• Does technology exist that will allow new players to bypass current barriers to entry?
POWER OF SUPPLIERS TO THE INDUSTRY

Suppliers are those organisations, groups or individuals that provide products or services to the industry.
They include raw material, labour and capital suppliers. If a type of supplier is particularly important to
the industry, it will have bargaining power over the industry, and this reduces the industry’s profitability.
When discussing suppliers and buyers in an industry, the term ‘concentration’ is important. It describes
whether there are many or few suppliers. With high concentration, there are very few suppliers so they
capture most industry revenues. In comparison, with low or diluted concentration there are many suppliers
who share a small amount of revenue.
A high concentration usually corresponds with high supplier power over industry participants. A low
concentration (i.e. a large number of small suppliers) means that buyers generally will have more choice
about whom to purchase from, which reduces supplier power and increases buyer power.
Suppliers can affect the returns to any competitors within an industry through their ability to raise prices
and determine quality. A supplier is powerful in the following circumstances.
1. The supplier industry is dominated by a few companies but sells to many customers such as in
supermarket retailing or chocolate confectionery manufacturing.
2. Its product or service is unique and the switching costs are high, such as software applications.
3. Substitutes are not readily available.
4. Suppliers are able to forward integrate — that is, to sell or distribute their products directly and compete
with their customers.
5. A purchasing industry only buys a small percentage of the supplier’s output and is therefore relatively
unimportant to the supplier.
Most of us can think of an example where price is not a consideration for something we really want,
and this value to us is often a function of how easy or hard something is to obtain.
In the agricultural industry there are many farmers (suppliers) compared to buyers, who can distribute
the product in retail outlets where consumers will buy them. So the farmers have low power, decreasing
their profitability. Conversely, a supplier with exclusive distribution for a desired product has high supplier
power, thereby increasing its profitability.
There are often several significant suppliers in an industry and in practice they should be assessed for
their relative impacts. This is also the case for buyers (see the ‘Power of buyers’ section below).
QUESTION 2.16
following box.
1. How would you describe the power of suppliers in the accounting services industry? Refer to
the issues listed in the box to structure your answer.
2. Provide reasons for your answer to question 1.
Issues for Consideration on Power of Suppliers

• What is the number and concentration of suppliers?
• How important are specific suppliers’ inputs?
• How likely are suppliers to forward integrate?
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• How easily can organisations in the industry switch suppliers?
• What is the proportion of the cost of suppliers’ products relative to the total cost of the industry product
or service?
• Is information about suppliers’ products easily available?
• How profitable are the suppliers?
• Does technology exist that will impact on the power of the suppliers?
Power of Buyers
Buyers are the customers of the industry. If buyers are particularly important to the industry, they will have
power over the industry, thus tending to reduce the profitability of the industry. The bargaining power of
buyers is essentially the mirror image of the bargaining power of suppliers. This time the industry is the
supplier, not the buyer in the transaction.
Buyers (customers) affect the returns that competitors can expect in an industry by their bargaining
position relative to industry participants. They can force prices down, play off competition against each
other and bargain for better quality or service. The buyer is in a powerful bargaining position in the
following circumstances.
• A buyer purchases a large proportion of the seller’s product or service. An example would be car
manufacturers, which are dominant customers of a component manufacturer.
• A buyer has the potential to backward integrate, which means the ability to make or supply the supplier’s
product or service themselves. An example would be a paper mill which could own its own forest
plantations and therefore be able to produce its own raw materials.
• There are many alternative suppliers because the product is standard or a commodity.
• There are few costs of changing suppliers (switching costs). For example, office supplies outlets are
easy to find.
• The product or service is a high percentage of the buyer’s costs, in which case they are more likely to
negotiate for the best deal available and will have an incentive to ‘shop around’.
• The product or service is easily substituted for something else.
As an example of buyer power, if there are few supermarkets compared with food industry manufactur-
ers, supermarket buyers will have power over the industry (buyer concentration). Similarly, if supermarkets
are large purchasers from the industry, this will also give them power (buyer volume). If retailers are not
very profitable, they will bargain hard with manufacturers (buyer profitability).
QUESTION 2.17
following box.
1. How would you describe the power of buyers in the Australian accounting services industry?
Refer to the issues listed in the box to structure your answer.
Issues for Consideration on Power of Buyers

• How concentrated are the buyers in the industry?
• Is distribution controlled by a few important outlets?
• Are there alternative channels of distribution?
• What impact does the product or service being purchased by the buyer have on their business?
• How likely are buyers to backward integrate?
• How easy or difficult is it for buyers to switch to alternative suppliers?
• How important are industry volumes to buyers?
• What is the proportion of the cost of the industry product being purchased relative to other products
and services the buyer buys?
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• How profitable is the buyer?
• How easily can the buyer access information about the industry’s products and services?
• Does technology exist that will impact on the power of the buyers?
Power of Substitutes
Substitutes are other products or services that can be used instead of the products or services of the
particular industry. For example, substitutes for the local stockbroking industry include:
• direct investment in property, gold or other financial products
• financial planners
• even investment in international stocks using international brokers (or online)
• simply holding cash and not investing at all.
Identifying substitutes is closely linked to the industry definition that the organisation uses. For example,
if you define the industry that you operate in as the Australian fast-food industry, all organisations providing
fast-food alternatives will be considered competition, i.e. organisations providing pizza, hamburgers, sushi,
chicken or fish and chips. Substitutes in this situation will be meal alternatives to fast food and may include
buying prepared meals from the supermarket, buying individual ingredients and cooking at home, or going
to restaurants that do not focus on the speed of service.
However, if you took a narrow definition of the industry by focusing on a particular segment (e.g. pizza),
this may change the classification. An organisation that only makes pizza, may only view other pizza
companies as competitors, with alternatives to pizza (e.g. hamburgers or sushi) seen as ‘substitutes’ rather
than competitors or rivals.
The more substitutes the buyer has for the industry’s products or services, the higher the buyer’s
bargaining power. A substitute can be defined as a direct substitute, or a substitute that fulfils the same
need for the buyer. For example, orange juice would be a substitute for a cola beverage because it quenches
thirst. An email would be a substitute for a letter or a courier-delivered document.
Technology often creates a substitute by offering the same benefit to the customer through a more
convenient method. This creates a disruption in the industry. Classic examples include video streaming
disrupting the video hire market and Uber disrupting the taxi market.
Example 2.8 describes how generic medicines act as a substitute for patented medicines.
EXAMPLE 2.8
Substituting Patented Medicines with Generic Medicines

Consider the patented medicine industry, which is a part of the overall global pharmaceutical industry. It is
estimated that discovering and bringing a new drug to market costs nearly US$900 million and takes 10 to
15 years. Discovery of new drug molecules is patent protected, to encourage companies to continue the
drug discovery process and enable discovering companies to gain returns from their enormous investment
in R&D. The patent system remains the primary mechanism for stimulating and rewarding pharmaceutical
innovations, and the key output from the process is a branded drug.
Patents, as a rule, last for 15 years, and the time taken for a new pharmaceutical to go from patent
application to regulatory approval is usually less than two years. Australia’s patent system allows for an
extension of the patent term of up to five years for new pharmaceuticals that have taken considerable
time to obtain regulatory approval.
Generic medicines are a substitute product, because they are replicas or copies of branded medicines
where the patent has expired (Fatokun & Ibrahim et al. 2011). They can be developed by a manufacturing
company through accessing data that is no longer exclusive well before a patent expires, and can be
prepared to the extent that they are ready to be marketed and sold on the day of patent expiry. However,
no sales and marketing activity can be undertaken prior to this date without prior written consent from
the original manufacturer (i.e. patent holder). This means that the total cost of developing a generic drug
is significantly lower than the costs involved in bringing the original patented drug to market.
Consequently, generic medications are generally available for retail sale at lower prices than their
branded equivalents, which has had negative implications for the sales of branded medicines. At the
end of 2010, 78% of all prescriptions dispensed were generic medicines (Hoffman et al. 2012). This is
also having negative financial implications for branded medicines.
Since the introduction of brand substitution in 1994, the generic market in Australia has grown
consistently, with one in five prescriptions being filled by generic products (i.e. four out of five are still
filled by the original branded medicine). By comparison, in the United States, 50% of all prescriptions are
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filled by generic products due to a very strong focus at the retail pharmacy outlet level on substituting
the prescription where possible. This is due to the high discounts offered to pharmacists by generic
manufacturers in order to gain prescription share (around 40% to 50% compared to 10% to 20% for
the original branded product).
Industry experts predict the Australian market will be equivalent to US substitution levels within three
years, given the large sales value of the products that will go off patent over the next four years, and the
high profit margins pharmacists are offered for dispensing generic medicines.
The power of substitutes in the global patented medicine industry (which is part of the global
pharmaceutical industry) is expected to have a considerable negative impact on the future profitability
of the industry, so their power is considered high and increasing. This is mainly attributed to the number
of ‘blockbuster’ medicines that have recently come off patent, and others that are identified as coming off
patent in the near future, with few new ‘blockbuster’ medicines in the pipeline.
It is important that organisations be aware of the opportunities available to customers to purchase a direct
substitute for their products in order to ensure they are aware of industry and market trends and incorporate
this knowledge into their planning processes.
Indirect Substitutes
Not all substitutes are direct. However, the scope of indirect substitutes can be more difficult to determine
(this relates directly back to difficulties that may have been experienced in scoping the industry for
analysis). Indirect substitutes can be found for a number of items as well. For example, you may choose
to go away for a weekend or buy a new computer. Alternatively, a short weekend break could be an
indirect substitute for a new and expensive wool suit — both could cost around the same amount for the
consumer to purchase. These items are not direct substitutes, but they are competing for a share of your
available dollars. Similarly, you could buy a new fine-wool suit or you could buy tickets for the theatre for
your family.
To avoid direct substitution a number of strategies are employed, such as product bundling. Bundling
makes it more difficult for consumers to directly compare one product with another, and therefore
reduces their ability to make direct product comparisons. Banks employ this strategy effectively, by
bundling free banking, credit cards, mortgages and other services together and applying varying product
features to the components of their bundle to make comparison with other bank ‘bundles’ difficult.
So whether direct or indirect, known competitors or disruptors, the decision about what constitutes a
substitute needs to be considered carefully.
QUESTION 2.18
following box.
1. How would you describe the power of substitutes in the accounting services industry? Refer to
the issues listed in the box to structure your answer.
Issues for Consideration on Power of Substitutes

• Are there equivalent prices and performance products available?
• Is there new technology offering the same benefit to customers?
• How easy or difficult is it for customers to switch from the industry products to a substitute?
• Does technology exist that will improve the position of substitutes?
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Power of Complements
Complements include products and services that add value to your industry. Understanding what comple-
ments your industry now and potentially in the future may help your organisation to strengthen and protect
your competitive position.
The computer industry provides an interesting example of this. In the early 1980s this industry was
disrupted by micro processing technology and a new industry sector was born — the microcomputer. IBM
and Apple were the two key organisations manufacturing products for this new market. IBM’s adoption
of open architecture meant that the computer software, in particular Microsoft Windows, became the
proprietary standard in the industry, reducing PCs to a commodity status. This increased the value of
the personal computer industry overall, but had a significant negative impact on the profitability of IBM.
Apple, on the other hand continued to own their operating system, protecting the profitability of their
computers. They have continued to adopt this approach in relation to the smart phone industry. The success
of the iPhone is largely dependent on the success of the apps that are developed for use with it. Apple
still owns the IOS operating system and supports app development using their platform. This helps the
complementary market to grow as well as generating extra profits for Apple. Their biggest competitor is
now no longer IBM or even Microsoft but is now Google.
Apple’s ownership and protection of its operating system, relationship with app developers and
development of integrated interfaces between Apple products has become known as the ‘Apple ecosystem’.
Therefore, recognising that an organisation’s influence goes beyond conventional industry boundaries has
given rise to the term business ecosystems. The notion of ecosystems highlights the interdependencies
among the players and the evolutionary nature of business. Understanding the entire ecosystem within
which your organisation operates enables strategic decisions to be made on how best to create value within
the system, protect or build on your existing power as well as building new capabilities to improve the value
proposition of the entire ecosystem.
QUESTION 2.19
following box.
1. What, if any, complementary products or services add value to the accounting services industry?
2. Are there opportunities or threats evident from any of the complements identified?
Issues for Consideration on Power of Complements

• Are there products or services that increase the value of the industry?
• Is there differentiation in the complementary product or services’ market, or is it commoditised?
• Can the complementary product or service be used to strengthen your position in the industry?
• Is your position protected long term?
• Does technology exist that will enable complements to impact on the industry?
Intensity of Industry Rivalry

Intensity of industry rivalry is the degree of competitiveness that is found between existing industry
competitors.
The way the existing firms in an industry compete with each other will also determine the level of returns
available to any one competitor. An action by one firm may generate a reaction from other competitors.
For example, in the airline industry, attempts to offer discount fares are readily met with similar attempts
by competitor airlines — for example Ryanair and easyJet.
The intensity of rivalry is related to the following factors.
• Number of competitors. In general, the more competitors, the greater the rivalry because it is harder for
competitors to effectively cooperate with each other.
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• Rate of industry growth and profitability. Any slowing in the rate of growth or profitability in an industry
means that to grow, the organisation has to capture market share from another competitor, thereby
increasing rivalry.
• Amount of fixed costs. High levels of fixed costs will increase the firm’s willingness to discount to utilise
capacity, thereby increasing rivalry.
• Capacity. If the only way a producer can grow is by increasing capacity, there is an incentive for them
to fully use that capacity, which can again lead to increasing rivalry.
• Degree of government involvement. Regulation of the industry or involvement of government-sponsored
entities can have a distorting effect on how well an entity can compete with others.
• Exit barriers. Exit barriers make it more difficult for an organisation to leave an industry. Typical exit
barriers include the following.
– Investment in specialist equipment. Investments in specialised and usually high cost equipment that
cannot readily be used in other industries tend to deter industry exit.
– Specialised skills. Highly specialised skills by industry participants that cannot be easily used in other
industries tend to be a barrier to exit.
– High fixed costs. High levels of dedicated fixed costs tend to be an impediment to leaving an industry.
Almost every organisation believes that its industry experiences ‘intense’ or ‘high’ rivalry. Under the
law of averages, this is highly unlikely to be true. From the list of factors just given, it should be clear that
many industries do not really face high rivalry. In particular, in industries where growth is high, products
are differentiated and there are few competitors, it is unlikely that rivalry will be high. Be wary of simply
assuming or accepting that rivalry is high without undertaking proper analysis.
QUESTION 2.20
following box.
1. How would you describe industry rivalry in the accounting services industry? Refer to the issues
listed in the box to structure your answer.
Issues for Consideration of Intensity of Industry Rivalry

• What is the life cycle stage of the industry?
• What is the proportion of fixed costs in the industry’s total cost structure?
• Does the industry have too much or too little capacity?
• How are the competitors organised?
• How different are the products and services being offered by competitors in the industry?
• How well established are brands in the industry?
• Are buyers loyal to specific competitors and on what basis?
• How complex or easy is it to compare the pros and cons of industry products and services?
• How does government policy affect the industry?
• Have mergers and acquisitions been supported or blocked?
• How difficult is it to exit the industry?
• Does technology exist that will impact on the intensity of the rivalry?
Drawing Conclusions About Industry Profitability

These five forces interact to determine the attractiveness of an industry. The strongest forces become the
dominant factors in determining industry profitability and the focal points of strategy formulation.
For each of the forces considered for an industry analysis, you should conclude whether its power is
high, average or low. After establishing the power for all forces, you can then draw a conclusion about the
current industry profitability. If all forces are rated as high, industry profitability will generally be very
low. Conversely, if all forces are rated as low, industry profitability should be very high.
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When summarising, the tendency is to play it safe and draw a middle-of-the-road conclusion, but taking
this approach hides the key issues that are influencing industry profitability.
This summarising approach is based on an assumption that there is some sense of average industry
profitability. In practice, this is a problem. Few people really have much idea of what constitutes average
industry profitability. In the United States, industry profitability can be quite easily assessed objectively
by reference to publicly available industry information. However, in countries with smaller economies
(i.e. most countries apart from the industrial giants of the world), such information is often not available
or is only available for some of the competitors and may not be representative. Increasingly, however,
international comparisons of profitability are being drawn as information houses, such as stockbrokers,
researchers and consultants, access similar data from overseas sources.
The desirable level of industry profitability (i.e. return on equity) might be thought of as being a
combination of:
• a return covering the risk-free real return for the country in which the operations exist (typically 0–5%
per annum) plus
• a return for expected inflation (typically 2–5% per annum) plus
• a return for the risk involved in the industry (typically 2–8% per annum).
Overall, using these example ranges, this means industry profitability should lie in the range of 4% to
18% per annum, depending on the impact of the factors listed, with an average of around 10% per annum.
An industry with high (or low) profitability does not equate to all organisations in the industry being
similar. Organisation profitability should be assessed within the context of industry profitability and only
after industry profitability has been assessed. For instance, a good performer in an unprofitable industry
could have quite low absolute profitability.
This analysis is an important tool in strategic decision making. Leaders and managers can use this
information to:
• position the organisation so that its capabilities provide the best defence against its rivals
• influence the balance of forces
• anticipate and respond to shifts in the factors underlying them.
Example 2.9 shows how the industry analysis can be applied to the Australian architectural and
decorative branded paint industry.
EXAMPLE 2.9
Five Forces Analysis for the Australian Architectural and Decorative

Branded Paint Industry
This industry includes all brand name paints that are used to decorate or cover the surface of structures
in Australia.
Threat of new entrants is medium. There are low capital requirements for low-technology products in
the architectural and decorative branded paint industry. While there are relatively low tariffs for imports,
the volume-to-value ratio of paint makes imports generally uncompetitive. The high exchange rate for the
Australian dollar could make international purchasing more competitive for the industry. Health and safety
compliance, dangerous goods regulations (storage and transport), environmental issues and increasing
regulation are making it more difficult for small operators to enter the industry. Having distribution outlets
or contracts in place with major retail stores is critical, as more than 50% of paint is now sold through
retail outlets and imported paint has recently started to be stocked by some major hardware retail outlets.
Supplier power is low. Architectural and decorative paints are made from basic commodity chemicals
that are widely available from local and international suppliers, with supply contracts negotiated locally.
Buyer power is high and increasing. The power of buyers is increasing as sales move from trade outlets
to retail outlets, with the dominance of two key distribution chains. This power is increasing as sales
volume shifts from trade to retail outlets, in support of new product development that has moved product
development away from solvent-based products, enabling more do-it-yourself (DIY) painting.
Substitute power is medium and increasing. A number of product options are available from a number
of suppliers, including house-brand products (i.e. products developed by major retail distributors and sold
in their own outlet) and, more recently, imported paints.
Industry rivalry is high. There are many local paint manufacturers that have well-established brands
in various segments. However, consolidation of competitors over time, mainly through acquisition, has
left only three major competitors in the market that have most of the market share in the architectural
and decorative industry. Strong competition in the industry between major companies has affected past
profitability and will continue to affect future profitability. More emphasis will need to be placed on
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branding and marketing to maintain or increase market share, with price becoming a key factor. Cost
competitiveness is essential, and the current competitors have to fight for market share. This means
that only limited profits can be made unless competitors can somehow differentiate themselves, such as
through new products, branding and marketing.
Future profitability. The Australian architectural and decorative branded paint industry is assessed as
medium and declining. Future profitability will continue to decline as the major manufacturers compete for
market share in a mature market that is becoming increasingly price and promotion driven. Are there any
complementary products or services that may add value to this industry and improve its overall outlook?
QUESTION 2.21
Now that you have reviewed the various aspects of the accounting services industry against the
five forces of Porter’s model and complementary forces in questions 2.15 to 2.20, draw all the
components of your analysis together.
1. Using the components from your previous analysis:
(a) Assess whether the future profitability of the accounting services industry is expected to be
average, above average or below average.
(b) What are the key driving forces of that future profitability?
(c) What external evidence is there to support your analysis or conclusions?
(d) What gaps did you discover in your understanding of the industry?
(e) What are the implications for the future of organisations in this industry?
as follows.
KEY POINTS
• The second stage of environmental analysis is to analyse the industry to determine profitability.
• Porter’s five forces model is used to analyse why certain industries are more profitable than others
and can help explain how expected changes will affect profitability.
and competition.
• Porter found five forces could explain differences in industry profitability:
– threat of new entrants
– power of suppliers
– power of buyers
– power of substitutes
– intensity of rivalry between competitors.
• A sixth factor — complements — is commonly added for some industries.
• If all forces are high, industry profitability will be low. If all forces are low, industry profitability will
be high.
• Leaders and managers can use the outcome of a five (or six) forces analysis to position the
organisation so its capabilities help defend against competitors, influence the balance of forces
in the industry, and anticipate and respond to shifts in the factors underlying the forces.
2.5 UNDERSTANDING CUSTOMERS AND MARKETS

At the end of your industry analysis, you should have a clear picture on what industry your organisation
is involved in, the major forces on that industry and the growth and profitability potential it represents.
However, this is still only one part of the external analysis. Next you need to consider your consumers.
That is, the people (or organisations) who consume the products or services offered by your organisation.
These represent your ‘market’.
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WHAT IS A MARKET?
Markets include both the organisations in the industry as well as the buyers of the products and services
they offer. As with the definition of industry, an organisation’s market definition can be very broad or very
specific, depending on how the organisation’s needs and capabilities.
Market Segmentation
Market segmentation, like industry segmentation, divides the market into groups who share similar
characteristics, needs and behaviours. In order to qualify as a segment the group needs to be meaningful
and distinct. Segments should satisfy the following criteria.
• Homogeneous in terms of members. Members of a particular segment must be similar in their attitudes,
behaviours, financial status, and so on.
• Heterogeneous in terms of other segments. Each segment must be different from the others.
• Substantial. Groups must be of sufficient size to warrant special marketing efforts. This does not mean
that there has to be a large number of consumers, as a small group in sheer numbers can be profitable
(there are relatively few buyers of Rolls-Royce automobiles, but at an average price of $300 000, even
selling a limited number generates good profit for the company).
• Identifiable. You must be able to identify group members and non-group members.
• Responsive. Segment members react in a similar manner to market offerings.
There are different approaches to decide how to segment a market. These variables can be used either
by themselves or in combination.
• Demographic. Grouping customers on the basis of age, income level, gender, family size, religion, race,
nationality and language.
• Psychographic. Grouping customers into clusters based on culture, lifestyle and personality type.
• Behavioural. Grouping customers based on usage level and brand loyalty.
• Distribution. Grouping customers based on the distribution channel through which they purchase
products, such as online or at a supermarket.
• Geographic. Grouping customers based on markets made distinct by their location.
Figure 2.25 shows the women’s clothing retail market segmented by age (demographic segmentation).
Often organisations need more specific segmentation to be meaningful. Not all 35–55-year-old women
choose to dress in the same way. This is where the other segmentation variables come into play. For
example, an organisation’s products may be best suited to 20–40 year old women, living in urban areas,
who have a healthy and active lifestyle.
FIGURE 2.25 Demographic segmentation of the women’s clothing market
Women 55+ years

Teen girls and women
38.4%
15–34 years 31.9%
Women 35–54 years 29.7%
When considering how to segment your market, national boundaries are becoming increasingly blurred
and less relevant and markets are less likely to be defined in geographical terms. There are a number of
reasons for this. Firstly, the term ’trading system’ is more open to international trade with a lowering of
tariffs (in most countries) and there is now an international monetary framework that helps reduce the risk
of fluctuating exchange rates. Also, technology has made communication and transport faster, cheaper
and more efficient across geographic boundaries and enabled information to be gathered, analysed and
disseminated globally from the palm of your hand.
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As explained in module 1, big data is the exponentially increasing data sets that are created from the
millions of interactions that occur every day with internet-connected devices. The scope and volume of
this type of customer data allows market definitions to be more specific as we gain insights into customers’
behaviours and attitudes.
Market Segment Analysis

As with industry analysis, market segments also need to be analysed to assess their attractiveness and
potential. Analysis of segments should include the following.
• Who are the buyers in each segment — their characteristics, wants, needs, attitudes and behaviours?
Are they distinguishable from other segments?
• How many buyers exist in each segment? This can be expressed as total market sales or market share.
• What is their potential value — contribution margins, profitability?
• What is the potential growth rate of this segment and does it have potential to increase in the future?
• How do they shop — online/instore, regular customers or one-off?
• How loyal are they — to your organisation, product?
• Does your organisation have the products/services/capabilities to serve this segment?
Market segmentation analysis and evaluations enables organisations to choose to target the segments
that are most suitable to its resources and capabilities. These are called target markets. Some organisations
may choose to target a number of segments (for example, David Jones), while others may target only one
(for example, Lorna Jane). New entrants to an industry may target a completely new segment that is not
currently being served.
Consider the ‘sustainable fashion’ segment. These organisations use renewable energy, fairly paid
workers and transparent supply chains and target buyers who want to align themselves with companies
that share their attitude of doing minimum harm to communities and environments. For example, vegan
clothes are becoming increasingly popular, and there’s no shortage of them to choose from. Some brands,
like Keep Company and Unicorn Goods, offer an expansive generalised catalogue of vegan shirts, jackets,
accessories and more. Other brands are more specialised: Unreal Fur has a beautiful line of vegan faux-
fur, Ahisa, Beyond Skin and SUSI Studio all sell stylish vegan shoes, and Le Buns specialises in vegan
swimwear. There are upscale vegan clothing retailers, such as Brave Gentleman, as well as more casual
budget options, like The Third Estate. Many vegan clothing companies, such as In The Soulshine and
Della, have found ways to sell cruelty-free clothing while also providing humane working conditions to
their factories’ workers.
Hipsters For Sisters’ products are made entirely with recycled, upcycled, or deadstocked materials,
earning the approval of PETA. Reformation utilises a carbon-neutral production process to make its
clothes (and offers customers a $100 store credit if they switch to wind energy), while Stella McCartney’s
entire product line is vegetarian. Amanda Hearst’s Maison de Mode features a combination of Fair Trade,
recycled, cruelty-free, and organic products — as well as a comprehensive labelling system to inform
customers which is which (Tech Crunch 2019).
While this is standard marketing information, non-marketers in the organisation are often fixated on
what the organisation can produce, not what customers actually want. This is a major fallacy in planning.
All leaders and managers in the organisation need a thorough understanding of customer needs and what
drives demand, as it is critical in designing strategies — and capabilities — to meet those needs.
Example 2.10 presents one way of applying market segmentation to the Australian domestic
airline industry.
EXAMPLE 2.10
Market Segmentation in the Australian Domestic Airline Industry

If we continue the Australian domestic airline example used for industry segmentation, you can see how
the industry segments are further broken down according to customer needs and expectations. The
major market segments in the domestic airline industry are domestic travellers, international travellers and
logistics companies as shown on the left of figure 2.26. A more useful segmentation may break domestic
travellers into business and leisure travellers, as shown on the right of figure 2.26.
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FIGURE 2.26 Market segmentation of the Australian domestic airline industry
Logistics
companies: 2.6%
International Logistics companies:
travellers: 2.6% International
8.0% travellers: 8.0%
Domestic leisure
travellers: 50.5%
Domestic
travellers:
89.4%
Domestic
business
travellers: 38.9%
Source: Data from IBISWorld, 2018.
Domestic leisure travellers (occasional travellers for holidays, events or to visit friends and family)
account for more than 50% of the industry’s total revenue. Domestic leisure travellers often plan their
travel to take advantage of lower-priced flights, though in travel for fixed-date events such as weddings
or concerts, price becomes less important. Baggage allowances, convenience and service are also
considerations, but price is the most significant factor. Domestic leisure travellers (occasional travellers for
holidays, events or to visit friends and family) account for more than 50% of the industry’s total revenue.
Domestic leisure travellers often plan their travel to take advantage of lower-priced flights, though in travel
for fixed-date events such as weddings or concerts, price becomes less important. Baggage allowances,
convenience and service are also considerations, but price is the most significant factor.
Business travellers’ needs means time and flexibility are priorities, with price being secondary. Airlines
thus charge a premium for business traveller tickets. Demand for business travel is susceptible to
variations in organisational profitability and, increasingly, the availability of substitutes such as telecon-
ferencing. Prior to the COVID-19 crisis, the international traveller segment had been growing strongly
due to the depreciation of the Australian dollar, which made Australia a more affordable destination for
international travellers. Demand from Asian countries in particular had been growing strongly.
The logistics segment carries freight domestically. This segment has been in decline due to competition
from substitutes. Advances in big data regarding traveller behaviour and attitudes represent an opportunity
for airlines to better customise services to particular target markets.
QUESTION 2.22
Consider the Airly model (from example 2.4 and question 2.5) and explain which market segment is
Airly targeting. Provide an explanation for your response.
QUESTION 2.23
Use the reading from example 2.5 and your industry analysis to answer the following questions on
the accounting services industry in Australia.
1. Explain the market segments in the Australian accounting services industry.
2. What does each segment primarily use the industry product or service for?
as follows.
KEY POINTS
• Market segmentation divides the market into groups with similar characteristics, needs and
behaviours.
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• Segmentation variables may be demographic, psychographic, behavioural, channel-based or
geographic.
• Market segment analysis and evaluation enables an organisation to choose target segments that
are most matched to the organisation’s resources and capabilities.
• It is a common mistake to focus on what the organisation can produce rather than on what
customers want. Leaders and managers must make sure these align.
2.6 COMPETITION IN THE INDUSTRY

Once the analysis of the growth and long-term profitability of the industry has been undertaken, it is
important to turn attention to the competition within the industry. This analysis uncovers how competitive
the industry is, what drives the competition and what is required for an organisation to successfully compete
in the industry. Porter’s five forces analysis conducted earlier gives insights into the level of competitive
rivalry in the industry. The next step is to consider the nature of this rivalry and the basis of competition
within the industry.
STRATEGIC COMPETITION
Competition can be natural or strategic. Natural competition refers to survival of the fittest. It is simply an
evolutionary process that weeds out weaker rivals — the law of the jungle. Strategic competition on the
other hand is the studied deployment of resources, based on a high degree of insight of a business system.
It tries to leave nothing to chance (Jain, Haley, Voola & Wickham 2012).
Strategic competition is dependent on strategic decisions regarding actions, resources and capabilities
within the organisation and requires:
• the ability to understand competitive interaction as a complete dynamic system that includes competi-
tors, customers, money, people and resources
• the ability to use this understanding to predict the consequences of a given intervention in the system
• the availability of uncommitted recourses that can be dedicated to different uses and purposes
• the ability predict risk and return with sufficient accuracy and confidence to justify the commitment of
such resources.
BASIS OF COMPETITION
Competitor analysis begins with identifying the basis of competition within the industry. This combines
your knowledge from the remote and industry analysis with customer and market knowledge to:
• identify what drives demand, choice, price and cost
• assess the current and potential risks that may affect future developments in the industry and
• discover what underpins sustainable competitive advantage.
Table 2.5 presents a number of questions that can help determine that basis of competition and
example 2.11 applies these questions to analyse the chocolate manufacturing industry.
TABLE 2.5 Basis of competition questions
Basis of competition Questions
Demand What drives demand for the products and services of the industry?
Choice What drives price, product performance and supply availability?
Price How is price determined in the industry?
Costs What are the main drivers of cost in the industry?
Current and potential risks What are the current and potential risks?
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EXAMPLE 2.11
The Basis of Competition in the Chocolate Manufacturing Industry

Chocolate
manufacturing
industry Response
What drives • Income — households in the top 10% of income earners spend almost double the
demand for the amount on chocolate than those in the bottom 10%.
products and • Demand for chocolate is highly price-elastic, with value for money being a key driver
services of the of the purchase decision.
industry? • Frequency of shopping — about 70% of chocolate purchases are made on impulse,
with 40% of purchases consumed immediately.
• Location of products for sale to support impulse purchasing.
• Recognised branding to enable product location in convenience stores, which stock
fewer product lines.
• Key events for gifts such as Easter, Christmas, Valentine’s Day and Mother’s Day.
What drives • Consumers may not be eating chocolate as often as they used to, but they are
price, product spending more on premium varieties as an indulgence.
performance • Key events such as Easter, Christmas, Valentine’s Day and Mother’s Day increase
and supply supply availability.
availability? • Extensive merchandising, marketing and media strategies. These include placing
products in prominent displays and adjacent to supermarket checkouts, specific
advertising campaigns, point-of-sale promotional materials, brand-building
promotions and quantity purchase discounts.
How is price • Price is directly related to perceptions of quality. Price is therefore a key success
determined in factor for those offering house-brand or no-brand products. Manufacturers
the industry? competing on the basis of quality are able to charge a premium. Differentiation
can reduce the necessity to compete on price. Competitors who compete in the
marketplace on the basis of low-grade or generic brands need to make sure that
price is one of their key success factors. Confectioners who compete on the
basis of quality need to develop differentiation strategies because price is not an
important determinant in the consumer’s purchasing decision.
What are the • Material inputs like cocoa, sugar and milk represent the largest components. Cocoa
main drivers represents about 40% of raw material costs. Other ingredients include milk and
of cost in the sugar, flavourings, fruits, nuts and artificial colours. The cost of these raw materials
industry? is a function of agricultural commodity prices. All these ingredients are locally
sourced, which eliminates high transport costs, and these ingredients are readily
available from many suppliers.
• Labour costs reduce as the level of capital intensity increases. However, labour
costs can be up to 25% for smaller manufacturers who specialise in high-quality
handmade chocolates that use fewer automated processes.
• Packaging is about 15% of the cost of inputs.
• As chocolate is often an impulse purchase, it responds extremely well to point-of-
sales merchandising. Displays are more important than price reductions and enable
retailers to generate full profit margins at the point of sale.
• The large multinationals achieve high production efficiencies by producing large
volumes and can sustain lower average selling prices because of the mass-market
nature of their products. Smaller manufacturers of high-quality products have lower
volumes and therefore incur higher production costs.
What are the • Increasing consumer concerns about dental health and obesity — chocolate
current and products are perceived to be unhealthy and high in calories.
potential risks? • Growth in-house brand chocolate sold in supermarkets increasing competition and
eroding margins.
• Government regulations and possible banning of TV advertising before 9.00 pm.
• An ageing population in key consumer markets (developed countries). Chocolate
consumption per capita peaks between 12 and 24 years of age, with a marked
reduction after the age of 25.
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QUESTION 2.24
Use the reading from example 2.5 and your industry analysis to answer the following question on
the accounting services industry in Australia.
Examine the basis of competition for the Australian accounting services industry and summarise
your responses on a work sheet (refer to table 2.5 and example 2.11 for guidance).
INDUSTRY KEY SUCCESS FACTORS

In all industries there are a few factors that are critical for an organisation to compete successfully.
Understanding the basis of competition makes it possible to summarise these factors. The question we
are trying to answer here is: ‘What would provide a sustainable competitive advantage?’
For the chocolate industry example, industry key success factors might be as follows.
• Strong brand names. High-profile brands with strong customer loyalty are fundamental to maintain
market share, generate high sales growth and prolong the product life cycle. Large companies with
significant promotion budgets are able to maintain strong brand images through constant promotion
and support the introduction of new products and brands. Organisations like Nestlé and Cadbury are
examples of strong brand names — these brands have been established for decades.
• Efficient selling and distribution networks. The larger manufacturers must ensure that their products
are widely and efficiently distributed so they are available for impulse purchases by consumers. As
lower prices are important to ensure competitiveness, cost-effective distribution and logistics are critical.
Manufacturers need to invest heavily in establishing strong relationships with downstream retailers.
Good access to confectionery stores is important for high-quality chocolates. Cadbury sells its products
globally, while manufacturing them locally in order to reduce distribution costs. While Lindt has
traditionally been purchased by consumers in retail stores, it is now operating its own shop fronts,
making its product more accessible to customers.
• Effective brand support, marketing and strong merchandising. Manufacturers must ensure their product
has strong marketing support and merchandising. This includes prominent displays, good product place-
ment near retailer checkouts, advertising and promotional campaigns to create demand, promotional
spend with retailers, point-of-sale materials, brand-building promotions, sponsorships and quantity
purchase discounts. As chocolate competes with other impulse purchases, it has to be well placed
for consumers. Strong brand support is important to enable brand recall for impulse purchases. Nestlé
and Cadbury both have high costs relating to advertising, with many of their campaigns prominent in
advertising history. Further, chocolates have prominent merchandising for impulse purchase at the front
cashier register.
It is preferable that the list of factors be controllable in terms of cost by the organisation, and the list
consists of factors that the industry defined competes on. However, the challenge in defining the key success
factors is when there is disruption in the industry that may change the relevance of particular factors. Think
about the mobile phone industry. Critical success factors in the early days of the industry included reliable
products and efficient distribution networks. Nokia had what looked like an unbeatable market position
with the most sturdy and reliable phones and a global distribution network. However, the introduction of
the iPhone to the industry changed the way mobile phones were perceived. Value no longer lay in a phone’s
sturdiness, but in its features. For example, phones could now receive and send emails, play music, take
photos and even search the internet. A wide distribution network remained a critical success factor, however
a new critical success factor of integration of technology was born. Nokia was caught completely off-guard
as it has not invested resources in technology and R&D. By the time they changed their strategic direction,
their once envious market share position had been taken by Apple.
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COMPETITIVE POSITION
You now understand the level of competitive rivalry, the basis of competition in the industry and the critical
success factors. The next step is to determine your organisation’s competitive position, which describes
how an organisation differentiates itself from competitors in its market. In order to do this, you first need
to understand your competitors. The following questions will help.
• Who is the competition? Now? Five years from now?
• What are the strategies, objectives and goals of each major competitors?
• How important is a specific market to each competitor and what is the level of its commitment?
• What are the relative strengths and limitation of each competitor?
• What weaknesses make competitors vulnerable?
• What changes are competitors likely to make in their future strategies?
• So what? What will be the effects of all competitors’ strategies on the industry, market, your
organisation?
Where do you get this information? Like your BI, you also need to incorporate a competitive intelligence
system. Again, there are a variety of sources for competitor information, that can be broke down into three
main areas.
1. What competitors say about themselves — public documents, annual reports, trade documents.
2. What others say about them — customers, suppliers.
3. What employees have observed about them — based on interactions of your salespeople with competi-
tors and their customers.
The more you know about your organisation’s competitors, the better you will be able to position
yourself against them and protect yourself from future changes. You should be able to identify who the
stronger or weaker competitors are within the industry and be able to rank your business against them,
based on its capabilities and resources. An organisation needs to be positioned so that its capabilities
provide the best defence against competitive forces. All strategic decisions should align with or improve
this competitive position.
Identifying and Assessing Competitors

Unless your organisation is a monopoly business (which is less and less likely in these days of consumer
protection), your customers do not have to buy from you. Your competitors are the organisations in your
industry that compete with your organisation for customer dollars. It is important to understand what your
competitors are good at — that is, their strengths — in order to:
1. confirm and communicate your competitive advantages to customers
2. use competitive intelligence that may reveal important industry trends that you have missed
3. use this information as a key input into strategic decision making so that your organisation can position
itself differently from its competitors.
Although there may be a large number of organisations in an industry, not all of them are direct
competitors. If you can understand, for example, where you have recently lost customers and who they have
gone to and why, you will gain a good insight into which competitors you need to know more about and
why they have successfully attracted some of your customers. This is a crucial point, particularly in this
age of technological advancement. Many organisations have been caught off guard by new technology
that has provided the same, or improved benefit to their customers and thus disrupted the industry
(e.g. taxis, video rentals and mobile phones). So when you consider your organisation’s current com-
petitors, you need to consider not only those that provide the same product or service, but also those who
offer substitute products or services that satisfy the same need or even change the consumers’ expectations
regarding the need. The following questions may be helpful in defining competitors.
• What need does the product/service fill?
• Which organisations provide exactly the same product/service to fill the need?
• Which organisations provide an improved product/service that fills the need?
• Which organisation provides a breakthrough product/service that has/ or has the potential to change
consumer behaviour and expectations?
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Once you have created your competitor list, you need to determine those that are the highest threat to
your organisation. Again, the risk here is to underestimate the threat of a new player, who may only have a
small market share at this stage. This is where leaders and managers need to show foresight in assessing the
potential changes in the industry. Major competitors then need to be considered in more detail by asking
the following questions.
• What is its business strategy?
• Who are its key stakeholders and what are their objectives and values?
• What is its current position in terms of market share, financial performance, operating efficiency and
long-term growth and development?
• What plans does it have to change either the scope or nature of its operations?
• What is its operating position in terms of its current volume compared with its maximum capacity, its
breadth of product range and its relative cost structure?
• What distinguishing features or customer benefits does it have? In other words, what is its value
proposition?
• What are its key capabilities or competitive strengths?
• What are its key competitive weaknesses?
• What assumptions does it hold about the industry and about itself?
The organisation’s value proposition is in effect how the organisation will uniquely position itself
against its competitors. As such, it is necessary to take into account the basis of competition in the industry
(i.e. what drives competition) as well as how competitors are positioned so as to find a unique competitive
position. It is therefore broader than just the basis of competition alone and industry key success factors
that matter when forming the value proposition — the positioning of each of the key competitors also
needs to be taken into account so that the organisation has a unique position in the market.
The value proposition is demonstrated as a business or marketing statement that an organisation uses to
summarise why a consumer should buy a product or use a service. This statement convinces a potential
consumer that one particular product or service will add more value or better solve a problem than other
similar offerings. Companies use this statement to target customers who will benefit most from using the
company’s products, and this helps maintain a competitive advantage. Value propositions are a promise by
an organisation to a customer or consumer segment. They are easy-to-understand reasons why a customer
should purchase a product or service from that specific business. A value proposition should be a clear
statement that explains how a product solves a pain point (i.e. a real or perceived problem), communicates
the specifics of its added benefit, and states the reason why it’s better than similar products on the market.
The ideal value proposition is concise, and it appeals to a customer’s strongest decision making drivers.
They can be a good indicator as to whether or not a company is a threat as they will appeal to the same
customers and their motivations.
Table 2.6 summarises some of the variables to consider in a competitor analysis and provides a template
to assess each of these components in relation to the key success factors identified earlier.
This evaluation of competitor attributes is subjective. In module 3 you will move from external analysis
to internal analysis — assessing the strategy and performance of the organisation against its stated strategy.
When you undertake internal analysis, another line can be added to competitor analysis — the relative
position of your organisation.
However, for now, developing a standard approach is useful as it enables a more direct comparison
between competitors. Over time it is also an extremely useful exercise to keep up to date within an
organisation. It provides a forum for debating and agreeing upon important assumptions, information
and facts. It is very useful for discovering both what is agreed upon and commonly shared within the
organisation and what is not agreed upon and not known about competitors. If documentation is kept in a
systematic way over a period of time it should be possible to start predicting competitor behaviours.
Example 2.12 provides an illustration of three fictitious tertiary institutions operating in the Country
Nomad higher education industry, and will test your knowledge in understanding the various frameworks.
The three companies are East Shore University, Bridgeland College and the University of Excellence.
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TABLE 2.6 Competitor analysis worksheet
Competitor factors Competitor 1 Competitor 2 Competitor 3
Need satisfied
Value proposition
Facilities and equipment
Personnel skills
Management capabilities
Finance capabilities
R&D capabilities
Operations capabilities
Marketing capabilities
Strengths
Weaknesses
EXAMPLE 2.12
Higher Education Industry in Country Nomad

The Country Nomad education industry as a whole generated $102.3 billion in revenue in 2019. As Country
Nomad’s largest service export, education contributes significantly to the country’s economic affluence,
with education exports valued at an estimated $7.44 billion in 2019–20. However, this has not always been
the case. Only over the past 40 years has Country Nomad become the ‘knowledge economy’ it is today.
As more jobs now require the skills and knowledge taught through higher education (universities, colleges
and institutes), Country Nomad has observed strong growth in the number of such student enrolments,
both locally and internationally.
Industry experts summarise the following areas as the key success factors for the industry.
• Access to a highly skilled workforce — recruiting experienced and qualified staff promotes the quality
of teaching and reputation of the institution.
• Current and relevant courses — institutions should be responsive in offering courses that address
industry skills shortages and meet student demand.
• A good reputation — increases demand for enrolment.
• Export markets — due to the large export market for education, it is important to develop these channels
to generate extra revenue from the full-fee paying overseas students.
This example will focus solely on the higher education industry. The market share breakdown of the
three main competitors in the Country Nomad higher education industry is shown in table 2.7.
TABLE 2.7 Country Nomad higher education industry market analysis
Domestic Overseas
student student Online teaching Total industry
enrolments enrolments facilities market share
East Shore 17.0% 28.5% 7.0% 17%

University
Bridgeland College 16.0% 15.0% 18.0% 15%
University of 7.5% 1.5% 31.0% 13%

Excellence
Other† 59.5% 55.0% 44.0% 55%
†
There are many small education institutions, none of which individually holds a dominating market share.
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East Shore University
East Shore University is Country Nomad’s most prestigious university. It has over 50 000 students, both
local and international, and more than 7000 staff members.
Historically, local students accounted for as much as 90% of the university’s student community. How-
ever, after three consecutive years of decreasing revenue over the period of 2009–10, the university shifted
focus to attracting full-fee paying overseas students by providing more accessible international enrolment
channels. East Shore University also created an agreement with the Nomad Country Government, whereby
overseas students are more easily able to gain entry visas to study at East Shore. In 2019, it was estimated
that local students would comprise only approximately 50% of the university’s enrolments.
East Shore University is a research-led institution. Its campuses boast 20 discipline-specific research
facilities, and the staff and research teams commonly produce world-class academic breakthroughs.
Given the continued success of this part of the institution, East Shore receives generous government
funding to ensure the maintenance and progression of its research practices. This funding filters through
to the teaching and learning streams, enabling the university to provide above-standard wages to its
teaching staff. This has attracted high-class educators to the university, facilitating a profitable cycle of
research success and liberal government funding.
East Shore University, however, has maintained a traditional route to education since its inception in
1901. This has fostered a culture of tradition, rather than innovation. As such, the university is yet to
develop a sufficient online platform to keep up to date with the current technological climate, potentially
limiting the university’s accessibility, as well as distance education and international students.
Bridgeland College
Bridgeland College formed in 2006 from a merger between two small, underperforming higher education
institutions, Hopetoun University and Bridgeland Institute. Since its formation, Bridgeland College has
generated a profit, albeit gradual and incremental.
Due to its recent development, there is a need to quickly generate revenue to continue to build the
university, its facilities and its reputation. Bridgeland College offers a comprehensive and integrated online
teaching and learning system (the Teaching and Learning Hub) that caters for distance education, mature
age and international students. This allows the university to gain excess revenue from these otherwise
inaccessible students.
Bridgeland College aims to attract a large number of students through the provision of more courses
than standard universities. It offers a range of undergraduate, postgraduate and double degrees, with
particular consideration of student demand, as well as areas with skills shortages. However, the newness
of the university, compounded by the extensive reach it is trying to achieve in the number of courses
it offers, has led to the quality of teaching staff suffering. The sheer volume of courses has meant that
staff with specialised knowledge are attempting to teach additional disciplines in which they are not
experienced. Thus, although numerous courses are offered, the standard of teaching is below average.
Unfortunately, this major quality control issue has infiltrated into the media, and the lecturers’ lack of
expertise has caused Bridgeland to lose credibility and attractiveness.
University of Excellence
The University of Excellence is a niche educational institution, specialising in business and finance
curricula. With only 15 000 students, the university is renowned for its exclusivity and high standards of
entry. Students must rank in the 99th percentile in their final secondary school year for their applications
to be considered. The university accepts a limited number of students each year, and often rejects more
than 80% of applicants.
Such high enrolment prerequisites are justified by the world-renowned quality of academic staff.
Commonly, business and finance experts work in relevant industries due to the lucrative nature of work
available, leading to a decline in the quality of academics in these areas. The sterling reputation of
the University of Excellence has proliferated, however, due to its exclusive access to high-profile, well-
qualified and experienced teaching staff.
This reputation has led to the university receiving considerable bequests and donations from high-
profile members of the business and finance sectors. Thus, the university does not have any difficulties
with funding, and is considered to be highly affluent.
The University of Excellence’s financial prosperity, combined with its desire to remain a niche and
exclusive Country Nomad institution, has meant that almost no places are reserved for international
students. Approximately 98% of the university’s student community is comprised of local students.
Nonetheless, student fees are already 20% higher at the University of Excellence than the second most
expensive Country Nomad institution, Braymar University.
The University of Excellence offers sophisticated and integrated online teaching facilities that attract a
significant portion of distance education students.
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QUESTION 2.25
Use the information in example 2.12 and the worksheet given in table 2.11 to respond to
this question.
Summarise the strengths and weaknesses of each competitor (East Shore University, Bridgeland
College, University of Excellence).
IDENTIFYING STRATEGIC GROUPS

As mentioned previously, not all industry players compete directly with each other. There are frequently
several different groups of competitors. Each group consists of competitors following a similar strategy in
a similar product-market classification, whereas other organisations in the industry have either a different
strategy or a different target product market. These groups are called strategic groups. Each strategic
group has a different position in the market based on having a different strategy for competing.
As an example, if we look at a few competitors from the Australian chocolate industry (see figure 2.27),
we see that, although there are several market players competing, there are three main strategic groups,
based on two axes — category of chocolate quality and market player (organisational) size. The first group
is tightly linked and competes in the everyday part of the market, and all of the companies here are large.
The second group moves more towards specialised chocolates and is smaller in size. The third group is the
luxury market and companies in this area are generally very small because it is a small niche market. This
is discussed further in example 2.13.
FIGURE 2.27 Strategic groups in the Australian chocolate industry
Luxury
Haighs/Koko Black/Pana
Lindt/Ferrero
Category
Mid-range Private label
Cadbury/Nestlé/Mars
Everyday
Large Medium Small
Organisational size
EXAMPLE 2.13
Strategic Groups in the Chocolate Manufacturing Industry

In the chocolate manufacturing industry there are a few large manufacturers that operate globally. In the
markets where they compete, there are usually a number of smaller competitors. The large manufacturers
and the small manufacturers form two strategic groups that generally compete on the basis of the following
business models.
Large chocolate manufacturers usually compete on the basis of cost. Their business models can be
characterised as follows:
• the supply of reasonable-quality products at lower average selling prices for a low price to the
mass market
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• high-volume, automated efficient production facilities generating low unit cost (i.e. economies of scale)
• high investment in strong distribution relationships with major retailers and convenience stores to secure
shelf space, particularly in key locations (i.e. checkout areas)
• high level of branding and promotion investment to support brands and stimulate impulse purchases
by consumers
• the supply of a wide variety of chocolate and confectionery products in general.
Specialised chocolate-makers usually compete on the basis of high-quality, differentiated products or
target niche markets. Their business models can be characterised as follows:
• higher average selling prices for high-quality and typically handmade chocolates
• lower volume production facilities with higher labour costs due to the manual work involved in handmade
chocolate, resulting in higher average cost per unit
• investment in distribution relationships with specialist chocolate stores to secure shelf space
• often limited geographic coverage, sometimes only in one region
• strong local branding and promotional activities to generate brand awareness as a luxury product for
luxury indulgence and gift markets
• specialisation in high-quality chocolate and confectionery only.
In small markets, it is typical to have two or three strong industry competitors who hold a significant
concentration of market share, and then several smaller competitors who capture the balance, competing
on a different basis from the larger companies. Similarly, in industries that have capital intensity, such as
the global pharmaceutical industry, there are typically only a few large global competitors.
QUESTION 2.26
Refer to example 2.5 and your industry analysis to answer the following questions on the accounting
services industry in Australia.
1. Identify the main competitors in the Australian accounting services industry and the strategic
groups they appear to fit in to.
2. Examine the key basis for competition, based on what distinguishes the strategic groups from
each other.
as follows.
KEY POINTS
• Competitor analysis combines remote, industry and customer and market insights to identify what
drives demand, choice, price and cost, assess current and potential risks and discover what
underpins sustainable competitive advantage.
• Key success factors refer to those factors that are critical for an organisation to compete
successfully.
• Competitive position refers to how an organisation differentiates itself from competitors in its market
— its value proposition.
and competition.
• The nature of competition in an industry is determined by the drivers of demand, choice, price
and cost.
• Direct competitors are those competing for the same customers, whether with the same products
or services, substitute products and services that satisfy the same need or products and services
that change the basis of competition.
• Strategic groups comprise competitors following a similar strategy in a similar product-market
classification.
• Strategic competition is the strategic deployment of resources and capabilities based on an
understanding of competitive interaction and forecast risks and returns associated with committing
the resources.
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2.7 FURTHER IMPLICATIONS FOR LEADERSHIP
AND MANAGEMENT
Module 1 showed that finance professionals are increasingly required to play a more strategic role that
both incorporates and extends beyond traditional accounting functions. The contemporary CPA’s role
in organisational strategy implementation includes aligning the organisation’s structure with its business
strategy. This involves resource and budget allocations to facilitate and fund the organisation’s strategic
options, and developing key performance indicators (KPIs) to check the organisation’s performance against
its strategy. Hence accounting has become more integrated with strategic analysis and decision making.
It is essential to identify the key external and internal factors that affect the organisation, because they
guide informed decisions about the need for change and help in selecting which strategies to implement.
This information is fundamental for transformational leadership, which requires all members of the
organisation to be convinced of the need for change.
Having initiated the strategic process, it is important to lead an organisation methodically through
the strategic phases, starting with a detailed examination of the external environment as described in
this module.
FRAMING THE EXTERNAL ANALYSIS

This module has provided a framework for analysing the external environment, focusing on an organ-
isation’s industry and the remote environment. We have now established an understanding of expected
industry growth and the estimated amount and causes of industry profitability. By starting with the external
environment in strategy analysis, leaders and managers are forced to look outside their organisation and
consider issues that are not normally part of their day-to-day world. This results in a more critical analysis
of the organisation in terms of how its strategy, stakeholders, capabilities and performance fit in the context
of the external environment and how this fit may need to change and evolve over time.
Leadership is necessary to ensure a consistent and disciplined approach to external analysis, which is
based on sound reasoning and a consideration of all major relevant factors. As such, leaders take an active
role in the structure, development and implementation of the external analysis in order to optimise its
relevance to the organisation. They provide insight into the type of forces that are most relevant to the
industry and therefore should be assessed as well as the resources to enable the collection and analysis of
the relevant data.
ESTABLISHING A DATA MANAGEMENT APPROACH

A key role of strategic leaders and managers is to consider how their organisation will manage the
increasingly complex and dynamic information landscape. Many organisations today are taking a cross-
functional approach to this, with input from marketing, finance, legal, operations and other relevant
functions as to their data and reporting requirements. This requires a higher level of data management
than ever before. Some organisations have the capabilities to manage this themselves, others create ‘data
curator’ roles to match data requests with the most relevant and reliable sources, and others turn to third-
party data and consulting services. To ensure the organisation get best ‘bang for their buck’, it is more
important than ever for the leaders and managers to be clear on what information they need and why.
As technology management has now become a key part of corporate strategy, it is essential that IT and
finance leaders work together to optimise strategic outcomes. IT will need the support of finance to build
capabilities in digital architecture and beyond, support innovation, defend against disruption and enable
digital transformation. Organisations that understand the importance of building capabilities to support
technology and innovation across many platforms will be the first to realise the benefits and competitive
advantage that embracing new technologies can bring. Leading organisations have disciplined, measured
innovation programs that align innovation with business strategy.
RESPONDING TO CHANGE
While leaders and managers can help frame the scope of external analysis based on their expertise and
experience, they need to resist falling into the trap of believing that they already know all there is to
know. Instead, unproven assumptions and far-fetched interpretations of environmental factors must be
challenged while at the same time they remain open to the potential opportunities and threats that may be
uncovered by the external analysis and be prepared to act on them, through strategic decisions that secure
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the organisations future growth and profitability. The industries that prosper in the longer term are those
that are perceptive enough to recognise the changes taking place in their environment and markets, and
have the capabilities to put in place strategies to respond to these changes.
These changes can be known — related to the industry’s life cycle, or unknown — disruptions. Either
way, leaders need to recognise the change and take the appropriate actions in order for the organisation to be
able to adapt and secure its future profitability. Leaders need to recognise which stage of the life cycle the
industry is in and recognise the signs of transition to the next phase in order to make the most appropriate
strategic decisions. Disruptive technologies have been shown to cause established leaders in an industry
to fail as established thinking prevents them from noticing or taking the new technologies seriously. It
is not until the new technology matures to its most efficient format that it begins to truly impact on the
market leaders. It is then usually too late for the established players to begin investing in these technologies
or capabilities.
The more information available about the history of the industry, and the more that is known about
developing trends and technologies, the more anticipation and foresight the organisation will hold. This
can place the organisation at an advantage when it comes to planning its future strategy. It is for this
reason that managers and leaders need to be open to challenging the status quo and acting on, or having
contingencies to act on, the insights gained through external analysis
A significant change in leadership has meant that finance leaders and managers are now expected
to balance, protect and preserve all stakeholder interests. As such, they are tasked not only with acting
with personal integrity, but also providing accurate, objective and meaningful information, disclosure and
transparency, secure handling of sensitive information and confidentiality as well as compliance with any
relevant rules and regulations. Navigating these ethical minefields is now an important skill for leaders
to develop.
In summary, external environmental analysis is an essential tool in strategic decision making. Leaders
and managers can use this information to: position the organisation so that its capabilities provide the
best defence against its competitive rivals; influence the balance of the various forces on the industry; and
anticipate and respond to shifts in the current operating environment.
REVISITING THE ROLE OF THE CPA

CPAs are strongly qualified to lead in many facets of analysis of the external environment because they
understand the need to justify assertions with evidence and have the ability to provide objective analysis
that is based on quantitative information.
Table 2.8 presents key issues for finance professionals to consider in relation to external analysis.
TABLE 2.8 Key questions for finance professionals to consider and answer
Concepts/models/approaches that can

Key questions be used to answer the key questions
What is the ‘industry’ of analysis? How can it be defined? How broad • Industry definition
or narrow is it?
What’s the typical way products or services in this industry get to the • Industry value chain
customer (i.e. how is the value chain for the industry defined)? Who
are all the different types of organisations involved? Where does my
organisation sit within this chain?
What are the industry segments? Are any growing faster than • Industry segmentation
others? Are any declining more quickly than others? • Historical data analysis
What stage of the industry life cycle is the industry in? How well • Industry life cycle stages (start-up,
developed/established is the industry? Are all the segments in the growth, maturity, shake-out, decline
industry at the same stage of the life cycle? or renewal)
• Historical data analysis
What have been the key remote environmental factors influencing • STEEPLE (social, technological,
past growth in the industry and what is expected to drive environmental, economic, political,
future growth? legal and ethical)
(continued)
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Concepts/models/approaches that can

Key questions be used to answer the key questions
What are the forces that determine the profitability of the industry? • Porter’s five forces of industry
What therefore is the current and expected profitability of the competitiveness (new entrants,
industry? How are the forces changing and so will the industry be suppliers, buyers, substitutes,
more or less profitable than today? industry rivalry)
Who are the customers for the products and/or services of the • Linking markets to industries
industry? How are they defined? • Customer market segmentation
On what basis do providers in the industry compete? What are the • Industry definition
key success factors for them to be able to successfully compete? • Value chain
• The basis of competition
• Industry key success factors
• Competitor analysis worksheet
• Strategic groups
FROM EXTERNAL TO INTERNAL ANALYSIS

External analysis provides a baseline from which you can view your organisation and place it in the
appropriate industry. It will make you think about where best to direct your strategy based on the industry,
growth possibilities, competitiveness and other relevant factors.
To do this effectively you need to understand the business strategy of the organisation and then
understand how it has been performing against its competitors and its own objectives. Evaluation of
performance is in the context of performance relative to competitors, both local and international depending
on the scope of the organisation. Hence the need to link the external analysis undertaken with an internal
analysis — the focus of module 3. Before progressing to the internal analysis in module 3, example
2.14 provides an opportunity to integrate knowledge about the external analysis by examining a range
of issues related to the digital economy that are serving as important changes in the external environment
for numerous industries.
EXAMPLE 2.14
Competition Issues in the Digital Economy

Technology has permeated many aspects of our everyday lives from work to socialising. The past
decade has seen IT-based businesses such as Alibaba, Amazon, Apple, Facebook and Google rise to
be the world’s largest companies by market capitalisation, overtaking traditional mining, energy and
telecommunications firms. Table 2.9 shows this change.
TABLE 2.9 Top 10 global companies by market capitalisation, 2009 and 2019
2009 2019
Market Market
value value
($US ($US
Ranking Company Sector billions) Ranking Company Sector billions)
1 Exxon Mobil Oil and gas 337 1 Microsoft Technology 905
2 PetroChina Oil and gas 287 2 Apple Technology 896
3 Walmart Consumer 204 3 Amazon.com Consumer 875

services services
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4 ICBC Financials 188 4 Alphabet Technology 817
(the parent
of Google)
5 China Mobile Telecommuni- 175 5 Berkshire Financials 494

cations Hathaway
6 Microsoft Technology 163 6 Facebook Technology 476
7 AT&T Telecommuni- 149 7 Alibaba Consumer 472

cations services
8 Johnson Healthcare 145 8 Tencent Technology 438

Holdings
9 Royal Dutch Oil and gas 139 9 Johnson & Healthcare 372
Shell Johnson
10 Procter & Consumer 138 10 Exxon Mobil Oil and gas 342
Gamble goods
Source: Adapted from PwC, 2019, ‘Global top 100 companies by market capitalisation’, www.pwc.com/gx/en/audit-
services/publications/assets/global-top-100-companies-2019.pdf; PwC, 2015, ‘Global top 100 companies by market
capitalisation’, 31 March update, www.pwc.com/gx/en/audit-services/capital-market/publications/assets/document/pwc-
global-top-100-march-update.pdf.
The control the big technology companies have over consumer data gives them significant market
power and, as such, has raised concerns related to competition as well as to consumer protection
and privacy.
The new products and services provided (often free of charge in the case of social media and search
platforms) have disrupted many industries. They have provided a digital infrastructure for a variety of
services including marketplaces (Amazon), application stores (Apple), social networking sites (Facebook)
and search engines (Google).
This ‘platformisation’ has implications not only for the nature of transactions in certain industries, but
also for the ability of firms to scale rapidly, thereby affecting the structure of the entire segment. So large
technology companies have actually changed the entire global business landscape.
With regard to specific industries, Amazon held an over 90% share in five different product markets in
the first quarter of 2018, Facebook had a 68.95% share of the social networking industry as at February
2019 and Google dominates the search engine market, with an 89.95% share as at January 2019. The
ACCC has found that, in Australia, 50% of traffic to Australian news media websites comes from Facebook
or Google. Dominant platforms such as Amazon, Apple and Google either own and operate the technology
infrastructure or provide a service on which traders and developers depend. The market power and
dominance of these key platforms affect both the access and survival of small innovative companies
in these markets.
What Makes Digital Platforms Special
The European Commission has defined an online platform as ‘an undertaking operating in two (or
multi) sided markets, which uses the internet to enable interactions between two or more distinct but
interdependent groups of users so as to generate value for at least one of the groups’. Platforms involve
services and activities such as marketplaces, social networking, search engines, payment systems and
video sharing. Some of their unique characteristics include the following.
• Digital platforms have new business models and function with algorithms, which are designed to collect
and process data, with decisions made based on that data.
• Data-driven network effects are one of the features that characterise digital platforms. A network effect
‘refers to the effect that one user of a good or service has on the value of that product to other existing or
potential users’. For example, people may wish to use Facebook for social networking simply because
their friends do so. The value of using digital platforms directly depends on the number of users.
• Economies of scale and scope as data-driven network effects and control of data create high barriers
to entry. For example, Google can use the search data of users to improve its search engine algorithms;
new entrants to the market do not have this advantage.
• Digital platforms have challenged the traditional approach to doing business, which defined the goal of
a private company as maximising profits. The new business models prioritise growth over profits in the
short to medium terms, that is, the maximisation of the number of users rather than profits.
• Dominant platforms have also expanded into other related businesses, with the objective of accessing
more data. For example, Google gives its Android operating system free of charge to mobile telephone
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manufacturers, thereby enabling it to collect user data. In addition, Google provides many other
services, including video sharing, price comparison, cloud computing and online payment system
services, and these have provided additional consumer data, increasing the quality of, on the one
hand, its search engine services, and on the other hand, the value of data sold to advertisers for better-
targeted advertising. This makes Google attractive for both users and advertisers, and increases its
advertising revenues.
• Research on behavioural tendencies shows that there is a cognitive cost in switching platforms, in terms
of time, effort, energy and the concentration and sustained thought required; competition is therefore
not ‘one click away’. This further reinforces dominant platform market power and dominance.
How to Protect and Promote Competition in the Digital Economy
As explained above, digital platforms have changed the nature of markets and business models. This has
posed some challenges for competition law and policy as listed below:
Adapting the Antitrust Framework to Digital Challenges
Adjustments to the antitrust framework and tools need to be made to be able to address twenty-first
century challenges. The competition process is important in this regard, as follows: ‘One overarching
idea has unified these three concerns (distrust of power, concern for consumers and commitment to
opportunity for entrepreneurs): competition as process. The competition process is the preferred governor
of markets.’
Competition Law Enforcement
Digital platforms are characterised by their network effects and by being multisided, as well as by having
high switching costs, economies of scale and levels of control of data, all of which are pertinent in
the definition of the relevant market. Competition authorities need to employ additional criteria for the
definition of the relevant market in digital sectors.
Merger Analysis
An important method of addressing potential competition concerns that might arise from platform market
power is through merger analysis. However, at present in most jurisdictions, only mergers fulfilling a
turnover or asset threshold are subject to review. This does not take into account the value of data and
its control by merging parties. In the digital economy, data are important and confer power to businesses
that control data. Since in most jurisdictions, merger notifications are based on certain thresholds, usually
of turnover or assets, digital companies and start-ups may not be captured by the notification criteria as
they often do not reach the relevant turnover thresholds, despite having great value. Ideally, competition
authorities need to detect and eliminate the potential competition restraints from mergers at the start,
rather than trying to correct anticompetitive outcomes ex post, as the latter may be difficult once a firm
has monopolised the market.
Regulation
There are growing concerns about the abuse of market power by key platforms, the extent of their control
of data and the harm not only to consumers but also to society. Some of these platforms have become
dominant and almost indispensable to consumers, who have little choice, tend to use the same platforms
and show an unwillingness to switch. Such platforms are often compared to utilities in the sense that
users feel they cannot do without them and so have limited choice but to accept their terms of service.
There is a need for further reflection on whether competition law enforcement is the most appropriate
place to address digital platform issues. It may be more effective to regulate the platforms themselves to
ensure open and fair access for all businesses and provide for a level playing field rather than trying to
address competition problems after the fact under competition law.
The Australian Competition and Consumer Commission’s inquiry into digital platforms outlined their
concerns about the market power of key platforms such as Facebook and Google and their impact on
businesses in Australia. The commission considered that their strong market position ‘justifies a greater
level of regulatory oversight’ and proposed addressing key platform market power by actions such
as: preventing Google’s internet browser from being installed as a default browser on mobile devices,
computers and tablets; preventing Google’s search engine from being installed as a default search engine
on internet browsers; giving a new or existing regulatory authority the task of investigating, monitoring
and reporting on how large digital platforms rank and display advertisements and news content; and
strengthening merger laws.
Conclusion
Digitalisation will continue to penetrate all economic sectors and digital platforms are global and affect
the everyday lives of citizens worldwide. Monopolisation in the digital economy may not only harm
economies but also societies and democracies. There is a pressing need, therefore, for cooperation
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between competition authorities at the bilateral, regional and international levels, to address the challenges
posed by the digital economy and to deal with any negative outcomes that may arise from digital platforms.
Source: Adapted from United Nations Conference on Trade and Development, 2019, ‘Competition issues in the digital
economy’, UNCTAD, 1 May, https://unctad.org/meetings/en/SessionalDocuments/ciclpd54_en.pdf.
QUESTION 2.27
Example 2.14 shows the impact of the digital economy on many external factors — social and
economic factors, laws and regulation, competition and even consumer behaviour. Therefore, when
conducting an external analysis, understanding the impact of technology and digital platforms on
the industry and organisation is vital. With this in mind, answer the following questions.
1. Examine how the digital economy is impacting on the accounting services industry in Australia.
2. Examine whether this is having an impact on competition in the industry.
3. Explain whether there are currently any laws or regulations relating to the digital economy that
effect the accounting services industry.
4. Explain whether more is needed to address the challenges faced by digital platforms in the
industry.
5. Explain what leaders and managers can do to minimise the impact or take advantage of the
digital economy within the Australian accounting services industry.
as follows.
KEY POINTS
• Beginning the strategic analysis with the external analysis forces leaders and managers to consider
issues outside their organisation, leading to a move critical analysis of how the organisation’s
strategy fits in the context of the external environment.
• Leaders need to establish a consistent and disciplined approach to external analysis that considers
all major relevant factors and uses sound reasoning.
• Leaders frame the external analysis by providing insight into the types of forces most relevant to
industry growth, profitability and competition.
• In the context of increasing availability of data and analytics, leaders and managers must establish
an approach to data management, including allocating resources, to ensure the organisation has
the data it needs to make management decisions.
• Interpretation of external analysis requires a balance between openness to potential opportunities
and threats and scepticism about unproven assumptions and interpretations.
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REVIEW
Module 1 set the context for global strategy and leadership, and explained the strategy process. This
module has examined the first phase of this process: analysis of the external environment. Beginning with
external, rather than internal, environment analysis forces leaders and managers to look outside their day-
to-day concerns and look more critically at the ‘big picture’ of the organisation’s strategy, stakeholders,
capabilities and performance in context with the changing external environment.
The first part of external analysis is to define the scope of the external environment. This will include
the industry the organisation operates within, but that may be defined in various ways. The industry value
chain is a useful approach to understanding the industry. The way the industry is segmented and its stage
in the industry life cycle are also relevant to defining the industry.
The remote environment will also influence the organisation and must be considered. The remote
environment includes social, technological, economic, environmental, political, legal and ethical factors
that affect the organisation, but are not necessarily specific to its industry. A STEEPLE analysis (or a
variation such as PESTLE or PEST) helps form an understanding of the relevant factors in the remote
environment.
An industry environment analysis may be performed using Porter’s five forces model, which examines
the main influences on industry profitability: the threat of new entrants, the power of suppliers, the power
of buyers, the power of substitutes, and the intensity of competitive rivalry.
Understanding the market and customers is crucial to creating a value proposition. This must be
combined with an understanding of competition in the industry so that the organisation can decide how to
position itself in relation to competitors.
An analysis of the remote environment and the industry environment creates understanding of the factors
that drive growth and profitability in the industry, now and in the future. External analysis provides much
of the information leaders and managers need to begin to formulate a strategy. To ensure the analysis of the
external environment is of maximum value, leaders and managers should guide the scope of the analysis,
establish a culture and processes that value data and analytics, and be open and responsive to change.
The analysis of the external environment represents one part of strategic analysis. The other part is
analysis of the internal environment — the organisation’s strategic, operational, organisational and people
drivers along with the resources and capabilities the organisation possesses. module 3 will examine the
analysis of the internal environment and then combine the internal and external analyses to identify the
organisation’s strengths, weaknesses, opportunities and threats.
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MODULE 3
UNDERSTANDING
THE INTERNAL
ENVIRONMENT
LEARNING OBJECTIVES

3.1 select the key concepts, factors and frameworks to understand the influence of the internal environment
on organisational strategy
3.2 evaluate current performance by selecting the appropriate assessment frameworks
3.3 appraise how the roles of management and leadership drive the organisational strategy in relation to the
internal environment.
ASSUMED KNOWLEDGE
• describe the overall strategic process and the role of leadership in strategy
• describe the role of external analysis in the strategy process.
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PREVIEW
Module 2 focused on analysis of the external environment. This module focuses on the internal envi-
ronment — those factors within the organisation that may affect the development of its strategy and the
implementation of strategic options. These are factors within the organisation’s control. Figure 3.1 shows
where the content of this module fits within the overall strategy process.
FIGURE 3.1 Strategy process: internal environment analysis

(Module 1)
Strategic analysis:
(Module 2)
Exploring Developing Implementation
(Module 4) (Module 5) (Module 6)
Strategic analysis:
(Module 3)
Strategy and leadership for emerging business models

(Module 7)
Strategic analysis: where are we now?

• Assess stakeholders.
• Assess current performance.
• Evaluate resources and capabilities.
• Identify strengths, weaknesses, opportunities and threats.
• Appraise leadership and management implications.
Assessing the internal environment is critical in understanding whether the organisation is currently
operating successfully and how it is positioned to meet the strategic intent and future ambitions of the
organisation. As such it is both an important input and performance measure for the organisation’s leaders
and managers.
Internal analysis assesses internal factors such as key stakeholders, operational performance and the
organisation’s capabilities. This module describes a variety of tools to help perform this analysis, including
how to effectively use information technology to conduct this work.
In assessing the internal environment, an organisation must first identify the key stakeholders of the
organisation and consider their needs. This step is critical, as key stakeholder requirements shape the
strategic direction of the organisation and its goals. An understanding of stakeholder interests informs how
leaders set and steer the overall direction of the organisation and how managers direct the organisation’s
use of its resources and capabilities.
The next step is to analyse the current performance of the organisation against its objectives. This
analysis of current performance provides a baseline from which the organisation can develop its strategy
and against which it can measure future performance.
Analysing performance is complex and what should be measured is often contentious. Establishing
the specific measures to use, gathering useful performance data against which to compare each measure,
analysing performance on each measure and combining the individual analyses into an integrated analysis
framework are all needed for a meaningful assessment of current organisational performance.
One way to understand current performance is to identify and analyse the strategic, operational, and
people and organisational resources that the organisation commands. These must be combined effectively
to perform the tasks and activities of the organisation.
Internal analysis helps identify the organisation’s unique strategic capabilities that will enable it
to compete effectively with other organisations. Strategy may evolve from leveraging these existing
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capabilities or be developed by starting with the requirements of the external environment. Either way,
an organisation’s capabilities and business strategy must be aligned.
Figure 3.2 shows how all aspects of internal analysis fit into the framework introduced in module 2.
FIGURE 3.2 Framework for strategy analysis
External business drivers

Political, regulatory and legal environment, market characteristics, competition, substitutes, demand
for services, increasing complexity, technological changes and advances,
environmental factors, stakeholder expectations
EXTERNAL INFLUENCES
INTERNAL INFLUENCES
Operational drivers Strategic drivers

Markets/ Stakeholders
Industries
Products/ Channels Customers
STEEPLE Internal and Services
SWOT
external BCG matrix
Porter’s
five forces
Competitive People and organisational

positioning drivers
matrix
Source: KPMG and CPA Australia 2020.
The insights gathered from the external and internal analyses can be combined to create an integrated
analysis of the organisation’s strengths, weaknesses, opportunities and threats (SWOT).
Finally a gap analysis identifies where and why current performance falls short of desired
performance, thus providing a basis for developing and implementing effective future strategies (the
focus of modules 4, 5 and 6).
ROLE OF THE CPA IN INTERNAL ANALYSIS

The CPA’s work is central to the collection, accuracy, recording and analysis of an organisation’s
financial and operational data to measure and manage the organisation’s performance. Their role in
communicating relevant analyses of internal performance data is critical for decision-making purposes
to improve performance and support strategic decision making.
In small and medium-sized enterprises (SMEs) and in work done for nano- and micro-businesses, the
CPA may primarily focus on financial data collection, data entry and report generation. In medium and
large enterprises, CPAs may have a stronger focus on performance improvement, and they may also engage
with other advisors and consultants. CPAs can also play an important role working with data analysts or
data scientists to guide the analysis of ‘big data’ — the broad and deep data sets generated by individuals’
everyday interactions with organisations, and technology-enabled platforms and devices. In effect, CPAs
can act as a bridge between data and meaningful business intelligence.
Many of the analyses CPAs perform are central to assessing the organisation’s performance. Such
measures include revenues, gross margin, net profits, cash flow, accounts receivable and return on
investment (i.e. how effectively the organisation is using its resources). This information is then used
to assist in making viable and strategic business decisions. Advising on business operations can include
dealing with issues such as revenue and expenditure trends, financial commitments and future revenue
expectations. The CPA provides strategic recommendations on internal analysis for specific financial
problems and the role of this analysis in strategy.
3.1 UNDERSTANDING KEY STAKEHOLDERS

Stakeholders are:
organisations, groups, and individuals that can affect or are affected by a firm’s actions. Stakeholders can
be grouped by whether they are internal (employees and board members) or external (customers, suppliers,
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and unions) to a firm (Rothaermel 2019, pp. 48–9).
MODULE 3 Understanding the Internal Environment 149

Stakeholders have the power to influence strategy and performance. Indeed, key business goals and
hence strategy components generally originate from stakeholders and, in particular, from the requirements
and objectives of key stakeholders.
Extensive research has revealed the benefits of placing greater weight on the role and expectations of
key stakeholders in strategy analysis (Springman 2011; Rothaermel 2019). In fact, in one of the seminal
works in stakeholder analysis the author asserts that ‘not doing stakeholder analyses would often appear
to be a “dumb practice”’ (Bryson 2007, p. 46).
Failure to recognise an important stakeholder group can create strategy blind-spots, which may affect
an organisation’s performance (Bourne 2016).
Stakeholder analysis helps managers to take a combined approach to manage internal and external
stakeholders to support the organisation’s pursuit of competitive advantage. We will now describe
four steps that can help an organisation gain a thorough understanding of its key stakeholders and
their impact on the organisation. This process helps managers to recognise, prioritise and address the
needs of diverse stakeholders, both in developing strategy and monitoring and responding to outcomes
(Rothaermel 2019).
STEP 1: IDENTIFY STAKEHOLDERS AND THEIR NEEDS

It is necessary to first identify the key stakeholders. Different stakeholders can exert varying levels of
influence on, and have differing levels of interest in, an organisation. For example, a major shareholder may
influence the strategy of the organisation differently (focus on shareholder return) to a government (focus
on taxes, job creation or environmental compliance) or employee (pay and benefits, working conditions and
learning opportunities). Competing and potentially incompatible values and attitudes may lead to conflict
at some stage between stakeholder groups and the organisation. Since the expectations of key stakeholders
can influence the organisation’s strategy, a clash of objectives may have unfavourable consequences for the
organisation. For instance, an organisation involved in research and development (R&D) needs to have a
long-term perspective about its return on investment (ROI), as there may be a long time between investment
into the R&D and a commercial outcome. However, shareholders, whose main concern is often profitable
returns, may be more hesitant to support the organisation expending costs on something that they may not
see the return or benefit from in the near future.
Key internal and external stakeholders of most organisations generally fall into the categories
identified in figure 3.3. Identifying key stakeholders is an important first step in understanding the
internal environment.
FIGURE 3.3 Typical stakeholder groups
Community
Suppliers Government
Organisation
Board members
Shareholders
Employees
Customers Competitors
Example 3.1 identifies the key stakeholder groups of pharmaceutical company Pfizer and provides
examples of each stakeholder category’s needs and requirements.
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EXAMPLE 3.1
Key Stakeholder Needs — Pfizer

Pfizer is a multinational biopharmaceutical company. The company states (Pfizer n.d.):
We are putting the science of engaging stakeholders to work every day to benefit patients and the
global health community.
Our engagement with stakeholders impacts the way we do business globally. These stakeholders
help inform and validate our decision-making processes and provide us with guidance and insights
that can help us move our business forward responsibly.
To understand its stakeholders, their needs and requirements and how the company is affected by and
affects them, figure 3.3 could help produce a stakeholder analysis such as that shown in table 3.1.
TABLE 3.1 Pfizer stakeholder analysis
Key stakeholder Examples of needs/requirements
Shareholders • Innovation — meeting unmet health needs and diseases

• Revenue and market share growth
• Total shareholder return
• Corporate social responsibility
• Fortune 500, Standard & Poor’s (S&P) ranking
CEO and the Board • Prestige

• Market share
• Revenue and profit growth
• Total shareholder return
• Fortune 500, S&P ranking
Major suppliers, including • Growth

chemical inputs, packaging • Stability of ordering
providers, transport entities, • Stable margins
machinery and processing and • High integrity in procedures
plant suppliers
Research institutions • Innovation and research that leads to more efficacious products and
and partners and testing products that meet unmet health needs and diseases
laboratories • High Integrity in testing procedures
Major customers — • Stability of supply

pharmacies, hospitals • Stable margins
• Safe, effective products
• Innovation — products that meet unmet health needs and diseases
Doctors/caregivers • Safe, effective products

• Innovation — products that meet unmet health needs and diseases
Government sector • Innovation — R&D to treat unmet health needs and diseases
• Low costs through long-term supply arrangements
• Safety
• Efficacy
• Continuity of supply
Patients • Access to medicines that treat health needs and diseases

• Low-cost medicines
• Preventative health measures
• Safety
• Efficacy
(continued)
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Key stakeholder Examples of needs/requirements
Employees • Wages and benefits

• Stability of employment
• Pride of working for an innovative organisation
Source: Adapted from Pfizer.com, n.d., www.pfizer.com.
QUESTION 3.1
Melbourne Victory is a professional soccer club based in Melbourne, Australia. The Chairman
of the Board is Anthony Di Pietro and the CEO is Trent Jacobs. It has been a very successful
member of the A-League (which consists of 11 teams playing in the highest-level professional men’s
soccer league in Australia and New Zealand). It is a very popular competition with crowds of up to
30 000 at matches and significant interest by the media. The Football Federation of Australia has
been the governing body regulator for all levels of soccer competitions in Australia, although the
professional leagues will soon be taken over by a new league entity, allowing clubs more freedom
over commercial arrangements and governing rules.
Identify Melbourne Victory’s key stakeholder groups and describe their needs.
STEP 2: ASSESS ALIGNMENT OF STAKEHOLDER NEEDS

It is important to assess whether the needs of different groups of stakeholders are aligned with each other,
and with the organisation and its strategy. An organisation trying to create, develop and implement its
strategy needs the support and efforts of its key stakeholders, particularly the company’s leadership team
and senior management (CEO and the Board). The diversity of stakeholder needs means any strategy is
unlikely to meet the objectives of all stakeholders. Implementing the strategy successfully thus requires
stakeholders and their expectations to be effectively managed.
Example 3.2 shows how the objectives of the Cancer Council New South Wales (NSW) in Australia
match the objectives of its various stakeholders, therefore ensuring the alignment of shareholder needs
with the organisation’s current business strategy.
EXAMPLE 3.2
Alignment of Key Stakeholder Needs and Current Business

Strategy — Cancer Council NSW
Cancer Council NSW is a not-for-profit organisation dedicated to the research, reduction, awareness and
defeat of cancer. Cancer Council NSW’s Strategic Intent 2019–2023 (Cancer Council NSW 2020) describes
the organisation’s purpose as follows: ‘unite the community, providing support, investing in research and
saving lives’. The organisation aims to achieve this through:
• information and support
• research
• prevention
• advocacy
• funding
• enabling its people.
Table 3.2 lists a selection of Cancer Council NSW’s stakeholder groups, their needs and how the
organisation’s strategy reflects these needs.
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TABLE 3.2 Strategic alignment between goals and stakeholders — Cancer Council NSW
Stakeholder group Needs Strategic alignment
Our people (staff and Recognition Our staff and volunteers are our greatest
volunteers) Professional development assets. We value their commitment,
opportunities passion and contribution to our vision.
Contribution We support them by providing a safe
and inspirational work environment that
celebrates achievements and recognises
talent.
The NSW community Cancer prevention We work with our communities across
Cancer support NSW by creating awareness about
Health and wellbeing our information and support services,
Advocacy influencing what politicians do about
cancer, engaging and supporting
fundraisers, and providing education
on cancer prevention. Our focus is
understanding our communities’ insights
and needs.
Aboriginal and Torres Cancer prevention Reducing the impact of cancer for
Strait Islander peoples Cancer support Aboriginal and Torres Strait Island peoples
is a priority. Aboriginal Australians are 60%
more likely to die from cancer than non-
Aboriginal Australians.
Source: Adapted from Cancer Council NSW 2015, Annual Report 2019–23, www.cancercouncil.com.au/wp-content/
uploads/2019/08/FSO-2019-23-Strategy-Booklet.pdf; www.cancercouncil.com.au/annualreport2017/our-communities;
www.cancercouncil.com.au/annualreport2017/our-people; www.cancercouncil.com.au/44841/local-services/southern-reg
ion/prevention-advocacy-cancer-care-southern-nsw/local-government-partnerships
QUESTION 3.2
Developed over a number of years by Mark Zuckerberg and three of his Harvard classmates, social
media platform Facebook was incorporated in mid-2004, with Sean Parker as President. It received
its first investment that year from PayPal co-founder Peter Thiel. An initial public offering (IPO) was
released in February 2012, and the organisation Facebook, Inc. began trading in May 2012.
At the time of the IPO, the founder and CEO Mark Zuckerberg had 28.2% voting control of
Facebook. Accel Partners, an investor in Facebook, held 11.4% voting power, Dustin Moskovitz
held 7.6% and board member Peter Thiel held 2.5%. Following the IPO, hundreds of other
stakeholders including former and current employees, venture capitalists, corporate investors and
private individuals, now have an ownership stake in Facebook, Inc.
Under the leadership of Zuckerberg, Facebook’s focus was firmly on users, with their mission to
‘give people the power to share and make the world more open and connected’ (Facebook 2012).
This has been very successful for Facebook.
At the end of December 2019, Facebook, Inc. was the 6th largest publicly traded organisation in
the world by market capitalisation, with a share price of US$205.25. This reflects their more than
1.6 billion active daily users and US$67 billion in revenue mostly from advertising.
But Facebook has also seen its share of scandal and controversy in its relatively short and
spectacular life.
Allegations of glitches and insider trading marred the early days of their trading, and their opening
share price of US$42 fell to US$28 per share by January 2013. Facebook initially struggled to find
revenue streams and, in the early years, analysts doubted their ability to ever make a profit.
Facebook is banned from use in some countries and has faced criticism and shut-downs by
governments over freedom of speech issues. For example, this occurred during the Arab Spring
uprisings, which were a series of revolts and demonstrations against low living standards and
oppressive regimes that started in Tunisia and spread to many parts of the Arab world in the early
2010s. Other political and social causes, such as the #MeToo movement against sexual harassment
and assault, have used Facebook to challenge long-held beliefs and practices.
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This shows the sharing power of Facebook and some of the purposes it serves. Facebook’s
mission to share and connect was further achieved with the acquisition of Instagram (a social
networking application that allows users from all over the world to upload and share photos
with other users) in 2012. In 2014, Facebook paid nearly US$19 billion for WhatsApp, an instant
messaging service.
Facebook had been dogged by questions about privacy for many years. In 2018, Facebook
faced severe criticism and fines for not preventing the firm Cambridge Analytica from being able
to harvest the personal data of millions of people’s Facebook profiles and using it for political
advertising purposes. This was an important wake-up call to many about the use and misuse of
personal data, and caused Facebook’s share price to fall 40% to US$125 in late 2018. The political
and community fall-out over the lack of respect for privacy led to Zuckerberg being required to
testify at a US Congress hearing held on the breach of privacy matter. Zuckerberg apologised for
not doing enough to prevent Facebook from being used for harm, stating ‘That goes for fake news,
foreign interference in elections and hate speech’. Zuckerberg changed Facebook’s mission to
‘give people the power to build community and bring the world closer together’ (Facebook 2018).
Using the case facts, describe the likely objectives that the various stakeholders (e.g. the
CEO, shareholders, consumers [Facebook users], advertisers and governments) might have, and
evaluate how Facebook’s strategy has met their needs.
Source: Adapted from www.macrotrends.net/stocks/charts/FB/facebook/stock-price-history; www.macrotrends.net/stocks/
charts/FB/facebook/revenue; https://investor.fb.com/investor-news/press-release-details/2019/Facebook-Reports-Third-
Quarter-2019-Results/default.aspx; https://en.wikipedia.org/wiki/List_of_public_corporations_by_market_capitalization;
www.judiciary.senate.gov/imo/media/doc/04-10-18%20Zuckerberg%20Testimony.pdf
STEP 3: ASSESS THE RELATIVE POWER OF

STAKEHOLDER GROUPS
Once stakeholder groups and their objectives have been identified, a stakeholder power-interest grid can be
used to assess the varying levels of interest and power of each stakeholder group, as shown for a clothing
manufacturer in figure 3.4.
Each stakeholder has varying levels of legitimacy, power and influence over the organisation’s per-
formance. By plotting stakeholders on the grid, an organisation can see which stakeholders are likely to
have an interest in the strategy and, more importantly, cross reference this against who has the power
to influence its direction. Thus, the grid identifies a method to prioritise the attention that will be given
to stakeholders’ diverse needs.
The approach also serves to inform how conflicts between stakeholder objectives can be managed.
Stakeholder conflict can arise at all levels of stakeholder groups and usually results from the needs of some
stakeholder groups compromising the expectations of others. An organisation has to balance the desires
of stakeholders and manage activities that some stakeholders might not like. For example, the cheapest
supplier of goods, which can help keep prices down for customers, may come at the expense of ethical
practice, industry standards or product safety. While the end product may be cheaper, an organisation’s
association with an unethical supplier or a low-quality product risks damaging its business reputation and,
ultimately, leads to financial loss. Moreover, the lower price may affect profitability and be in conflict with
shareholder expectations.
Let us look at each of the four stakeholder categories identified in figure 3.4.
• Crowds are those with both low power and low interest. They have minimal influence on strategic
decisions for the organisation. Smaller suppliers and customers, and even some employees, may fit
in this category.
• Context setters are those with a high degree of power but low interest. These stakeholders have the
ability to influence an organisation’s strategy, but are unlikely to get involved unless a significant issue
draws their attention. Government and regulators usually fall into this category, which may also include
large customers or suppliers.
• Subjects are those with low power but a high level of interest (can be either positive or negative interest).
They have little impact on strategic organisational decisions; however, because of their high level of
interest, they may develop greater power over time by lobbying and other strategies. Many employees
and shareholders fall into this category, which also includes certain suppliers and customers who rely
on the organisation. External monitors, such as environmental and governance groups, may also have
high levels of interest in the organisation’s actions but limited ability to make change.
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• Players are those with high interest and high power. These are the most critical stakeholders to be
considered in strategy decisions as they are the most likely to exert influence on strategic decisions.
Specific employees, such as the CEO, senior executives and particular employees with specialist skills,
may be players. Larger shareholders and directors are likely be in this quadrant as well.
FIGURE 3.4 Power-interest grid for a clothing manufacturer
Subjects Players
• Employees • CEO and board
• Retailers • Shareholders
Interest
Crowd Context setters

• Suppliers • Customers
• Governments
Power
It is important to note that for different organisations with different objectives, particular stakeholder
categories may appear in different quadrants than shown for this example.
STEP 4: DEVELOP TECHNIQUES FOR INTERACTING WITH

STAKEHOLDER GROUPS
The final step is to prepare a way of interacting with each stakeholder group to increase the level of positive
engagement with the organisation and minimise difficulties and conflict. There are four techniques for
interacting with stakeholders.
1. Partner closely with stakeholders who have a large amount of power and interest (the players identified
in figure 3.4), to ensure they are involved and carefully listened to. Partnering suggests that these
stakeholders will have considerable input and influence during the strategic process. For example,
the Board of Directors represents the shareholders of the company. Their key responsibility is to
govern or control the organisation. The CEO and management team’s responsibilities are to manage the
organisation. They should work closely together, with the CEO and management team regularly briefing
the Board on the progress of the organisation, providing advice and operationalising the strategic
decisions of the Board. A close partnership should give the Board confidence the operational issues
are being looked after and not require them to feel they need to micro-manage the CEO.
2. Consult with stakeholders who have a large amount of power to affect the strategy of the organisation
but limited interest (the context setters identified in figure 3.4). Listening to these groups and attempting
to address their concerns will increase their likely acceptance of the strategy. For example, managers
must ensure that any government regulations are understood by the organisation and are followed as
required. If there are uncertainties or problems that arise, it is important for management to ensure the
government department is consulted about the issues. Keeping the channel of communication open to
relatively disinterested but ultimately powerful stakeholders is important to ensure good relations into
the future.
3. Inform those stakeholders who do not have much power (the crowd identified in figure 3.4) about
the organisation’s intentions and actions. The obvious temptation for many managers is to ignore
stakeholders who do not have the power to affect their decision making. However, it is more effective
to keep communicating with those stakeholders. For example, public utilities organisations will inform
customers that there will be an interruption to service in an area at a given time. The customer has little
say in the interruption; however, the organisations see it as a courtesy to inform them.
4. Manage the expectations and requirements of other stakeholders (the subjects identified in figure 3.4).
Although these stakeholders do not have much power, their high interest will keep them engaged
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in the decisions made by the leadership team of the organisation. Stakeholders in this category can
band together to increase their power to impact the organisation if they feel their needs have been
too overlooked.
It is vital for organisations to manage the expectations of staff, shareholders and investors when imple-
menting a new project or undertaking a new practice within the organisation. Mergers and acquisitions are
also an example of projects requiring clear communication and expectations management. Ensuring clear,
concise and correct information and an effective channel of communication to all stakeholders will assist
with this.
Identifying key internal stakeholders and determining their power to influence strategy is a necessary
step of internal analysis. It is important to include the current set of leaders in this stakeholder analysis.
Strategic leaders usually display passion and commitment, as well as talent, but if change is required
they may not wish to relinquish power. They are not immune to acting out of self-interest. Therefore,
it is essential to include these people in the internal analysis and honestly assess their style and ability
to adapt to changing circumstances. Conversely, leaders need to understand the importance of managing
internal stakeholders.
QUESTION 3.3
Use the case facts and your answer to question 3.2 to discuss the key stakeholders for Facebook,
define their needs and evaluate how well Facebook has met the needs of the different stakeholder
groups. Using this information, comment on the following.
1. Is there any evidence of strategy change due to pressure exerted by the key stakeholders? What
does this show?
2. Classify the key stakeholders of Facebook according to the power-interest grid.
3. Recommend how Zuckerberg should interact with (i) major shareholders and (ii) the US Govern-
ment, now that the situation has improved since the 2018 scandal.
as follows.
KEY POINTS
3.1 Select the key concepts, factors and frameworks to understand the influence of the internal
environment on organisational strategy.
• Stakeholders are organisations, groups and individuals that can affect or are affected by an
organisation’s activities.
• Stakeholders may be internal (e.g. employees, shareholders) or external (e.g. community groups,
customers, regulators) to the organisation.
• Key stakeholders can have a powerful influence on organisational goals and strategy.
• To analyse stakeholders and thus understand how to engage with them and manage their
expectations, organisations should:
– identify stakeholders and their needs
– assess alignment of stakeholder needs
– assess the relative power of stakeholder groups
– develop techniques for interacting with stakeholder groups.
relation to the internal environment.
• Stakeholders often strongly influence the key goals and hence strategy of the organisation. Leaders
thus respond to stakeholder needs and manage their expectations when setting overall direction.
Managers respond to stakeholder needs and manage their expectations when directing the use of
the organisation’s resources to develop and implement strategy.
• It is important to include the leaders and managers themselves as stakeholders in internal
stakeholder analysis.
3.2 ASSESSING CURRENT PERFORMANCE

The key objective of internal analysis is to understand current performance in order to drive future
strategic options.
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Performance can be measured against the organisation’s goals and against comparable organisations,
such as competitors, and industry averages.
It is important to note that when the issue of how to measure performance is considered, it is often
found that:
• the definitions of performance vary greatly
• most organisations use a number of performance measures, each of which may give conflicting findings
• due to varied definitions and metrics, managers may often be unclear and in conflict with each other
about how well their organisation and the elements within it are performing.
It is important also to recognise that different types of organisations have different goals and that these
of course help shape the strategic options it may consider. For example, a public sector organisation such
as Australia’s social security agency Centrelink may aim to deliver services more efficiently rather than
aim for growth or if it does target growth that may be defined in terms of servicing more clients with the
same level of resources. Other not-for-profit organisations such as charities will also define their goals
differently to business organisations.
INTERNAL ANALYSIS AND DATA ANALYTICS

This role of CPAs in business performance reporting and improvement means they are well positioned
to take on the role of assisting their organisations in achieving the advantages of harvesting the greater
volumes and different types of data now available for internal analysis. This data includes the organisation’s
own internally generated data on a range of transactions and activities and data from many possible
sources outside of the organisation. The data may include ‘big data’ which refers to the broad and deep
datasets automatically generated by interactions with interconnected digital devices and technologies.
Many organisations are recognising the value in using more data, whether it is about customer buying habits
or internal performance measures. Data is a core business asset, yet over 53% of internally generated data
goes unused (Producer 2020). Unlocking the potential of this data is an extension of the CPA’s business
intelligence role.
Many organisations have managed to use their data to analyse their performance and then improve it
based on the evidence. There are a range of things an organisation needs in order to get value out of their
data, and to be able to exploit big data. They include having:
1. access to good data
2. the ability to analyse the data
3. the ability to turn analytic insight into commercial insight.
Access to Good Data

Organisations need to have access to good data to work with. A problem many organisations face is in
obtaining specific relevant data, understanding and identifying new forms of data in the digital age.
Organisations need to establish what internal data is important to capture and how it will be measured.
CPAs are central to this process, both in relation to financial measures and increasingly in non-financial
measures of the organisation’s activities. CPAs are experts with financial data, and they look beyond
financial data to understand what is driving the financial outcomes because it is almost always a
non-financial business activity that is driving the outcome. It is important for CPAs to be curious about what
is driving the numbers. Where are the problems in the business? What are their root causes? Accessing
data on the drivers of value in the organisation will allow the organisation to better measure and better
manage those drivers.
Managers often do not recognise the potential value in the data available to them — they do not
understand how the data can help them improve their internal processes. A useful way to tackle this
problem is to encourage managers to change from the conventional approach of asking what they can
use data for to asking ‘What problem issues could we improve if we had all the information we need?’
(Barton & Court 2013). This turns the focus to the problems faced and then finding the information needed
to deal with them rather than trying to find a use for information that is available. The organisation should
be willing to embrace new forms of data from social media, tracking data from GPS/geolocation, CCTV
images, machine sensor data, satellite imagery and the Internet of Things among others as necessary to
help. Organisational leaders need to ensure the organisation’s IT systems are geared towards providing
data and information to support decisions.
The focus of this module is internal analysis, but it is important to realise that this does not mean
such an analysis uses only internal data. Organisations use both internal and external data to assess
performance as only then can organisations understand how their performance compares to competitors
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and the industry overall. Organisations often have less control over the content and structure of external
data, but it can still be analysed to provide important insights into the organisation’s performance and
into how external factors affect that performance. Organisations are increasingly using non-traditional
external sources of data such as social network data to predict job-seeking behaviour, economic data
for forecasting, suppliers’ data to predict demand, and satellite images to understand traffic flow around
shopping centres.
In drawing upon and interpreting external data, analysts and managers need to exercise caution. The
challenges in using external data include the complexity of the data-provider market, negotiating access to
data and liability terms, and managing data-provider relationships. Technical challenges include assessing
the veracity of the data and appropriately managing associated risks and dealing with unstructured
data formats (Deloitte Insights 2019). Larger organisations would often use data managers to oversee
these important data issues, whereas smaller organisations often multitask this job within the IT and/or
accounting function.
Technology insight 3.1 describes one application of data generated automatically to support public
transport planning and management.
Transport for London and Big Data — Journey Data

Transport for London (TfL) is responsible for the city’s public transport network — buses, trains, ferries,
taxis, roads and paths. The challenge for TfL is to understand how the public transport system is
used by the population each day in order to manage the network and infrastructure as efficiently as
possible.
The introduction of the Oyster swipe-card ticketing system for use on all public transport has allowed
TfL to capture huge amounts of customer-use data. Customers load their cards with credit and swipe
their cards when boarding and leaving public transport. This enables data to be collected about precise
journeys being taken by millions of people a day.
To ensure privacy, the data collected is anonymised. The data is then presented in the form of maps
depicting journeys at any desired level of granularity (from an overarching view down to individual
journeys).
Source: Adapted from B Marr, 2015, ‘How Big Data and the Internet of Things improve public transport in London’, Forbes,
May 27, www.forbes.com/sites/bernardmarr/2015/05/27/how-big-data-and-the-internet-of-things-improve-public-transport-
in-london/#f885b2a1be63.
Ability to Analyse the Data

Data is potentially available in all areas of the organisation for internal analysis — data from finance,
marketing, suppliers, technical, operating and customers. Functional areas are often ‘siloed’, however,
and this can be worsened if operations are spread across different geographic locations. Bringing the
relevant data together and analysing what it tells about the organisation’s functions or processes can help
the organisation monitor and improve their performance in critical aspects of those activities.
Data from systems specifically designed to capture information relevant to business processes and
information needs is usually structured according to a set of defined rules and standards. This enables ease
of processing. However, businesses also have access to enormous volumes of unstructured data generated
by mobile devices, website visitors, social media interactions, call centres and numerous other sources.
Its unstructured nature presents a challenge for data analysis, but the breadth and depth of such data also
promises considerable value for the organisation. About 90% of all digital data is unstructured, but only
43% of businesses make it a priority.
A simple example is reports of difficulties with a product posted on the company’s social media
presences (e.g. a Facebook page) or indeed on social media generally (e.g. when a company’s name or
product name is mentioned in a tweet). A business can capture and analyse such data to identify, for
example, product faults or positive or negative sentiment towards a product or brand. This can happen
more quickly and based on a much larger number of data points than relying on, say, complaints made
directly to the company. It also offers the business the chance to respond more quickly and thus preserve
the company’s reputation. It is usually necessary to establish a system (generally automated) for collecting,
filtering and organising unstructured data so it can be analysed. For businesses deciding to integrate
unstructured data into their analytics, it is necessary to promote a culture that recognises and values the
potential insights that can be gleaned from unstructured data. This can be a challenge for CPAs because
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this kind of data is often not as rigorous and objective as financial and structured measures, and CPAs need
to understand that the data can be pointing in the correct direction while not being precise. Technology
insight 3.2 describes how one business has improved their use of data to deliver value to the organisation
and its customers.
Siem Car Carriers — Analysing the Data

Siem Car Carriers (SCC) specialises in shipping cars for motor vehicle manufacturers between North
America, Europe and Asia. As part of their service, they must pay for any damage that occurs to the
vehicles in transit. Simon Jeffrey, a Group Manager and management accountant by training, wanted to
find out what the business could do to reduce the costs associated with damage incidents. The system
SCC used for handling damage claims did not lend itself to easy access to information about damage
incidents. The information needed was in four different, siloed systems — their customers’ systems
recorded the data on the extent of the damage; their own surveyors had a system that recorded where the
damage occurred, Siem’s cargo booking systems recorded where the car was going to and their finance
system how much they paid for the damage.
Simon Jeffrey put all the data about each incident together and then simply sorted the information by
the amount of the damage claim. From this he identified some interesting patterns. The biggest claim
for damages was a certain type of tyre damage and was consistently found on a certain type of vehicle.
When discussed with the customer, they told SCC it was a production problem with their vehicle and
SCC should not have to pay for the damage. A second major category of damage was discussed with
the customer, who thought they had fixed a specific production problem but the damage data made them
realise they had not. SCC managed to reduce their damage payments by over 90% and added value to
their own customers who were able to rectify their production issues and reduce the problem of damaged
cars being delivered to their customers.
Source: Adapted from CGMA, n.d., ‘Podcast: Readying business for the big data revolution’, www.cgma.org/resources/
videos/readying-business-for-the-big-data-revolution.html.
Turn Analytic Insight into Commercial Insight

Once the data analysis has occurred and an analytic insight has been made, it needs to be trned into a
commercial insight for decision makers to be able to make better decisions and act on it.
For example, supermarkets have been able to use algorithm-based analysis of large data sets to create
additional revenues by:
• finding the best location to place products within a store to maximise buying behaviour
• identifying which products should be placed next to each other to generate cross-selling
• specifying the exact price points for each product based on elasticity of demand
• determining the best music to play.
Biesdorf et al. (2013) suggests that using data and analytics to manage and lead operations ‘can
deliver productivity and profit gains that are 5–6% higher than those of the competition, and offer greater
transparency’ and more realistic forecasting.
Business improvements from data analytic insights are not likely to happen unless there is a culture of
evidence-based decision making and there is a desire for business improvement.
McKinsey has identified that a distrust and lack of understanding of big data among management often
means managers do not use the data and analysis available to them. Essentially there is an incompatibility
between the organisation’s decision-making culture and the tools available to help improve decision
making. Leaders need to implement a change of culture to one where decisions are made on the basis
of evidence and there is a real desire to improve performance.
The CPA’s role in understanding the financial implications of business activities gives them influence
in getting decision makers to understand the commercial benefits of data analytics and can assist them
in embedding a culture that values data and analytics and uses them to improve the organisation’s
performance.
Example 3.3 discusses how the world’s largest retailer, Walmart, has converted analytic insight into
commercial insight.
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EXAMPLE 3.3
Walmart — Analytics
Walmart has more than 20 000 stores in 28 countries. Its operations involve an enormous range and volume
of transactions. In fact, Walmart’s systems generate 2.5 petabytes (or 2 500 000 gigabytes) of data every
hour. In addition, the analytics system captures external data from social media, local events databases,
weather services and many others.
This data presents a valuable resource, but only if it can be analysed to generate business intelligence.
Walmart has created a dedicated analytics hub at its Arkansas headquarters to analyse, model, visualise
and interact with the company’s transaction data. All parts of the organisation are welcome to access the
data experts at the data hub to see whether analytics can be used to find solutions to their problems. To
make this intuitive and accessible for non-experts, the system works with interactive touch screens.
The company believes its data hub tools have reduced the time needed to solve problems facing the
business units, in some cases down to mere minutes.
Walmart’s analyst Naveen Peddamail said:
If you can’t get insights until you’ve visualized your sales for a week or a month, then you’ve lost sales
within that time.
One example of this process in action involved a grocery team that had observed a sudden and
significant drop in a particular product category. With the help of the analytics team they were able to
discover pricing miscalculations that had led to the products being tagged with too high a price.
Walmart’s system generates automated alerts when particular metrics fall below predetermined
thresholds. These alerts essentially ask the responsible teams to seek help from the analytics hub.
Source: Adapted from B Marr 2017, ‘Really Big Data at Walmart: Real-time insights from their 40+ petabyte data
cloud’, Forbes, January 23, www.forbes.com/sites/bernardmarr/2017/01/23/really-big-data-at-walmart-real-time-insights-
from-their-40-petabyte-data-cloud/#724d4d9f6c10.
The greater availability of different types and volumes of data is an opportunity for the organisation
to harvest the data to improve the quality and speed of decisions. The three issues outlined above are
necessary to achieve if the organisation is to reap the benefit of data analytics.
SMEs tend to confront the same challenges in data management and analysis as larger businesses, but
on a smaller scale — and also with less resources. SMEs can increasingly access data analytics services
from specialist providers, but many insights can be gained from more easily accessible sources such
as Google Analytics, social media metrics, new business enquiries and internal sales records. Powerful
business intelligence software (such as Excel, Azure and PowerBI) are small-business friendly and are
within the reach of both the skills and the finances of most small businesses. An example of a small business
adopting a data analysis approach is Sydney small business Rise Above Custom Drone Solutions. It drew
on its customer and sales data for information. In response to the findings the businesses began tailoring
its email communications to customers to reflect their individual needs. The change in approach led to
an increase in sales. The process was largely automatic, based on the data system, meaning the tailored
approach did not greatly increase costs or the time involved in marketing (The Age 2018).
It is a natural fit for CPAs to assist their organisations in optimising the benefits they can achieve from
data. They are in touch with all aspects of the business. Their role is to be the credible, objective person
who can help each business process owner understand the data and interpret it. The CPA is an appropriate
person to be asking questions about what is driving the numbers in the P&L account, and they can act as
the conduit in the business to bring together the different business processes in order to do solve specific
problems and improve performance.
Finally, a key aspect of the CPA’s role is data visualisation. Data visualisation is about the presentation
of the data in a manner that non-financial people can understand. It takes the data and presents it in a visual
context such as a map, graph or table. This allows decision makers to see the analytics presented in a way
that enables them to easily identify and address the patterns, trends and outliers in the information. This is
extremely important as most people find information contained in a spreadsheet much harder to understand
than a succinct graph of the data — and without understanding the need for change there is no compelling
reason to change.
Example 3.4 examines how a restaurant chain has brought together the pre-requisites for effective data
analytics. Technology insight 3.3 illustrates the use of various technologies at Rio Tinto.
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EXAMPLE 3.4
Data Analytics for Dickey’s Barbecue Pit

Dickey’s Barbecue Pit has more than 500 restaurants located across the United States. With a vision of
understanding its customers better and leveraging that to increase sales, Dickey’s management initiated
an analytics project.
The company’s data analysis system collects and analyses data to produce real-time insight into sales
and other key performance indicators. The data is generated by point-of-sale systems, loyalty program
records, marketing promotions, inventory systems, customer surveys and others. Because the insights
are virtually provided in real time (every 20 minutes) and integrate so many data sources, restaurants can
quickly make changes to respond to opportunities and problems.
In addition to real-time business intelligence, a daily briefing is produced for consideration at corporate
headquarters. This ensures data analytics are not just used for operational matters, but are also used as
a basis for strategy development and implementation.
For example, when a store’s sales are underperforming, that information is used to refine implementation
issues (e.g. headquarters might initiate a training program for the store’s managers or staff). On
the customer side, lower-than-expected sales can prompt a spontaneous direct marketing campaign
(e.g. text messages to local customers) to help lift sales and avoid inventory issues.
The investment in analytics has helped Dickey’s compete in its ultra-competitive market. Problems
that once only became evident from reports circulated months after the fact can now be identified and
addressed on the same day.
Source: Adapted from B Marr 2015b,‘Big Data at Dickey’s Barbecue Pit: How analytics drives restaurant performance’,
Forbes, June 2, www.forbes.com/sites/bernardmarr/2017/01/23/really-big-data-at-walmart-real-time-insights-from-their-40-
petabyte-data-cloud/#724d4d9f6c10.
QUESTION 3.4
Using the information given in example 3.4, explain the different types of data that Dickey’s
Barbecue Pit restaurants has access to, the kinds of analyses they use and how they commercialise
the insights they find from their data analysis.
Rio Tinto’s Analytics System

Rio Tinto is a large multinational mining company. Its operations in the Pilbara region of Western Australia
involve a highly automated portfolio of assets to mine and transport iron ore. This consists of 16 mines
connected by a 1700 kilometre rail network and related infrastructure to four independent port terminals.
The entire system is designed to ramp up and down rapidly in response to changes in demand.
Much of the iron ore is mined using Rio Tinto’s fleet of 26 production drills that operate across seven
sites. This system is known as the Autonomous Drilling System (ADS). The ADS allows Rio Tinto to monitor
multiple drills from different manufacturers across multiple sites from a single remote console located
in Perth.
Rio Tinto also extensively uses haul trucks to move ore. About one-third of its haul truck fleet
across the Pilbara is autonomous. The trucks use pre-defined GPS courses to automatically navigate
roads and intersections. These autonomous systems continuously track actual locations, speeds and
directions of other vehicles, allowing Rio Tinto to move more material, more efficiently and safely,
increasing productivity.
In 2019, Rio Tinto launched AutoHaul™, the world’s first automated heavy-haul rail network. The system
can move about one million tonnes of iron ore a day. It improves safety by reducing risk at level crossings
and through automated responses to speed restrictions and alarms, eliminating the need to transport
drivers to and from trains mid-journey, which in turn saves almost 1.5 million kilometres of road travel
every year. It also improves cycle times by using information about network topography to calculate and
deliver a safe, consistent driving strategy.
Rio Tinto’s integrated iron-ore network is supported by an Operations Centre in Perth, a state-of-the-
art facility that enables all the autonomous trucks, trains and drills at their mines, ports and rail systems
to be operated from a single location. The Centre incorporates visualisation and collaboration tools to
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provide real-time information across their demand chain and allows Rio Tinto to optimise their mining,
maintenance and logistic activities across the Pilbara in a way never before possible.
Source: Adapted from Rio Tinto n.d. www.riotinto.com/Operations/australia/pilbara.
A FRAMEWORK FOR PERFORMANCE ASSESSMENT

In order to direct an organisation’s strategy and identify the areas for growth and further consideration,
leaders, managers and other decision makers need an accurate and comparable assessment of its internal
performance. As discussed above, the collection and analysis of many forms of data, including internal
and external market data, drives this. To help organise the assessment of current performance, we can use
the framework illustrated in figure 3.5. The framework provides guidance on what to assess and how to
assess it, using both qualitative and quantitative data around:
• strategic drivers
• operational drivers and
• people and organisational drivers.
These are discussed in detail in sections 3.3, 3.4 and 3.5.
FIGURE 3.5 Current performance assessment framework
Assessing current performance
Objective: Understand current performance in order to drive future strategic opportunities.

An organisation needs to analyse its achievements and challenges to create the case and need for change.
‘If you don’t know where you are today, you won’t know where you’re going tomorrow.’
3. People and
1. Strategic 2. Operational
organisational
drivers drivers
drivers
What differentiates What are the core How do we

us from our activities we must encourage, motivate
competitors? do well? and fulfil the needs
of our people?
as follows.
KEY POINTS
3.2 Evaluate current performance by selecting the appropriate assessment frameworks.

• The objective of internal analysis is to understand current performance and thus provide input to
decisions about future strategic options.
• Current performance is measured against the organisation’s goals, against comparable organisa-
tions such as competitors, and against industry averages. Numerous possible metrics are available.
• Current performance may be assessed using qualitative and quantitative data and generally
examines strategic drivers, operational drivers and people and organisational drivers.
• Advances in data collection and analysis have provided new opportunities for organisations to
understand their operations and customers in more detail and in real time, enabling organisations
to identify, understand and respond to opportunities and threats more quickly.
• Assessment of current performance informs leaders and managers how effectively the organisation
is meeting its goals and what options it has for pursuing future strategic themes.
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• Managers need to develop an appreciation of the value of the data for problem solving and
overcome trust issues related to its use.
• To benefit most from data analysis, organisational leaders need to promote a culture that empha-
sises decision making based on evidence and focused on business improvement.
• To enable analytics to contribute to organisational performance, managers must ensure access
to good data, the ability to analyse the data, and the ability to ensure analytics outcomes can be
translated into commercial insights.
• Decision makers need to understand any gaps and uncertainties and challenge any assumptions
in internal analysis in order to be able to exercise proper judgement in the decisions they make.
3.3 STRATEGIC DRIVERS

Strategic drivers differentiate an organisation from its competitors and thus are central to an organisation’s
performance. The key strategic drivers of an organisation include:
• industry and markets
• customers
• products and services
• channels and
• competitive advantage.
We will discuss each of these in turn.
INDUSTRY AND MARKETS

Module 2 looked at how to define and understand an industry and the markets in which an organisation
operates. In terms of the internal environment, it is important to understand the organisation’s position
relative to its industry and the markets in which it has a presence.
There are various ways to examine an organisation’s position in its industry. One method, for example,
is to analyse the organisation’s customer market share over time against the growth rate of the industry
as a whole, thus measuring the organisation’s performance against an industry benchmark. In terms of
understanding market position, markets are often analysed in terms of geographic markets (i.e. geographic
regions) and customer markets (i.e. groupings of customers based on some shared characteristic).
Geographic markets are defined by where the organisation’s output is sold. Geographic markets can
be international or domestic and may be broken down into smaller components or conversely combined
into regions, depending on how the organisation needs to understand its markets. For example, a coffee
producer from Papua New Guinea may sell its product domestically to Port Moresby, the country’s capital,
and export internationally to Australia, New Zealand, Singapore and Thailand. For the purposes of analysis,
it is important to identify each geographic region where the product is sold and for each of those any
modifications in distribution, marketing and customer requirements and systems. If, for example, the coffee
producer sold to Australian customers only in New South Wales and Queensland, as opposed to all over
Australia, it would be necessary to describe the markets of the coffee producer at this level of detail, rather
than simply as Australia.
To establish useful and valid insights, internal analysis related to market position must also appropriately
define the market in terms of product (e.g. the market for ground coffee and the market for coffee beans
may require separate analyses to be most useful in strategic development).
CUSTOMERS
It is important to understand the different types of customers to whom the organisation’s products or
services are sold or provided. Different customers may have different needs and require different sales
models or distribution channels. For example, Qantas may break its customers down into several different
classifications, including travel agents, direct passenger bookings (either by phone or over the internet),
frequent flyers and business organisations. Again, each of these customer types has different needs and
requirements that Qantas needs to factor into its overall business operations.
Pdf_Folio:163

Customers, markets and industry are often closely related and thus strategic drivers for industry and
markets and for customers are often interlinked.
As customers are generally responsible for the generation of an organisation’s profits, it is important to be
able to collect and analyse data and present findings that give insight into customer trends and profitability.
Customer-related issues can be identified, and target areas for growth can be pursued based on the findings.
QUESTION 3.5
The Castle Confectionery Company (CCC) is a fictitious organisation that manages confectionery
products distribution in Australia. Figure 3.6 displays customer gross sales value by customer
segment from data captured over the past four years.
FIGURE 3.6 CCC gross sales value by customer segmentation
30 000
25 000
Gross sales value ( $ )
20 000
15 000
10 000
5 000
0
Year 1 Year 2 Year 3 Year 4
Year
Large retail Small retail

Hospitality Other
Using figure 3.6, write a clear explanation that will help decision makers understand customers
as a strategic driver of the organisation.
PRODUCTS AND SERVICES

Products and services are often looked at in conjunction with markets and of course customers, as they are
closely linked and interrelated. This component of the strategic drivers analysis analyses the key products
and services that the organisation offers and how those products and services are performing. It attempts
to answer the general question, ‘What business are we in?’.
The output of the organisation can be a product or a service — something physical that is produced
(e.g. clothing, appliances), something provided (e.g. healthcare, financial services) or something sold (e.g.
by a wholesaler or retailer). It is important to think about the output of the organisation in terms of both
products and services to capture a complete view of the organisation’s activities.
Table 3.3 provides examples of various products and services developed by a number of organisations
and the markets they serve.
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TABLE 3.3 Examples of industry, geographic markets, customers, and products and services
Industry and geographic

Organisation markets Customers Products and services
Wesfarmers Industry: • Individual shoppers • Home improvement

• Retail • Small and large products
• Chemical and fertilisers businesses • Office products
• Energy • Fertilisers
• Industrial safety • Safety gear and
Market: workwear
• Australia, New Zealand,
United Kingdom, Ireland, India
Rio Tinto Industry: • Large international • Aluminium

• Mining businesses • Copper and diamonds
Market: • Energy and minerals
• Global • Iron ore
Salvation Army Industry: • Individuals • Retail products

• Community services • Other charitable • Charitable services:
• Retail organisations counselling,
Market: employment, family
• Global support, etc.
Hilton Hotels Industry: • Personal and business • Serviced hotels,

• Hospitality and hotels travellers extended stay suites,
Market: • Corporate conferences resorts
• Global • Family functions • Events
• Food and beverage
• Wellness
BP Industry: • Downstream refiners • Oil

• Energy • Distributors • Natural gas
Market: • Consumers at BP • Alternative energies
• Global petrol stations
National Australia Industry: • Individuals • Lending and deposit

Bank (NAB) • Finance and banking • Businesses products
Market: • Trade finance
• Australia, parts of South-East • Working capital
Asia (including Indonesia, products
Singapore and Japan), United • Commodity solutions
Kingdom, United States • Funding solutions
• Superannuation funds
BUPA Industry: • Individuals • Travel, home, car, life

• Insurance • Businesses and health insurance
• Care • Government • Care homes
• Health services
Market:
• Global
Cancer Council Industry: • Patients • Research studies

NSW • Medical research • Carers • Patient and carer
• Patient services • Health professionals services
Market: • Researchers • Cancer awareness
• New South Wales
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QUESTION 3.6
Alibaba was founded by Jack Ma in the city of Hangzhou in China in 1999. Its retail arm acts as a
marketplace to connect suppliers — mostly from China — to buyers from all over the world. It has
grown to become the world’s largest retailer, with its online sales and profits greater than those of
all US online retailers — including Amazon and eBay — combined.
The Alibaba Group consists of three major online retail businesses:
1. Alibaba.com, where buyers from many different countries make purchases from predominantly
Chinese suppliers
2. Taobao, where individuals and small businesses sell to consumers
3. Tmall, which is an online storefront for higher end international and Chinese brands selling to
more affluent Chinese consumers.
The Alibaba Group operates in many other areas also. These include:
1. Alipay, an online third-party payment platform similar to PayPal
2. Alimama, which offers online marketing services to sellers for their Alibaba Group platforms and
beyond
3. Alibaba Cloud, which offers cloud computing services (information technology infrastructure
services) to the public.
Use the above information to classify the industries, markets, customers, and products and
services that the Alibaba Group are engaged with, using the structure shown in table 3.3.
The Boston Consulting Group Product Matrix

Once an organisation has identified the particular products and services it provides and the markets in
which it operates, a products and services analysis needs to be undertaken. The Boston Consulting Group
(BCG) product matrix shown in figure 3.7 serves as a useful tool for assessing the organisation’s products
in terms of market growth and its market share, making it easier to identify the position of all services
and products and how they contribute to the firm. The BCG matrix shows areas that are either core to the
organisation or the market, or are well positioned for growth.
FIGURE 3.7 BCG product matrix
QUESTION MARK STAR

Earnings: low, unstable, growing Earnings: high, stable, growing
Cash flow: negative Cash flow: neutral
HIGH
Strategy: analyse potential Strategy: invest for growth

Market growth rate (%)
DOG COW
Earnings: low, unstable Earnings: high, stable
Cash flow: neutral or negative Cash flow: high, stable
LOW
Strategy: divest Strategy: milk
LOW HIGH
Market share
Source: Adapted from RM Grant, 2019, Contemporary Strategy Analysis: Text and Cases, 10th edn, John Wiley & Sons,
pp. 321 and M Smith, 1997, Strategic Management Accounting Issues and Cases, 2nd edn, Butterworths, Sydney, p. 119.
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This model uses market growth rate and company market share as referential axes upon which
to base positioning. Market growth is used as an indicator or proxy for a market’s attractiveness.
Rapidly growing markets indicate an increasing capacity for success in the market due to its expansion.
Company market share indicates the amount of the market being serviced by the organisation or
business unit (i.e. the total revenues in the market that are earned by the company). This acts as a
proxy for competitive advantage and control over the market. Plotted against these two dimensions
of company market share and market growth rate, the matrix identifies four types of product groups,
as follows.
1. Stars are products and services with large market share in fast-growing industries. Such products are
considered attractive due to their competitiveness in strong industries. If successful, as the industry
matures, stars may become cash cows due to the low-growth rate.
2. Cash cows are products and services with large market share in low-growth industries. Such products
are considered attractive due to their large generation of cash and little need for investment.
3. Question marks are products and services with small market share in fast-growing industries. They often
provide a strategic dilemma due to their potential for gaining market share and transforming into a star
or cash cow, or for deteriorating into a dog. Question marks often consume excess cash, so should be
treated with careful consideration.
4. Dogs are products and services with small market share in low-growth industries. These offerings are
unattractive due to their low market share and low potential for growth, and should often be liquidated
or divested.
QUESTION 3.7
The largest product segment in the Australian snack food manufacturing industry is potato chips.
Health snack foods (including nuts) are the second largest segment. Corn chips and other snacks
make up the rest of the product offerings.
The continued rise in health consciousness in Australia has led to consumer concern over
excessive quantities of fried foods and added flavours and chemicals to snacks. Consumer
lifestyles will continue to become busier in future and this is predicted to increase demand for
healthier and more premium snack foods as replacements for meals. These products typically
command higher prices.
Snacks2Go is a fictitious organisation competing in the industry in Australia. Their brands include:
1. Potatoes2Go, a range of potato chips in standard flavours
2. GourmetChips2Go, a range of premium potato chips in exotic, natural flavours
3. Health2Go, a range of baked grain products health bars with natural flavours and dried fruit
4. Burgers2Go, a range of fried cereal products with added flavours to taste like hamburgers
5. Cheese2Go, a range of fried cereal products with added flavours to taste like cheese
6. Nuts2Go, a range of standard nut products.
These products are listed in order of the relative sizes of their market share in each product
segment.
Classify each of Snacks2Go’s products in the BCG matrix based on the market share and growth
prospects you can infer from the case facts.
CHANNELS
Channels are the methods by which an organisation distributes its product or provides its service to
customers. For example, an organisation might sell through company-owned physical stores, an online
store, franchised physical stores and export agents. These would be supported by intermediaries such as
couriers and potentially after-sales support providers, such as installers.
Channel analysis provides another method to identify potential loss or profitable areas, and displays the
data in a way that identifies the strong and weak channels, allowing an organisation to focus on channels
that require improved performance.
When managing the channels it is also vital to consider any legislation, taxes or regulations that may
influence the strategies developed for future growth. Compliance with industry and government regulations
must be understood and integrated into all strategic decisions.
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QUESTION 3.8
Question 3.5 presented sales by customer segment for the Castle Confectionary Company (CCC),
a fictitious organisation that manages confectionary products distribution in Australia. Figure 3.8
displays the company’s sales by channel from data captured over the past four years.
FIGURE 3.8 CCC sales revenue by channel
90 000
80 000
70 000
Sales revenue ( $ )
60 000
50 000
40 000
30 000
20 000
10 000
0
Year 1 Year 2 Year 3 Year 4
Year
Retail/grocery Export Food service Clearance and other
Using the data in figure 3.8, provide an analysis of the CCC channel revenue and any actions that
could be taken by CCC based on the findings.
COMPETITIVE ADVANTAGE AND GENERIC STRATEGY

Identifying the markets, products and services, customers and channels helps to clarify the focus of
the organisation. This helps the organisation develop and assess strategic options to improve current
performance and pursue future goals. Here, we will provide an overview of the generic strategies available
to an organisation. The development of specific strategic options around markets and products will then
be discussed in module 4.
We defined competitive advantage in module 1. Porter (1980) described two basic types of com-
petitive advantage an organisation can have — an organisation can pursue a low-cost advantage or a
differentiation advantage. Low cost means producing the product or service at a cheaper cost than
competitors whereas differentiation simply means doing something different from competitors in a way
that appeals more strongly to customers.
Porter argues that generic strategies based on differentiation or low cost can be implemented on either a
broad industry basis or a narrow niche basis. He refers to this choice of broad or narrow scope as ‘focus’.
Figure 3.9 shows how generic strategies can be targeted to both the broad and narrow segments of
the market. Targeting the strategy to the narrow market would require the organisation to focus on the
niche market.
According to Porter (1980), an organisation needs to choose one of these generic strategies. Trying to
undertake more than one would leave the organisation ‘stuck in the middle’ and not having a competitive
advantage in focus, low cost, differentiation or any particular part of the market. In other words, an
organisation cannot be all things to all people, and needs to choose a basis on which to compete. We
will now examine each of Porter’s generic strategies: differentiation or low-cost, with a broad or
narrow focus.
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FIGURE 3.9 Porter’s generic strategies
SOURCE OF COMPETITIVE
ADVANTAGE
Low cost Differentiation
COST
Industry wide DIFFERENTIATION
LEADERSHIP
COMPETITIVE
SCOPE
Single segment FOCUS
Source: Adapted from ME Porter, 1980, Competitive Strategy: Techniques for Analyzing Industries and Competitors, Free Press,
New York, Figure 2-1 ‘Three generic strategies’, p. 39; and R Grant, 2016, Contemporary Strategy Analysis: Text and Cases
Edition, John Wiley & Sons, Melbourne, p. 166
Generic Strategy: Differentiation

Where an organisation aims to produce a product or deliver a service different from those of its rivals and
competitors, it is operating under a differentiation strategy. The ultimate aim of differentiation is to make
the product or service unique so that customers do not consider alternatives. The customers’ needs are
met completely by the product or service offered by the organisation — that is, it has a ‘unique selling
proposition’. Other products, services and competitors are unable to compete for this particular market
segment. Table 3.4 provides some aspects of differentiation strategies that organisations can use to enhance
their competitive advantage.
TABLE 3.4 Possible differentiation strategies
Basis of differentiation Comments
Product quality This is an important basis for differentiating products. It can involve performance
(standards achieved, durability, reliability), features or image. Based on the quality
(higher or lower) the product or service can be differentiated. For example, luxury
hotels such as the Intercontinental hotel chain versus budget hotels such as the
Travelodge brand of hotels.
Product reliability Customers value reliable products and services. For example, reliability of
‘on-time’ departures of airlines. Some airlines choose to publish monthly online
arrival and departure reports to demonstrate their reliability of service.
Product innovation For example, presenting the product in an entirely different way can create
interest in the product. The invention of shipping containers changed global
trade, as the container could be easily moved in transporting goods from ships to
trucks and trains. Their convenient size and portability have also seen shipping
containers used for a variety of other purposes such as mobile offices, mobile
kitchens and workshops, storage containers and even tiny homes.
Product range For example, offering a wide range of products, making it easy for a customer
to find what they want from a single provider. New category killer stores are
adopting the product range approach to marketing. Category killers specialise
in a particular type of discounted merchandise and become the dominant retailer
in that category. Firms such as Costco and Tesco use this strategy.
Service levels Differentiation could be based on high service, extended service time (24 x 7)
or low service (self service). For example, Sleeping Duck sell mattresses and
offer a 100-night free trial of the mattress in the home, with free returns and a
100% refund if the buyer is not completely satisfied. This is not common for
mattress sales.
(continued)
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Basis of differentiation Comments
Product features Adding features to an existing product can assist in customers perceiving
the product as different. Smart TVs have adopted this approach, from a
technological perspective, in adding wireless capability, universal search, media
players, apps, Netflix and YouTube.
Brand name Initially brands can achieve differentiation based on a particular aspect of a
product. Later the consecutive use of the brand name can create perceived
differentiation. For example, many automobile manufacturers have been
purchased by big companies, but they retain the original brand name. For
example, the Alfa Romeo brand name is kept even though Volkswagen
has purchased the business and uses the VW platform and components in
Alfa Romeo cars.
Distribution channels By offering products through an exclusive distribution channel, an organisation

can differentiate. For example, Zara offers women’s designer clothes and makes
it difficult for others to copy them. They only sell their clothing through their own
retail outlets. It is believed that customers are willing to travel to Zara’s shops
because it is difficult to find their designs in other shops. This allows Zara to
better understand their customers and encourages additional purchases.
Flexibility Flexibility could be a source of differentiation when the organisation can offer
customised products and services over a broad range of their products.
An example of this is Dell Inc., which offers customisable options over their
computer product ranges.
Source: Adapted from G Hubbard, J Rice & P Galvin, 2019, Strategic Management: Thinking, Analysis, Action, 6th edn,
Pearson Australia, Melbourne, pp. 179–80.
Example 3.5 illustrates how R.M. Williams competes in the Australian footwear and clothing company
industry using a differentiation strategy.
EXAMPLE 3.5
R.M. Williams — Capturing the Spirit of the Outback

R.M. Williams was established by Reginald Murray Williams in 1932 after he learnt leatherworking from
an itinerant saddler named Michael George ‘Dollar Mick’ Smith. Williams had worked on pastoral runs
and developed a good understanding of workers’ needs in footwear. He mastered the making of bridles,
pack saddles and riding boots. The boots with the unique feature of being one piece of leather and stitched
up the back. To this day, the R.M. Williams company still makes their boots with 70 hand processes and a
single piece of leather. Such attention to detail, superior quality materials and workmanship, along with its
long-revered brand name, make R.M. Williams boots distinguishable from other high-quality riding boots
and shoes for more common use.
The R.M. Williams product range is broad and includes menswear, womenswear, footwear and
accessories. All products share a similar concept — footwear and apparel suitable for ‘the Outback’ with a
proven track record in practicality and functionality — which remains the company’s guiding principle. This
long-time tradition and focus on quality are now supported by innovation and new product development.
While ownership of the company has changed hands several times, most of its products are still made
in Australia, with a narrow range of products (mostly t-shirts and caps) now made in China.
The R.M. Williams company also publishes the R.M. Williams OUTBACK magazine, which has one of
the highest subscription rates of any magazine in Australia.
R.M. Williams remains the leading name in the Australian bush outfitting industry. With sales of over
AU$50 million a year, the company’s retail and concept store program has grown to more than 100
locations in Australia and New Zealand. Other international stores are located in London and New York.
Source: Adapted from R.M Williams, n.d., www.rmwilliams.com.au.
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QUESTION 3.9
Explain, with reference to table 3.4, how R.M. Williams’ strategy can be considered a differentiation
strategy.
Generic Strategy: Low Cost

Although generally known as ‘low cost’, Porter’s (1980) intention in delineating this generic strategy
was to highlight the organisation in the industry with the lowest costs of production. The benefits for
the organisation with the lowest costs in the industry are either in higher profit margins (due to lower
expenditure and similar selling prices) or in higher market shares (as customers choose this organisation
over others due to their ability to sell their products at lower prices). Therefore, this strategy improves the
competitive position of the organisation.
Most industries are in the mature stage of the industry life cycle (see module 2) and, therefore, have
low organic industry growth. In such industries, the competitors compete for market share of this low-
growth market. Organisation growth rates are constrained by that of the industry, unless they win market
share from other competitors. To win this market share, competitors may engage in price discounting or
sales promotions to win sales, which in turn puts pressure on an organisation’s profitability. Adopting a
low-cost strategy enables organisations to achieve a sustainable competitive advantage over competitors
by absorbing price reductions and margin pressure.
Table 3.5 provides some possible low-cost strategies that organisations can use to enhance their
TABLE 3.5 Types of low-cost strategies
Basis of low cost Comments
Economies of scale Businesses with large-scale operations are able to achieve lower fixed costs per
and/or scope unit and hence overall lower unit cost than smaller competitors
Example: Hyundai Motor’s Ulsan, South Korea car manufacturing plant is one
of the largest manufacturing facilities in the world. Their fixed costs are high due
to the size of the plant and their use of automated machinery. It is capable of
producing over 1.6 million vehicles per year, so the scale of production means
their costs per vehicle are low.
Experience/learning curve A business with more experience will often achieve a lower production cost
due to expertise developed from experience and learning, leading to a cost
advantage over newer entrants to the industry.
Technology advantage Superior technology can be a source of cost advantage.

Example: Rio Tinto has a large iron-ore mining operation in a remote part
of Western Australia. They have the world’s first automated heavy-haul rail
network capable of moving about one million tonnes of iron ore per day. This
reduces accidents, saves the need for shifts of drivers, optimises the journey and
improves their production times.
No-frills product Cost can be reduced by minimising non-essential features of the product. For
example, packaging may be kept very basic or extra features of the product are
not included. The home brand and generic store brand ranges of products in
supermarkets are examples of no-frills products.
Simple product design Product parts can be eliminated through re-engineering, leading to lower material
cost and manufacturing cycle time. This needs to be done while still meeting
customer needs. Ikea adopts this strategy. They scrutinise every product idea
for the best use of raw materials and manufacturing process while offering
well-designed, stylish products.
Cost control Costs can be reduced by improving control of raw materials (sourcing materials
from low-cost countries such as China), direct labour, factory overheads or
administrative overheads.
(continued)
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Basis of low cost Comments
Location advantage Inexpensive premises offer a great cost advantage as do appropriately located
operations, which provide, for example, easy distribution of products. If the
distribution is a crucial activity to the business, the cost can be reduced by
locating the company next to freight infrastructure (e.g. an airport, railway station
or port). The trend towards off-shoring manufacturing operations is another
example of this approach — for example, where manufacturing has been moved
to China or India as the production costs are less than in Western countries.
Production innovation Production innovation can be achieved by identifying cheaper ways to make a
product or service. For example, savings can be made by making changes to
the production process, such as automating the stages of production. Bar code
scanning and electronic data interchange in both EFTPOS and file share has
reduced costs for ordering, stock management and warehousing.
Purchasing cheap assets For example, obtaining assets such as plant and equipment at distress sales can
help to reduce costs. The recent purchase by Kogan of a number of the failed
Dick Smith’s assets and stock is an example of purchasing low price assets. A
number of online auction sites exist that turn over previous plant and equipment,
enabling this practice for many organisations.
Government subsidy Governments are keen to attract jobs to their communities, so governments
offer packages for organisations who are interested in expansion but flexible
about location. For example, in Australia, when Alcoa (an American industrial
corporation and the world’s eighth largest producer of aluminium) was
expanding its processing capacity, the company received proposals from several
governments offering subsidised power.
Source: Adapted from G Hubbard, J Rice & P Galvin, 2019, Strategic Management: Thinking, Analysis, Action, 6th edn, Pearson
Australia, Melbourne, pp. 1183–82.
Example 3.6 discusses competition on the basis of low cost in the airline industry.
EXAMPLE 3.6
Low-Cost Generic Strategy — Airlines

For the production of most goods and services, alternative process technologies exist. Process tech-
nology and process design are methods of cost savings enabled by innovations that result in improved
efficiency in the production process. A process is technically superior to another when, for each unit
of output, it uses less of one input without using more of any other input. Where a production method
uses more of some inputs but less of others then cost efficiency depends on the relative prices of the
inputs. For example, budget airlines such as AirAsia have implemented a different process — with different
inputs — to those used by traditional airlines. Their cost advantage was created by: choosing alternative,
less expensive airports (e.g. in Paris, landing in Orly instead of Charles de Gaulle); using one type of aircraft
(thus streamlining maintenance); flying simple routes; and using online booking to minimise the fees to
agencies and the cost of bookings staff.
After entering the Australian airline market in 2000 with aircraft operating on a single route as a low-cost
carrier, Virgin Australia Airlines, formerly known as Virgin Blue, has evolved to become Australia’s second
largest airline. Virgin introduced to the Australasian market a business model incorporating aspects of
the ‘no-frills’ approach, which has become very popular and now accounts for 25% of the Asian aviation
market. Now, similar business strategies are implemented by AirAsia, Jetstar, Tiger Airways, Firefly, Lion
Air and close to 50 other budget regional airlines. These airline companies successfully implemented low-
cost strategies in the South-Asian airline industry that had proved successful for Southwest airlines in
the United States and Ryanair in Ireland. Their business principle is to provide no-frills, hassle-free low
fares to their passengers, and they achieve low costs through maintaining high efficiency in every part of
the business.
Budget airlines initially tried to create new markets for people who have not had the opportunity to
travel before due to the costs of transportation or the lack of direct links to their area (because they were
not covered by full-service carriers). However, nowadays budget airlines capture market share previously
held by traditional full-service airlines. Moreover, Asia–Pacific budget airlines AirAsia and Jetstar recently
overtook full-service carriers in a brand-reputation survey — a reflection that more passengers in the region
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are turning to low-cost options. While full-service airlines, such as Singapore Airlines, Cathay Pacific,
Malaysian Airlines and Qantas, experience a drop in their revenues, budget airlines continue to grow.
Today, nearly all full-service airlines in the region have their own low-cost arm businesses — for example,
Qantas launched low-cost airline Jetstar and Malaysia Airlines owns Firefly.
High efficiency is achieved via a lean and simple cost structure based on: one-to-one point operations,
the use of only a few types of modern aircraft, high frequency of flights (aircraft earn profits only when
they fly), steady growth via expansion of networks (mainly based on low-cost airports), and rewards for
continuous cost reduction. Efficiency creates savings that are then passed on to customers to make their
air travel affordable. The philosophy of South–East Asia’s leading airline, AirAsia, is ‘Now everyone can
fly’. Budget airlines have thus revolutionised regional air travel, encouraging more people to choose them
as their preferred choice of transport in South-East Asia. The ability to operate the airline business cost-
effectively does not require a compromise on safety and the quality of services provided to customers.
High safety standards are maintained via the use of modern and reliable aircraft, and collaboration with
the world’s most renowned providers of technical maintenance.
Source: Adapted from R Grant et al., 2013, Contemporary Strategic Management: An Australasian Perspective, 2nd Edition,
John Wiley & Sons Australia: Milton, Brisbane.
Changes in the external operating environment — including the entry of other competitors — mean
that an organisation’s generic strategy may have to change over time. Qantas’s establishment of low-cost
carrier Jetstar is an example of responding to such a change. Other premium airlines have responded by
emphasising their quality of service, maintaining and building on their differentiation strategy in the face
of competitors with a low-cost strategy.
QUESTION 3.10
Explain, with reference to table 3.5 and example 3.6, the types of low-cost strategies low-cost
airlines most often adopt.
Generic Strategy: Focus

Another way to direct an organisation’s strategy is by way of a focus strategy. An organisation pursuing a
focus strategy aims to find a small product or market segment with a particular set of significantly different
needs and to focus on this area only, rather than compete in the whole industry. Table 3.6 summarises
various types of focus strategy.
Example 3.7 shows how Smiggle, a stationery retailer, has developed a successful business using a focus
strategy.
EXAMPLE 3.7
Smiggle — A Focus Strategy

While the retail industry in Australia suffers ongoing weak consumer spending, increased competition
and rising rental and labour costs, there are companies that continue to grow. Stationery retailer
Smiggle, owned by Premier Investments (more commonly known as the Just Group), has achieved
strong growth and been able to continue a program of overseas expansion. What is the strategy behind
such performance?
Smiggle was established in Australia in 2003 with a simple business model based on bright stylish
stationery and storage products designed to not only make a work or study space more organised, but also
to energise their users by bringing colour into their everyday lives. The target market of Smiggle is young
teenagers. Most of its merchandise is priced below AU$20. Smiggle quickly grew to 20 retail stores across
various states before it was acquired in 2007 by the Just Group, the Australian fashion and apparel retailer.
The company became the Just Group’s only non-clothing business but shares many of the ‘affordable
fast fashion’ attributes of its clothing stablemates (e.g. Jay Jays and Dotti). The brand, with its frequently
changing range of funky products, is very popular among children and young people. The company aims
to keep its customers excited by continuously introducing new products or re-introducing ‘old favourites’
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in a modern presentation. All products are designed in Australia and the company is of an Australian
origin, and this ‘Australian-owned’ factor also contributes to Smiggle’s positive image. The products are
manufactured in reputable factories around the world, which enables the company to balance quality
and affordable prices. While the company is committed to opening more stores, it maintains a strong
online presence.
In 2009, the decision was made to expand the Smiggle network at airports across Australia and New
Zealand under a franchising deal with travel retail specialist Lagardere Services Asia–Pacific (LSAP). This
group has competencies in operating stores under various banners — including Lonely Planet, NewsLink
and Virgin Entertainment — in Australian airport terminals. Their collaboration with Smiggle is an interesting
combination of competencies — LSAP’s operation of stores with high traffic and Smiggle’s creation of
affordable fun. This partnership also became a market testing for Smiggle before their commitment to
expand internationally in 2011. Smiggle’s first international store was successfully opened in New Zealand.
The company has continued to open new Smiggle stores, expanding the portfolio to 100 sites across
Australia, New Zealand and Singapore.
Source: Adapted from R Grant et al., 2013, Contemporary Strategic Management: An Australasian Perspective, 2nd Edition,
John Wiley & Sons Australia: Milton, Brisbane.
TABLE 3.6 Types of focus strategies
Basis of focus Comments
Narrow product line This implies offering a limited range of products and services, thus meeting
special customer requirements. Narrow product lines can occur when the
producer only makes a few products for a line or when there is only a specific
niche market demanding the product and a line extension is not warranted. For
example, law firm Slater and Gordon specialises in class actions.
Customer segment This is an approach that allows companies to focus only on a small customer
segment. This strategy can be in play for two reasons: (1) by choice of the
organisation, such as producers of high-end goods such as hand-crafted wine;
and (2) because of the nature of the product, such as skincare for eczema
sufferers or gluten-free biscuits.
Geographic segment This involves concentrating on a narrow geographic area, such as the local small
business. Seasonal clothing stores such as ski shops and bikini stores tend to
be close to the areas of geographic attraction. ‘Buying local’ community produce
shops can adopt this strategy to move local produce.
Focused functional This involves aiming to serve a small segment well by focusing on unique
capability production capability, research, and capabilities or distribution channels.
QUESTION 3.11
Referring to example 3.7, explain the generic strategies of Smiggle, the Just Group and Lagardere
Services Asia–Pacific.
Connecting Innovation and Business Strategy

Module 1 described the role of innovation in business strategy.
Innovation can be developed as a business strategy within the generic strategy — differentiation
based on innovation. To implement innovation as a business strategy, the organisation needs to have
appropriate internal resources and capabilities, the ability to acquire them or access them through
alliances. In particular, employees’ creativity depends on the organisational environment, which needs
to be both nurturing and competitive. Innovative organisations often exhibit approaches to leadership
and management that put in place flat organisational structure, loose controls to foster ideas, flexible
strategy development and financial control, appropriate reward systems such as autonomy and recog-
nition, and recruitment of the right people with sound technical knowledge and creative personal traits
(Galbraith 1986).
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Kim and Mauborgne (2014) broadened the idea of business strategy with their concept of ‘Blue Ocean
strategy’, which is about finding or creating marketplaces where there is little or no competition. The
concept of Blue Ocean strategy is deeply rooted in innovation. Companies such as Cirque du Soleil, female
health club Curves, and Yellow Tail wines are classic examples of innovation successfully implemented
through Blue Ocean strategy. Blue Ocean strategy is discussed in detail in module 4.
Externally, customers and other stakeholders are increasingly willing to become involved in developing
innovative products and services. For example, Cisco, HCL Technologies uses ‘crowdsourcing’ to get
innovative ideas and Lonely Planet utilises users’ comments and experiences to develop its books. As
described in section 3.1, stakeholder views often shape strategy. In terms of involving customers in product
decisions, this has become much more direct.
Once a product or process is innovated the organisation needs to protect it from imitation. The different
mechanisms for protecting innovation include secrecy, patents, and lead-time. Protection of intellectual
property is discussed in depth in module 4.
QUESTION 3.12
Read appendix A at the end of the book, which explores the retail business Zara. With reference to
the information in this section of module 3, answer the following questions.
• Who are Zara’s key customers and geographic markets?
• What are Zara’s key products or services?
• Relate Zara’s strategy to Porter’s generic strategies.
• Evaluate the effectiveness of Zara’s strategy in securing and maintaining a competitive
advantage.
as follows.
KEY POINTS
• The strategic drivers of an organisation include: industry and markets, customers, products and
services, channels (distribution) and competitive advantage.
• The generic strategies available to an organisation to achieve a competitive advantage are low-cost
and differentiation, and then broad or narrow focus.
• A low-cost strategy attempts to achieve lower costs and thus increase sales via lower prices or
increase profits through higher margins.
• A differentiation strategy attempts to meet the needs of a customer segment better than any
competitor.
• Focus refers to whether an organisation competes with the entire industry or concentrates its efforts
on a narrower part of the market.
• The Boston Consulting Group (BCG) product matrix is a useful tool to assess the performance and
potential of a product or market.
• The BCG product matrix uses market growth as an indicator or proxy for a market’s attractiveness
and market share as a proxy for competitive advantage.
• The BCG product matrix categorises products as stars (large market share in fast-growing
industries), cash cows (large market share in low-growth industries), question marks (small market
share in fast-growing industries) and dogs (small market share in low-growth industries).
• In the BCG product matrix, stars and cash cows are attractive, whiles dogs are often liquidated or
divested. Question marks require careful consideration.
• Leaders and managers use assessment of the strategic drivers’ current performance to under-
stand performance against current goals and determine strategic options to pursue current and
future goals.
• The strategic drivers are at the heart of strategy and thus must be core concerns of strategic leaders
and managers.
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3.4 OPERATIONAL DRIVERS
The second major element of the internal analysis is to assess the current performance of the operational
drivers of the organisation.
Strategy is concerned with meeting organisational objectives. The key operational drivers — the
organisation’s revenue, costs and growth — underlie the organisation’s operational objectives and thus its
overall organisational objectives. This section examines the major alternative approaches for measuring
performance against operational objectives.
Operational objectives reflect the goals of the organisation. These goals depend on whether the
organisation adopts a shareholder view or stakeholder view of its purpose. What constitutes strategy and
how operational performance should be measured vary between the two views. We will briefly outline the
shareholder view and stakeholder view.
Originally proposed by Milton Friedman (1970), the shareholder view is based on the premise that
organisations exist for shareholders. The primary argument is that it is shareholders who put in the risk
capital of the organisation, without which the organisation would not start and without which it will stop
(i.e. go into liquidation).
The shareholder view leads to a concentration on financial measures and on activities that maximise
financial return, such as shareholder return, as the measure of performance. This approach is known as
the shareholder view or as value-based management. Proponents of this view have a simple belief as to
how to measure strategic performance: returns to shareholders are the primary measure to use.
The alternative approach to the shareholder view is the stakeholder view, which considers the
organisation as existing to serve the needs of multiple types of stakeholders with a variety of interests.
In this view, aspects of the organisation’s activities, output and value generation cannot be appropriately
measured with dollar outcomes. Consider, for example, a not-for-profit organisation that seeks to improve
literacy rates among children. Such an organisation clearly focuses on the creation of value, yet its
outcomes cannot easily or appropriately be measured by traditional financial measures such as profitability,
market value or return on equity.
Organisational objectives informed by a stakeholder view therefore involve complex measurement
issues, including the following.
• What measures are appropriate for each stakeholder group?
• How does the organisation balance performance between these measures?
• What does the organisation do when there is conflict between measures?
In practice, many for-profit organisations have a clear focus on shareholder returns, but taking into
account the needs of stakeholders is becoming increasingly important too.
The Business Roundtable (BRT), a lobby group of leading US CEOs, issued an updated Statement on
the Purpose of a Corporation in late 2019. The statement expressed a fundamental commitment to all
stakeholders, representing a move away from the long-standing view that shareholder profit is the sole
purpose of corporations. The statement received support from 181 CEOs, including the leaders of Amazon,
Apple, Bank of America, Citigroup, The Coca-Cola Company, Dell, Procter & Gamble and Walmart
(Business and Human Rights Resource Center 2019).
This discussion about the purpose of the organisation leads to the question: what are effective
performance measurement criteria?
EFFECTIVE MEASUREMENT CRITERIA

Effective performance measures are measures that:
• help management develop and, ultimately, implement strategy
• support decision making
• motivate managers and other employees
• communicate with, or signal to, stakeholders.
Table 3.7 shows characteristics of effective performance measures and what they incorporate. The
Strategic Management Accounting subject also makes reference to these performance measures.
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TABLE 3.7 Characteristics of effective performance measures
Characteristics Requirements
Validity, sometimes also Refers to how well a measure captures the

referred to as accuracy issue, or whether it ‘hits the target’.
Reliability, sometimes also Produces the same results regardless of who uses the measure and when it
referred to as ‘replicability’ is used.
Clarity Easy to understand, with little or no ambiguity in interpreting the results.
Low cost The expected benefits of using the measure exceed the associated cost
of measurement.
Timeliness Provides information early enough to allow action to be taken.
Accessibility Is accessible by all authorised participants at the organisation who need

the information.
Controllability Must be controllable or able to be influenced by those whose performance is

under consideration.
Resistance to gaming and Captures desired behaviour at the same time that it discourages dysfunctional
manipulation behaviours, where managers make decisions that alter the outcomes of
performance measures in ways that do not necessarily benefit the organisation.
Applicability or relevance Consistent with the strategy and goals.
The chosen measures are important: ‘If it isn’t measured, it doesn’t count. If it counts, measure it’.
People concentrate on whatever managers, or the systems, measure and report. If qualitative measures,
such as innovation, employee satisfaction and environmental impact, are considered important, ways of
measuring them must be found. Recently many organisations have expanded the performance measures to
environmental and social sustainability metrics.
Because people focus on what is measured, it is also important to avoid measuring items that are not
appropriate and which may lead to dysfunctional or negative behaviour.
Common Organisational Performance Measures

Due to the unique nature of each organisation, it is impossible to provide a list of measures that would be
generally accepted and acknowledged as universally relevant.
Many types of performance measures exist and they generally focus on the operational drivers of an
organisation, such as:
• input measures (time, cost and resources used)
• activity measures (how often an event or activity occurs)
• output measures (quantity of goods and services produced, revenues booked)
• efficiency measures (ratios and relationships of outputs with respect to inputs, such as cost efficiency
and savings)
• effectiveness measures (measures of output and outcome conforming to specified characteristics — such
as absolute quantities, timeliness, customer satisfaction — or quality)
• impact measures (measures describing how the outcome of a program affects strategic organisational or
mission objectives — for example, ‘reduced community obesity’)
• analytical measures (measures such as the proportion of products developed that are within statistical
process control limits, or quality outcomes)
• organisation-specific measures that might be applicable to your firm (measures such as an innovation
index for a high-tech R&D organisation, or a service-quality index for a service firm)
• environmental sustainability measures (emission of greenhouse gases, energy consumption, and
waste)
• social sustainability metrics (percentage proportion of female employees in management and executive
positions, time lost to accidents, accident rate, and percentage of employees with disabilities).
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The choice of which sort of performance measure to use depends, in the first instance, on the performance
that is desired. For example, if an organisation wants to achieve an output or outcome such as an increase
in the innovation of its R&D function, it needs to measure the output of its R&D group directly. The R&D
output could be measured by the number of new products introduced into the market or the number of
patent applications in a time period. When measuring performance, it is the productivity of dollars spent
on research and innovation activity that matters, rather than the dollar investment.
COMPETITIVE BUSINESS ENVIRONMENT BENCHMARKS

Once the organisation has decided on the metrics to use to measure performance and how to calculate
performance on those metrics, the issue arises as to how to assess the organisation’s performance.
Whenever a judgement is made about some aspect of performance, it is done against a benchmark or
reference point. For instance, if ROE is calculated to average 9% for the last three years or customer
satisfaction is calculated to be 85%, it is important to be able to confirm whether these are ‘good’ or ‘bad’
results in comparison with a benchmark. For example, if your competitor’s customer satisfaction rating is
92%, then a result of 85% turns out to be a competitive weakness.
When an organisation’s profit for the year is assessed as ‘disappointing’, that assessment is made against
certain criteria. It could be against prior expectations, or perhaps with respect to general buoyant trading
and corporate results, or possibly against the profit announcements of its closest rival. The point is that,
in order to be able to make any judgement about performance, it must be made relative to a separate,
comparable performance benchmark or standard.
Comparisons for performance measurement can include the following.
• Being measured at one point of time against comparable standards, such as past performance, internal
targets, industry averages, best industry practice or even world’s best practice.
• Being measured over periods of time using trend analysis (e.g. results can be improving, static, declining
or volatile). In measuring over time, performance should also be compared with one of the comparable
standards mentioned (i.e. it may be improving from a trend point of view, but still be lower than the
industry average).
Performance measures need to be evaluated in the context within which the business operates and
competes. A growing practice within a number of sectors is that of industry analysts and consulting firms
who collect and analyse industry market data and organisational data on a confidential basis (Hubbard
et al. 2014). This is done in relation to market share, cost structures, key costs and customer satisfaction.
This type of information often tells the organisation how it is performing compared with its competitors,
but does not explain the reasons for that performance difference.
There are many ways of gathering information to enable an organisation to assess its capabilities against
those of its competitors, including activities in its normal day-to-day business. These activities include:
• researching competitor information and analysis
• talking to customers and competitors’ customers
• obtaining quotes from competitors
• talking to suppliers, agents, distributors or industry analysts involved with competitors
• making product enquiries in person, by telephone, as a mystery shopper and on the internet
• purchasing competitors’ products and services
• physically examining and analysing competitor products
• talking to people employed by competitors and industry consultants
• hiring people from competitors (Hubbard, Rice & Galvin 2019, pp. 123–4).
Benchmarking
According to Hong et al. (2012), benchmarking is:
systematically identify[ing] the processes and performance outcomes of an organisation with those of its
competitors as well as comparing processes and outcomes within the organisation itself, in the constantly
changing business environment.
Many individuals, organisations and industries use benchmarking in order to improve performance and
set and achieve goals.
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In terms of evaluating strategic performance, a judgement needs to be made about the relative
performance of the organisation in the competitive business environment. Information is needed against
which to make those judgements. Because people within the organisation are unlikely to be objective about
analysing the data, a variety of methods should be used to ensure an accurate assessment is being made.
Where targets are not achieved, variances provide a signal to management to reconsider the relevance of
their strategy. However, strategy is a long-term process, and making short-term responses to either strategic
goals or their measures may not be appropriate.
THE BALANCED SCORECARD

Kaplan and Norton (1996) popularised a method of performance measurement based on the stakeholder
approach: the balanced scorecard (BSC). The BSC approach is one of the most widely used and relevant
performance management tools. The ability of a BSC to support strategy implementation is based on its
ability to translate strategy into linked causal activities in different parts of the organisation, and in turn
motivate behaviour.
The BSC approach is organised around four distinct perspectives that balance short- and long-term
performance, external and internal performance, financial and non-financial performance, and different
stakeholder perspectives. Accordingly, this performance measurement approach can be used by all types
of organisations, as it focuses on broad areas of focus in the organisation. Many not-for-profit organisations
and corporatised government departments have used the BSC approach.
The four perspectives (Kaplan & Norton 1996, p. 9) are described as follows.
1. The financial perspective: ‘To succeed financially, how should we improve efficiencies?’ This perspec-
tive includes factors that affect the bottom line of an organisation and shareholder value drivers, such as
profit, growth and shareholder return. The financial perspective is in many ways an outcome of the other
perspectives. Kaplan and Norton (1996) argue that organisations should clearly state how improvements
to their processes and the quality of their products will improve market share and increase profits.
2. The customer perspective: ‘To achieve our vision, how should we appear to our customers?’ This
perspective includes factors that indicate customer satisfaction and value propositions (e.g. satisfaction,
repeat business, product loyalty). It more widely refers to the identification of customer needs, market
segments and how the customer will behave. The catch-cry for many organisations is to ‘meet and
exceed customer needs’. The customer perspective, underpinned by the internal perspective and the
innovation and learning perspective, delivers the outcomes as measured in the financial perspective.
3. The internal process perspective: ‘To satisfy our shareholders, what business must we excel at?’ This
perspective is concerned with measures of internal processes and performance that deliver customer
expectations. It encompasses the critical business processes that have the greatest impact on client
satisfaction and achieving financial objectives: operations management (e.g. supplier relationships,
production, quality, distribution and risk management), customer management (e.g. customer selection,
acquisition and retention) and innovation (e.g. new product identification and development, R&D). This
perspective takes a relatively short-term point of view.
4. The learning and growth perspective: ‘To achieve our vision, how will we sustain our ability to
change and improve?’ The measurement of learning is important as this activity can in turn drive
internal efficiencies and processes to deliver an improved value proposition to customers. The intangible
assets of human, information and organisational capital (Kaplan & Norton 1996) are central to an
organisation’s learning and growth. They include human resources (e.g. strategic jobs, team and skill
competencies and readiness), information (e.g. transaction processing, analytical processes that help
to understand and improve the business, and transformation processes to change the business) and
organisational capacities (e.g. culture, leadership, reward alignment and teamwork). The learning and
growth perspective looks at what will create long-term growth and improvement within the organisation.
Figure 3.10 illustrates the interrelationships between the four perspectives of the BSC.
In order to use the BSC for assessment of current performance, it is important to carefully identify the
objectives that are important to each perspective. Kaplan and Norton (1996) identify the following four
steps in designing and using the BSC.
1. Identify the organisation’s vision and mission, and break it down into goals and objectives.
2. Link the vision and the objectives to individual performance.
3. Create the plan or strategy based on the findings and set goals.
4. Obtain feedback and develop the strategy accordingly.
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FIGURE 3.10 The four perspectives of the BSC
FINANCIAL
INT
CUSTOMER
ERNAL PROCES
Vision
and
strategy
S
LE H
AR WT
NIN G
AND GRO
Source: Adapted from R Kaplan & D Norton, 1996, The Balanced Scorecard: Translating Strategy into Action, Harvard Business
School, Boston, p. 9.
Depending on what business strategy is being followed, the BSC enables each organisation to develop
its own unique set of objectives and consequent measures consistent with that strategy. Thus, different
measures will be used by different organisations. A BSC of goals can be created to help keep the
organisational areas distinct and ensure focus is placed on the areas that most require it. When creating
goals, it is important to keep the SMART checklist in mind.
• Specific. Goals should be both definable and easily recognised when success is realised. This enables
managers to differentiate between efforts and results.
• Measurable. An organisation must be able to accurately and quantifiably measure the degree of
accomplishment at any time throughout goal progression. Organisations with ‘specific’ and ‘accepted’
measurement criteria will be less likely to disagree about these goals in the future (MacLeod 2012).
• Achievable. An organisation’s goals should be achievable in terms of time, resources and skill sets. The
organisation’s actions can be compared to its competitors.
• Relevant. The goals should be relevant for the organisation and linked to what the organisation is trying
to achieve.
• Timely. The length of time for goal completion should complement the organisation’s strategy. The
completion time frame should be specific and determined immediately, so that management can
accurately monitor progress and make any changes if goal progression is not as originally forecast.
Figure 3.11 provides a sample BSC with generic content.
Note: ‘Targets’ and ‘initiatives’ will be discussed in module 6 when determining the strategic projects
and their implementation. At this stage of the strategy process, it is necessary to focus first on the objectives
the organisation wishes to achieve, and then on how success will be measured.
A wide range of potential BSC measures is shown in table 3.8 along with some general sources of
data to support the measures. A particular performance measure may fit into more than one quadrant. The
classification choice will depend on the organisation doing the analysis and the purpose of the analysis.
For example, revenue growth may be part of the financial perspective. However, an organisation might also
see revenue growth as an indicator of customer satisfaction. Similarly, sales backlog could be measured
from a financial perspective or customer perspective. The important thing is to consider the linkages or
cause–effect between the measures.
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FIGURE 3.11 Example of generic BSC objectives and measures
Financial
Objectives Measures
1. Reduce Reduce rate

operational costs achieved in next
year
2. Improve the Improved

financial stability profitability
and profitability
of existing services
Customer Internal process
Objectives Measures Objectives Measures
1. Enhance Feedback from 1. Strengthen Number of

customer customers from internal and recommendations
experience quarterly customer Vision and external implemented from
satisfaction surveys strategy governance previous review
arrangements
2. Broaden services New service 2. Technolgical Number of technical
available to initiatives produced innovations innovations
potential implemented
customers
Learning and growth
Objectives Measures
1. Develop internal Staff participation

leadership in leadership
capability and program
succession
2. Embed a client Feedback from

service excellence clients from
culture quarterly client
satisfaction surveys
Source: Adapted from R Kaplan & D Norton, 1996, The Balanced Scorecard: Translating Strategy into Action, Harvard Business
School, Boston, p. 9.
TABLE 3.8 Examples of BSC measures
BSC
quadrant Explanation Example measures Data source
Financial Includes factors that • Shareholder returns Financial reports

perspective affect the bottom line • Revenue and profit growth
of an organisation and • Earnings before interest and
shareholder value drivers, taxes (EBIT), earnings before
such as profit, growth and interest, taxes, depreciation and
shareholder return. amortisation (EBITDA) and net
operating income (NOI)
• Gross margin
• Net margin, cash flow, expenditure
• Cash flow
• Sales backlog
(continued)
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BSC
quadrant Explanation Example measures Data source
Customer Includes factors that • Sales growth, customer Internal customer data,
perspective indicate customer satisfaction, customer customer satisfaction
satisfaction and value compliments and complaints, surveys
propositions. It more surveys
widely refers to the • Customer loyalty, customer
identification of customer conversion, awards
needs, market segments • Relative pricing index
and how the customer
will behave.
Internal Concerned with measures • Return on assets, return on equity Production and operation
process of internal processes and • Wastage, shrinkage, returns reports
perspective performance that deliver • Injury hours, warranty claims
customer expectations. It • Out of stock ratios, stock-turns,
encompasses the critical debtor days
business processes that • Level of markdown/discount
have the greatest impact required to move stock, obsolete
on client satisfaction inventory levels
and achieving financial • Number of patents
objectives: operations • Number of product trials
management, customer • Inventory levels
management and • returns
innovation. • Hours with customers on
new work
• Order-delivery cycle
Learning Learning can drive • Rate of improvement index Employees training and
and growth internal efficiencies and • Number of staff suggestions development record,
perspective processes to deliver • Links to research institutions, links company records on
an improved value to industry organisations employees’ suggestions,
proposition to customers. • Staff attitude survey, staff and calculating different
Looks at what will create satisfaction growths.
long-term growth and • Staff retention, staff turnover,
improvement within the training days
organisation.
Australia, Melbourne, pp. 138, 145–6.
Kaplan and Norton (1996) argue that the BSC helps organisations to translate objectives into action. This
happens because the BSC communicates the goals to managers and helps to improve their understanding
and commitment. In order for this to happen:
• there must be an organisational strategy that can be expressed in an unambiguous way
• it must be possible for measures of the vision and strategy to be clearly articulated and their necessary
data be obtainable — measures should include both outcome measures (lagging indicators) and
measures of actions that create outcomes (leading indicators)
• it must be possible to set targets for both leading and lagging indicators, and assign responsibility for
achieving those targets.
Importantly, although the BSC represents a stakeholder approach to organisations, it does not ignore
the importance of shareholders (Kakabadse et al. 2005). Shareholder value is seen as (part of) one of the
four areas (‘financial’) that must be ‘balanced’, but it is not seen as the only one. Just as the organisation
needs shareholders to provide risk capital, it also needs customers to buy its products and services, and
employees to provide them. The BSC recognises the role of implementation in strategy, and tries to measure
that through its measurement of internal process performance, including the areas of internal efficiency,
employee morale and satisfaction, and innovation. Finally, it also recognises the role of learning and growth
in developing the organisation for the future. Measures here assess the attention being given to the long-
term future of the organisation, and indicate how the organisation is balancing the short term and the long
term. Both qualitative and quantitative factors are considered, providing a more comprehensive analysis.
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Example 3.8 describes the type of information that can be used to inform a BSC.
EXAMPLE 3.8
The Brave New World of Genomic Risk

Genetic Technologies Ltd’s vision is to be a world leader in the development and commercialisation of
genetic risk assessment technology. They are headquartered in Melbourne Australia and have a wholly
owned subsidiary headquartered in Charlotte, North Carolina. They offer test products to identify the
personal genetic risk of developing a specific disease. They were the first to market with a genetic test for
breast cancer. Currently, they have just launched their third generation personalised risk assessment test
for breast cancer, GeneType for breast cancer. Their second product, GeneType for colorectal cancer, is
also the first to market, having just been launched in early 2020. It also offers a personalised cancer risk
assessment test, but for colorectal cancer.
The company’s acting CEO Dr George Muchnicki is a Doctor of Medicine, and their Chief Scientific
Officer Dr Richard Allman holds a PhD in microbiology. They fund their own R&D to generate intellectual
properties for the company. They follow a focused R&D operation. At times they enter into research
projects with other specialists, such as their November 2016 agreement with the University of Melbourne
to develop and commercialise colorectal cancer risk assessment test, which entered the market in January
2020. In the 2019 financial year, the company spent AU$2.4 million on R&D activities. They are currently
validation testing type 2 diabetes and cardiovascular genetic risk assessment tests for expected launch
later in 2020. Plans for prostate cancer and melanoma genetic risk tests are well advanced.
The group’s laboratory in Australia is among the first of its type in the world to be accredited by
NATA (Australia), Royal College of Pathologists of Australia (RCPA), Clinical Laboratory Improvement
Amendments (CLIA) (the US) and International Organization for Standardization (ISO) (Europe). Their
accuracy of test results are consistently very high and their turnaround times are superior to stated
requirements. This has led to use of its DNA testing services by State Police Forces to convict criminals.
Their leading market position gives them an advantage over their competitors.
There is now significant acceptance in the pathology services industry of this kind of testing as a tool for
measuring the risk of cancer and other common complex diseases. Over 300 papers have been published
in the past 12 months — up from 1 in 2012, being Genetic Technology’s original paper, which stemmed
from its involvement in the human genome project. Genetic Technologies expects to take advantage
of the growing confidence and interest in genomic testing as genetic testing moves into the healthcare
mainstream as a tool for predicting disease occurrence. Individuals are increasingly demonstrating their
willingness to order their own tests as discretionary incomes increase and health consciousness increases.
The rapidly aging population is also projected to lead doctors to make more frequent referrals to anticipate
and manage serious conditions during preventative health checks. These are the same types of drivers
for the expected increase in demand for pathology services in general.
Dr Muchnicki stated in a January 2020 ASX announcement that ‘2019 represented a tipping point for the
genomics industry, with the call from KOLs [Key Opinion Leaders] and industry leaders for the introduction
of Polygenic Risk Score (PRS) into clinic guidelines. Terms such as “powerful, accurate, better outcomes,
lower mortality, better use of medical resources” are a mantra that has never before been stated so boldly
or so often.’ Polygenic risk scores are associated with genetic risk assessment testing.
Despite the rosy outlook for genetic testing, Genetic Technologies has yet to make a profit. Genetic
Technologies’ net income and revenues for the period 2014–18 are shown in figure 3.12. Their financials
worsened at the end of the 2019 financial year, with a loss of AU$6.4 million and only AU$25 500 in
revenue. Genetic Technologies was only able to continue operating through a successful capital raising in
late 2019. Their share price on the Australian Stock Exchange (ASX) is AU$0.011 per share and they have
a market capitalisation of AU$44.69 million.
Genetic Technologies has recently reorganised their internal operations to focus on establishing the
US testing operations. It is projected there will be 268 000 new invasive and 62 000 non-invasive breast
cancer cases diagnosed in women in the United States in 2019. GeneType for breast cancer is able to
create a cost-effective solution to better identify at-risk women. A significant reduction in cost for the test,
from US$3000 per test in 2011 to US$249 per test is expected to remove a major hurdle in using the test
to manage the risk of breast cancer for women.
Genetic Technologies has continuing CLIA (US laboratory regulator) certification for its laboratory
developed tests in all 50 States in the United States, and also maintains licenses in all individual states
that require supplemental accreditation. The company’s current 35 000 test laboratory capacity has the
ability to be scaled up in line with demand. They are currently in 20 centres in eight US states and expect
to expand further later in 2020.
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FIGURE 3.12 Genetic Technologies’ net income and revenues
2018
–6
2017 1
–8
2016 1
–9
2015 2
–9
2014 5
–10
–12 –10 –8 –6 –4 –2 0 2 4 6
($AU m)
Net Income Revenue
Genetic Technologies faces competition from new and innovative products from their competitors.
These can make Genetic Technologies’ products non-competitive or obsolete before they are ever able
to recoup the significant investment they have made in R&D and commercialisation of their products.
There are major pharmaceutical and biotechnology companies whose financial, technical and marketing
resources are much greater than those of the company. However, the threat of new entrants to the industry
is low, given the high price of building and accrediting laboratories, the heavy regulation and finding highly
skilled staff.
The company operates in a highly regulated industry. Genetic Technologies has to obtain regulatory
approvals from regulatory authorities in every market before they can enter with their products. Failure to
comply with the present or future regulations related to clinical, laboratory and manufacturing practices
may result in delays to market or cancellation of permission to produce or sell the products.
QUESTION 3.13
Use the information in example 3.8 to construct a BSC that could be used to assess Genetic
Technologies’ current performance. Evaluate Genetic Technologies’ current performance on each
of the perspectives.
as follows.
KEY POINTS
• The key operational drivers of an organisation — revenue, costs and growth — underlie its overall
organisational objectives.
• Adopting a shareholder view of the organisation, the overall objective is to generate returns
to shareholders.
• Adopting a stakeholder view of the organisation, the overall objective is to create value for the
diverse stakeholders.
• Effective performance measures: help management development and implement strategy, support
decision making, motivate managers and other employees, and communicate with or signal
to stakeholders.
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• Comparison against competitive business environment benchmarks (such as growth in revenues)
is crucial to provide context to understand what the organisation’s performance measures show
and in particular how its performance compares with its competitors.
• The balanced scorecard approach adopts four perspectives to measure performance: financial,
customer, internal process, and learning and growth.
• Once goals are established for each BSC perspective, measures may be developed. These clearly
communicate organisational objectives and this helps managers understand their objectives and
translate them into action.
• The operational drivers of an organisation represent what the organisation must do well to succeed.
Performance measures against the operational drivers establish clear objectives for managers
to pursue.
• Measures established as part of a BSC clearly link objectives to actions and outcomes and thus
both motivate managers and provide an important tool for them to monitor performance.
3.5 PEOPLE AND ORGANISATIONAL DRIVERS

We will now look at the people and organisational drivers of the organisation and how these are performing
and contributing to the performance of the overall organisation. The culture of an organisation, along with
the employees it attracts and resources it develops, will naturally direct an organisation. Retaining such
features when successful and adapting to change when required will help an organisation achieve success
in this area. These are important focus points for organisation leaders and crucial components of strategy
development — the strategy needs to fit in with the organisation’s intangible characteristics, described
further next.
VALUES
Often the values of the organisation are not included in the definition of strategy. These values result
directly from the organisation’s vision and mission, as described in module 1. The rise of value
statements in many organisations shows that values are certainly considered important in organisational
processes and performance. Where an organisation’s core values are not well communicated, there
is often a lack of guidance or drive by the organisation’s people due to the lack of direction. It is
essential that an organisation’s leaders clearly and consistently communicate the vision, mission, and
values to the organisational members and that managers’ actions are consistent with implementing,
promoting and reinforcing organisational and individual behaviours that align with the direction set
by leadership. Communicating a clear vision inspires and motivates members of the organisations to
achieve goals. Communicating core values defines and clarifies the norms and ethical standards expected
of employees.
INNOVATION AND LEARNING — THE IMPORTANCE OF

LOOKING AHEAD AND MANAGING KNOWLEDGE
While an organisation attempts to follow its particular strategy, competitors will try to find other ways to be
successful, or find ways to copy leading organisations in the industry. Therefore, even leading organisations
must seek to continually improve their operations. Organisations need to understand their performance on
innovation, learning and knowledge management and seek to continuously develop these three dynamic
capabilities (Hubbard, Rice & Galvin 2019).
We introduced the concept of innovation in module 1. In essence, innovation involves creating value
by implementing new ideas. For innovation to occur, learning must take place at both the individual and
the organisational level. To encourage learning, organisations should expand their capacity of thinking,
communicating and leading, to allow all people within the organisation to learn together. Organisations
need to be adaptive and flexible to not only manage and implement change, but to excel (Senge 1990).
Organisations that achieve this are called ‘learning organisations’. Google is perhaps the best known
example of a learning organisation. It empowers its employees to allocate 20% of their working time to
whatever activity they like. This has proved to be beneficial for the organisation’s innovation capabilities;
Pdf_Folio:185

for example, a Google scientist thought of the Google News concept while attempting to locate news
articles online in his 20% time-space.
An important enabler of learning organisations is knowledge management — how organisations
capture, share and use knowledge. Knowledge includes explicit knowledge — information that is formally
captured and recorded — and tacit knowledge — the undocumented knowledge and experience of the
individuals in the organisation. Tacit knowledge is often highly valuable and most at risk — it is wasted if
it is not used and it is lost if the employee leaves the organisation. It is important to capture tacit knowledge
by converting it into explicit knowledge, through articulation, codification and sharing.
Effective knowledge management leads to better organisational management. Successful organisations
achieve this through a rewards system, ambitious goals, incentives linked to goals, training, job rotation,
and encouragement of cross-functional projects.
Figure 3.13 presents a summary of knowledge management practices that managers may adopt or seek
to implement.
FIGURE 3.13 Knowledge management practices for managers
Knowledge Types of Examples

process activity
Texas instruments’ appraisal and
Managing intellectual property
licensing of its patent portfolio
Knowledge
identification
BP’s ‘Connect’ database of
Corporate ‘yellow pages’ employees’ skills and experience
Knowledge Skandia (Swedish insurance co.);

measurement Intellectual capital accounting
Dow Chemical
US Army Center for Lessons

Knowledge
Lessons learned Learned distils kn. from maneuvers
retention
and operations into procedures
Databases Accenture’s Knowledge Xchange
Knowledge
Schlumberger’s Eureka project of
transfer and Communities-of-Practice
virtual, distributed teams of experts
sharing
Ford Motor’s best practice
Best practices transfer replication benchmarks processes
across all its plants
Walmart’s analysis of > 1 million

Data analytics Big data analysis
customer transactions every hour
Source: Adapted from RM Grant, 2016, Contemporary Strategy Analysis: Text and Cases Edition, John Wiley & Sons.
Nonaka (1994) proposed that knowledge conversion between tacit and explicit forms and between
individual and organisational levels produces a ‘knowledge spiral’ in which the organisation’s stock
of knowledge broadens and deepens. For example, explicit knowledge is internalised into tacit knowl-
edge in the form of intuition, know-how, and routines, while tacit knowledge is externalised into
explicit knowledge through articulation and codification. Knowledge also moves between levels: explicit
individual knowledge is combined into organisational knowledge; tacit individual knowledge is socialised
into organisational routines.
This process of knowledge conversion lies at the heart of a key stage of business development:
transitioning from the craft enterprise (a business based upon individual, tacit knowledge) to the industrial
enterprise (based upon explicit, organisational knowledge). This transition is depicted in figure 3.14.
Pdf_Folio:186

FIGURE 3.14 Knowledge conversion
Levels of knowledge
Individual Organisation
Facts, information, Databases, rules,

scientific knowledge systems, IP
Explicit
Combination INDUSTRIAL
ENTERPRISES
Types of knowledge
Internalisation
Routinisation
n
tisatio
Externalisation ma
ste
Sy
CRAFT
ENTERPRISES
Tacit
Organisational
Skills, Socialisation
routines
know-how
Source: Adapted from I Nonaka, ‘A Dynamic Theory of Organizational Knowledge Creation,’ Organization Science 5 (1994):
14–37.
as follows.
KEY POINTS
• An organisation’s success depends on organisational drivers (such as organisational values) and
people drivers (such as how an organisation’s employees are recruited, motivated and developed).
• Organisations need to continuously develop their abilities around innovation, learning and knowl-
edge management.
• Knowledge management refers to how organisations capture, use and share knowledge.
• Successful knowledge management converts tacit knowledge to explicit knowledge and individual
knowledge to organisational knowledge, creating a knowledge spiral, in which the organisation’s
overall knowledge and thus knowledge-based capabilities broaden and deepen.
• Leaders establish and communicate an organisation’s vision, mission and values.
• Managers work to ensure the organisation and the people in it act in accordance with the vision,
mission and values established by the organisation’s leaders.
• Leaders and managers must place value on learning and knowledge sharing to create an
environment in which individuals and the organisation as a whole can be innovative.
3.6 THE ROLE OF RESOURCES AND CAPABILITIES

IN STRATEGY
Resources are the productive assets owned by the firm; capabilities are what the firm can do. On their own,
individual resources do not confer competitive advantage; they must work together to create organisational
capability. Organisational capabilities must as a minimum meet the industry’s key success factors.
When applied through an appropriate strategy, organisational capabilities create competitive advantage.
Figure 3.15 shows the relationships between resources, capabilities, and competitive advantage.
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FIGURE 3.15 The links between resources, capabilities and competitive advantage
Competitive
Strategy
advantage
Industry key
success factors
Organisational
capabilities
Resources
Tangible Intangible Human
Source: RM Grant, 2016, Contemporary Strategy Analysis: Text and Cases Edition 9th edition, John Wiley & Sons Inc: United
Kingdom.
Strategy is concerned with matching an organisation’s resources and capabilities to the opportunities and
threats that arise in the external environment. Strategy should exploit the resource and capability strengths
of the organisation, while protecting against its weaknesses.
Figure 3.16 presents a three-step framework for:
• identifying the resources and capabilities that an organisation has or can access
• appraising these resources and capabilities in terms of their potential to offer a sustainable competitive
advantage
• considering how the organisation can exploit its strengths and minimise its vulnerability to its weak-
nesses as part of its strategy.
We will consider each step in turn. We will consider this last step in the SWOT analysis in section 3.7.
FIGURE 3.16 A framework for analysing resources and capabilities
3. Develop strategy implications Strategy
Potential for
2. Appraise the firm’s resources and capabilities sustainable
for whether they are strategic capabilities competitive
advantage
Capabilities
1. Identify the firm’s resources and capabilities
Resources
Kingdom.
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Identifying Resources
Drawing up an inventory of a firm’s resources can be surprisingly difficult. No such document exists
within the accounting or management information systems of most organisations. The balance sheet
provides only a partial view of a firm’s resources — it comprises mainly financial and physical resources.
Our broader view of a firm’s resources encompasses three main types of resource: tangible, intangible
and human.
Tangible Resources
Tangible resources are the easiest to identify: financial resources and physical assets are detailed in
the firm’s balance sheet. However, the primary goal of resource analysis is not to value a company’s
tangible resources but to understand their potential for generating profit. This requires not just valuation
but information on their composition and characteristics. With that information, we can explore two main
routes to create additional value from a firm’s tangible resources.
1. What opportunities exist for economising on their use? Can we use fewer resources to support the same
level of business or use the existing resources to support a larger volume of business?
2. Can existing assets be used more profitably elsewhere?
Intangible Resources
For most companies, intangible resources are more valuable than tangible resources. Yet, in companies’
balance sheets, intangible resources tend to be either undervalued or omitted altogether. The exclusion or
undervaluation of intangible resources is a major reason for the large and growing divergence between
companies’ balance‐sheet valuations (or book values) and their stock‐market valuations. Among the
most important of these undervalued or unvalued intangible resources are brands. For example, BrandZ
(compiled by Kantar Millward Brown, Financial Times, June 29, 2017) valued the Walt Disney brand at
US$52 billion (based on the net present value of forecast future earnings); yet in Disney’s balance sheet,
its trademarks are valued at just US$1.2 billion.
Trademarks, together with patents, copyrights, and trade secrets, form the intellectual property of the
firm (discussed further in module 4). The growing importance of intellectual property as a strategic
resource is evident from the legal efforts companies make to protect it.
A firm’s relationships can also be considered resources. They provide a firm with access to information,
know‐how, inputs, and a wide range of other resources that lie beyond the firm’s boundaries. Being
embedded within an interfirm network also conveys legitimacy upon a firm, which can enhance its survival
capacity. These interfirm relationships have been referred to as ‘network resources’ (Gulati 1999).
Finally, organisational culture may also be considered an intangible resource. Organisational cul-
ture is ‘an amalgam of shared beliefs, values, assumptions, significant meanings, myths, rituals, and
symbols that are held to be distinctive’ (Green 1988). Although difficult to identify and describe, it
is clear that organisational culture is a critically important resource in most firms: it exerts a strong
influence on the capabilities an organisation develops and the effectiveness with which they are exercised
(Barney 1986).
Human Resources
Human resources comprise the skills and productive effort offered by an organisation’s employees.
The firm does not, of course, own its employees, but the stability of employment relationships (where
applicable) allows us to consider human resources as part of the resources of the firm.
Pronouncements that ‘our people are our greatest asset’, are more than a platitude: most companies
devote considerable effort to analysing their human resources — in hiring new employees, appraising
their performance, and planning their development. Many organisations have established assessment
centres to measure the skills and attributes of employees and prospective employees. Competency
modeling involves identifying the set of skills, content knowledge, attitudes, and values associated
with superior performers within a particular job category, then assessing each employee against
that profile (Lawler 1994; Spencer & Spencer 1993). The finding that psychological and social
aptitudes are critical determinants of superior work performance has fuelled interest in emotional
and social intelligence (Goleman 2006). Hence the growing trend to ‘hire for attitude; train
for skills’.
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Identifying Capabilities: the Creation of Organisational Capabilities
by Management
In business we see new entrants with modest resources outcompeting established giants: Dyson against
Electrolux in domestic appliances, Hyundai against Toyota in automobiles, Dollar Shave Club against
Gillette in shaving products, ARM against Intel in microprocessors. Clearly, there is more to organisational
capability than just resources. Organisational capability involves coordinated behaviour among organisa-
tional members. This distinguishes an organisational capability from an individual skill. Organisational
capabilities are created through management action, in particular the creation of processes — coordinated
sequences of actions through which specific productive tasks are performed. Management needs to locate
these processes within appropriately designed organisational units, motivate the individuals involved,
and align the resources, processes, structures, and management systems with one another (Felin, Foss,
Heimeriks & Madsen 2012).
The capabilities of an organisation may be viewed as a hierarchical system in which lower‐level
capabilities are integrated to form higher‐level capabilities. For example, in oil and gas companies, a key
requirement for success is the ability to find oil and gas. Figure 3.17 shows that exploration capability
comprises a number of component capabilities, which, in turn, can be further disaggregated into even
more specialised capabilities.
FIGURE 3.17 Organisation capabilities as a hierarchy of integration: the case of oil and gas exploration
Exploration capability
Negotiating Geological Seismic Drilling Well construction Partnering Procurement

capability capability capability capability capability capability capability
Directional Well Deepwater Well Hydraulic

drilling logging drilling casing fracturing
capability capability capability capability capability
Kingdom.
An organisation needs to take a systematic survey of its capabilities. A commonly used approach
is functional analysis, which identifies organisational capabilities within each of the firm’s functional
areas (e.g. operations, purchasing, logistics/supply chain management, design, engineering, new product
development, marketing, sales and distribution, customer service, finance, human resource management,
legal, information systems, government relations, communication and public relations, and health, safety,
and environment). Table 3.9 shows an example of an organisation’s functional areas, with related
capabilities listed.
TABLE 3.9 Functions and related capabilities
Function Related capability
Operations • Operational flexibility

• Speed of response
• Reliability of on-time, on-budget delivery
• Reputation for quality
• Low-cost production
• Equipment breadth
Marketing • Effective brand creation and promotion

• Links with a global customer
• Complete product range
• Understanding of customers’ real needs
• Customer service/product support
• Installed base of satisfied customers
• Effective salesforce
• Effective advertising and image creation
• Customer loyalty
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Information technology • Use of the customer information system
Human resources • Selection processes

• Performance evaluation and motivation system
Research and development • Speed of new product development

• Ability to find and link with leading-edge research in
other organisations
• Continuing product innovation
• Customised design
Distribution • Size and location of distribution

• Good relations with distributors
Purchasing • Raw material origination and sourcing
Finance and accounting • Integrated financial information system

• Trading and risk management
Head office • Effective financial control systems

• Strategic insight into development of the industry
• Effective data capture and analysis systems
• Decision-making system
• Ability to transfer technology, know-how and
management systems to acquired companies
• Effective incentive systems
General • Reputation for quality

• Shared vision and culture
• Entrepreneurial spirit
• Coordination skills
• Successful implementation of acquisitions
• Well-known, powerful parent
• Pioneer/early entrant into industry
Source: Adapted from G Hubbard, J Rice & P Galvin, 2019, Strategic Management: Thinking, Analysis,
Action, 6th edn, Pearson Australia, Melbourne, pp. 119–20.
A value chain analysis identifies a sequential chain of the main activities that the firm undertakes. This
process was explained for the industry as part of our external analysis in module 2. A similar process at
the organisation level can be undertaken as part of the internal analysis.
Both functional analysis and value chain analysis provide a comprehensive view of an organisation’s
capabilities, but they may fail to identify those idiosyncratic capabilities that are truly distinctive and
critical to an organisation’s competitive advantage. Consider that Apple’s remarkable ability to create
products of unrivalled ease of use and customer appeal results from its combining technical capabilities
with design aesthetics and penetrating market insight. Their new product development capability is an
upper‐level capability that integrates technological development, marketing, design, product engineering,
process engineering, and finance. This capability is not readily apparent from either a functional or a value
chain analysis.
To look beyond generic capabilities to uncover those that are unique requires insight and judgement. A
careful examination of an organisation’s history can be revealing. In reviewing an organisation’s successes
and failures over time, do patterns emerge and what do these patterns imply about the capabilities that
underlie them?
APPRAISING RESOURCES AND CAPABILITIES

Having established the resources and capabilities of the organisation, we need to appraise them relative to
the organisation’s competitors.
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Benchmarking — the process of comparing one’s processes and performance to those of other
companies — offers an objective and quantitative way for a firm to assess its resources and capabilities
relative to its competitors (Benchnet n.d.). The substantial productivity differences between firms within
the same industry are primarily the result of differences in management practices and thus benchmarking
is an important tool for managers (Bloom et al. 2017; Bloom & Van Reenan 2010).
Benchmarking is most useful for assessing functional capabilities. To assess idiosyncratic
capabilities — Johnson & Johnson’s ability to infuse ethics into its business practices; Lego’s ability to
inspire children across countries, cultures and generations; Nokia’s capacity for corporate reincarnation —
benchmarking needs to be supplemented by more reflective approaches to recognising strengths and
weaknesses.
Resources and capabilities that are better than competitors should then be examined to appraise their
potential for the creation of competitive advantage for the firm.
Strategically important resources and capabilities are those with the potential to establish and sustain a
competitive advantage for the organisation over its competitors.
Hitt et al. (2011) suggested the following four tests for a resource or capability to be termed a strategic
capability that can give an organisation a competitive advantage over its rivals. A resource or capability
must meet all four tests in order to be a strategic resource or capability.
1. Valuable. Is the resource or capability valuable? It must be something that is able to create value for the
organisation’s customers. Value is not restricted to monetary value — it can include time, ease, location,
accessibility, and so on.
2. Rare. Is the resource or capability rare? Competitors of the organisation cannot have a similar resource
or capability, as this will not provide the organisation with a ‘strategic resource of capability’. The
resource or capability needs to be rare in comparison to competitors’ capabilities in the same area.
3. Costly or difficult to imitate or replicate. If the resource or capability is costly or difficult to replicate,
then the chance of it being replicated by a competitor is low and thus it may be a strategic resource of
capability.
4. Non-substitutable. Is the resource or capability non-substitutable? If competitors have a different
resource or capability that they can use instead to achieve the same benefit to customers, then the
resource or capability will not be a strategic resource or capability for the organisation as its customers
can go elsewhere for that offering. A port facility in a city’s harbour would be a non-substitutable
resource. Customers wishing to bring sea freight to the city have no other choice.
Valuable
People in organisations typically assume that any resource or capability the organisation has creates value
for the customer. Consider though how often organisations develop new ideas for products of services,
but decide not to launch them as they do not sufficiently match customer needs. Consider too how many
new products are launched into the market only to fail because customers did not find them of value. It is
important to recognise that the value of resources and capabilities lies in the value they create for customers
and hence in turn the organisation. It is a key task of organisational management to ensure resources
and capabilities are aligned with creating value and actually succeed in doing so. As an example, Beats
Electronics designs and markets premium headphones; the manufacturing cost of these headphones is not
more than $15. However, they sell for $150 to $450. Customers value their design, their clever marketing
and their celebrity endorsements. Customers do not directly value the manufacturing process.
Rare
Organisations operate within industries and markets and, even when these are relatively new, there is always
going to be the presence of competitors. A capability is rare when there are few or no competitors who
offer the same capability. This was the case with the release of iTunes into an industry where none of its
competitors offered online music downloads at a cost. This can also be the case where a manufacturer
or distributor has sole rights to a particular product or patent — such as pharmaceutical companies with
certain medications or retailers with sole rights to stock a particular brand.
Costly to Imitate or Replicate

If an organisation has a strategic capability that provides competitive advantage, why do competitors not
copy it? Organisations have different histories — different sets of experiences, different sets of resources
and skills, different corporate cultures and different ways of thinking. Strategic capabilities are long term or
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durable. What the organisation does well now has been developed over a long period of time. Competitors
wishing to copy this are likely to take some time simply to replicate the existing position and thereby will
remain behind the curve, as their competitors continue to develop upon their initial position during that
time. When other organisations cannot obtain this capability due to the cost disadvantage, an organisation
has a strategic capability.
Non-Substitutable
A resource or capability is non-substitutable when it is not possible for competitors to create value in the
same way using a different resource or capability. For example, a prestigious brand with an image steeped
in history, such as the Guinness brewery, is a resource that cannot be used by a competitor. A competitor
would need to seek competitive advantage by drawing on some other resource or capability.
Example 3.9 brings together various aspects of the internal analysis related to capabilities.
EXAMPLE 3.9
Strategic Capabilities
The three key success factors for the pharmaceutical and toiletry wholesaling industry are:
1. links with suppliers
2. an extensive distribution network
3. a cost-effective distribution network.
Table 3.10 shows these critical factors mapped against the characteristics of strategic resources and
capabilities and mentions some example factors that an organisation might consider in using this table to
analyse strategic capabilities.
TABLE 3.10 Key success factors for the pharmaceutical and toiletry wholesaling industry
Key success Valuable? Rare? Difficult to Non- Strategic

factor imitate or substitutable? capability?
replicate?
Having links Yes No Yes Yes and no No

with suppliers First full-line Major Level of May Not better
wholesaler to offer competitors consolidation have sole than
pharmaceutical have in industry is distribution competitors.
manufacturers the arrangements high. rights over
option of traditional with major Covers a particular
wholesaling or pharma- traditional brand or
‘cost plus’ direct ceutical and direct product,
distribution, which companies. options for thereby
it operates through manufacture. making PIA
its Health Distribution the only
Australia business Breadth of avenue to
unit. geographic access these
coverage products.
Provides wholesale from NZ
distribution of hospital dental Other
and medical supplies business. wholesalers
to public and private are able to
hospitals and dental provide some
health businesses in of the same
New Zealand. and similar
products.
(continued)
Pdf_Folio:193

Key success Valuable? Rare? Difficult to Non- Strategic

factor imitate or substitutable? capability?
replicate?
Having an Yes No Yes No No

extensive National pharmacy Major Establishment Major Not better
distribution distribution network, competitors of buying competitors than
network including franchises. have similar groups and have similar competitors.
Operates several market franchises is market
well-known shares. difficult and shares.
retail buying Lane and cannot be However,
groups, including Delta easily copied. the same
Pharmaworld, service more applies as
Chemist Advice pharmacies above – may
and PIA Health Care and have have sole
Chemist, with around more distribution
650 member stores companies in rights for
across these groups. their buying particular
groups. products.
Having a No No No No No
cost-effective Declining volume. Lane’s Lane and Many other Not better
distribution Move towards full AMFAC Delta have substitutes than
network vertical integration. point-of- systems to available, competitors.
sale system make their especially
Franchisees typically widely used. business considering
source their product operations others are
from one supplier, Lane and
Delta service efficient. more cost-
unlike pharmacies effective.
in general, which a larger
source their products number of
from a multitude pharmacies
of wholesalers and and therefore
suppliers. have greater
volumes to
generate
efficiencies.
On the basis of this analysis, while PIA has some strong capabilities it has no strategic capabilities in
the areas that are identified as key success factors for the industry.
QUESTION 3.14
Platinum Pharmaceuticals Ltd (Platinum), an Australian pharmaceutical wholesale organisation,

was established by several entrepreneurial pharmacists with the aim of providing an alternative
business model to the major national pharmaceutical wholesalers.
Platinum has strong growth ambitions, and aims to be the third largest national pharmaceutical
wholesaler in Australia by servicing at least 20% of the national market within three years. The
organisation aims to build a significant national profile in the pharmaceutical wholesaling industry
as a service-oriented and price-competitive wholesaler of pharmacy products.
Platinum’s mission is to provide Australian pharmacies with the best possible buying prices, while
still maintaining a profit. Platinum seeks to ensure that its customers (the pharmacies) consider its
service the best in the industry.
To achieve its strategic aims, Platinum intends to:
• expand its range to include products from all the leading manufacturers
• become a national wholesaler, establishing interstate distribution operations to distribute in
northern Australian states rather than out of its Victorian warehousing operations
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• have a strong reputation as a leading short-line wholesaler (short-line wholesalers stock a
limited range of the more popular and higher turnover pharmaceutical products, whereas full-line
wholesalers stock a full range of pharmaceutical products and offer a comprehensive service).
Underpinning Platinum’s strategic aims are the following.
• Exceptional service. Platinum’s objective is to continue providing personal service to each of its
pharmacy accounts.
• Independence. Platinum remains an independent wholesaler, servicing both major retail phar-
macy banner groups and independent accounts.
• Licensed operator. Platinum is currently licensed to wholesale ‘poisons and controlled sub-
stances’. The strict criteria applied and rigorous procedure involved in obtaining such a licence
poses a significant barrier to quick entry by potential competitors.
• Low infrastructure costs. Platinum’s low-cost structure gives it a competitive advantage in
pricing its products and affords it greater flexibility as its business develops.
Platinum is a competitive, independent pharmaceutical wholesaler and distributor. The organisa-
tion’s core business consists of purchasing products directly from manufacturers in bulk quantities
and selling these products to retail pharmacies.
The organisation purchases directly from major pharmaceutical manufacturers. They already
have agreements with two of the major manufacturers, and are in negotiations with a further three
manufacturers. The products that these companies manufacture are generally well known, with
substantial sales in Australian pharmacies.
Platinum has also secured exclusive long-term agreements to distribute nationally a range of
pharmacy lines for a number of smaller manufacturers.
The organisation’s first 12 months of operations were focused primarily on establishing Plat-
inum’s Victorian office, warehouse and associated infrastructure to support its anticipated growth.
Until recently, Platinum’s sales were generated in Victoria only. Platinum’s distribution operations
are limited to retail pharmacies only and it has no plans to enter the hospital distribution segment.
The complex ward delivery requirements in the hospital segment would add significant costs to
Platinum’s business and are not consistent with Platinum’s ‘bulk’ philosophy. Hospitals require
pharmaceutical products to be distributed on a ward basis. This requires wholesalers to assemble
orders for individual wards and deliver them directly to the wards, not the hospital pharmacy. This
increases the distribution cost to hospitals significantly, because of a wholesaler’s need to have
more, and smaller, orders at multiple delivery points within the hospital.
The organisation currently services Victoria, Tasmania, South Australia, and Western Australia
from one distribution operation in Victoria. Platinum offers free into-store delivery to all customers.
However, for next-day delivery to accounts outside the Victorian metropolitan area, a small service
fee is charged, which recoups the additional cost of air freight incurred by Platinum. This fee is not
charged by the major full-line wholesalers, all who offer free next-day delivery. However, Platinum’s
overall discounts are higher than these full-line wholesalers and more than offset this charge.
Key points to note about Platinum’s business model are as follows.
• Platinum has a dynamic team of sales agents who are actively sourcing new business. These
agents have significant industry experience and work on a commission-only basis of around
2% of the list price of ethical medicines and over-the-counter (OTC) lines, and 10% of toiletries,
perfumes and cosmetics (TPC) lines. Under this fully variable structure, Platinum does not incur
any cost if the sales agent does not generate sales. In comparison, the major full-line wholesalers
have sales representatives who are remunerated on a salary package, irrespective of sales that
are generated. These wholesalers therefore have a fully fixed cost of around 3.5% of sales.
Given the future environment of declining industry sales, Platinum’s cost structure is much
more flexible. It also enables Platinum to offer ‘cost plus’ services to major manufacturers more
effectively.
Note: Ethical medicines are available only with written instructions (a prescription) from
a doctor or dentist and are dispensed by a pharmacist. Over-the-counter medicines can be
purchased from pharmacies, with selected products also available in supermarkets, health food
stores and other retailers. Examples include cough and cold remedies, anti-fungal treatments,
sunscreens and non-prescription analgesics, such as aspirin and paracetamol.
• Platinum has made a large investment in distribution system infrastructure to support its strong
growth plans. ‘Pick-to-light’ technology has been installed in its warehouse, whereby limited
manual labour involvement is required in the picking of orders from the warehouse shelves.
This significantly reduces the cost of distribution. While a high investment was required up-front
to install this technology, its long-term benefits will outweigh this initial cost. It will also allow
Platinum to substantially increase order volumes, with minimal incremental cost in its distribution
operations. The major full-line wholesalers have not implemented this infrastructure due to the
impact that such an investment would have on their financial performance, and they use high
levels of manual labour to pick orders.
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Note: ‘Pick-to-light’ technology is automated technology whereby boxes move on conveyor
belts to the correct position in the warehouse and a light is shone on the area where the required
product is stored so it can be selected quickly.
• Platinum uses the relationships they have developed with the manufacturers to rely on
using the skills of the manufacturers’ representatives in the retail pharmacies. Platinum’s
agents are ‘order takers’ only and do not provide any detailed product knowledge. This
is better provided by the manufacturing pharmaceutical organisation representatives. This
enables Platinum’s representatives to be remunerated in line with fast-moving consumer
goods (FMCG) levels rather than the higher pharmaceutical levels. In addition, Platinum
provides price comparison data sheets to its sales agents, showing Platinum’s price com-
pared with the major full-line and short-line wholesalers, to assist them to secure orders.
Platinum has plans to introduce a purchasing broker service for all pharmacies with a
view to providing pharmacies with the lowest product price to supplement this price
comparison data.
Note: The major wholesalers publish quarterly pricing books for all their products, so price
comparison data is relatively easy to obtain.
• Platinum has established the successful ‘Platinum Club’ loyalty program. Under the program,
pharmacies earn points on their purchases that they can redeem for pharmacist professional
education, pharmacy assistant education programs, free next-day delivery if they are outside
the Victorian metropolitan area, and a range of additional offers. The full-line wholesalers do not
offer such a loyalty program — they compete on discount alone. Platinum has plans to further
promote sales by using plasma/LCD screens in retail pharmacy stores across Australia. This new
marketing initiative will supplement the Platinum Club program.
Platinum currently sells ethical, OTC and TPC products in Victoria, South Australia, Western
Australia and Tasmania. These states represent around 55% of the total industry sales. Platinum
aims to expand into other Australian states. Sales agents have been signed up and have begun
developing relationships in these states, targeting major pharmacies and buying groups. Platinum’s
business is expected to grow significantly as it expands nationally.
A capital raising was recently undertaken to fund the establishment of another distribution
operation in Sydney to service the New South Wales, Australian Capital Territory and Queensland
markets. This offer was open by invitation only to all pharmacists with Platinum accounts and
investment companies. Platinum intends to reward pharmacies that invest in the organisation with a
‘better price’ policy, offering a special price for members of the Platinum Investor Forum. Platinum
considers this to create a win–win situation, where the pharmacist is saving on purchases while
supporting Platinum. Pharmacy investors will also be invited to participate in national advertising
campaigns.
Platinum intends to implement a strategy to expand its client and manufacturer (supplier) base.
It aims to open accounts with all major manufacturers of ethical and OTC products. Once these
accounts are established, it plans to introduce more ethical and OTC products to its existing
customer base, growing its number of lines from around the current 1500 to 2000. Platinum’s
competitive prices will give it the opportunity to increase its customer base. At the same time,
Platinum will grow its product range through the development of its own exclusive OTC product
range, which will be supported by strong advertising. This strategy will enable Platinum to achieve
higher margins and, over time, build goodwill in these products. Platinum also has commenced
discussions with manufacturers to secure agreements for their own range of generic ethical lines.
Based on the key success factors of the industry listed in example 3.9 (having links with suppliers,
having an extensive distribution network and having a cost-effective distribution network) for the
Australian pharmaceutical and toiletry wholesaling industry, assess whether Platinum has strategic
capabilities (valuable to customer, rare, difficult to replicate or imitate, non-substitutable) in these
key success factors.
The key points covered in section 3.6 of this module, and the learning objective they align to, are as follows.
KEY POINTS
• The resources of an organisation are its tangible and intangible assets.
• Capabilities are the organisation’s ability to use its assets and include process and systems
capabilities and organisational culture.
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• Capabilities contribute to competitive advantage when they are valuable, rare, difficult to replicate
or imitate and are non-substitutable.
• A functional analysis identifies strategic capabilities by examining the organisation’s functional
areas such as operations, marketing, finance and distribution.
• A resource analysis identifies and scores the organisation’s tangible resources, intangible
resources, process and systems resources and cultural resources.
• An organisation’s management uses analysis of organisational capabilities to identify where the
organisation has strengths and thus where it can pursue competitive advantage and where it will
need to acquire or develop resources and capabilities for future competitive advantage.
3.7 COMBINING EXTERNAL AND

INTERNAL ANALYSIS
It is the combination of external and internal analysis that provides an organisation’s management with the
information necessary to make decisions about the organisation’s objectives and how to achieve them.
One valuable practice that combines the findings of external and internal analysis is SWOT (strength,
weaknesses, opportunities and threats) analysis. In the past, only simple data and information on an
organisation was used in SWOT analysis. With technological advances and access to richer data,
SWOT analyses can now involve extensive quantitative and qualitative analysis. This assists in getting
a comprehensive and thorough understanding of the organisation’s position.
Once the organisation’s position and objectives are known, a gap analysis can be performed to find what
the organisation needs in order to bring its current performance level to its desired performance level.
SWOT ANALYSIS
SWOT analysis is a tool widely used by managers as it is useful and easily understandable in its approach
to strategy analysis. SWOT analysis identifies the extent to which the current operations of an organisation
and its specific strengths and weaknesses are relevant to, and capable of dealing with, changes taking place.
The benefit of this analysis is that it clarifies what can often be quite complex issues for organisations in a
simple framework. The analysis should be undertaken relative to competitors, considering external factors
affecting the organisation (opportunities and threats) and how these could be responded to. Although
SWOT analysis is a simple tool, it is a useful starting point for bringing together internal and external
analyses. Table 3.11 illustrates the SWOT framework and provides questions to consider at each point.
TABLE 3.11 SWOT analysis considerations
Strengths — sourced from internal analysis Weaknesses — sourced from internal analysis
• What advantages does the organisation have? • What could the organisation improve?
• What does the organisation do well? • What does the organisation do poorly?
• What relevant resources does the organisation have • What should the organisation avoid?
access to?
• What do other people see as the organisation’s
strengths?
Opportunities — sourced from external analysis Threats — sourced from external analysis
• What are the promising opportunities facing the • What obstacles does the organisation face?
organisation currently? • What is the competition and the market doing?
• What are the interesting trends you are aware of? • Is changing technology threatening the organisation
position?
• Could any weakness threaten the business?
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Table 3.12 provides some examples for each element of the SWOT framework.
TABLE 3.12 Examples of SWOT analysis content
Strengths Weaknesses
• Technological skills • Lack of specific skills

• Leading brands • Low brand awareness
• Customer loyalty and relationships • Poor distribution channels
• Production quality • Product and service faults
• Scale • Lack of critical mass
• Management • Lack of guaranteed supply inputs
• Speciality equipment • Poor product development track record
Opportunities Threats
• Changing consumer tastes • Changing consumer tastes

• Free trade agreements • Closing of some geographic markets
• Changes in the law • Exchange rate issues
• New distribution channels • Competitor technology
Note that strengths and weaknesses are internal to the organisational and opportunities and threats are
based on external factors. For example, a strength could be a specific capability of the organisation, such
as its systems and processes, and a weakness could be an incomplete product range. An opportunity could
be the development of new channels of distribution, and a threat could be a new competitor product that
makes your offer obsolete in the market.
The SWOT analysis develops insights by integrating both external (discussed in module 2) and internal
analysis. The internal analysis focuses on the strengths and weaknesses which are related to the resources
and capabilities of the organisation. An organisation will be able to deliver value and sustain its competitive
advantage if its resources and capabilities are valuable, rare, difficult to imitate and non-substitutable
by competitors. The external analysis focused on opportunities and threats which are captured through
PESTEL and Porter’s Five Forces Analysis (see module 2). These analyses help managers to understand
the environmental trends which impact the industry growth rate and the forces which affects the industry
profitability, respectively.
The SWOT analysis helps to integrate the organisation’s current position and future possibilities
by considering both internal and external factors. The analysis helps to scan the environments which
may affect the current and future competitive advantage. Managers can use the questions presented in
table 3.13 to begin thinking about the development of strategic options.
TABLE 3.13 Example of strategic questions to develop strategic options
Strategic questions Opportunities Threats
Strengths How can firms use internal How can the firm use internal
strengths to take advantage of strengths to reduce the likelihood
external opportunities? and impact of external treats?
Weaknesses How can firms overcome internal How can the firm overcome
weaknesses that prevent it from internal weaknesses in order to
taking advantage of external mitigate against external threats?
opportunities?
Source: FT Rothaermel, 2019, Strategic Management, McGraw-Hill Education, New York, pp. 134.
We will examine this in further detail in module 4, where the SWOT framework is extended to support
the development of strategic options that leverage an organisation’s strengths, weaknesses, opportunities
and threats.
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QUESTION 3.15
Use the information in example 3.8 to undertake a SWOT analysis for Genetic Technologies.
Justify each of the strengths, weaknesses, opportunities and threats of the organisation you have
identified with some evidence from the case facts.
GAP ANALYSIS
It is through the process of analysing the remote, industry and market environments (see module 2), and
assessing organisational performance, that performance gaps and opportunities for the future are revealed.
From this understanding, strategic options for the future strategy can be proposed.
Consistent with our focus on business strategy analysis, the technique of gap analysis is applied at
the business level. The strategy that an organisation develops should be consistent with the current and
expected future external environment (to align with external performance). It should also be consistent with
the organisation’s capabilities (to achieve superior internal performance) and the performance outcomes
that are acceptable to its key stakeholders.
As a simple example, consider an organisation that currently achieves an ROE of 10% and wishes to
maintain a similar level of return for the next three years. However, declining markets, labour shortage and
increasing innovations from competitors may prevent the organisation from maintaining its profitability
level if it continues with its existing strategy. The forecast profitability based on these factors may be
much lower than the established objective. So, at the end of the three years, there will be a gap between
its required performance and the forecast performance if the organisation does not change its strategy.
Gaps reflect inconsistencies between the two elements being compared. While gaps between the external
environment and the current strategy yield information about whether there is an external consistency
between these two elements, any gaps between the internal environment and business strategy indicate
internal inconsistencies (see figure 3.18). The aim of strategy formulation and implementation is to seek
external and internal consistency by resolving these gaps or inconsistencies.
FIGURE 3.18 Strategy formulation — seeking external and internal consistency
Business strategy
Internal environment
External consistency Internal consistency
External environment
Understanding the drivers of performance and agreeing what the gaps are inside an organisation is a
fundamental first step in being able to identify options that could ‘plug’ the gaps. If there is no agreement
that gaps exist, there is unlikely to be anything more than limited support for change initiatives.
As illustrated in table 3.14, it is important to consider the organisation’s strategy in the context of both the
external environment and its performance, so you will also need to go back to your external environment
analysis to complete a gap analysis.
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TABLE 3.14 Gap analysis areas of focus
Area of focus Description
External environment — business strategy gaps
Remote environment gaps Key remote environment trends (which were identified in the remote environment
analysis) that are considered to be important in terms of their impact on the
future growth rate of the industry are listed, and an assessment is made of the
degree to which the current business strategy is consistent or inconsistent with
the trends identified.
Industry environment gaps The key industry environment trends (which were identified in the industry
analysis) that are considered to be important in terms of their impact on the
future profitability of the industry are listed, and an assessment is made of the
degree to which the current business strategy is consistent or inconsistent with
the trends identified.
Industry competitors’ gaps The organisation’s performance relative to its key industry rivals is assessed
in order to identify the gaps in the organisation’s stated strategy and its actual
position relative to its competitors.
Internal environment — business strategy gaps
Key stakeholder gaps The organisation’s performance is assessed to see how well it is meeting the
expectations of the key stakeholders, who have the ability to influence the
organisation’s strategy. Understanding whether the organisation’s strategy is
consistent with the key stakeholders’ needs is therefore very important for the
future of an organisation.
Strategic driver gaps The organisation’s position is assessed against its competitor’s strategic drivers,
and its benchmarks to identify gaps in its strategic drivers (e.g. customers,
markets, channels, etc.) that are preventing it from achieving its strategy.
Organisational performance The organisation’s performance is assessed against its stated strategy to
gaps identify where the organisation is not performing and where it may have
superior performance.
Capability gaps The organisation’s competitive position is assessed against all the important
capabilities required to carry out the main business activities in order to identify
the gaps in its capabilities (e.g. resources, skills, equipment, market share,
finance) that are preventing it from achieving its strategy.
Example 3.10 provides an example of gap analysis in relation to a speciality chemical manufacturing
and trading organisation.
EXAMPLE 3.10
Gap Analysis for a Surface Coatings Business Division

The surface coatings division of a speciality chemical manufacturing and trading organisation wants to
achieve growth and profitability in a low growth, low profitability industry. The division has identified the
following gaps that need to be addressed in its business strategy.
Remote Environment — Business Strategy Gaps
• There are significant cost and product registration constraints involved with bringing new technology to
Australia. Intellectual property protection constraints also exist where local manufacturing is possible,
especially in resins.
• Larger customers are tending to buy ‘direct’ or being serviced by the other global companies, based
on global agreements developed outside Australia. This limits market size potential.
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Industry Environment — Business Strategy Gaps
• The Australian paint industry is a major customer of the division, representing approximately 50% of
the division’s profit, but it is mature and experiencing declining profitability.
Key Competitor — Business Strategy Gaps
• Locally manufactured products, especially resins, are difficult to compete with on a price basis.
Therefore, the opportunities are in specialist areas that will not necessarily provide the required growth,
although profitability may be adequate.
Business Strategy — Business Stakeholder Gaps
• The organisation is not meeting the parent company’s ROE and ROA performance expectations, which
are extremely ambitious given the current position.
• Only around 60% of the surface coatings division’s sales are from parent group products. This is
regarded as insufficient by the parent company.
Business Strategy — Strategic Driver Gaps
• Sales and activity reports are focused on product rather than customer segment, which means that the
sales strategy has not been focused on the growth, and more profitable, areas of the industry.
• Market share is so small (less than 1%) relative to total industry size that the division is unlikely to
become a preferred supplier in the desired market segments (per its stated strategy) within the time
frame of its plan.
Business Strategy — Performance Gaps
• The organisation is experiencing an overall lack of profitability and debtor days are steadily increasing.
• Cost allocation systems do not show the overhead costs for each activity and there is too much
emphasis on gross profit margins, which are too low.
• There is a general lack of performance information against which to benchmark and track improvements
or to link to reward systems.
• The division is experiencing the lowest profits per kilogram in the paint industry, which represents
50% of the division’s profit. Over the past four years, the profits per kilogram in this sector have been
steadily declining.
Business Strategy — Capability Gaps
• The organisation lacks the marketing skills to identify growth opportunities in a systematic way.
• The division has insufficient information (market size, value and competitor information) to target growth
and measure growth performance for the industry segments where the division wants to be a preferred
supplier (ink, paint and Masterbatch [a plastics colouring additive]).
• Operational systems are not integrated, making it difficult to monitor the effectiveness of most activities,
which in turn makes it difficult to set up strategies for improvement.
• A lack of information systems makes the business heavily reliant on individual knowledge, making it
difficult to delegate work and impeding growth.
• The organisation generally lacks the resources (people, systems and money) to grow to the
levels required.
• Very little is spent on training and development in an industry where staff retention is critical.
QUESTION 3.16
Use example 3.8 to assess the following gaps between the current business strategy and Genetic
Technologies’ current situation. In your answer, consider:
• remote environment — business strategy
• industry environment — business strategy
• key competitor — business strategy
• business strategy — key stakeholders
• business strategy — strategic drivers
• business strategy — performance
• business strategy — capabilities.
Are any changes to Genetic Technologies’ current strategy indicated by this analysis? Explain
your response.
as follows.
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KEY POINTS
• Strategic analysis ultimately involves both internal and external analyses.
• A SWOT analysis examines an organisation’s strengths and weaknesses (internal factors) and
opportunities and threats (external factors).
• A SWOT analyses provides a basis for developing strategic options that respond appropriately to
the organisation’s capabilities and the environment in which it operates.
• A gap analysis identifies differences between the organisation’s current resources and capabilities
and those it will need to improve performance against current and future goals.
• Leaders and managers rely on information provided by strategic analysis in order to develop
strategic options to better achieve current and future objectives.
• Internal and external analyses are combined to provide the information managers need to develop
strategic options.
3.8 FURTHER LEADERSHIP AND MANAGEMENT

IMPLICATIONS FOR INTERNAL ANALYSIS
As described earlier in the module, the factors within the internal environment are under the organisation’s
control and hence can be managed by the organisation’s leaders and managers using the principles
described in module 1.
Also described in module 1 is the rational approach to strategy. This approach makes evidence-based
decisions intended to improve organisational performance. Much of what has been discussed in this module
(and module 2) is about capturing and analysing data and other information in order to provide analysis and
advice upon which leaders and managers can make decisions. It is also an important function of leaders
and managers to create an environment that values data as a resource and has the capabilities to use it to
strategic advantage.
This last section of module 3 will examine some further specific leadership and management issues
relevant to internal analysis and its role in the strategy process.
A key function of leaders and management is an understanding of the different stakeholder groups and
their needs. This will inform how leaders set and steer the overall direction of the organisation and how
managers direct the organisation’s use of its resources and capabilities. As we have discussed above, the
needs of different stakeholder groups can be conflicting and the leadership of the organisation needs to
determine which of these needs take precedence and which objectives may need some compromise.
The more influential the stakeholders are, the more important it is for leaders of the organisation to
regularly and personally communicate directly with them. Decisions the organisation takes — especially
difficult decisions — must get the understanding and support of key stakeholders. Less influential
stakeholder group (such as subjects and crowds) will more commonly be communicated with by managers
and lower levels of the organisation. Organisational leadership may occasionally communicate with these
groups but it is more likely that it is infrequent and via the electronic media.
QUESTION 3.17
The Commonwealth Bank of Australia (CBA) announced their financial and business results at
the end of the 2018/19 financial year at their Results Presentation on 7 August 2019. They invited
representatives from financial institutions such as Credit Suisse, Macquarie and Citigroup, which
are key customers and suppliers, to the event. The leadership group of the Managing Director,
CEO and CFO met key stakeholders including their largest shareholders and investors for individual
briefings prior to the event. At the event, the CEO and CFO give a detailed presentation of all aspects
of the bank’s relevant business results and future plans. Following the presentation, the CEO and
the CFO answered their questions.
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A number of important regulators were also advised before the event: this commonly takes the
form of the leadership group ensuring that all the correct paperwork has been filed with them.
Figure 3.19 is part of slide number 34 in a 138-page slide pack of the FY2019 results from the
Results Presentation event. All preceding slides were focused on financial results of the overall
business.
FIGURE 3.19 CBA slide showing FY2019 results
Source: Commonwealth Bank, 2019, Results Presentation and Investor Discussion Pack,
www.commbank.com.au/content/dam/commbank/about-us/shareholders/pdfs/results/fy19/2019-Full-Year-Results-
Presentation.pdf.
Consider the key stakeholder groups mentioned by CBA. Explain whether CBA has a shareholder
or stakeholder view of the business.
Leaders set the future direction for an organisation based on their decisions about meeting stakeholder
needs. They determine how the strategic drivers of industry, markets, customers, products and services,
channels and generic strategy may change for the organisation. The organisation’s leadership sets
goals and objectives for the organisation to achieve in these areas, and they will depend on which
objectives of their stakeholders they prioritise. These strategic decisions will determine the new projects
and the changes to processes and procedures the organisation needs to implement and the level of
performance required.
The strategic decisions of leadership are often passed down to senior managers as targets for them to
reach when implementing new projects and refining processes and procedures of the organisation. Senior
managers often break those targets down to lower-order targets and pass them on to managers and team
leaders in their areas, so that the different activities performed at each level of the organisation in total
achieve the higher-level targets for the senior manager’s area.
It is the responsibility of managers to implement these new projects and operationalise the strategic plans
for the organisation’s processes and procedures in addition to their responsibilities for the ongoing business
activities. In doing this they focus on planning, budgeting, allocating resources, organising, co-ordinating,
assigning tasks and staffing. Managers control the outcomes of these internal processes by monitoring
them through observation and the use of performance measures for key aspects of these activities. They
evaluate how well they are proceeding to plan, and problem solve to improve performance expectations are
not reached. As discussed above, the chosen measures are important: ‘If it isn’t measured, it doesn’t count.
If it counts, measure it’. The measurements need to be effective because people focus on what is measured.
Achievement can be measured against the target set, against historical performance of the organisation and
can be compared to similar organisations through benchmarking.
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An effective leader should be able to recognise the opportunities that the different types and volumes of
data available could potentially be used to better understand the internal performance of the organisation
and improve it. Leadership and senior management should work together to facilitate the organisation’s
access to good data, the analytic skills to gain insights from it and the right skills to commercialise
the insights.
Managers assist in the strategy process by summarising the results of their internal performance analysis
for these to be viewed by the leadership team with the results of the organisation’s external analysis
(discussed in module 2). The internal analysis gives the leadership the information to understand the
strengths and weaknesses of the organisation and the gaps between the internal environment and the current
business strategy. The external analysis (see module 2) gives the leadership the information to understand
the opportunities and threats in the external environment and the gaps between the external environment
and the current business strategy. A key role of leadership during the strategy process is to ensure that all
the broad assumptions and claims are challenged and verified in these analyses, so that managers do not
exaggerate the performance of their area or claim an under-resourcing they do not have. The leadership
should work together with members of the senior management team to ensure that they reach agreed
decisions that are as rational or objective as possible and that individual viewpoints, issues, perspectives
and situations are understood and taken into account during the strategy process.
as follows.
KEY POINTS
• The internal environment is largely under the control of the organisation’s leaders and managers.
• It is an important function of leaders and managers to create an environment that values data as a
resource and has the capabilities to use it to strategic advantage.
• The outcome of internal and external analysis is the information necessary for leadership and
management to consider strategic options.
• A key function of leaders and managers is to understand the organisation’s different stakeholder
groups and their needs as the most important stakeholders are a strong influence over the overall
direction of the organisation and how managers direct the organisation’s use of its resources
and capabilities.
• Leaders and managers should base their communication approach with different stakeholders on
an understanding of the relative power and engagement of those stakeholders.
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REVIEW
This module has focused on analysis of the internal environment, including identifying stakeholder needs,
assessing current performance, and analysing the organisation’s resources and capabilities.
It described organisation’s stakeholders as those individuals and groups affected by and potentially able
to influence the organisation. An evaluation of each stakeholder group’s interests and their potential power
to influence the organisation shapes how the leaders of the organisation shape its strategic goals. The
analysis also guides leaders and managers in which stakeholders they need to partner with, consult with,
inform or manage.
An assessment of current performance against organisational objectives provides a baseline from which
strategic goals can be developed and future performance measured. Performance assessment is a complex
task, involving establishing what should be measured (performance indicators) and how to measure it
(metrics). Data analytics are increasingly accessible to all organisations and can provide greater insight
into the organisation’s performance and the reasons underlying it.
Performance assessment is often focused on the strategic, operational, and people and organisational
drivers of the organisation. The strategic drivers include the industry and markets, customers, products
and services, channels and competitive advantage. The operational drivers relate to the organisation’s
operational objectives and influence revenue, costs and growth. The balanced scorecard is an important
tool for establishing ways to measure performance. The people and organisational drivers relate to
organisational values and capabilities, and how employees are recruited, developed and motivated. The
internal analysis also examines the organisation’s resources and capabilities and identifies those that are
potentially strategic resources and capabilities. This begins to inform management as to potential strategic
options, and points to whether new resources and capabilities need to be acquired or developed.
Once the internal and external analyses are complete, they can be combined into a SWOT analysis
which identifies the internal strengths and weaknesses of the organisation and the external opportunities
and threats facing the organisation. A SWOT analysis provides a framework for organisational leaders to
begin to examine the organisation’s strategic options. A gap analysis identifies any inconsistency between
the internal environment and what is needed to successfully achieve the organisation’s strategy.
With the strategic analysis complete, leaders can turn their attention to the options available for new
product, service and market development. This will be the focus of module 4.
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McAfee, A, Brynjolfsson, E, Davenport, TH, Patil, DJ, & Barton, D, 2012, ‘Big data: the management revolution’, Harvard
Business Review, 90(10), 60–68.
Mortimer, G, 2016, ‘How Kmart ate Target: a story of retail cannibalisation’, The Conversation, 31 May, http://theconversation.
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PASSUR, 2019, ‘Aviation’s Big Data’, Passur, www.passur.com/who-we-are/aviations-big-data.
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Pfizer, 2017, ‘Company fact sheet’, www.pfizer.com/about/leadership-and-structure/company-fact-sheet.
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Preston, J, 2011, ‘Movement began with outrage and a Facebook page that gave it an outlet’, New York Times, 5 February.
Qantas, 2012, Broadening Our Horizons: Qantas Annual Report 2012, www.qantas.com.au/infodetail/about/investors/
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226–52.
OPTIONAL READING
Henderson, B, 1970, ‘The product portfolio’, Boston Consulting Group, www.bcgperspectives.com/content/Classics/strategy_the_
product_portfolio.
McAfee, A, Brynjolfsson, E, Davenport, TH, Patil, DJ & Barton, D, 2012, ‘Big data: the management revolution’, Harvard
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MODULE 4
PRODUCT, SERVICE AND

MARKET DEVELOPMENT
LEARNING OBJECTIVES

4.1 select the key concepts, factors and frameworks to develop products, services and markets
4.2 evaluate a range of issues, factors and strategic options relating to development of new products, services
and markets
4.3 appraise how the roles of management and leadership drive the development of products, services
and markets.
ASSUMED KNOWLEDGE
• describe the overall strategic process and the role of leadership in strategy.
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PREVIEW
In modules 2 and 3, we worked through the process of strategic analysis — designed to consider
the question ‘Where are we today?’. This culminated in identification of the organisation’s strengths,
weakness, opportunities and threats. This module describes how we can answer the question ‘Where do
we want to go?’ Figure 4.1 shows where this module’s focus sits in the overall strategic approach.
FIGURE 4.1 Strategy: product, service and market development

(Module 1)
Strategic analysis:
external
environment
(Module 2) Exploring Developing Implementation
Strategic analysis: (Module 4) (Module 5) (Module 6)
internal
environment
(Module 3)

(Module 7)
Defining the future state: Where do we want to go?

• Create a culture of innovation.
• Identify strategic options:
– new products
– new services
– new market.
The focus of this module is the development of options for the organisation to achieve its goals (and
in particular, growth), responding to the strengths, weakness, opportunities and threats identified during
strategic analysis.
The module content is organised around new product development, new service development, and new
market development as mechanisms for organisations seeking to grow.
We start the module with a discussion of innovation, as this underpins the development of new products,
services, processes and other outputs that change the scope of an organisation’s operations, the markets it
penetrates and/or the products and services it offers. Innovation is crucial to the success of organisations
operating in competitive markets.
Detailed information is provided around new product, service and market development, including ways
in which an organisation can enter a new market, with an emphasis on entry to new international markets.
The role of intellectual property (IP) is also considered, as there are IP considerations for organisations
of all sizes, especially those with well-known brands and those that invest in research and development.
We also look at the role of leadership and management. Studies have shown that leadership and
management of a culture of innovation require specific skills and approaches to bring together the right
people with diverse and divergent views and capabilities and to harness their collective capabilities for
innovation and growth.
THE ROLE OF THE CPA IN NEW PRODUCT, SERVICE AND

MARKET DEVELOPMENT
Finance professionals working in global organisations in the contemporary business environment have an
opportunity to use their skills to contribute to their organisation’s strategy, both through providing information
and analysis and via direct involvement in strategy development and decision making. CPAs have an impor-
tant role to play in leadership, whether through formally appointed leadership and management positions
or through informal leadership activities and behaviours taken on as part of their professional duties.
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In the context of globalisation with markets becoming hypercompetitive, and technology enabling
and supporting the rapid emergence of new competitors, it is becoming increasingly difficult to sustain
competitive advantages for long periods.
Innovation is difficult for well-established companies and innovation targets need to be set through
performance timelines and measurable goals so that everyone takes responsibility for innovation and it
becomes part of the organisation’s everyday activities (de Jong et al. 2015). Setting and monitoring relevant
performance measures and budgets for innovation is critical to success.
Of course, it will always be important to run an organisation efficiently, but it is increasingly important
to appreciate that future competitive advantages of any duration will be contingent on how well an
organisation addresses customers’ changing value propositions and the industry’s evolution. A strategic
approach must involve a balance between the value of efficiently developing and delivering on products
and services and the value of and achieving speed to market. Innovative product and service development
projects cannot be judged using the approaches and tools familiar to traditional business. It is also important
to understand the value of downstream marketing activities (e.g. shaping customers’ perceptions before
and after launching a new product, innovating around customers’ consumption circumstances, determining
what customers really need from products, and capturing and deploying the right data sets about customers’
buying behaviours) that influence the prospects of success or failure of new product, service and market
development options. In summary, assessing the value generated by use of the organisation’s resources
has become increasingly complex.
CPAs play an important role in ensuring the organisation has the facts, data and other information for
rigorous and objective evaluation of the product and market options available to an organisation. They
also play a critical role in understanding and managing the specific accounting issues for an organisation
when it decides to enter a new geographic market or undertake significant new product development in
other jurisdictions. The consideration of accounting impacts is a key factor in assessing organisational
capability when considering internationalisation of an organisation, particularly in terms of the cost and
resourcing implications of any desired changes; although some of the issues discussed may appear more
operational than strategic in nature, they are a vital part of an organisation’s capabilities and thus are key
in successfully implementing a strategic option.
CPAs have emerged both as a provider of information and analysis, and increasingly as a part of an
organisation’s strategic decision making.
4.1 INNOVATION
If an organisation is to achieve growth that is greater than the industry average, the organisation must do
something beyond what the industry overall is doing. That is, there must be something different that the
organisation does in terms of the products or services it sells in its geographic or customer market, or in the
way it delivers services to its customers; in other words, a competitive advantage. A key source of creating
competitive advantage is innovation.
Innovation is the act of introducing something new. It is the process of creating a new product, service,
process or other idea for an organisation that will result in increased customer value and/or positive changes
in, for example, efficiency, quality, competitiveness and market share.
In an increasingly competitive marketplace, where organisations are trying to achieve growth, innovation
is an important component of an organisation’s strategy and overall culture. Innovation is often used to
improve quality, create new markets, extend product and service offerings, reduce labour cost and improve
environmental performance. In addition to these benefits, organisations innovate in order to:
• maintain relevance in the marketplace and industry
• manage opportunities and threats
• diversify revenue avenues
• reach growth targets
• use the capabilities of their people.
Without innovative ideas and offerings, organisations are essentially standing still while others overtake
them, and will face a loss of revenue to competitors, possibly increased staff turnover and inefficiencies in
outdated practices and processes.
Innovation is so central to organisational success, particularly in today’s environment where it is difficult
to sustain a competitive advantage over the long term, that a core task of leadership and management within
the organisation is to create a culture that enables and encourages innovation.
Technology insight 4.1 describes organisational attributes associated with successful innovation.
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MODULE 4 Product, Service and Market Development 209

Strategic and Organisational Success Factors for Innovation

An extensive study of companies that consistently lead in innovation identified four common strategic and
creative attributes and four common organisational attributes.
It summarised these under the following headings.
1. Aspire. Does the organisation view innovation as a crucial way to create growth and set targets
accordingly?
2. Choose. Does the organisation invest in innovative initiatives in a way that appropriately balances time,
resources and risk?
3. Discover. Does the organisation have strategic business, market and technology knowledge that can
create value?
4. Evolve. Does the organisation create new sustainable and profitable business models?
5. Accelerate. Does the organisation develop and launch innovations quickly, ahead of competitors?
6. Scale. Does the organisation launch innovations into the appropriate market segments at the ideal
scale?
7. Extend. Does the organisation use external networks to advantage?
8. Mobilise. Does the organisation mobilise its human resources through rewards, motivations and
organisational structure?
Source: Adapted from M de Jong, N Marston & E Roth,2015,‘The eight essentials of innovation’,McKinsey Quarterly, April,
www.mckinsey.com/business-functions/strategy-and-corporate-finance/our-insights/the-eight-essentials-of-innovation.
INNOVATION IN BUSINESS
Many organisations think of innovation in terms of research and development (R&D) of new products
and services, but there are many aspects of business that can benefit from innovation. According to
Keeley et al. (2013), innovation in business can take place in 10 key areas, either individually or as a
combination of several areas. This perspective provides a useful framework for organisations to identify
possible opportunities for innovation, as shown in the table 4.1.
TABLE 4.1 Innovation groups and the 10 types of innovation
Innovation group Description Innovation areas
Configuration Innovations focused on how the Profit model

organisation operates, its business Network
systems and business model Structure
Process
Offering Innovations focused on the organisation’s Product performance

portfolio of products and services Product system
Experience Innovations focused on how the Service

organisation interacts with its customers Channel
Brand
Customer engagement
Source: Adapted from L Keeley, R Pikkel, B Quinn & H Walters, 2013, Ten Types of Innovation, Wiley, pp. 16–17.
Example 4.1 describes how Zara, the world’s largest clothing retail company, is achieving innovation in
its business.
EXAMPLE 4.1
Innovation — Zara’s Focus on People Before Product

Spanish company Zara is the world’s largest clothing retailer. In its stores, Zara emphasises the customer
experience with a range of initiatives that distinguish it from its competitors.
One technology-enabled innovation is the introduction of augmented reality features to its stores. This
technology enables customers to view images of models wearing the clothing they are interested in by
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using their mobile phones or engaging with special displays in the store. This has proven an attractive
drawcard to Zara’s key customer demographic.
This is one example of Zara’s focus on customer experience, which is in turn part of the company’s
‘4Es’ marketing strategy: focusing on experience, exchange, evangelism and being in every place the
customer needs.
Experience — Zara Makes Customer Experience King
Product used to be king, but in the new retail economy, experience matters more than product in the mind
of the shopper.
‘While Zara is an excellent purveyor of product, it also capitalizes on the store experience by
continuously offering reasons for customers to visit the stores and catch the hottest trends at affordable
prices,’ Kohan explains, noting that Zara has cultivated a loyal customer who visits about six times per
year, as compared to other retailers in the contemporary market where two to three visits per year are
the norm.
The fast-fashion experience formula for success combines frictionless shopping in a highly curated
product environment offering scarce supply and new styles that rotate rapidly. ‘The more quickly and
efficiently a customer can navigate through the store to explore and find hidden gems, the better the
experience,’ she says. ‘Zara nails that.’
Exchange — Zara Exchanges with Customers for Value
The old pricing formula — pile it high, sell it cheap — worked well through the 20th century, but in the new
experience economy, it has been replaced by the concept of exchange.
‘Exchanging dollars for product is no longer meeting the needs of today’s shopper as they strive for
deeper connections with the brand,’ Kohan states. ‘Retailers must adapt to the changing consumer where
the top characteristic is value. Today, value is measured beyond price, but also in time and convenience.’
Zara has a deep understanding of the entire value proposition it exchanges with the customers. Its fast-
fashion deliverable is available in the quantity, format and time in which the customer needs the product.
That translates into great value.
‘Branded value aligns customer’s needs with a brand deliverable,’ Kohan stresses. For example, the
most loyal customers for retailers typically account for 80% of the sales. These brand loyalists are also
less price sensitive. ‘Appealing to the loyal segment of the target market, like Zara does, allows for higher
profit margins and caters to customers who seek out branded value,’ she emphasises.
Zara masters the concept of exchange as it is not the cheapest in the fast-fashion arena, but it
consistently delivers branded value of trend-right product at appealing prices.
Evangelism — Zara Creates Brand Evangelists
By making the brand experience meaningful and the exchange valuable, Zara taps the potential of its
customers to evangelise the brand. Rather than push marketing out, Zara pulls customers in, cultivates
them as brand influencers to improve operations, services and products and stimulates them to spread
the word.
‘Shopper frequency at Zara is 2x to 3x higher than traditional women’s apparel, which indicates super
loyalty to the brand,’ Kohan says. These loyalists become brand evangelists who share excitement about
the brand with their networks. Zara, for example, has over 25 million Facebook followers, 16 million on
Instagram and over one million on Twitter.
Zara has a highly evolved data infrastructure, Kohan also notes, that allows for super-efficient analysis
of what’s selling and being said on social media platforms. This data is used to improve various aspects
of the business from product offerings to service enhancements. ‘The two-way communication between
the customer and Zara allows for continual improvement of product and services,’ she says.
Every Place — Zara is Every Place the Customer Needs It to Be
Personal commerce is the ‘every place’ where the customers are, rather than only in the physical place
the brand is present. This is the new distribution model for retailers today: delivering the brand experience
and products when and where the customer demands them. Zara does that for them.
‘Zara has devoted significant time, money and resources to develop a synchronized strategy between
online and offline commerce,’ Kohan explains. Through this technology and mobile connectivity, it links a
customer’s shopping visit and provides access to inventory not present in the specific location. ‘It is a big
win for both the customer and the company,’ she says.
And the company’s store location strategy is another aspect of its every place factor. It currently operates
in 2213 stores across 93 markets and 39 online markets. The flagship locations are located in the most
critical markets that appeal to their most loyal shopper. ‘Zara has the courage to continually strengthen
their portfolio of stores by closing unprofitable ones, opening new markets, and expanding sister brands
in existing markets (Zara Home, Massimo Dutti),’ Kohan says.
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Zara is all about the Customer
Zara has cultivated unique advantages with its 4Es approach to marketing by focusing on experience,
exchange, evangelism and every place strategies for the customer, rather than the old product, price,
promotion and place concept focused on the brand. ‘As the brand ethos is so embedded in the customers’
mind, the customer becomes the brand manager,’ Kohan explains.
In 2016, Zara service agents responded to more than 17 million customer inquiries. ‘Zara actually listens
and reacts to customer feedback as its most valuable brand asset to improve its products and services,’
she says.
Further, Zara focuses on its own people with corporate initiatives on diversity, respect, equal opportunity,
work-life balance and professional development. Zara fosters a highly engaged workforce that translates
into highly engaged interactions with customers. Additionally, over 60% of the workforce is 30 or younger,
aligning with the brand’s target market.
‘The result is the customer and the company work cooperatively together so that the Zara customer
becomes the Chief Customer Officer providing feedback on all aspects of the business,’ Kohan concludes.
This is a fundamentally different alignment than how brands using the 4Ps approach to marketing operate.
Today the customer, not the company, calls the shots. Zara involves the customer interactively in the
decision-making process. That is the Zara difference.
Source: Adapted from PN Danziger, ‘Why Zara succeeds: It focuses on pulling people in, not pushing product out’,
Forbes, 23 April 2018, www.forbes.com/sites/pamdanziger/2018/04/23/zaras-difference-pull-people-in-not-push-product-
out/#5c70437623cb.
Table 4.2 illustrates how Zara is applying the 10 types of innovation to its business. Before reading the
right-hand column, look at the left-hand column entries and refer back to the article to try to identify the
innovations yourself.
TABLE 4.2 How Zara is applying the 10 types of innovation
Innovation group
and area What Zara is doing
Configuration: Profit model, • Using highly evolved data infrastructure for efficient analysis of what’s selling
network, structure, process and being said on social media platforms
• Positioning flagship stores in critical locations based on customer loyalty data
• Actively managing their portfolio of stores — opening new stores to expand,
and closing unprofitable stores, locating flagship stores where there is greatest
brand loyalty
• Configuring systems to optimise sales through physical and online shopping
Offering: Product • Selling the hottest trends at affordable prices

performance, product • Offering a highly curated product environment with limited stock (scarce supply)
system • Stocking new styles that rotate rapidly
Experience: Service, • Having an extensive physical and online store network around the world
channel, brand, customer • Innovating to enhance the shopping experience and drive sales e.g. augmented
engagement reality so shoppers can see products in additional ways and link to access to
inventory not present in the specific location
• Making the customers brand managers — using their feedback to improve
operations, services and products
• Extending reach through their customer base on social media platforms
• Having highly engaged interactions of staff with customers
• Employing a workforce that aligns with the brand’s target market
Other factors contributing to Zara’s success are explained in appendix A at the end of the study guide.
We will revisit Zara throughout the module to explain the development of options in the offer and the
experience innovation groups (as shown in tables 4.1 and 4.2) to achieve growth through the development
of new products, services and markets.
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Technology insight 4.2 examines business model options for digital innovation. This will be explored
again in module 7.
Digital Innovation — Platforms and E-commerce Business Models

Innovation during the past four decades has been dominated by applications of digital technology. Digital
innovation has distinctive characteristics to the extent that digital technology is generic: it reduces a vast
range of artefacts — information, images, sounds — to binary code. It creates new products — websites,
mobile communication, video games — and transforms existing ones — retailing, travel reservations,
payments, and recorded music.
The wealth‐creating potential of digital innovation is remarkable. McKinsey & Co. show that the
‘economic profit generated by TMT [technology, media, and telecom] companies grew 100‐fold . . . from
2000 to 2014.’ However, most of this value creation was concentrated among a few giant companies. As
a result, by 2018, the world’s seven most valuable companies — Apple, Alphabet, Microsoft, Amazon,
Tencent, Facebook, and Alibaba — were all based on digital technologies.
Common to all seven of these companies — as well as other digital start-ups that have established multi
billion dollar valuations, such as Netflix, Uber, Airbnb, and Pinterest — is their platform‐based businesses.
Digital technologies, together with internet or wireless connectivity, have created markets where network
externalities (meaning the value of a product to an individual depends on how many other people use it)
arise both from user connections and from the availability of complements. These platform‐based markets
are also referred to as two‐sided (or even multi‐sided) markets because they form an interface between
two groups of users: customers and the suppliers of complementary products.
Operating systems are the quintessential platforms: Microsoft’s Windows, Apple’s iOS, and Google’s
Android create network externalities among users (direct externalities) and among the suppliers of
applications (indirect externalities). Each of these platforms is central to an ecosystem comprising
thousands of interdependent companies that co‐evolve. Thus, the Android ecosystem comprises over 100
smartphone manufacturers, thousands of app developers, suppliers of hardware components, accessory
providers, and many other types of player.
Deciding whether to pursue a product strategy or a platform strategy is a key strategic issue. Google
and Facebook both began with product strategies but soon recognised the potential for their products —
Google’s search engine and Facebook’s social network — to become platforms.
Source: RM Grant, 2019, Contemporary Strategy Analysis: Text and Cases, 10th edn, John Wiley & Sons.
FOCUSING INNOVATION EFFORT

An organisation must consider two key elements when deciding where to focus its effort on identifying
and developing options for growth in these innovation groups:
• the organisation’s perspective (Voice of the Company)
• the customer/market’s perspective (Voice of the Customer).
The organisation’s perspective is captured through the SWOT analysis (see module 3). This includes
strategic and stakeholder requirements, which will vary depending on the organisation type. For example,
some companies have aggressive growth targets to deliver returns to shareholders, while other organisa-
tions may have goals that may be more strongly focused on achieving social impact than financial returns.
An extended SWOT analysis provides a way of directing option development in response to identified
strengths, weakness, opportunities and threats, as shown in table 4.3.
TABLE 4.3 Extending the SWOT analysis to develop options
Strengths — S Weaknesses — W
List strengths here. List weaknesses here.
Opportunities — O Strength/opportunity options Weakness/opportunity options

List opportunities here. Use organisational strengths to take Develop options that address weakness
advantage of opportunities. to take advantage of opportunities.
Threats — T Strength/threat options Weakness/threat options

List threats here. Use strengths to avoid threats Develop defensive strategies that
address weaknesses and threats to
the organisation.

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Identification of possible options to address an organisation’s SWOT analysis is often undertaken as
part of a facilitated workshop activity run within an organisation, perhaps as part of an annual strategy
development process either in business, functional or cross-functional groups, depending on the size of
the organisation. The organisation usually has the expertise and experience internally to identify some
projects and initiatives, but such events do not provide sufficient time to develop projects and initiatives.
Almost certainly, the outputs of workshop type events need to be tested and validated by customers and
further refined before implementation.
How the organisation is set up to drive innovation is discussed in the leadership section later in
this module.
Of key importance to the success of any project is understanding the customer perspective, which can
be captured in several different ways. This is also discussed in detail in this module.
as follows.
KEY POINTS
4.1 Select the key concepts, factors and frameworks to develop products, services and
markets.
• An extended SWOT analysis can be used as a framework to align the development of options
for new products, services and markets with identified organisational strengths, weaknesses,
opportunities and threats.
4.2 Evaluate a range of issues, factors and strategic options relating to development of new
products, services and markets.
• To grow above the industry average an organisation requires a competitive advantage.
• Innovation is a key source of creative advantage. Innovation maintains the organisation’s relevance,
is a way to manage opportunities and threats, enables an organisation to diversify its sources of
revenue, helps achieve growth and makes the most of the capabilities of the organisation’s human
resources.
4.3 Appraise how the roles of management and leadership drive the development of products,
services and markets.
• Leadership and management need to create an organisational culture that promotes innovation.
4.2 NEW PRODUCT, SERVICE AND

MARKET DEVELOPMENT
The external environment analysis discussed in module 2, combined with the internal analysis in module 3,
provides information for determining how to assess an organisation’s current performance and offers
insight into its growth potential. It is important for an organisation to have a clear understanding of its
existing position, to identify its desired position (based on its vision, mission and goals) and to accurately
determine its ability to reach this desired position by implementing strategic options while taking into
account any strategic capabilities it may possess or need to acquire.
To help us consider strategic options in a systematic way, we can use the Ansoff product/market matrix
as a framework for classifying and organising strategic options. This model considers products and markets
(customer or geographic) on the basis of whether they already exist or are new for the organisation and the
relative implementation risk of these options for the organisation. Note that ‘products’ within the Ansoff
matrix refers to both goods and services.
The Ansoff matrix provides four broad classifications to group the strategic options.
1. Market penetration — options to grow by improving the performance of existing products and services
in existing markets (the lowest-risk option).
2. Product development — options for developing new products and services to achieve growth in existing
(geographic and customer) markets.
3. Market development — options for entering new markets (geographic and customer) with the organi-
sation’s existing products and services to achieve growth.
4. Diversification — developing new products and services to sell in new markets (the highest-risk option).
New product development, new service development and new market development are the three
approaches to growth that are the main focus of this module. These may be defined as follows.
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New product development is:
the overall process of strategy, organization, concept generation, product and marketing plan creation
and evaluation, and commercialisation of a new product. It is also frequently referred to just as ‘product
development’ (PDMA n.d.).
A new product is generally defined as:
a product (either a good or service) new to the firm marketing it. The definition excludes products that are
only changed in promotion (PDMA n.d.).
New service development is the outcome of design that:
choreographs processes, technologies and interactions with complex systems in order to co-create value
for relevant stakeholders (Service Design Network n.d.).
New market development can be either developing new customer markets with a product or service
(which may entail making product or service modifications) or entering new geographic markets.
Market penetration — improving the performance of existing products in existing markets — is an
obvious place for an organisation to start thinking about how to improve its performance from its current
portfolio of activities resources and capabilities. Options in this area are typically based on initiatives to
improve efficiency and productivity.
Diversification into new products or services and markets usually requires new or different capabilities
and/or resources or experience that the organisation does not have. While the organisation may have the
resources and can acquire the capabilities it needs, diversification is the highest-risk option and only
considered if market penetration, market development and product and service development options have
been exhausted.
Decisions related to product, service and market development are often based around an organisation’s
capabilities and experience. Risk varies with the organisation’s capabilities and experience. Product, and
market development can entail significant financial investment.
In practice, organisations are likely to be considering multiple growth options simultaneously, and
there is not always a clear distinction between whether an option is market penetration, product/service
development and/or market development.
Different organisations in different industries at different stages of industry organisational maturity
will have different goals for growth. Some may be struggling to survive economic conditions and
having a clear focus on their core business and the efficiency and performance of what they currently
do may be critical. They may have to make difficult decisions about divestment of some part of their
business. They may do this to fund entry into other businesses they think will be better aligned to
their strategy and their growth ambitions. Or they may be government or non-government organisations
(NGOs) that must maximise service delivery from fixed revenue with little or no capacity to grow
their revenue base.
The ‘right’ level of growth is an important question, which is very much set and driven by key stakeholder
requirements and the type of organisation. Listed companies will have far greater growth imperatives than
a small family organisation. Government organisations are more likely to be driven by efficiency and how
far they can stretch the available funding to provide services. Similarly, not-for-profit organisations (such
as charities) will be concerned with helping as many people as they can in a meaningful way.
It is important to note, too, that different types of organisation have different purposes and goals — and
growth may not be their key focus. Organisations sometimes choose to reduce in size or capabilities. This
could be for any number of reasons.
For example:
• the organisation’s employees or owner wants to reduce workloads
• the organisation wishes to focus on a core activity
• a venture may not be as profitable or successful as initially anticipated
• a family company wants to stay the same size to retain control of the company
• a large organisation has acquired another organisation that has activities that they do not wish to retain.
Divestment is a deliberate reduction in the size of a business and can be an important and necessary
strategic decision to achieve the organisation’s goals.
The immediate outcome of divestment is a decrease in the physical size or scope of an organisation.
Longterm consequences can involve a decrease in industry involvement and market coverage, or the
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specialisation of an organisation to address the needs of a smaller, more specific market. Divestment can
be prompted by legal, strategic or market concerns, among others (Moschieri & Mair 2011).
Traditionally, divestment has been carried out when an organisation is under some kind of threat;
however, divestment is not necessarily negative.
Some reasons an organisation may divest are listed in table 4.4.
TABLE 4.4 Reasons an organisation may divest
Cause Examples
Focus on core activities Origin Energy decided to divest its exploration and production
activities to focus on energy retail and onshore gas development.
Not aligned with core values The Future Fund (a fund set up to assist future Australian government
superannuation liabilities) dropped tobacco organisations from its
portfolio of investments.
Financial hardship Walmart left the German market due to poor profits. Bunnings left the
UK market for the same reason.
Social pressure Coles committed to phasing out Coles-branded caged eggs.
Environmental concerns Zara committing to selling only sustainable clothes by 2025 and
that all cotton, linen and polyester sold will be organic, sustainable
or recycled.
Because current business success has a strong focus on growth and expansion, divestment is not typically
a focus of management. Additionally, the decision to divest parts of the business can be challenging
for incumbent leaders that have led the growth of the organisation to date. It is important, however,
to understand the potential advantages associated with divestment, as it can be an appropriate strategy
for organisations.
THE ANSOFF PRODUCT/MARKET MATRIX

One of the better-known tools for assisting in the identification and assessment of strategic options is the
Ansoff product/market matrix (Ansoff 1957). This model’s approach facilitates the clear identification and
categorisation of market and product development opportunities. The representation of the Ansoff product/
market matrix shown in figure 4.2 provides a useful framework for considering possible alternatives
and options.
FIGURE 4.2 Strategic options — Ansoff product/market matrix classification
Products
Ansoff matrix Existing products New products
Market penetration Product development

Existing Increasing the amount and value of Introducing new products or services
markets business with existing customers to existing customer markets
in existing markets
Markets
Market development Diversification

New Taking existing products or services Moving into new products or services
markets into completely new markets and new markets at the same time
(can be either related or unrelated to
current activities)
Source: Adapted from I Ansoff, 1957, ‘Strategies for diversification’, Harvard Business Review, vol. 35, no. 5, September–
October, p. 114.
This matrix looks at options from an organisation’s perspective based on two dimensions: product focus
and market focus. It is important to note that in this matrix the term ‘product’ refers to both physical items
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(e.g. cars) and services (e.g. insurance or a home loan). The market dimension considers customer markets
or groups (e.g. different types of purchasers — wholesalers, supermarkets and butcher shops for a meat
processor; online consumers and shop-front customers for a retailer) as well as geographic markets (e.g.
Europe or China).
The various strategies for growth require different capabilities for successful implementation. The
capabilities required by any individual organisation will vary according to factors such as the size of the
organisation, the life cycle stage of the organisation, and its current activities, current performance, track
record of achievement, leadership team and geographic location.
If an organisation is using a rational approach to strategy, over time, it should follow a logical
development pattern. Typically, an organisation will begin as a single operation with a narrow product
and market scope before it ventures into additional products or markets. (There are exceptions based on
alternative business models — see module 7.)
As a first step, an organisation needs to clearly identify its current position and concentrate on its existing
products and markets. It should leverage its existing capabilities as much as possible, until it obtains
its maximum market position and penetration — that is, the market penetration quadrant as shown in
figure 4.2. This analysis will already have been conducted in module 3.
At the point when an organisation is unable to increase the market share for its existing products or
markets (e.g. it has reached maximum penetration), it will need to expand out of its current product/market
set if it wants to grow. The rational approach to strategy suggests that the organisation has two choices.
1. Add new products to existing markets: for example, banks adding financial services and wealth
management products and offering them to existing customers.
2. Expand by taking existing products into new markets: for example, banks establishing operations in
other countries (new geographic markets) or expanding from retail banking to merchant banking (new
customer markets).
These options are represented in the market development and product development quadrants in
figure 4.2.
Expanding into new products and services or markets related to current organisational activities usually
provides ample opportunities for an organisation to focus on and consolidate these new products and
services and/or markets.
The decision as to whether the organisation should develop its product range or markets as the first
step depends on its strengths, experience and capabilities. For example, where the organisation has strong
product development skills but little experience in developing new geographic or customer markets, it
should first attempt product development and then, once all opportunities have been exhausted in that
area, expand into new markets. Alternatively, where the organisation has market development skills, it
should move into market expansion first and then, once all opportunities have been exhausted in that area,
expand into new products.
Diversification involves moving into new products and new markets that are either related or unrelated
to the current organisation at the same time. Diversification is frequently pursued as a strategy when
there is a desire to avoid the fluctuations in revenue that different seasons or a downturn in the economy
might represent to an organisation. It is also done when all other related product/market options have been
exhausted. Diversification is high risk and should only be done after all other options have been exhausted.
It is reflected in the diversification quadrant in figure 4.2.
In the following sections, the quadrants of the Ansoff product/market matrix (figure 4.2) are considered
in more detail to examine how an organisation might expand its activities in a way related to its current
business activities.
MARKET PENETRATION — GROWTH IN EXISTING

PRODUCTS AND MARKETS
An organisation in the top-left quadrant (growth in existing product markets) aims to increase penetration
into existing markets with existing products and to increase market share from the organisation’s
current position.
There are many ways to achieve greater penetration of existing markets, such as:
• increasing product use in existing customer markets by increasing the frequency of use, such as
providing frequent user incentives (e.g. airline frequent flyer programs or coffee cards where you buy a
certain number of coffees and get one free)
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• increasing the quantity of product used: for example, increasing the pack size (e.g. 1.5-litre bottles
instead of 1-litre bottles, providing 50% extra ‘free’) or making it easier to use more of the product
(e.g. adding a pump to a bottle)
• finding new applications for the product for current users (e.g. Arm & Hammer baking soda being
available in, or as, a variety of products including pure baking soda, fridge deodorisers, carpet
deodorisers, pool maintenance products) (Arm & Hammer n.d.)
• attracting new customers to gain greater market share of existing customer segments (e.g. a wholesaler
selling to supermarket chain Coles in addition to Woolworths captures the same customer segment of
supermarket shoppers but broadens numbers by including Coles shoppers)
• cross-selling (e.g. banks that offer free banking to customers who have their mortgages with them and
by enabling easier movement of funds between different accounts than if funds were held in different
accounts with different banks)
• upselling (e.g. when a customer buys a book from Amazon, the website attempts to upsell to the customer
by automatically providing a list of book titles that other customers who have ordered the same book
have selected; hyperlinks make clicking for more information about these titles and ordering a user-
friendly experience)
• launching a new marketing campaign and other promotional activities (e.g. offering free delivery for
purchases over a certain value).
High performance is generally achieved by investing in and developing resources, such as the organ-
isation’s people and infrastructure. High-performing organisations are in a strong position because they
have earned the funds to grow the organisation as a result of earning above-average profits, although their
managers may still source funds from the capital market. To increase the share of existing customers and
markets, the following questions are useful to consider.
• Who are the existing customers, and are there any that have not specifically been targeted?
• Can any product or service be used in a different way by existing customers and markets?
• What capacity are plant and equipment running at, and is there any spare capacity?
• What are competitors’ capabilities, and are they the same as the organisation’s capabilities? If not, why
not, and should these capabilities be developed to enable the organisation to compete more effectively?
• What do customers buy from competitors, and what would it take to get them to switch?
• Are there customers who have stopped buying? Why?
• Is a change in pricing, marketing, distribution or other activities required, and what impact will this have
on existing customers and employees?
The response to these questions informs the formulation of market specific initiatives, including
relationship building and complaints handling
One of the ways to grow in an existing market is to gain a higher concentration of the market. An effective
and simple method to achieve this is by responding to customer complaints. A timely and considerate
resolution of a problem or concern can lead to increased business with existing customers, while potentially
obtaining a higher market share through word-of-mouth from positive experiences. Dissatisfied customers
whose complaints are handled well often become loyal customers who will recommend an organisation
to others. With social media as the dominant means by which customers can relay their complaints or
experiences to the organisation (and the public), these organisations need to be able to respond in a manner
that addresses the complaint.
Conversely, improving performance could involve decisions to reduce the organisations activities in
some areas. These can include:
• removing some products/services that have been identified as unprofitable as part of the organisational
performance analysis (e.g. the BCG matrix)
• changing distribution channels for products and services (e.g. removal or replacement of under-
performing supply chain partners)
• changing pricing based on customer profitability analysis (e.g. charging more per kilogram for smaller
pack sizes).
QUESTION 4.1
At the Myer Investor Briefing held on 5 September 2019, Chief Executive Officer and Managing
Director, John King, presented Myer’s strategies and future focus, including:
• working with landlords to reduce Myer’s footprint, with a target of a 5–10% reduction in gross
lettable area (GLA) and the possible closure of some stores
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• refurbishing some stores to transform the customer experience
• rolling out of new and ‘Only at Myer’ brands, with more than 90 new brands to be added
• having a significant increase in products available online, including the addition of several new
concessions
• expanding the most successful brands to additional stores across the Myer network
• exiting of non-performing brands
• investing for improvement in the online platform
• lowering promotional markdowns and better management of shrinkage
• furthering reductions in supply chain costs and centralisation of distribution
• having a disciplined focus on inventory management (King 2019).
Explain how each of these strategies could contribute to Myer achieving growth within its existing
products and markets.
Making the decision to stop providing products and services and/or changing supply chain partners is
often difficult for organisations to make. CPAs have an important role in data analysis to help organisations
understand their overall and product/service specific performance and strategic advice that may lead to the
decision to stop providing selected products and services or exit some markets.
PRODUCT DEVELOPMENT — NEW PRODUCTS FOR

EXISTING MARKETS
We place strategic options in the top-right quadrant (new products and/or services for existing markets)
when an organisation aims to modify and develop products/services that closely relate to existing products
and services and then attempts to sell them to its existing market. This is a relatively low-risk strategy
because the customer base is known and familiar, and target customers can more easily be involved in
product/service design and specification.
Product/service development can occur by:
• adding features and refinements (e.g. a higher resolution camera in the next version of a mobile phone;
complimentary gym access when staying at a motel)
• expanding the product/service line (e.g. adding different flavour options to the current options on offer;
adding new destinations to flight routes)
• developing a new-generation product (e.g. something based on new technology that allows the product
to be presented in a different way, such as ‘fresh’ food products that can have a long shelf life because
of new packaging developments)
• developing completely new products/services (e.g. launching a monthly magazine when the current
business is daily newspapers or offering products and services via a subscription model).
The more aspects that one product has in common with another (i.e. the more related it is), the more
likely it is that the product/service development will succeed. Relatedness can be considered in terms of the
nature of the new product/service or the function it serves, the technology and operating systems involved
in producing the new product/service, and the distribution system required by the product/service.
Where related products and services are available, the benefits of purchasing the suite of products/
services need to be clear to the consumer. For example, traditional camera vendors such as Kodak, Fujifilm,
Olympus and Canon now offer complementary products and services (e.g. photo printers and online photo
services) that allow photo printing and sharing at home, as technology in photography has become almost
completely digital. A clear benefit must result for the customer who purchases both a camera and photo
printer from the same organisation instead of seeking out products from unrelated suppliers that may
be less costly if purchased separately. The same concept is practised by Apple — for example, iPhones
automatically sync with Macs, and features of the iPad can be viewed on a television via Apple TV.
IS IT A NEW OR EXISTING PRODUCT?

The Ansoff matrix provides a useful way of thinking about potential strategies, but it is important to note
that there is often more than one way to classify an item. An option may not fit neatly into the matrix.
For example, at what point does innovation and product modification turn something into a ‘new product’
rather than a variation of the original product?
For example, you might increase the size of your product by 10% to sell more product to the same
customers. This often happens with products like chocolate bars and breakfast cereal. The product is
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virtually unchanged except for a small increase in size. As such, this would be considered to be an example
of market penetration.
On the other hand, you may create a completely different pack size, which differs considerably from the
original. For example, breakfast cereal usually comes in 500-gram or 1-kilogram boxes. However, cereal
manufacturers have also released small 30-gram boxes as single-serve convenience items. The breakfast
cereal itself is unchanged, but the new packaging and way the product is being presented (as a single-use,
convenient way to have breakfast) may be enough to warrant this being classified as a new product. So,
this would be classified as product development.
QUESTION 4.2
In May 2019, Cadbury’s chocolate introduced five new flavours that will sit alongside its core Dairy
Milk range. Three of the flavours were available through selected retailers for a limited period only:
1. Popcorn — milk chocolate, popcorn and toasted corn kernels
2. Coconut Rough Fruit & Nut — milk chocolate, toasted coconut, sultanas and hazelnut
3. Hedgehog — milk chocolate, biscuit, toasted coconut and almonds.
The two other new flavours were permanent additions:
1. Creamy Hazelnut Crunch — hazelnut crème and hazelnut
2. Crispy Mint Crème — milk chocolate, mint crème, mint lollies.
Would you classify the new chocolates as existing or new products? Why? Do you think the
distinction is important? Why?
QUESTION 4.3
Apple released the original iPod portable music player in 2001. This was called the ‘classic
model’. As technology has improved, Apple released newer versions of the ‘original iPod’ but with
enhancements such as greater storage capacity. There have now been a number of versions of
this model and variations within these versions (e.g. storage capacity and colour). Apple has also
released more significant variations of the music player, including the iPod nano, iPod shuffle and
iPod touch.
Would you classify the original iPod, iPod nano and iPod touch as existing or new products?
Getting the classification ‘right’ is not the point. Rather, thinking about the options and what is needed
and the possible risks associated with successful implementation is the key consideration for organisations.
MARKET DEVELOPMENT — EXISTING PRODUCTS FOR

NEW MARKETS
An alternative approach to product development is to find new markets for existing products. Some risk
exists because, although the products are unchanged, it is not clear how the ‘related’ markets will respond
to products that have not been specifically designed for them. Related market development can occur in
two ways:
1. targeting new customer segments in the same geographic region
2. expanding geographically.
For example, a bank, retailer, manufacturer or other organisation might believe that it has limited
opportunities to develop further within its own country. Consequently, rather than diversifying its existing
product range within its current country, it may choose to take its existing products and services into other
countries to grow. Similarly, a bank might seek new customer groups to sell its products to, such as retail,
small business or wholesaler customers.
Customer markets can be defined as aggregates of consumer groups with similar needs. Several different
approaches to defining customer markets can be used either on their own or in combination. Organisations
may target new segments of the market with existing products in order to increase sales. Some product
modification may be required, such as new packaging, but to meet the criteria of being an existing product,
differences are limited.
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Grouping customers by distribution channel is a very common approach, as distribution is so important
to revenue generation. This might be addressed by an organisation employing account managers and sales
representatives to service specific distribution channels.
For example, a winemaking organisation may traditionally sell to wholesalers (also known as wine
merchants), who then sell to retailers, where consumers buy the products. The winemaking organisation
may then decide to sell directly to selected retailers. For this, it would most likely need to employ a sales
representative to manage these accounts. It may then decide to try to supply a completely new market
segment — for example, restaurants. To do this it would need additional capability in sales and after-sales
service, as well as the ability to distribute small quantities to many customers. For both these situations,
the products are unchanged; it is the market participants that change.
Example 4.2 describes how organisations in the New Zealand dairy industry have used the market
expansion strategy.
EXAMPLE 4.2
Fonterra — Geographic Market Expansion

Fonterra Co-operative Group Ltd is a New Zealand-based dairy organisation. It was established in 2001
following the merger of the country’s two largest dairy co-operatives, New Zealand Dairy Group and Kiwi
Cooperative Dairies, with the New Zealand Dairy Board.
Historically, growth of organisations in the dairy industry was based on the consumption patterns of
dairy products in New Zealand. However, in the 1960s, growth in domestic markets began to slow as the
country’s consumption of dairy products reached saturation levels.
To generate further growth, the dairy cooperatives in New Zealand that became Fonterra began to seek
new markets for their dairy products.
They started exploring new markets when Britain (New Zealand’s largest export market) first contem-
plated joining the European Economic Community during the 1960s. Having successfully established
exports to Britain, they developed further export markets over the next two decades. By 1995 they
had over 80 subsidiaries and associated organisations supporting the distribution of their products in
overseas markets.
Fonterra also set up operations in Australia in 2001 when it acquired a 25% stake in Bonlac Foods;
it increased its stake to 50% in 2003. It has since acquired Bonland Dairies and Murrumbidgee Dairy
Products and is the outright owner of Bonlac Food, having acquired the remaining share of the company
in 2006.
As a result of this market development strategy, at the end of 2019, the Fonterra Cooperative Group
employed over 200 000 people, operating out of 48 manufacturing sites around the world, and was
responsible for delivering dairy to consumers in more than 130 countries and accounts for more than
one-third of international dairy trade.
Source: Adapted from Food service, 2014, ‘About us’, www.fonterrafoodservices.com.au/aboutus.php?id=3; Fonterra
2014a, ‘Company overview’, http://nzdairies.com/nz/en/about/company+overview; Fonterra 2014b, ‘Our heritage’,
Sustainability Report 2019, https://view.publitas.com/fonterra/sustainability-report-2019/page/1.
Fonterra’s international growth is an example of market expansion, as Fonterra is selling its existing
dairy product range to new geographic markets, primarily through export activities.
Example 4.3 is another example of market expansion, as Staples sells its office product range to different
customer segments or markets that have a need for office products.
EXAMPLE 4.3
Staples, Inc. — Customer Market Expansion

US-listed Staples is the world’s largest office products organisation. Opening its first store in 1986, Staples
pioneered the office products superstore concept with the first superstore focused on serving the needs
of small businesses in Brighton, Massachusetts.
After growing rapidly in the United States, Staples expanded into Canada in 1991 and Europe in 1992.
Once Staples reached market penetration through opening new stores, Staples’ management looked
for future growth opportunities by studying business customers and their purchasing behaviour. Staples’
research team discovered that going to a retail store to make purchases was appealing only to small
businesses, students and consumers. As businesses grew in size, they no longer wanted to have to go to
the store to purchase their office products.
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Based on this information, Staples began to segment the office products market into different customer
groups and looked at how it could serve customer segments that did not want to shop in a store. In 1993,
Staples launched a Contract and Commercial division to serve multi-site organisations and Fortune 1000
businesses, diversifying the organisation’s customer base away from solely retail customers.
In the United States today, Staples has segmented its customer markets based on business size. The
organisation effectively reaches each of these customer segments through a variety of distribution chan-
nels that have been specifically designed to be convenient for each segment’s purchasing requirements
as shown in table 4.5.
TABLE 4.5 Customer segmentation and channels — Staples
Customer segment Staples’ solution
Retail customers and Staples’ retail superstores

very small businesses Small businesses and retail customers visit the organisation’s stores for their
purchasing needs.
Pricing is based on the store pricing on the day of purchase.
Small businesses Staples’ business delivery

Staples’ business delivery operations combine the activities of Staples’ direct
mail catalogue business (operating since 1990), the Staples.com website and its
many internet sites globally (26 countries).
Staples’ business delivery is primarily designed to reach small businesses and
home offices; it offers next business day delivery for most office supply orders in
a majority of markets.
Staples’ business delivery is marketed through catalogue mailings, direct mail
advertising, a telesales group generating new accounts and growing existing
accounts, and internet and other broad-based media advertising.
Pricing is based on the catalogue or website price on the day of order.
Small and medium Quill

businesses Founded in 1956 and acquired by Staples in 1998, Quill is a direct mail catalogue
Medical professionals and internet business with a targeted approach to servicing the business product
needs of small and medium businesses in the United States.
To attract and retain its customers, Quill offers outstanding customer service,
Quill brand products and special services.
Quill also operates Medical Arts Press, a speciality internet and catalogue
business offering products for medical professionals.
Pricing is based on the catalogue or website price on the day of order.
Medium to large Staples’ contract

businesses Staples’ contract operations focus on serving the needs of mid-sized businesses
and organisations (20 or more office workers) through Staples Business
Advantage and the needs of Fortune 1000 organisations through Staples
National Advantage. Contract customers often require more service than is
provided by a traditional retail or mail-order business.
Through its contract sales force, Staples offers customised pricing and payment
terms, usage reporting, the stocking of certain proprietary items, a wide
assortment of eco-friendly products and services, and full-service account
management.
Source: Adapted from Staples, 2011, ‘About us’, http://staples.newshq.businesswire.com/about#axzz2IrHoNgMg.
DIVERSIFICATION
Organisations can pursue two approaches to diversification. The first approach, related diversification, is
when new products that are linked to existing products are created. The new products are then marketed
and sold to new customer markets. For example, an organisation may choose to redevelop an existing
product so that it suits the conditions and tastes of a different country and culture. Companies that have
strong brand names will often attempt to launch into new customer and product markets by attaching their
brand name and hoping it will be strong enough to attract new customers.
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Example 4.4 describes ridesharing platform Uber’s move to capitalise on its name and existing core
technologies to move into a new market.
EXAMPLE 4.4
Uber — Diversification
In 2019, rideshare giant Uber moved to enter the business of connecting gig economy workers with
organisations seeking short-term workers.
The offering is based on an app called Uber Works, launched initially into the Chicago market, but with
the possibility of a wider rollout following successful testing. Uber Works seeks to connect trade and other
non-professional workers on the supply side with businesses experiencing labour gaps, principally in shift
work, on the demand side.
Uber’s platform is specifically targeted at connecting workers and work, with the company relying on
alliances with more traditional staffing agencies for employment screening, verification, payroll and taxes.
For workers, the app offers the ability to connect with many businesses without needing to make
individual applications or approaches. They can also see the work conditions, pay and other details before
expressing an interest. For businesses, Uber Works offers access to a large pool of workers.
Source: Adapted from M Moon, 2019, ‘Uber’s new app will match temporary workers with job vacancies’, www.
engadget.com/2019/10/03/ubers-works-temp-workers.
The second approach is unrelated diversification. When an organisation has exhausted all other growth
opportunities from the market penetration, product development and market development quadrants of the
Ansoff matrix, it may consider diversifying into unrelated products and markets. This could mean that the
organisation is moving into a completely different industry.
Unrelated diversification is not recommended, unless it is based on some related capability that can
somehow be applied. For instance, an organisation might argue that it has a capability in managing
manufacturing operations that it could apply to produce different products. Therefore, so long as the activity
was manufacturing-based, the products manufactured would not necessarily affect the outcome. Usually
though, there is so little capability overlap between unrelated product/market businesses that the risk of
failure is high.
Despite the inherent risks involved, there are some situations in which unrelated diversification may be
appropriate, for example:
• counter-seasonal diversification, where organisations dependent on a seasonal market could diversify
into products that require resources to be used in the ‘off-season’
• counter-cyclical diversification, an approach that can be used by firms in industries that are cyclical,
such as building industries
• where there are limited industry prospects in the organisation’s existing and related product markets.
Despite these underlying risks, some organisations do use unrelated product and market diversification
successfully to provide new growth opportunities for their organisation. However, they also must have an
increased focus on risk evaluation and implementation because the nature of these options differs greatly
from the rest of their operation business model.
A commonly cited example of growth through unrelated diversification is the Australian-listed organisa-
tion Wesfarmers, which has operations in retail, home improvement supplies, office supplies, coal mining,
energy, insurance, chemicals and fertilisers, and industry safety projects. Wesfarmers aims to provide a
satisfactory return to its shareholders by conducting existing operations in an efficient manner and by
seeking out opportunities for expansion — where it can apply its capabilities to introduce efficiencies and,
therefore, improve returns to shareholders.
Example 4.5 explains how US manufacturer of baking soda Arm & Hammer’s product development
maps to the Ansoff product/market matrix.
EXAMPLE 4.5
Arm & Hammer — Product Development

Arm & Hammer is a US-based manufacturer of baking soda. Baking soda (also known as sodium
bicarbonate) and soda ash (also known as sodium carbonate) are naturally occurring substances found
in all living things that regulate pH balance (i.e. the balance between alkalinity and acidity).
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Arm & Hammer was founded in 1846, and until the 1930s, its main product, baking soda, was sold
principally as a raising agent for baking. When heated and combined with acidic ingredients, baking soda
gives off carbon dioxide, which causes a cake or dough to rise.
In addition, when baking soda comes in contact with either an acidic or an alkaline substance, it
neutralises the pH and also resists further changes in the pH balance in a process called buffering.
Since the 1930s, Arm & Hammer has used the neutralising property of baking soda to develop many
new products. It has also achieved through acquisition.
Table 4.6 summarises the organisation’s key product development activities since 1930.
TABLE 4.6 Arm & Hammer’s Product Development history
Timeline Development
1930s Includes baking soda in personal care products for the bath, body and teeth
1950s Introduces baking soda products for baby care, camping and other personal care uses
1970s Introduces powdered laundry detergent
1972 Introduces a baking soda product for the fridge and freezer to keep food fresh
1980 Introduces liquid laundry detergents
1981 Introduces a carpet deodoriser
1988 Introduces toothpaste
1992 Introduces cat litter deodoriser
1999 Introduces a spill-proof box for its fridge and freezer deodoriser products
2000 Introduces baking soda products in a plastic shaker dispenser (previously, the only
packaging was boxes)
2001 Acquires laundry brands as part of the acquisition of USA Detergents, Inc.
Acquires the consumer products business of Carter-Wallace, Inc., purchasing antiperspirant
and pet care brands outright and buying the remainder of the business, including condoms,
depilatories and home pregnancy and ovulation test kits, in a 50–50 joint venture with a
private equity organisation
2003 Introduces product in resealable plastic pouches
2003 Acquires former Unilever Oral Care business in the United States and Canada
2005 Acquires the Spinbrush battery-operated toothbrush business from Procter & Gamble
2006 Acquires Orange Glo International, a premium-priced leader in the laundry pre-wash
additive category, bathroom cleaners and household cleaning products
2009 Begins selling swimming pool pH maintenance tablets through pool-care outlets
2009 Increases focus on sustainable production practices
Products are typically sold through the supermarket distribution channel, with the Arm & Hammer brand
having more grocery aisle space than any other brand in the United States.
As of 2020, 40% of Arm & Hammer’s parent company (Church and Dwight) consumer product sales
were from new innovation products.
Using the Ansoff product/market matrix classifications, from Arm & Hammer’s perspective:
• using baking soda in personal care products for the bath, body and teeth
• selling baking soda products in a plastic shaker dispenser
• acquiring the Spinbrush battery-operated toothbrush business from Procter & Gamble
• selling swimming pool pH maintenance tablets through pool-care outlets would be classified as follows.
1. Using baking soda in personal care products for the bath, body and teeth.
– Product development involves introducing new products or services to existing customer markets
and includes adding features to existing products, bundling purchases, repackaging and so on.
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This classification is justified on the basis of developing new products from the basic raw materials of
the existing organisation. Additionally, the assumption is that these products will be sold through the same
distribution channels (typically the supermarket channel) and that the brand will attract existing customers
to try a new product from the company.
2. Selling baking soda products in a plastic shaker dispenser.
This classification is based on the creation of new packaging — a plastic shaker container, rather than
the existing cardboard box container. As such, it is not just repackaging the existing product within the
existing cardboard containers but creating a new product. Therefore, this would be classified as product
development and not market penetration
3. Acquiring the Spinbrush battery-operated toothbrush business from Procter & Gamble.
– Diversification involves moving into new products and new markets at the same time. This can be
either related or unrelated to current activities.
The product development classification is on the basis that the company does not produce tooth-
brushes currently, but that toothbrushes are a complementary product to its current product range, which
includes toothpaste. (It purchased the Unilever Oral Care business in the United States and Canada three
years before purchasing Spinbrush.)
It may be argued that the move into the toothbrush business is diversification because the whole
business was acquired. Moreover, this includes not only a new product but also a new market that may
not previously have been reached by the company (e.g. a new geographic location or a broader type of
consumer than those who purchased the toothpaste).
It is important to note that there are often multiple ways an item can be classified. There is often no single
correct answer — and as long as the analysis is logical and well structured, then either interpretation will
be valid.
4. Selling swimming pool pH maintenance tablets through pool-care outlets.
– Diversification involves moving into new products and new markets at the same time. This can be
either related or unrelated to current activities.
This classification would be made on the basis that the product is new to the company, as are the
distribution channel (pool-care outlets as opposed to the typical supermarket channel) and the end user
(swimming pool owners as a distinct market segment that is targeted through pool-care outlets).
It is important to note that options can sometimes be classified in more than one way. This is acceptable
if based on appropriate evidence that the potential implementation risks are properly understood.
For example, the move by Arm & Hammer into swimming pool pH maintenance tablets through pool-
care outlets is riskier than the other options discussed. This company appears to have strong product
development capabilities and has implemented options in a sequential manner over time. There is less
evidence that the company has market development capabilities, which are required for the swimming
pool option. So, if this company is at a point where it has to choose between which option to implement and
in which order, this last option appears to present the most risk. However, looking at the implementation
timeline, this development is probably a result of the company having exhausted the market penetration
options available to it at the time. There has been a recent focus on sustainable practices as a way to
enhance the appeal of its products and brand generally.
Source: Adapted from Church & Dwight, 2020, ‘Innovation’, https://churchdwight.com/innovation; Arm & Hammer,
2020, ‘About us’, www.armandhammer.com/about-us; Arm & Hammer, 2013, ‘About us’, www.armandhammer.com/
aboutus.aspx.
as follows.
KEY POINTS
4.1 Select the key concepts, factors and frameworks to develop products, services
and markets.
• The Ansoff product/market matrix is a useful framework to structure thinking about strategic
options.
• The Ansoff product/market matrix classifies strategic options into market penetration, product
(including services) development, market development and diversification.
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• Market penetration (growth in existing products and markets) may be achieved through increasing
frequency of product use, increasing quantity of use, finding new product applications, attracting
new customers, cross-selling, upselling and undertaking promotional activities.
• Product development (new products for existing markets) may be achieved by improving products,
expanding the product line, developing a next-generation version of a product or developing
completely new products.
• Market development (existing products for new markets) may be achieved by targeting new
customer segments in the same geographic market or expanding into new geographic markets.
• Diversification may be achieved by targeting new markets by creating new products linked to
existing products or by moving into unrelated products and hence new markets.
• The various strategies for growth require different capabilities for successful implementation.
• A rational approach to the pursuit of growth will maximise existing products and markets, then
either add new products to existing markets or take existing products to new markets.
4.3 NEW PRODUCT DEVELOPMENT (NPD)

New product development (NPD) and delivery is critical to creating new wealth and to growing and
ensuring the survival of business. It is a major concern for many organisations, regardless of size.
Organisations with high market shares need new products to grow their business. In fast-moving industries,
such as electronics, an estimated 50% of sales come from products or services introduced during the past
five years.
Some organisations aim to achieve a fixed percentage of revenue from new products. The 3M
organisation has operated for over 100 years on the basis of innovation and product development; it
continually makes its own products obsolete by developing new products to replace them. According to
Govindarajan and Srinivas (2013), 3M has created ‘the structure, systems, and culture to enable their
people to think and do things differently in order to achieve extraordinary success’. 3M’s approach to new
product development and product obsolescence is described in example 4.6.
EXAMPLE 4.6
3M — Culture of Innovation
3M is a multinational conglomerate operating in the industry, worker safety, health care, and consumer
goods markets. The company is renowned for innovations such as the Post-It Note and Scotchgard.
3M consistently achieves higher than industry average gross margins and return on assets and ranks
consistently high in Fortune magazine’s annual survey of America’s most admired corporations.
A key to 3M’s success is its ‘30% rule’: company management has established that 30% of each
division’s revenues must come from products introduced in the last four years. Approximately 6% of
sales revenue is allocated to research and development projects. Each area of the company focuses
on specific markets and projects to address short-term, medium term (3 to 10 years) and long term
(20 years) opportunities.
To drive 3M’s innovation system and innovation culture, the company’s leadership and management
teams have established numerous initiatives, a selection of which are described in the next section.
• Seed capital. Inventors can request seed capital from their business unit managers. If their request is
denied, they can seek funding from outside their business unit.
• New venture formation. Product inventors are required to recruit their own teams. Recruits have the
opportunity to evaluate the inventor’s track record before signing up. However, if the product fails,
everyone is guaranteed their old jobs back.
• Dual-career ladder. Scientists can continue to move up the ladder without becoming managers.
They have the same prestige, compensation and perks as corporate management. As a result, 3M
doesn’t lose good scientists and engineers only to gain poor managers, a common problem in the
manufacturing sector.
• Rewards for innovators. 3M provides a system of rewards for developing innovations. Examples include
cash rewards; membership of the Carlton Society (named after former company president Richard P.
Carlton), which honours top 3M scientists who develop innovative new products and contribute to the
company’s culture of innovation; and a culture of storytelling about successful innovators, such as
Arthur Fry who identified an application for the accidental development of what we now know as the
Post-It note.
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• The 15% rule. 3M engineers are encouraged to spend up to 15% of their work time experimenting
and pursuing whatever project they wish, including visiting and observing customers in their own
environments to better understand how they work, their pain points and where solution development
should be focused.
Source: Adapted from V Govindarajan and S Srinivas, 2013, ‘The innovation mindset in action: 3M Corporation’, Harvard
Business Review, https://hbr.org/2013/08/the-innovation-mindset-in-acti-3.
Organisations that are successful in product development can significantly outperform other organisa-
tions in terms of revenue contribution to growth and development productivity. New products may also be
able to attract higher prices and profit margins, depending on their benefits over existing products. Most
organisations have many more opportunities for investment than their resources allow. Module 5 describes
how to evaluate, rank and prioritise available opportunities.
THE NEW PRODUCT DEVELOPMENT PROCESS

New product development encompasses a wide range of activities, which vary with the type of product
being developed and/or the extent of change from an existing product. The key steps of the new product
development process are summarised in table 4.7. Example 4.7 describes Zara’s NPD process.
TABLE 4.7 The key steps of a generic new product development process
Step Description
Generating and Generating product ideas is the first step for most product development processes.
capturing ideas What possible responses are there to the organisation’s SWOT?
What are the consumers’ unmet needs?
Screening ideas Once a number of ideas have been identified, they must be evaluated against a variety of
criteria, such as the problem they solve for customers, the potential investment costs to
develop the product, the fit with the organisation’s existing strategy, the potential costs,
and the profits and return on investment on the product.
Prototype This involves the development of a working prototype of the product, transforming it from
development a concept into a tangible product that can be test-marketed.
Test marketing Marketplace testing helps to identify any changes that need to be made to features and
price and to verify market demand.
Launch Launching the product in the market is the next step. This involves making the product
available through the various channels to market, ensuring that the product’s availability
is appropriately communicated to all stakeholders and marketing activities to make
customers and consumers aware of the new product and to generate demand.
Commercialisation Commercialisation means taking the successfully built, test-marketed and launched
product and supporting its ongoing success in the overall marketplace.
After-sales service This is support for the product in the marketplace. Service can include activities such
as processing returns and repairs, responding to consumer enquiries, providing training
in product use. After-sales service can be expensive if there are issues with the product
that haven’t been identified or resolved in earlier stages.
Disposal/recycling The replacement, disposal and/or recycling of products is often included in a ‘cradle-to-
grave’ approach in the design and development of new products.
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EXAMPLE 4.7
Zara — NPD Process

The left-hand column of table 4.8 lists the steps in the new product development process. Read through
these steps and then reread example 4.1 and read appendix A thinking about these steps. The right-hand
column of table 4.8 uses the information contained in example 4.1 and appendix A to describe how Zara
approaches the NPD process.
TABLE 4.8 How Zara approaches the NPD process
Step What Zara does
Generating and • Uses customer feedback, requests and complaints data for ideas — analysing
capturing ideas large amounts of data from across its global operations
• Uses its salesforce — empowers them to intently listen and note down customer
comments, ideas for cuts, fabrics or a new line, and observe new styles that its
customers are wearing that have the potential to be converted into Zara styles
• Keeps pace with latest fashion trends and how fashion is changing and evolving
every day across the world — design teams regularly visit university campuses,
nightclubs and other venues to observe what young fashion leaders are wearing
• The design team uses flat-screen monitors linked by webcams to offices in
Shanghai, Tokyo and New York (the leading cities for fashion trends), which act
as trend spotters
• The ‘Trends’ team never goes to fashion shows but tracks bloggers and listens
closely to the brand’s customers
Screening ideas • Uses data and customer demand to prioritise what gets done (e.g. the pink scarf
example)
• Uses Radio Frequency Identification Technology (RFID) in its stores to get data
about what and where stock is moving
Product • Has an in-house creative team of over 200

development • Has frequent interactions between Zara’s local store managers and its
creative team
• Specialist teams receive constant feedback on the decisions its customers are
making at every Zara store, which continuously inspires the Zara creative team
Test marketing • Uses a ‘make and buy’ approach — it produces the more fashionable and riskier
items (which need testing and piloting) in Spain, and outsources production of
more standard designs with more predictable demand to Morocco, Turkey and
Asia to reduce production cost. The more fashionable and riskier items (which
are around half of its merchandise) are manufactured at a dozen company-owned
factories in Spain (Galicia), northern Portugal and Turkey. Clothes with longer shelf
life (i.e. those with more predictable demand patterns), such as basic T-shirts, are
outsourced to low-cost suppliers, mainly in Asia
• Manufactures lower quantities of product with frequent new product introductions,
and so limits risk from failure of any single product
Launch • Produces over 450 million items and launches around 12 000 new designs
annually — therefore launch is a continuous activity
• Delivers new products to stores twice a week
• If a design does not sell well within a week, it is withdrawn from shops, further
orders are cancelled and a new design is pursued
Commercialisation • Produces roughly 12 000 styles a year. Even if a style sells out very quickly, there
are new styles waiting to take up the space. This means more choices and higher
chance of getting it right with the consumer
• Has a vertically integrated supply chain that enables the export of garments
24 hours, 365 days of the year
• Only allows its designs to remain on the shop floor for three to four weeks
• Only has two time-bound sales a year, rather than constant markdowns
• Discounts only a small proportion of its products (about half that of competitors)
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After-sales service • No information provided
Disposal/recycling • Inditex (Zara’s parent company) has pledged to only sell sustainable clothes by
2025 and that all cotton, linen and polyester sold will be organic, sustainable
or recycled
• Customers can drop off their used clothing, footwear and accessories at collection
points in 1382 stores in 24 markets today
You will see from example 4.7 that Zara deviates from the generic new product development strategy in
its approach to test marketing and launch. Launch for Zara is continuous — it is ‘business as usual’, and
a key competitive advantage for the organisation is its speed to market with new products.
QUESTION 4.4
Many of the Walt Disney Company’s movie and television studios are familiar household names:
Marvel Studios, Pixar, Lucasfilm, National Geographic and of course Walt Disney Pictures and Walt
Disney Animation Studios. This portfolio provides Disney with a library of existing content and a
steady flow of new television shows and movies.
Disney had accessed the on-demand streaming market by licensing its content to Netflix.
However, as the expiry of that deal approached, Disney made preparations to launch its own
flagship streaming service called Disney+. Two months ahead of its scheduled 12 November
2019 launch in the USA, Canada and the Netherlands, Disney made the service available in the
Netherlands in the form of a two-month free trial to study consumer response and identify and
solve any technical problems before the formal launch. The only real limitation of the trial was that
it did not include access to new content specifically produced for the channel.
Disney is familiar and vastly experienced with the concept of pre-launch testing. For example,
in the movie industry it is routine procedure to hire a cinema and do test screenings with invited
participants to gauge reactions to new movies before they are finalised for general release. Testing
the Disney+ streaming service was a more complex challenge.
The Netherlands market provided Disney with the opportunity to test the service among a
population with access to high-speed internet and high familiarity with the Disney brands, yet
a much smaller population of users than in its home North American market — there was little
chance the Disney+ servers would be overwhelmed no matter how popular the trial. In essence,
the Netherlands offered the chance to conduct a large-scale beta trial instead of using a small set
of test users.
As part of its preparations to launch its own streaming service, Disney+ had acquired control of
streaming technology company BAMTech a couple of years earlier. BAMTech’s office in Amsterdam
would be headquarters for monitoring the trial.
Disney appears to have offered the free trial to anyone interested rather than targeting specific
users or user groups. New of the trial spread quickly in the Netherlands both through conventional
and social media. As is common practice with free trials, trial participants would automatically be
switched to a paid subscription unless they opted out before the formal launch.
Early attitudes towards the service and its program content were generally positive. While some
small technical issues were encountered, interviews suggested enthusiasm for Disney+.
• One participant in the trial said they spend four to five hours a day using the service.
• Another was attracted to older Disney titles, out of a feeling of nostalgia, that he couldn’t find on
Blu-ray.
• Another binge-watched the nine Star Wars movies in less than three days.
The test period also identified some technical and interface issues experienced by participants.
A commonly reported issue was that the service did not allow users to resume a movie or television
program from where they left off. If they paused or stopped part-way through a show, when they
returned they had to fast-forward to find where they were up to. Some test users gave feedback
that the volume seemed too low, no matter how they set the volume on their television. Disney said
it would address both these issues. Another test user suggested the recommendations algorithm
(to suggest what to watch based on past viewing) was not as a good as Netflix’s.
One user suggested to Disney that it make its controls more similar to Netflix so that Netflix users
did not have to learn a new way to interact with their hardware in order to use the Disney+ service.
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Disney’s decision to test the service in a smaller market reflects the importance to the company of
getting the US launch right — the Disney CEO had described Disney+ as his top priority. Even where
initial interest is high, problems in the early days of an online service can quickly destroy trust and
positive sentiment.
Disney+’s launch price in the USA was about half the price of Netflix’s most popular package. In
Europe, the price was roughly equivalent to Netflix. Disney made various special deals available for
people willing to sign up for longer-term subscriptions.
Analysts in the entertainment industry and the broad investment industry expect Disney+ to pose
a realistic and direct threat to current streaming leader Netflix, which was established in 1997 and
has more than 160 global subscribers spread across the world except China, North Korea, Syria
and Crimea. With the end of its licensing deal for Disney, Netflix lost access to Disney’s content
including high-demand content such as the Marvel films.
Disney announced that one day after the formal launch in the USA, Canada and Netherlands, it
had exceeded 10 million subscribers. A week later it launched in Australia, New Zealand and Puerto
Rico. By early 2020 subscription numbers had grown to close to 30 million. This was expected to
increase substantially as the service became available in 15 more European countries and in India
in the first half of 2020.
The launch appears to have been a success, though it is still early days for the new service.
Some technical issues have arisen, with some users needing to reset their passwords to gain
access and some users complaining that the episodes of some television series are not presented
in chronological sequence.
Disney also controls the Hulu streaming service. It is differentiating them in various ways,
including ensuring Disney+ is focused on family-friendly programming, while Hulu has broader
programming.
Describe and evaluate the key actions Disney took for its new streaming service against each of
the generic new product development process steps shown in table 4.7.
Source: Information from E Schwartzel, 2019 , ‘Dutch get sneak preview of Disney’s new streaming service’, The
Wall Street Journal, www.wsj.com/articles/dutch-get-sneak-preview-of-disneys-new-streaming-service-11570440602;
J Goldsmith, 2020, ‘Disney+ Heads For Big International Rollout In March, Announces India Debut’, 5 February, Deadline
Hollywood; C Vourlias, 2020, ‘Disney Plus Set for Earlier Launch in U.K. & Western Europe’, 21 January, Variety;
S Roxborough 2019, ‘Why Disney+ quietly launched in the Netherlands first’, 26 September, The Hollywood Reporter,
www.hollywoodreporter.com/news/why-disney-quietly-launched-netherlands-first-1243068.
Disposal/recycling is a relatively recent addition to the steps in the generic new product development
process, as stakeholders have become increasingly concerned with reducing waste. Consequently, factoring
in how what is produced will be dealt with at the end of its useful life has become an important consideration
in design and development of products and is often be part of the value proposition to the customer.
For example, polyester accounts for approximately 65% of all textiles produced globally and does not
degrade in landfill. A growing market for sustainable sources of synthetics has emerged from concerns
about the climate and plastic pollution.
Example 4.8 explains how water filtering company BRITA has sought to reduce its environmental impact
by making it easy for customers to send used filters back to the company for recycling.
EXAMPLE 4.8
BRITA — Reducing Plastic Waste

BRITA provides water filtration systems and accessories for consumers and commercial customers,
ranging from individual drink bottles to water jugs and office filter taps and dispensers. It is promoted
as a more environmentally friendly alternative to purchasing bottled water in single-use plastic bottles.
However, the filter cartridges are only effective for a few weeks
Acknowledging the plastic waste and pollution created by discarded cartridges, BRITA partnered with
TerraCycle to implement a recycling program for its MAXTRA+ filters and the packaging they come in.
Customers join the recycling program, wait until they have at least three used filters, download a pre-paid
postage label and stick it to a suitable box, and take the box to Australia Post to send to TerraCycle.
TerraCycle then processes the used cartridges, recycling the plastic into new products such as shipping
pallets and outdoor furniture (figure 4.3). TerraCycle operates a points program that offers the chance for
heavy users, or those who coordinate collections from individual users, to have TerraCycle contribute to
their charity of choice.
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FIGURE 4.3 The BRITA-TerraCycle recycling partnership
Partnership
BRITA Terracycle
Pr cyc
Ca
oc
be
Us pin id
Re
Ne
rtr lter
op epa
la
es ing
idg
rs
g
w
sin
Sh Pr
te
fi
es
l
fil
g+
ed
Customer Recycled plastic
products
Sources: Brita, 2020, ‘Kind to the planet’, www.brita.com.au/recycling; TerraCycle, 2020, ‘BRITA MAXTRA+ filter
recycling program’, www.terracycle.com/en-AU/brigades/brita-recycling.
As mentioned earlier, the steps in the generic new product development process shown in table 4.7 vary
according to the specific requirements of different industries and different product types. For example, the
steps in the development of a pharmaceutical product are far greater and take far longer, mainly due to the
extensive regulatory requirements (that may vary for different geographic markets) than the development
of, for example consumer goods.
According to PPD (n.d.), bringing one new drug to the public typically costs a pharmaceutical or
biotechnology company on average more than US$1 billion and takes an average of 10 to 15 years. While
the process is long and expensive, with multiple regulatory hurdles, and only a few new drugs ever make
it to market, the process steps and what is needed to move from one stage to the next is very well defined
and is shown in figure 4.4.
FIGURE 4.4 The new drug development process
Year 1 Year 15
Discovery Pre-clinical Clinical trials

• Explore potential investigation • Proceed to trail of 5 compounds
of up to 15 000 • Narrow potentials • Phase 0: 10–15 participants. Determine if drug
chemical to 25 behaves as per pre-clinical studies
compounds • Phase 1: 10–100 participants. Explore safety
and tolerance
• Phase 2: 100–300 participants. Tests efficacy
and safety
• Phase 3: 300–3000 participants. Determine
safety, efficacy or effectiveness
Therapeutic use —
monitoring Regulatory evaluation
• Identify adverse outcomes • Therapeutic goods
• Investigate adverse administration
Commercialisation Regulatory
outcomes examines chemical
approval
• Communication with data, non-clinical data
health sector and public from labs, data from
• Regulatory response clinical trials
as required
Source: Information from Therapeutic Goods Administration 2018, ‘Australian clinical trial handbook’, 12 October,
www.tga.gov.au/book-page/clinical-trial-phases-and-stages; PPD, n.d., www.ppdi.com/about/about-drug-discovery-
and-development.
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Drug companies undertake their own research and development to discover new molecules that have
the potential to be the new drugs of tomorrow. They also work extensively with research organisations and
universities around the world. IP protection and management, discussed later in the module, is of critical
importance for drug companies, as it is for all organisations that have a large investment in research and
development for competitive advantage.
New product development requires the support of in-house systems and processes. Although some of
the steps can be outsourced (e.g. prototype development and market testing), an organisation should not
outsource product development if it is critical for success in the industry.
New and complementary products can also be acquired by organisations through mechanisms other than
their own product development capability. This includes licensing agreements and acquisitions, which are
discussed in more detail in the market development section of this module.
While the key steps of the generic new product development process are presented linearly in table 4.7,
new product (and service) development is typically an iterative process. Information learned from the
process, such as feedback from customer interviews, prototyping and testing, provides important input to
design briefs and specifications for implementation.
The iterative nature of the development process is reflected in the UK Design Council’s ‘double-diamond
model’. The design brief and the implementation phases are clearly separated in the model as shown in
figure 4.5.
FIGURE 4.5 The Design Council’s double-diamond model
Source: Design Council Double Diamond, created in 2004, www.designcouncil.org.uk/news-opinion/double-diamond-15-years.
The double-diamond approach advocates clear separation between problem definition and solution
development and the mantra ‘define before design’. In other words, solution development, the ‘how-to’,
should not commence until there is a clearly defined problem or opportunity scoped, that can be tested,
iterated and refined.
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The separation of problem definition and solution development also supports systematic and objective
evaluation of all the problems/opportunities identified by an organisation in response to its SWOT analysis
and/or customer requirements, before any significant financial investment is made. Approaches to the
evaluation, selection and prioritisation of what will be implemented is covered in module 5.
THE ROLE OF MARKET RESEARCH

Market and customer research are integral components of the new product development process. Market
research should be considered an investment in reducing the uncertainty and risks associated with new
product and service development. This includes the research approaches used for remote environment
analysis considered in module 2.
Different market research techniques are used at different times. Each has advantages and disadvantages,
and some are more difficult or more expensive than others. However, it is important to understand that
customers cannot describe what does not exist. They can articulate only their needs and the context
within which these needs exist. Traditional market research and focus group methods work for product
development that extends the functionality of existing products and services, but they do not work well for
what are termed disruptive technologies — those few product developments that can change the basis of
competition in an industry.
As the late Henry Ford is once reported to have said, ‘If I had asked people what they wanted, they
would have said faster horses’ (Vlaskovits 2011).
In effect, a customer cannot specify the requirements for a solution that does not yet exist, so
organisations have to find other ways to get these requirements.
Market research for discovery and definition — the best technique for this component of the double-
diamond model is primary customer research (interviews). Design thinking (discussed later in this module)
applies structured approaches to define what is to be learned from interviews, plan who should be
interviewed, design structured interview questions, and analyse and interpret interview data. A well-
designed interview process will help uncover unmet and other needs. Using focus groups and surveys
at this stage is wrong and generally only confirms existing assumptions that are likely to be invalid and
may result in the organisation working on the wrong problem or opportunity.
Market research approaches for development and delivery — techniques for this component of the
double-diamond model include approaches such as focus groups (what do you think about the subject of
the interview, in a group context, usually of what is considered to be the target market), choice models
(which one do you prefer from the choices I am presenting you with?) and surveys (how do you rank,
evaluate the options I am putting in front of you?). These approaches are most useful where there is a
prototype product/service solution that has been developed (preferably based on the primary customer
research undertaken in the discovery and definition stage).
QUESTION 4.5
Suggest the appropriate type(s) of market research chocolatier Cadbury could have used when
they introduced five new flavours of chocolate (Creamy Hazelnut Crunch, Crispy Mint Crème,
Popcorn, Coconut Rough Fruit & Nut and Hedgehog) alongside their core Dairy Milk range. Explain
your reasoning.
FOCUSING ON STRATEGICALLY IMPORTANT PROJECTS

A project is a temporary organisation structure that is created for the purpose of delivering one or more
business outputs according to a specific business case. Most organisations use projects as a way to organise
and allocate resources to ensure specific work gets done. Project management is discussed in module 6.
At this point in the development of options in response to identified problems and opportunities many
assumptions still need to be tested. Implementation strategies have not yet been developed, which is
appropriate, as these options may or may not proceed to become fully scoped projects.
A key issue arising from the development of multiple project options is how to identify which
strategically vital projects should be progressed further in terms of investment in testing and validation,
from the many important potential projects that have been identified and developed in response to the
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organisation’s SWOT analysis and market research. It is important to ensure projects that may not appear
to be very exciting, but are important to the organisation, are not overlooked.
The Kano model (figure 4.6) provides a framework to consider a range of project options. It is a simple
two-axis grid, comparing investment in projects with customer satisfaction.
FIGURE 4.6 Kano diagram
Customer
satisfaction
+
Reversal
Delighters
– + Product/service
performance
Performance
attributes
Threshold
attributes — Must be’s
–
Source: Adapted from N Kano, N Seraku, F Takahashi & S Tsuji, 1984, Attractive Quality and Must-Be Quality, Journal of the
Japanese Society for Quality Control, Vol. 14, No. 2, pp. 147–156, Shmula.com (n.d.), Lean Six Sigma Simplified, www.shmula
.com/ kano-model-customer-experience-continuous-improvement/13462; www.shmula.com/kano-model-customer-experience-
continuous improvement/13462; MindTools, 2020, ‘Kano model analysis’, www.mindtools.com/pages/article/newCT_ 97.htm;
American Society for Quality, 2020, ‘What is the Kano model?’, https://asq.org/quality-resources/kano-model.
Kano challenged the conventional belief that projects improving every aspect of an organisation’s
products and/or services lead to increased customer satisfaction. Instead, he asserted that focusing on
improving certain aspects serves only to maintain basic customer expectations, whereas improving other
aspects can delight customers with less effort. Table 4.9 presents a summary of Kano’s assertions
It is important to understand that customer satisfaction decays over time. When what is new becomes
normal and expected by customers, further innovation is needed to attract and grow business. For example,
air bags in cars were once only available in the most expensive cars, but today are expected as a standard
inclusion in every new car.
Threshold and performance attributes generally map to the basis of competition in an industry (as
discussed in module 2), and organisations should have project options that address these attributes in order
to be competitive in their industry. Customer complaints are a common source of data that results in projects
that address threshold and performance attributes. They rarely result in innovation.
Most organisations focus on Kano’s performance attributes on the basis that the higher the performance
attributes, the higher the customer’s willingness to pay. However, failure to appropriately address threshold
attributes can lead to huge customer dissatisfaction, as they are often not understood by the organisation
to be as important as they are.
To outperform the competition, ways of delighting customers need to be found.
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TABLE 4.9 Summary of Kano’s performance attributes
Kano’s
attributes Summary Key questions
1 Threshold If this attribute isn’t fulfilled, then How do we make sure we don’t omit
attributes — customers will be dissatisfied. However, unstated needs in our product/service
must-be’s fulfilment doesn’t increase satisfaction. scoping and development?
For example, an airbag in a car, ability to How do we make it at least as easy for
get customer service assistance in store customers to buy from us as our competitors
or online. (so we don’t lose customers)?
2 Performance Customers will be satisfied if this attribute How much extra will a customer pay for this
attributes is there and dissatisfied if it isn’t. For attribute?
example, kms/litre petrol performance Will the increase in the price for including this
from a car. attribute deter customers from purchasing it?
3 Delighters Customers will be delighted when this How do we recognise and specify unmet
attribute is provided, but if it’s not there needs where we can develop solutions
it doesn’t cause dissatisfaction. For that will be delight our customers and
example, an unexpected free upgrade differentiate us from competitors?
on a long-haul flight.
4 Reversal Adding something, or increasing How do we know we aren’t guilty of making

complexity, can create increasing our products too complex for our customers
dissatisfaction. For example, too much to use?
choice in a restaurant. Are we confusing our customers?
5 Indifferent The level of customer satisfaction will not How do we identify things the customer
be affected by this factor. For example, doesn’t care about so we can avoid
the size of a logo on a takeaway coffee the costs associated with providing
cup. these things?
QUESTION 4.6
Refer back to question 4.4 on Disney’s new streaming service. Based on Kano’s performance
attributes summarised in table 4.9, how would you classify the various pieces of feedback that
test users gave in that article? What observations can you make from analysis of this feedback?
Blue Ocean strategy (discussed later in this module) provides approaches to developing projects that
challenge the established basis of competition in an industry and address the delighter, indifferent and
reversal attributes of the Kano model.
Other approaches to better understanding the customer perspective include design thinking (human-
centred design), which is also discussed in this module.
as follows.
KEY POINTS
4.1 Select the key concepts, factors and frameworks to develop products, services and
markets.
• Organisations that consistently develop new products can significantly outperform the productivity
and growth of competitors.
• The key steps in new product development are: generating and capturing ideas, screening
ideas, prototype development, test marketing, launch, commercialisation, after-sales service and
disposal/recycling.
• The Design Council’s double-diamond model advocates a clear separation between problem
definition and solution development to ensure the problem or opportunity is fully understood and
that all problems and opportunities have been evaluated before decisions about investment in
solution development.
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• Market research helps both discover and understand opportunities and develop responses to those
opportunities.
• Kano’s performance attributes identify that different types of product changes produce
different responses in the market. Some changes do not improve customer satisfaction, whereas
others have significant effects. This provides a framework to choose which strategic options to
focus on.
• To encourage growth, some organisations aim to achieve a specified portion of revenue from new
products.
4.4 NEW SERVICE DEVELOPMENT

The previous section of this module discussed new product development with reference to both goods and
services. The development of services involves some special considerations, which will be discussed in
this section.
In addition, there is a growing view that tangible products are merely distribution mechanisms for service
provision and products can be considered as ‘service avatars’ (Stinkdorn et al. 2016). In essence, the sale
of a product exists in the context of a service process that the customer experiences.
The concept of access over ownership has driven the development of several new businesses. Businesses
like Designerex (n.d.) and Designer Clothes on Demand enable access to clothing that would otherwise
be unaffordable, and unjustified in terms of investment (if only to be worn once for a special occasion).
In this case, a tangible product has become available through a rental service to access a range of clothing
options and use of the selected item for a specified period of time, at a fraction of the cost of ownership of
an equivalent item of clothing. The potential pain of having to dry clean the item and find storage space
(where it would likely gather dust) has also gone.
Consider also the global music industry and the massive decline in the sales of physical music formats. The
basis of the industry was to sell physical copies of music, so customers had to buy multiple CDs to get the
selection they wanted. Spotify changed this ownership model by providing a service to enable access to a wide
range of music options via a subscription combined with the ability to compile customised playlists, making
it unnecessary to own any physical product. Along with download services, this has helped make physical
CDs somewhat redundant, with most new cars and computers, for example, no longer including CD drives.
Customers purchase, hire and use products and services to get a specific job done, exchanging their
time, money or attention for something that has value for them. The key to developing a solution for these
customers is understanding their ‘jobs to be done’. For example, does the customer really want to own a
drill, or do they just want the holes that the drill makes so they can build something? Customers may not
care whether the solution is a product or service.
This approach challenges our assumptions and is important to consider in terms of the development of
possible solutions to perform the ‘job to be done’ (Klement 2018). Is a drill necessary at all? And what
does that mean for our organisation, if all we do is make drills? What is the job to be done?
Figure 4.7 shows the difference between what people buy and what they want.
Failure to understand the difference between what we sell and the value customers are seeking, and
to challenge our assumptions and question our value to our customers is likely to see us overtaken by
competitors. Consider the case of Kodak.
In 1975, a Kodak engineer invented the digital camera, but it was shelved by management. Management
argued that Kodak ‘could’ sell a digital camera, but why would they? They made billions of dollars selling
photographic film. A digital camera would cannibalise their film sales. In the end, Kodak’s management
decided that the company would focus on selling photographic film. It sold its patent for digital camera
technology to Nikon.
In 2012, Kodak filed for bankruptcy. What happened? Customers no longer needed film for their cameras
because they had switched to digital cameras. Kodak’s downfall was management’s unwillingness to adapt
to a world with digital cameras — something they had invented 40 years earlier. Nikon, which bought
Kodak’s patent, has become a major player in the digital photography industry.
Dyson, the British technology company and manufacturer of the Dyson bagless vacuum cleaner (and
now also many other engineered products), was established in 1991 because James Dyson (the founder)
could not get an existing vacuum cleaner company to license his technology. The recurring revenue stream
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for vacuum cleaners is the sales of the bags that collect the dust and no company with that technology
wanted to cannibalise their vacuum bag sales.
FIGURE 4.7 The difference between what a customer buys and what they want
What Is Customer Jobs? What Is A Job to Be Done (JTBD)?
This is most important to customers . . . . . . not this.

Carbon
skateboard
Swiss
bearings
Titanium Hollow
hardware trucks
Polyurethane
wheels
Source: A Klement, 2018, When Coffee and Kale Compete, 2nd edition, p. 33, www.whencoffeeandkalecompete.com.
The lesson in this is that if your organisation doesn’t do it, then your competitors or someone else will.
That is why the strategy employed by 3M and their leadership of making existing products obsolete within
a certain timeframe, as explained in example 4.6, has underpinned 3M’s success for so long.
QUESTION 4.7
IKEA is well known for its flat pack furniture innovation that customers assemble for themselves.
IKEA started to facilitate connections between customers and tradespeople who, for a fee, would
assemble IKEA products in the customers home. In 2017, IKEA purchased TaskRabbit — an
online and mobile marketplace that matches tradespeople and labourers with local demand to
get immediate help with everyday tasks, including cleaning, moving, delivery and handyman work.
Based on what you know about Jobs To Be Done (JBTD), what does IKEA’s acquisition of
TaskRabbit suggest in terms of IKEAs understanding of their customers and what they are
looking for?
COMPONENTS OF SERVICE DESIGN

According to Sangiorgi and Prendiville (2019), there are three components to service design, as illustrated
in table 4.10.
TABLE 4.10 The key components of service design
Service design
component What it is What to look for
The service A focus on the experiences people have as they Where are the service touchpoints?
encounter engage in interactions with touchpoints provided What is the evidence of service?
by others, often organisations but possibly by
other individuals
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(continued)

Service design
component What it is What to look for
Value co-creating A focus on the dynamic exchanges of resources Which needs are being met?
system and processes that achieve outcomes for the What is the perceived value?
actors involved, typically organisations but
possibly individuals
Sociocultural How everything is put together, which emerges What social and cultural influences
configuration through the practice, providing interfaces impact the service?
through which everyone involved engages with What artefacts support this?
the service and service resources
Source: Adapted from D Sangiorgi & A Prendiville, 2018, Designing For Service: Key Issues and New Directions, Bloomsbury
Visual Arts.
Example 4.9 describes accommodation platform Airbnb’s service design components.
EXAMPLE 4.9
Airbnb — Service Design

Airbnb is a digital platform that connects people seeking accommodation with people offering accom-
modation. Most Airbnb clients are seeking or offering short-term homestay-style accommodation, often
in holiday or tourist destinations. The platform allows guests to filter the accommodation search based
on price, location, number of rooms and so on. All users are required to agree to extensive conditions in
order to participate in the platform. Providers and customers benefit from a mutual review system.
Accommodation services offered on the Airbnb platform thus compete with a range of traditional
accommodation services, from traditional bed and breakfasts through to resorts.
Table 4.11 analyses Airbnb’s service design using the three components identified in table 4.10.
TABLE 4.11 Airbnb’s service design components
Service design
component What to look for What Airbnb does
The service Where are the service Makes the website easy for the customer to use
encounter touchpoints? Lists accommodation and makes it easy to search
What is the evidence of Makes it easy for people with accommodation to list
service? their vacancies
Makes it easy for people to get to the accommodation
(directions, maps etc.)
Gives additional information about what to do when
there (e.g. restaurants, shopping) Confirms bookings
for guests and hosts
Value co-creating Which needs are being Finding a place to stay

system met? Staying in a different city like a local
What is the perceived Feeling safe while renting and on arrival/during the stay
value? Feeling comfortable
Rating good hosts, houses and guests
Renting spare space
Building trust to rent a home
Helping hosts enable a good experience
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Sociocultural What social and cultural Advice and guidance on what to expect as a host
configuration influences impact the What hosts have to provide as a minimum (e.g. soap,
service? toilet paper)
What artefacts support Expectations re: response times for people booking
this? Host reports on their account page on the website plus
advice on areas to work on to improve host rating
Services can be purchased similarly to products, but they are often characterised by a high degree of
intangibility and variability. The provision of a service involves the application of skill and expertise by the
provider to fulfil the identified need of the consumer. The value of a service is highly variable and, unlike
a product, relies heavily on the provider. A customer who purchases the same service from two different
providers is likely to have a different experience each time.
‘When you have two coffee shops right next to each other, selling the exact same coffee at the exact same
price, service design is what makes you walk in one and not the other, come back and tell your friends
about it’ (Stickdorn et al. 2018).
The integration of the product and service experience with the product is changing how we think
about new product and service development and is an underpinning principle for the growth of many
businesses. The growth of service design as a discipline and service design principles have very much
led the way in terms of ensuring the customer perspective in service design. A number of approaches
have been developed to capture the customer perspective to be successful, and these are discussed in
the following subsection.
QUESTION 4.8
Refer to example 4.1 and appendix A at the end of the study guide. Analyse Zara’s components of
service design.
1. The service encounter. Where are the service touchpoints? What is the evidence of service?
2. Value co-creating system. Which needs are being met? What is the perceived value?
3. Sociocultural configuration. What social and cultural influences impact the service? What
artefacts support this?
EMBEDDING PRODUCTS INTO SERVICES

WITH TECHNOLOGY
Services are often distinguished from tangible products by the way they are created and consumed. Services
are generally created and consumed at the same time, with the service provider actively involved in co-
creating the service with the customer. One consequence is that any growth of service is usually necessarily
accompanied by a corresponding growth in required resources. For example, in an accounting firm, to
service additional clients requires engaging more professional staff. Similarly, providing more services to
existing clients requires more staff.
It is an attractive proposition for such organisations to be able to decouple the production of services from
their consumption, hence enabling revenue to grow without a corresponding direct increase in costs and
thus increasing margins. Sawhney (2016) refers to this as ‘productising’ the service. This is an emerging
area for services organisations, largely driven by advances in technology. The principal technologies used
are as follows.
• Automation — using information technology (IT) to perform aspects of service creation and delivery
that would traditionally be performed by human labour. Tasks that can be clearly described by rules lend
themselves to automation.
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• Artificial intelligence (AI) — using IT to support professional decision making. AI involves using
algorithms to perform work that traditionally requires an element of human judgement. AI can either
replace human labour or work alongside it to make it more efficient or higher quality.
• Advanced data analytics — using IT to analyse data more quickly and thoroughly than is possible
using conventional statistical techniques, identifying more business opportunities and adjusting service
delivery intelligently in response to learning.
These technologies can help professional services firms in particular to decouple from the traditional fee-
per-hour business model. There are three key stages to the ‘productising’ approach to product development
for professional services firms (Swahney 2016).
1. Discovering potential products by identifying opportunities for automation.
2. Developing the products and enabling them to process, analyse, and learn from data.
3. Monetising them by building a revenue model that captures benefits from automation and the application
of analytics.
Example 4.10 explores how global labour law practice Littler has embedded products in its service
offerings.
EXAMPLE 4.10
Littler — Using Technology to ‘Productise’ Professional Services

Littler does legal work for companies in more than a dozen countries. To improve the quality and efficiency
of its services, it has ‘unbundled’ the tasks involved in their delivery and assigned them either to people
with specialised knowledge or to products with automation and analytics capabilities, depending on the
level of sophistication involved. Essentially, the firm has reengineered its legal services by developing
offerings that are powered by technology and humans.
One example is Littler CaseSmart–Charges. This offering helps HR professionals and in-house
attorneys better manage employee discrimination claims and complaints by combining software, project
management tools, and the skills of flextime attorneys (FTAs) and data analysts. FTAs focus on specific
tasks in the litigation process and have deep subject-matter expertise, which makes them highly efficient
and effective at performing particular services. (They also work out of home offices on a flexible schedule,
which reduces the company’s overhead.) Data analysts, meanwhile, focus on reviewing, interpreting,
and translating data on behalf of lawyers and work at a lower price point.
Littler uses a dashboard that enables clients to track discrimination charges filed with the Equal
Employment Opportunity Commission. The dashboard provides data-driven insights to proactively
address business risks, which in turn lowers legal costs and speeds up the process of managing pending
cases. In some instances, this can help prevent the cases from escalating to litigation.
Similarly, Littler CaseSmart–Litigation provides a streamlined method for HR clients to manage the
litigation process in cases where they are being sued by individual plaintiffs. A dashboard interface
provides insights on employment issues while tracking the progress of legal cases, and that technology is
coupled with attorney services. Again, the offering improves the speed and quality of Littler’s work while
lowering costs for both Littler and the client. It also allows clients to look across their portfolios of litigation
and identify recurring factors that may be contributing to those cases (for example, they can determine
whether there’s a pattern involving a particular jurisdiction, decision maker, or policy and then proactively
manage that issue).
To share the benefits of these innovations, Littler has entered into alternative fee arrangements
(AFAs) with clients that save them money while boosting the firm’s revenue. Instead of billing for the
hours its attorneys spend on claims, Littler uses a fixed-fee model in which charges are based on
productivity (per grievance or complaint). This change has resulted in lower legal costs for clients —
they’ve reported drops ranging from 10% to 35% — which has enabled the CaseSmart team to win
new business.
Source: M Sawhney, 2016, ‘Putting products into services’, Harvard Business Review, September 2016, https://
hbr.org/2016/09/putting-products-into-services.
QUESTION 4.9
One of the aims of productising services is to decouple from the traditional fee-per-hour pricing
model. Consider the following example (Sawhney 2016):
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Let’s say that your company reviews legal agreements at a rate of AU$200 an hour and each
agreement takes about 10 hours, resulting in a fee of AU$2000 per agreement. Now suppose
you automate that process so it takes only two hours per agreement, which translates to a five-
fold productivity gain. Since your client won’t be happy about paying an hourly rate that’s five
times higher (AU$1000), a better approach is to propose a per-agreement price with a discount
thrown in for good measure. Thus you might charge the client AU$3500 for two contract reviews
— less than the previous cost of AU$4000. Your client will be pleased with the reduced fee, and
you’ll both come out ahead.
Evaluate the proposed ‘outcomes-based’ pricing model, identifying potential advantages and
disadvantages, along with risks, from the perspective of the service provider and the client.
as follows.
KEY POINTS
and markets.
• Key components of service design are: the service encounter, value co-creation and sociocultural
configuration.
• In evaluating the service encounter, consider the service touchpoints and the evidence
of service.
• In evaluating value co-creation, consider which needs are being met and what the perceived
value is.
• In evaluating sociocultural configuration, consider what social and cultural influences affect the
service and what artefacts support the service.
• Technology such as automation, AI and advanced data analytics increasingly enables services
to be ‘productised’, decoupling the human labour involved in service production from service
consumption by automating aspects of service production and delivery.
• Increasingly, products are viewed in terms of the service they provide or ‘the job to be done’ by the
product. Products are thus ‘service avatars’.
• When products are viewed in terms of the service they provide, customer expectations may be
considered in terms of access to the service rather than ownership of the product.
• Organisations can decouple service production and delivery costs by using technology to automate
aspects of their service products. This can increase revenues without increasing labour costs,
leading to higher margins.
4.5 APPROACHES TO DEVELOPING NEW

PRODUCTS AND SERVICES
This section of the module will discuss a variety of tools and approaches that can help organisations
consider and develop options for new products and services.
DESIGN THINKING AND HUMAN-CENTRED DESIGN

IDEO is a leading authority on the practice and application of design thinking, which is defined as:
a human-centred approach to innovation that draws from the designer’s toolkit to integrate the needs of
people, the possibilities of technology, and the requirements for business success (IDEO n.d.).
Design thinking begins from deep empathy and understanding of needs and motivations of people. It
is done collaboratively and in the belief that a better solution is always possible. As such, the process
is iterative, learning from observation, developing prototype solutions and iterating prototypes based on
feedback. It moves between divergent and convergent thinking, so having a diverse team for collaboration
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is an important ingredient for success, as is being empowered and encouraged to experiment throughout
the process and ‘learn, unlearn and relearn’ what they know (Moote 2013).
The five-stage design-thinking process is shown in table 4.12.
TABLE 4.12 The key stages of design thinking
Design-thinking
stage Questions Steps
1. Discovery I have a challenge Understand the challenge

How do I approach it? Prepare research
Gather inspiration
2. Interpretation I learned something Tell stories

How do I interpret it? Search for meaning
Frame opportunities
3. Ideation I see an opportunity Generate ideas

What do I create? Refine ideas
4. Experimentation I have an idea Make prototypes

How do I build it? Get feedback
5. Evolution I tried something new Track learnings

How do I evolve it? Move forward
Source: Adapted from the Design Thinking for Ed Toolkit, n.d., www.ideo.com/post/design-thinking-for-educators.
IDEO publish numerous resources and tool kits and activity templates to guide organisations that want to
use the design-thinking process, particularly to address problems and challenges in the developing world.
These toolkits and templates are downloadable from a website IDEO has specifically dedicated to design
thinking: www.ideo.com/tools.
Technology insight 4.3 examines the new technology of 3D printing which enables rapid prototyping
and thus supports design thinking approaches.
Prototyping with 3D Printing

The development of 3D printing technology over recent years, whereby objects can be ‘printed’ directly
from computer-aided design (CAD) files has enabled a more agile approach to prototyping. Designs can
be realised as prototypes quickly (in a matter of hours) and at low cost, enabling in-house and field
testing and experimentation. This enables any number of cycles of refinement of the design or concept
before committing to large-scale investment. This refinement can be based on actual experiences with
the product rather than needing to rely on descriptions or mock-ups or expensive manually machined
prototypes. In this way, 3D printing encourages innovation and facilitates design that is responsive
to needs.
Depending on the nature of the organisation, it may choose to invest in 3D printing technology itself
or rely on the growing number of specialist service providers. Depending on the particular technology
chosen, 3D printing can provide an object that looks and feels like the design or at a more advanced level
provide a functional prototype that can be tested for mechanical, chemical and thermal performance.
Prototypes can also provide insight into production challenges.
The Designing for Growth Field Book (Liedtka et al. 2014) presents the process steps according to
figure 4.8. Similar to the Design Council’s double-diamond process, extensive research is undertaken
before solution development commences, and once solution development does commence, a period of
rapid prototyping, learning and iteration to finalise a concept that works is undertaken.
Despite the name, design thinking follows a highly structured process, and Liedtka et al.’s fieldbook
provides numerous templates to support the process shown in figure 4.8. The ‘what is’ stage involves
extensive customer and market research to be able to identify Insights that Inform design criteria that is
then challenged in the ‘what if’ stage. The ‘what wows’ stage surfaces key assumptions and the ‘what
works’ stage is the concepts that are landed on for further development and iteration.
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FIGURE 4.8 How to approach designing for growth
Before you begin

Step 1: Identify an opportunity
Step 2: Scope your project
Step 3: Draft your design brief
Step 4: Make your plans
(you are here)
What is? What if? What wows? What works?
What is? What if? What wows? What works?

Step 5: Do your research Step 8: Brainstorm ideas Step 11: Surface key Step 13: Get feedback
secondary research blue cards and assumptions from stakeholders
direct observation trigger questions Step 12: Make co-creation tools
ethnographic interviews analogies/thief prototypes Step 14: Run your
job to be done and doctor visualisation basics learning launches
value chain analysis worst idea storytelling Step 15: Design
journey mapping contra-logic storyboarding the on-ramp
personas change perspectives
360 empathy Step 9: Develop concepts
creating posters anchors
Step 6: Identify insights bring-build-buy map
Step 7: Establish forced connections
design criteria combinatorial play
Step 10: Create some
napkin pitches
Source: J Liedtka, T Ogilvie & R Brozenske, 2014, The Designing for Growth Field Book, Columbia Business School Publishing,
p. 13.
Blue Ocean strategy (discussed in the next section) includes a similar process using different tools to
understand ‘as is’ or the current state. As you will see when we discuss Blue Ocean strategy, assumptions
about the current state that are identified during this part of the process can be challenged to change the
basis of current competition. ‘What works’ then iterates ideas using prototypes until an optimal solution
has been developed.
A key to design thinking is the interactions with the customer throughout the process in order to
understand the context and perspective of the customer, involving the customer in both solution design
and development. That is, the process is human-centred. This has the benefit of taking customers on
the development journey and creating products and services in parallel with developing customers. This
improves the chances of solution success in the marketplace.
QUESTION 4.10
IDEO.org worked with Unilever and Water and Sanitation for the Urban Poor (WSUP) to develop a
comprehensive sanitation system that delivers and maintains toilets in the homes of subscribers.
Clean Team serves 5000 people in Kumasi, Ghana, making the lives of the city’s poorer residents
‘cleaner, healthier, and more dignified.’
The project involved wide-ranging interviews to build understanding of the design challenge.
Sanitation experts were consulted, a toilet operator was shadowed, the history of sanitation in
Ghana was investigated, and numerous Ghanaians were interviewed to facilitate key insights into
what the toilet should look like and how waste should be collected.
An important insight was gained into the history of sanitation in Ghana. For many years, Ghana
had night soil collectors, people who cleaned out bucket latrines each night. However, many night
soil collectors dumped human waste in the streets leading to a ban on night soil collection as a
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threat to public health. This meant the team could leverage an existing behaviour around in-home
waste removal, but they would have to avoid any association with illegal dumping.
Prototypes were developed within seven weeks. After brainstorming with its partners and
everyday Ghanaians, the team determined which direction to take and began testing ideas. What
aesthetics did people like? Would a urine-diverting toilet work? Were people comfortable with
servicemen coming into their homes? Where in the home would the toilet go? Can you design a
toilet that can only be emptied at a waste management facility?
By building a handful of prototypes and modifying existing portable toilets, the team got tangible
elements of the service into the hands of Ghanaians. They learned how the service should be
positioned, early ideas around marketing and promotion, as well as certain technical limitations,
namely that though flush functions appeared popular early in the goings, water scarcity was a major
factor to contend with.
Once the service offerings, and look and feel of the toilet were more or less fleshed out, WSUP ran
a Live Prototype of the Clean Team service. Because tooling for toilet manufacture is so expensive,
WSUP used off-the-shelf cabin toilets, which approximated about 80% of the toilets that IDEO.
org would design, to test the service. They got great results, went ahead with manufacturing, and
as of 2012, the toilets are in production, sport IDEO.org’s branding, and have found their way into
the lives of over 5000 people.
Explain how the Clean Team service reflects human-centred design.
Source: Adapted from Design Kit, n.d., ’Clean Team: In-home toilets for Ghana’s urban poor’, www.designkit.org/case-
studies/1.
BLUE OCEAN STRATEGY — NEW PRODUCT AND

SERVICE OFFERINGS
Blue Ocean strategy emphasises the creation of new, undiscovered markets through activities to innovate
an organisation’s product and service offering. They call the uncontested space ‘blue oceans’, as compared
with the ‘red oceans’ where organisations compete against the factors identified as the basis of competition
for an industry (as identified in module 2). (See figure 4.9.)
FIGURE 4.9 Conventional thinking versus Blue Ocean strategy thinking
Red Ocean Strategy VS Blue Ocean Strategy
Compete in existing market space. Create uncontested market space.
Beat the competition. Make the competition irrelevant.
Exploit existing demand. Create and capture new demand.
Make the value–cost trade-off. Break the value–cost trade-off.
Align the whole system of a firm’s activities with Align the whole system of a firm’s activities
its strategic choice of differentiation or low cost. in pursuit of differentiation and low cost.
Source: Blue Ocean Strategy, n.d., www.blueoceanstrategy.com/what-is-blue-ocean-strategy.
Chan and Mauborgne propose that, by changing the basis of competition (what they call the factors of
competition), then it is possible to create new value in ‘uncontested water’ at the same time as reducing
cost, gaining undiscovered profits and making the competition irrelevant. They call this ‘value innovation’
(see figure 4.10). An important aspect of this is challenging assumptions that we make about what is
‘normal’ and accepted. As with design thinking, it is important to involve people who have diverse and
divergent views and will challenge accepted norms. We discuss this in more depth in section 4.8.
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FIGURE 4.10 Value innovation
Cost
Cost savings are made by eliminating and

reducing the factors an industry competes on.
Value
innovation
Buyer value is lifted by raising and creating

elements the industry has never offered.
Buyer value
Source: Blue Ocean Strategy, n.d., www.blueoceanstrategy.com/tools/value-innovation.
Factors of Competition and the Strategy Canvas

The first step in developing a Blue Ocean strategy is to identify the current factors of competition, that is
the factors that organisations compete on for the product or service they are offering. These are used to
create an ‘as is’ value curve on an ‘as is’ strategy canvas. Price is always the first factor of competition on a
Blue Ocean strategy canvas. The factors identified in module 2 as forming the basis of industry competition
can also be used and adapted.
The key factors of competition are represented on the horizontal axis (suggested to be a maximum of
12, including price). Low, medium and high options are plotted again the vertical axis.
Current performance is assessed for each factor on the vertical axis. The organisation then maps their
own performance against the same key factors of competition, giving a visual representation as to how the
competition in the industry takes place and how the organisation is placed relative to the accepted norms,
which is called the industry value curve.
This approach can be extended to show a comparison of the organisation’s position relative to two or
three of its competitors, or against different segments of the industry (e.g. budget versus premium wines).
Figure 4.11 shows a generic strategy canvas. The red line is the accepted industry value curve. That is,
how the industry currently competes against the accepted industry value curve. The blue line shows a new
value curve for the organisation — in figure 4.11, this is a hypothetical response to the accepted factors of
competition.
The strategy canvas in figure 4.11 shows that the organisation will be slightly higher priced than current
industry pricing, that it will not compete at all for the next two factors, it will reduce the offering for the
next two and raise the value for the last two factors well above accepted industry norms. There is no red
line for the final two factors — this means that the organisation is creating and offering something new
that doesn’t currently exist.
Creating a new value curve is not simple. Extensive customer, competitor and industry research is
undertaken to challenge assumptions that underpin the current basis of competition in the industry and
the ‘as is’ value curve and create a new value curve.
Blue Ocean strategy uses several tools to systematically work through information to pinpoint oppor-
tunities to change the basis of competition in the industry. For example, the buyer utility map, shown in
figure 4.12, is used to assess the current buyer experience against several utility levers to uncover the blocks
to utility, identify customer pain points and locate specific areas of focus to develop options that challenge
current industry approaches.
• The buyer experience cycle. The customer journey from when and how a customer finds out about
and purchases the product or service, how they get it, how they use it, whether they need other
products/services to use it, how they maintain it and how they dispose of it is explored in detail.
• Blue Ocean strategy utility levers. The levers against which to test whether there are opportunities to
change the experience at each stage of the buyer experience against each of the six utility levers.
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FIGURE 4.11 A generic strategy canvas
High
Blue Ocean strategic move
Offering level
Industry value curve
LOW
Factor 1 (price)
Factor 2 (price)
Factor 3 (price)
Factor 4 (price)
Factor 5 (price)
Factor 6 (price)
Factor 7 (price)
Factor 8 (price)
Factor 9 (price)
Competing factors
Source: Blue Ocean Strategy, n.d., www.blueoceanstrategy.com/tools/strategy-canvas.
Similarly to strategy canvas development, the red dots on the example buyer utility map in figure 4.12
show what the current industry focus is, with Blue Ocean opportunities identified by blue dots.
FIGURE 4.12 The buyer utility map
The six stages of buyer experience cycle
Purchase Delivery Use Supplements Maintenance Disposal
Customer
productivity
Simplicity
The six utility levers
Convenience
Risk
Fun and
image
Environmental
friendliness
Current industry focus Blue Ocean offering
Source: Blue Ocean Strategy, n.d., www.blueoceanstrategy.com/tools/buyer-utility-map. Copyright Kim & Mauborgne, Blue Ocean
Strategy, www.bluestrategy.com.
The buyer experience cycle is similar to other approaches to mapping the customer journey, but is
distinguished by challenging whether it is possible to change the buyer experience at each step using any
of the six utility levers. For example, can the purchase experience be made more fun for the customer, or
could the use component of the buyer experience be made simpler?
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Blue Ocean strategy has developed several other frameworks to research the market and different
customer groups. These include tools that look across industries to see whether there are opportunities
to apply what is normal in another industry to the product or service being developed. As with design
thinking, the work to get from the ‘as is’ strategy canvas to ‘to be’ strategy canvas is not trivial.
You can access information about other Blue Ocean strategy tools on their website at www.blueoceans
trategy.com/tools.
The Four Actions Framework

Options identified using the Blue Ocean strategy tools can be mapped against the criteria of the four actions
framework, as shown in figure 4.13.
FIGURE 4.13 The four actions framework
Reduce
Which factors should be
reduced well below the
industry’s standard?
Eliminate
Create
Which of the factors that A new
the industry takes for value
created that the industry
granted should be curve
has never offered?
eliminated?
Raise
raised well above the
industry’s standard?
Source: Adapted from WC Kim & RM Mauborgne, 2012a, ‘Four actions framework’, Blue Ocean Strategy, accessed May 2017,
www.blueoceanstrategy.com/about/concepts/4-actions-framework. Copyright Kim & Mauborgne, Blue Ocean Strategy,
www.bluestrategy.com.
The selected actions are then transposed onto the ‘as is’ strategy canvas as a blue ‘to be’ value curve.
As shown in figure 4.11, any new (created) factors of competition are added to the horizontal axis on the
far right, as they are additional to the basis for current competition.
Note that it is likely to be necessary to redraw the ‘as is’ strategy canvas so that the factors across the
horizontal axis align to the new value curve in a visually sensible way; for example, grouping the factors
together to represent where the new strategy will eliminate factors, and where it was raise, reduce and
create value.
The process steps in the Blue Ocean strategy process are summarised in table 4.13.
TABLE 4.13 The Blue Ocean strategy process
Process step Description
Development of the • Develop the ‘as is’ strategy canvas with the factors that the industry competes on along
‘as is’ value curve the bottom, starting with price
and strategy canvas • Chart product/service performance against these factors
• Chart industry and/or competitor products/services against these factors on the canvas
(continued)
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Process step Description
Exploration of • Research (primary and secondary) across each of the factors of competition across the
opportunities to buyer experience cycle (e.g. the customer journey from purchase through to disposal)
change the factors • Evaluate the buyer experience across the buyer experience cycle against six utility
of competition levers to identify blocks or pain points
• Explore the pain points identified across a range of criteria
• Identify ways pain points might be mitigated and the organisation could add value
Use of the four • Identify based on previous exploration of what will be eliminated, reduced, raised
actions framework or created to change the basis of competition for the product or service relative to
competitors in the industry
Creation of the to be • Chart the new strategy on the ‘to be’ strategy canvas (possibly re-positioning the key
strategy canvas factors of competition on the ‘as is’ canvas)
Test of the strategy Confirm that the strategy meets the three tests of a Blue Ocean strategy.
1. Is it divergent?
2. Is it focused?
3. Can it have a compelling tag line? (to communicate internally and externally)
Source: Adapted by the author from the Blue Ocean Strategy Application Workbook for a workshop held in Melbourne in July 2009
by UCSI Blue Ocean Strategy Regional Centre.
The blockbuster touring theatrical circus Cirque du Soleil is an example of the process and outcomes
of Blue Ocean thinking. Cirque du Soleil’s product development is discussed in relation to Blue Ocean
strategy in example 4.11.
EXAMPLE 4.11
Cirque du Soleil — Applying Blue Ocean Thinking

Since it was founded in 1984, Cirque du Soleil has performed for more than 180 million people in 450
cities on every continent but Antarctica. Cirque du Soleil features a mix of circus acts, street performance
and acrobatic feats. The Montreal-based company, now one of the largest live theatrical companies in
business, consistently introduces state-of-the-art stages, special effects and world-class stunts.
When Cirque du Soleil did the necessary work to understand the current state of the circus industry,
the key factors of competition were identified as follows in table 4.14.
TABLE 4.14 Cirque du Soleil key factors of competition
Key factor of competition As is value curve
Star performers These are the key people that the industry competed for and were a key
point of difference when marketing shows, but expensive
Animal shows A traditionally important part of the circus experience, but costly to maintain
and increasing animal ethics issues being experienced
Aisle concessions sales People selling items in the aisles during performances
Multiple show arenas Typically three-ring arenas, meaning acts had to be coordinated across
multiple places to keep the audience engaged
Unique venue Where the show runs, including the surroundings
Fun and humour Generally clowns and slap-stick humour
Thrill and danger Through various acts, acrobats and stunts
Source: C Kim & R Mauborgne, 2005, Blue Ocean Strategy, Harvard Business School Press, pp. 13–16.
From using the various Blue Ocean strategy tools, the four actions framework was completed with a
strategy to respond to the key factors of competition. Of particular note is how Cirque du Soleil looked
across other industries, particularly theatres, concerts and shows, to get ideas for how they could re-invent
their offer. The new factors of competition they defined were as follows.
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• Theme — investment in the storyline, show and overall experience (it has 23 shows running worldwide
with six permanent shows in Las Vegas and 12 others on tour). This is a major expense item with
estimates suggesting that its most expensive production — Ka — costs US$165 million to create.
• Refined environment — retaining the venue but making it more up-market with better finish, more
comfortable seats (removing sawdust and hard benches).
• Multiple productions — creation of a portfolio of different performances.
• Artistic music and dance — creation of original scores, choreography and production aspects such as
lighting and sound.
The four factors framework is shown in figure 4.14. Figure 4.15 shows Cirque du Soleil’s new value
curve.
FIGURE 4.14 The eliminate–raise–reduce–create grid: the case of Cirque du Soleil
Eliminate Raise
• Star performers • Unique venue
• Animal shows
• Aisle concession sales
• Multiple show arenas
Reduce Create
• Fun and humour • Theme
• Thrill and danger • Refined environment
• Multiple productions
• Artistic music and dance
Source: C Kim, R Kim & R Mauborgne, 2005, Blue Ocean Strategy, Harvard Business School Press, pp. 36.
FIGURE 4.15 Cirque du Soleil’s new value curve
Eliminate Reduce Raise Create
Cirque du Soleil
High
Ringling Bros.
Smaller regional circuses
Low
Star performers Aisle concessions Fun and humor Unique venue Artistic
music
Price Animal shows Multiple show arenas Thrills and danger Theme and
dance
Source: Six Path Consulting, n.d., www.sixpathsconsulting.com/innovation-blog/blue-ocean-strategy-training.
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Apart from creating the theme, refined environment, multiple productions and artistic music and dance,
Cirque du Soleil did the following.
• Eliminated the animals and star performers, which were costly elements of industry competition, as
well as multiple arenas, by delivering the show on one arena only, aisle concession sales were also
removed (replace by a more traditional theatre experience of purchasing refreshments prior to the
performance or during the intermission only). Star performers were to a large extent replaced by athletes
such as gymnasts, with the organisations reportedly employing several former Olympians and national
gymnastic athletes (Cirque du Soleil n.d.).
• Raised the unique venue aspect by making the venue quite different from a traditional theatre and
making the seating and other amenities more comfortable and more closely akin to a theatre type venue
and experience.
• Reduced the fun and humour by replacing traditional clowns in the performance and replacing the
traditional circus thrill and danger stunts with more athletic and skill-based acts and performance.
QUESTION 4.11
NABI is a Hungarian bus company with its main customers being public transport companies
that operate fixed public transport routes in major cities. For the industry, work was usually won
through tenders, with the lowest price the most important selection criteria. A key issue was that
because competition was price based, quality was low and buses were regularly out of service for
repairs. NABI recognised that after-sales service and repairs, and the costs associated with hiring
replacement buses, were a huge cost that was not being taken into account because of the way the
cost of purchase was not combined with the ongoing costs of maintenance, repairs and off-road
costs overs the 12 year expected life of the bus.
NABI made a number of changes to the accepted norms, including substituting fibreglass panels
for steel for the main body of the bus, which had a number of benefits including the ability to
replace damaged panels more easily and significant lowering the overall weight of the bus, which
in turn lowered the cost of manufacture and reduced fuel consumption. Although the initial price to
purchase the bus was higher than the accepted industry norm, the life cycle costs associated with
operating the bus were significantly lower. NABI quickly gained market share and accumulated
over US$1 billion in orders for its innovation and was named by the Economist Intelligence Unit as
one of the 30 most successful companies in the world in 2002.
Using the seven key factors of competition in the strategy canvas of the US Municipal Bus
Industry (dotted line) provided in figure 4.16, complete an Eliminate–Raise–Reduce–Create Grid for
NABI (solid line).
FIGURE 4.16 The strategy canvas of the US Municipal Bus Industry, circa 2001
High
NABI
Average US transit bus
Low
Initial Corrosion Maintenance Fuel Environmental Aesthetic Customer
purchase cost consumption friendliness design friendliness
price
Life cycle costs
Source: C Kim & R Mauborgne, 2005, Blue Ocean Strategy, Harvard Business School Press, pp. 67.
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USING IT TO SUPPORT NEW PRODUCT AND
SERVICE DEVELOPMENT
Data analysis now plays an important role in making decisions, including those about new product
development. Organisations can use IT to analyse data to get a clearer picture of their customers and
their needs. Machine learning approaches to data analysis can identify unexpected trends that might lead
an organisation to develop a new product or service or to enhance the way they sell their current offerings.
Rather than an organisation just focusing on what it could make or produce, attention should be paid to
finding customer pain points, frustrations and desires. Using technology in this process allows the target
market to be segmented into extremely narrow groupings for which tailored products or services may be
created. At its extreme, this approach allows bespoke service to individual customers. Demographic and
geographic data can be combined to highlight special niches that may not have been identified or properly
served in the past. The advantage of using advanced data analysis approaches that make use of machine
learning or AI is that organisations do not need to hypothesise trends, segments or patterns of behaviour —
machine learning approaches can find these based on less-defined parameters.
Such developments in IT have enabled organisations to target what is referred to as the ‘long tail’ (a
reference to the bell curve, in which the tail represents events that are distant from the mean). Previously,
products would be profitable only if they were demanded by a larger portion of the market (represented by
the mean in the bell curve). With improved data capture technologies and online distribution channels, it
is now possible to profitably develop and distribute niche and tailored products that do not sell significant
volumes (i.e. the long tail).
The same technology can assist in the actual production of the service. Example 4.12 illustrates the use
of IT to improve the efficiency of service production and the quality of service in the healthcare sector.
There are parallel developments in accounting and financial services, where AI can help provide finance
professionals with information to support decisions.
EXAMPLE 4.12
Arterys — Using AI to Improve Diagnostic Quality and Efficiency

Arterys is a US-based company with a mission ‘to transform healthcare by reducing subjectivity and
variability in clinical diagnosis’. In essence, its system — a combination of analytics, cloud, machine
learning and artificial intelligence technologies — takes the data generated by CT (computed tomography),
MRI (magnetic resonance imaging) and other diagnostic scans, compares them with data from thousands
of reference files and serves the images and diagnostic information to radiologists to assist them in making
their diagnoses.
There are two key benefits. Firstly, the system can process images, compare them to its reference
files and indicate diagnostically relevant findings, such as lesions or tumours, more than 100 times faster
per examination than a radiologist using conventional methods. This saves radiologists time, meaning
they can work through more patients more quickly. Secondly, the use of a large and growing library of
reference images means the system is effective at identifying diagnostically relevant features on scans —
the company claims that it would require seven experts to study the images to achieve the same level of
accuracy its system delivers. This means more reliable diagnosis and thus better patient outcomes — in
some cases the difference between life and death.
In addition, the system provides for access via a web browser or app from anywhere in the world and
integrates reporting and collaboration tools.
Arterys CEO Fabian Beckers says ‘We’re not replacing humans. We’re giving them more information to
make a more accurate diagnosis, and letting the system do manual tasks so they can [focus more] on the
patient and their experience.’
Arterys has regulatory approval for more than 100 countries. It currently supports heart, lung and liver
imaging and diagnosis, but plans to extend to a wider range of services in the future.
Source: Information from A Bluestein, 2019, ‘Arterys most innovative companies’, Fast Company, www.fastcompany.com/
90299399/arterys-most-innovative-companies-2019.
Manufacturers analyse data from a range of indicators (e.g. product failure rates, service and warranty
data, design data) to extract information patterns that can inform both product development and manu-
facturing operations. In deciding whether to proceed with a new product or service, companies often still
rely on focus groups and other standard marketing research practices to identify a preferred option from a
small group of consumers. Technology, especially social media, provides companies with fast consumer
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feedback on product ideas or releases, so companies can make faster and better decisions about product
modifications, new releases or even product deletion. Most consumers do not realise how regularly they
interact with organisations on websites for new products (e.g. pop-up messages, links clicked, time spent
viewing content). Even the click-through rate on a company’s website can indicate whether to further
pursue specific product development. According to The Economist (‘Getting to know you’ 2014), data
obtained from mobile devices is so precise that approximately 100 different pieces of data are collected
about you and how you are using your device. This information is then analysed to improve or develop
products, and it serves as the foundation for advertising programs.
A powerful way of using IT to develop new products or website services is by rapid prototyping and
experimenting in the online environment. The product development approach is condensed to an extremely
short period (often days), and the product or service is then released to the market. Each product release
can be considered an experiment, and data is immediately gathered and analysed. New experiments are
then conducted with minor changes or improvements to the product. The product or website service may
then be rereleased or just continually updated, and the data from any changes is continuously collected,
interpreted and acted upon. The benefits of this approach include speed of development, low initial cost of
developing a new product or service, and product modification to suit customer needs earlier rather than
later in the project. It is a technology-enabled extension of lean product development, which aims to
minimise waste and maximise value for the customer and organisation by overcoming long development
cycles and high production costs.
Sometimes a product itself is not even released — just the idea or concept of a product. A website
provides a landing page that describes the product or service and asks people to purchase it or register
their interest. Based on the data received from this landing page (i.e. levels of customer response, prices
that customers are willing to pay), product development may then commence (if it is justified), be delayed
(until further refinements are made) or be cancelled (if there is a lack of interest). The Kickstarter digital
platform is a business based on this approach, providing a way for people and organisations to gauge the
appeal of their product idea and raise funding at the same time.
Example 4.13 explains how wine company Winc changed its business model from distributing wines
made by other organisations to producing its own wines based on subscriber feedback.
EXAMPLE 4.13
Winc — Using Customer Data to Inform Product Design

Subscription wine clubs provide regular home delivery of selected wine in return for a regular subscription
fee. They offer convenience, access to exclusive labels and in some instances lower prices than the
customer can access through bottleshops. Some examples are Naked Wines, Different Drop, The Wine
Society and Wine Direct.
US-based wine club Winc, established in 2012, decided in 2015 to change its business model by adding
wine production to its distribution business. In doing so it was no longer just a wine club but also a winery.
In fact, by 2019 it had grown its revenue by 292% to become one of the USA’s top 50 wineries.
In contrast with traditional winemakers who create wines from their own or other locally grown grapes
and then market them, Winc studied wine ratings from its customer base — largely millennials — then
sourced the appropriate grapes to create a range of about 100 wines designed to match the company’s
customers’ preferences. Some of its wine labels and deals are so popular they have long waiting lists. In
2018, Winc produced and sold about 300 000 cases (more than three-and-a-half million bottles).
The company has further increased its market by selling to independent restaurants and retailers. It
continues to build its data about customer preferences by surveying taste preferences via its website.
Source: Information from CG Weissman, 2019, ‘How Winc uses subscriber feedback to make wines millennials go crazy for’,
Fast Company, www.fastcompany.com/90299032/winc-most-innovative-companies-2019; AR Richard, 2018, ‘Are wine
clubs or subscriptions worth it?’, 21 September, CHOICE, www.choice.com.au/food-and-drink/drinks/alcohol/articles/are-
wine-clubs-worth-it; Winc, 2020, www.winc.com.
Recently, some companies have taken consumer data analysis to the farthest extent and allowed
customers to directly influence product development. In this situation, the initial idea of a new product
is released online to the crowd of potential consumers. If enough people or potential customers indicate
that they believe the product will be useful or successful (by contributing ideas or money towards its
development), the project is started. This approach creates a ready customer market for a product that may
lead to deeper customer engagement with the company and the product being created.
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QUESTION 4.12
Refer to appendix A at the end of the study guide. How does Zara use data and technology to work
with its customers to develop new products?
Technology insights 4.4 and 4.5 examine the development of standards in relation to technology
products. Ownership of a standard can generate significant benefits and organisations often compete to
become the established standard in relation to technology products and services.
Standards
A standard is a format, an interface or a system that allows interoperability. Adhering to standards allows
us to browse millions of different web pages, ensures the light bulbs made by any manufacturer will fit
any manufacturer’s lamps, and keeps the traffic moving on our roads (most of the time). Most modern
standards have at least some technology element and many are entirely technology based.
The establishment of a standard can be a key event in an industry’s development and growth. In the
digital, networked economy, more and more markets are subject to standards which play a vital role in
ensuring compatibility between users. For companies, owning a standard can be an important source
of competitive advantage with the potential to offer returns that are unmatched by any other type of
competitive advantage. Examples include:
• Microsoft’s ownership of the Windows operating system, the de facto standard for PCs
• Adobe’s ownership of the PDF document format
• Bosch’s ownership of the ABS standard for car brake systems
• Sony’s ownership of the Blu-ray high-definition video format.
A characteristic of most of these companies is the fact that these standards have generated consid-
erable profits and shareholder value. On the other hand, a problem with de facto standards is that they
may take a long time to emerge, resulting in a duplication of investments and delaying the development of
the market.
A mandated, public standard can avoid much of this uncertainty. In many cases, standards are
established by international non-governmental and not-for-profit organisations such as W3’s standards
for the HTML language used to create web pages. These cannot directly serve as a competitive advantage
for an organisation.
Source: RM Grant, 2019, Contemporary Strategy Analysis: Text and Cases, 10th edn, John Wiley & Sons.
Winning Standards Wars

Past competitive battles between rival platforms embodying different technical standards have exercised
a powerful influence over current thinking about designing strategies for markets subject to network
externalities. None has been more influential than the competitive battles of the late 1970 and 1980s in
videocassette recorders (VCRs) and personal computers (PCs). In neither case was technical superiority
the key — indeed, in both instances it could be argued that the superior technology lost. The key factor
was managing the dynamics of market penetration in order to build market leadership.
• In VCRs, Sony kept tight proprietary control of its Betamax system; JVC licensed its VHS system to
Sharp, Philips, GE, RCA, and others, fueling market penetration.
• In computers, IBM’s PC platform became dominant because access to its product specifications
and the availability of the core technologies — notably Microsoft’s operating system and Intel’s
microprocessors — allowed a multitude of ‘clone makers’ to enter the market. The problem for IBM
was that it established the dominant ‘Wintel’ standard but Intel and Microsoft appropriated most of the
value. For Apple, the situation was the reverse: by keeping tight control over its Macintosh operating
system and product architecture, it earned high margins, but it forfeited the opportunity for market
dominance.
This trade‐off between penetrating the market and appropriating the returns to platform ownership is
shown in figure 4.17. Learning from these two epic contests, platform owners have relinquished more and
more value to complementors, competitors, and customers in order to build a bigger bandwagon than
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their rivals. In some cases this has meant foregoing all possible profits. In the browser war of 1995–1998,
both Netscape (Navigator) and Microsoft (Explorer) ended up giving away their products.
FIGURE 4.17 Standards wars in videocassette recorders and personal computers
VCRs
VHS Betamax
Maximising Maximising
market value
penetration appropriation
IBM PC Apple Mac
Personal computers
Finding a better balance between market penetration and value appropriation has resulted in new pricing
models. Adobe (and many other software suppliers) follows a ‘freemium’ model — Acrobat Reader is
available free of charge, but to create or convert PDF files, it is necessary to take out a paid subscription
to Acrobat software.
Other standards show that winning is not solely about building the biggest bandwagon of users and
complementors. Users buy a system, not a platform, and their choices depend on the overall quality of
the system. Apple’s dominant share of the profits from the global smartphone industry, despite having a
smaller market share than Google’s Android, derives from the overall quality of the iPhone system, which
depends to a great extent on Apple’s exercise of tight control over application developers, including quality
standards and overall system integration.
Achieving compatibility with existing products is a critical issue in standards battles. An evolutionary
strategy (that offers backward compatibility) is usually superior to a revolutionary strategy.
What are the key resources needed to win a standards war? Shapiro and Varian emphasise:
• control over an installed base of customers
• owning intellectual property rights in the new technology
• the ability to innovate in order to extend and adapt the initial technological advance
• early‐mover advantage
• strength in complements (e.g. Intel has preserved its standard in microprocessors by promoting
standards in buses, chipsets, graphics controllers, and interfaces between motherboards and CPUs)
• reputation and brand name.
Sources: A Gawer & MA Cusumano, 2008, ‘How companies become platform leaders’, MIT Sloan Management Review, 49,
pp. 28–35; C Cennamo & J Santal, 2013, ‘Platform competition: strategic trade‐offs in platform markets’, Strategic
Management Journal, 34, pp. 133–150.
DEVELOPING PRODUCTS TO EMBED IN A SERVICE

As discussed earlier in the module, using technology to embed products in a service enables services firms
to decouple the labour involved in production and delivery of a service, thus increasing revenues without
corresponding increases in costs.
Sawhney (2016) suggests three key things are necessary in order to achieve this, requiring changes to
both organisational structure and organisational culture. Hence such a shift is only possible with the full
commitment and support of the organisation’s leadership.
The organisational changes required are as follows.
• Create a business unit or teams specifically for product development. The product development team
requires a degree of autonomy, but should have close relationships with other business units so that
service ideas are informed by the needs of the business.
• Ensure the product development team has a cross-section of skills by drawing people from different
parts of the business, including IT, operations, marketing and business analysis.
• Create new metrics to measure the success of the product development team. These metrics should
focus on idea generation, prototype creation and level of automation and ‘productisation’ achieved,
while acknowledging that moving to product-embedded services is a long-term proposition.
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follows.
KEY POINTS
and markets.
• Design thinking is a human-centred approach to product design that integrates people’s needs,
the potential of technology and the business’s needs for success.
• Design thinking responds to opportunities by proceeding through the stages of discovery, inter-
pretation, ideation, experimentation and evolution.
• Design thinking involves customers in product development, thus improving the potential the
product will succeed.
• Blue Ocean strategy is a method of identifying uncontested space in the market rather than
focusing on competing on factors common to competitors.
• Blue Ocean strategy begins by identifying the current factors of competition, including price, then
maps the organisation’s performance on those factors against competitors’ performance.
• Blue Ocean strategy then uses a number of tools to systematically identify how to change the basis
of competition.
• Blue Ocean strategy uses a four actions framework to choose which factors to eliminate, reduce,
raise or create to change the basis of competition.
• The output of Blue Ocean strategy is a strategy canvas.
• Advanced data analysis has provided a way for organisations to identify previously unknown trends
and patterns as the basis for understanding customers, including their pain points, frustrations and
wants, and hence responding to their needs with new products.
• Deep understanding of customers enables organisations to efficiently target niche segments of the
market with tailored products.
• AI is increasingly used in the production of services, improving service efficiency and quality.
• Technology has facilitated rapid prototyping and testing of new products, enabling speed to market
while also helping avoid product failures.
• Embedding products in services requires a new approach to product development, including
creation of a dedicated cross-functional team and new metrics, and a shift in organisational
structure and culture championed by the organisation’s leaders.
4.6 NEW MARKET DEVELOPMENT

New market development can be the development of new customer markets, new geographic markets for
the organisation or a combination of both.
The concept of customer market expansion is integrated throughout the module, particularly in the
section for developing new markets for existing products, and briefly discussed in the next section. The
focus of this section, however, is on expansion into new geographic markets.
EXPANDING INTO NEW CUSTOMER MARKETS

Customer markets can be defined as aggregates of consumer groups with similar needs. Several different
approaches to defining customer markets can be used either on their own or in combination. Organisations
may target new segments of the market with existing products in order to increase sales. Some product
modification may be required, such as new packaging, but to meet the criteria of being an existing product,
differences are limited.
Grouping customers by distribution channel is a very common approach, as distribution is so important
to revenue generation. This might be addressed by an organisation employing account managers and sales
representatives to service specific distribution channels.
For example, a winemaking organisation may traditionally sell to wholesalers (also known as wine
merchants), who then sell to retailers, where consumers buy the products. The winemaking organisation
may then decide to sell directly to selected retailers. For this, it would most likely need to employ a sales
representative to manage these accounts. It may then decide to try to supply a completely new market
segment — for example, restaurants. To do this it would need additional capability in sales and after-sales
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service, as well as the ability to distribute small quantities to many customers. For both these situations,
the products are unchanged; it is the market participants that change.
Online customer markets are a further customer group that is growing at increasing rates each year. The
accessibility of the internet and the increase in its security has pushed the growth of online purchases,
and this channel is becoming increasingly popular with larger numbers of consumers. Online shopping
is growing in popularity across a range of areas. In some sectors, such as online supermarkets, it is
becoming more popular as a result of the time saving and convenience it offers to consumers. In other areas,
such as books, apparel and electrical products, it is growing in popularity because it allows consumers
access products that may not previously have been available in their geographic area, and often at a
cheaper rate.
Consumers continue to be attracted to the lower prices that products purchased via the internet represent.
It is for these reasons that traditional retail channels continue to experience declining sales in bricks-and-
mortar stores.
EXPANDING INTO NEW GEOGRAPHIC MARKETS

An organisation that is successful in its existing markets, will often seek to expand its business by extending
its operations into new markets either domestically or internationally.
In venturing overseas, organisations may be looking to:
• access new customers (if growth opportunities in the home market are limited)
• achieve cost efficiencies (such as accessing lower-cost labour or materials)
• establish a base for regional coordination (e.g. many airlines, such as Jetstar or Air Asia Pacific, have
established regional offices in Singapore or Jakarta to serve as regional hubs for the East Asia market)
• access new knowledge and learning opportunities (e.g. many organisations from Japan and Europe
have established research and development operations in California to network with the technology
organisations based in Silicon Valley).
Consumers in different markets may have varying preferences, so organisations may need to adapt their
products and services accordingly. For example, many Asian markets are price sensitive, and customers
are unwilling to pay a premium for products and services, other than for luxury brands. Tariff barriers
import duties and industry business models have historically made it very difficult for Australian, US and
European organisations to enter the Indian and Chinese markets with products from their home countries
and have therefore had to set up local manufacturing operations.
In entering a new international market, timing is crucial. Having first-mover advantage may be attractive,
but it is less risky to follow other organisations once the pitfalls are well known. The scale of entry is also
important. A small but significant investment might involve less risk than attempting to achieve large-scale
penetration in a new market at an early stage. Moreover, the mode of entry must be viable and allow further
investment and development later (if this is attractive).
Developing an internationally focused strategy involves changing perspectives and competitive posi-
tions. The strategic thinking of a multinational organisation will orientate it towards particular objec-
tives, which can influence many aspects of the commercial approach of the organisation, as well
as its structure, culture and employment practices. But strategy itself is heavily influenced by the
culture of the organisation’s home country and by the cultures encountered in different countries
and regions.
The leadership and management of organisations must beware that the attractions of an overseas market
do not blind them to deficiencies in their competence to work in an unfamiliar market. Over-ambitious
expensive investments in local offices and plants may have to be written off, when a less ambitious approach
to market entry may have worked well.
Using IT to Support New Market Development

The two main stages in which IT can be useful in new market development are the market selection stage
and physical implementation. Finding the right new market to focus on can be extremely time-consuming
and difficult, given the need for study trips and purchased research from specialised providers to help
match an organisation’s products and services to similar customer groups in new locations. IT allows for
faster collection and review of relevant data from a wider variety of sources. Countries are constantly
releasing useful statistical data that is combined with research from global bodies that provide comparison
and ranking services (e.g. World Bank and World Economic Forum).
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When it comes to actually implementing this type of strategy, several practical issues need to be
resolved. Legal permits and registration, hiring employees, finding and certifying suppliers, and setting
up distribution channels all require detailed knowledge of the marketplace. IT can help identify, source
and control these issues in a systematic and efficient manner (e.g. with online project management tools
and language conversion tools), while allowing knowledge that is learned in one situation to be easily
transferred and used throughout the organisation (e.g. through wikis and other collaboration tools).
DEVELOPMENT OF NEW GEOGRAPHIC MARKETS

Organisations usually begin with all of their activities integrated in the home market. When they decide to
explore international expansion to achieve growth, they have a variety of options to consider.
International expansion often begins by undertaking some individual functions, such as manufac-
turing, overseas. Consider, for example, an integrated domestic firm whose activities include product
development, production, marketing, sales and after-sales service. Such an organisation might begin
international expansion by exporting — often by engaging an agent or distributor to undertake mar-
keting and sales in a foreign country. Over time they might establish their own subsidiary overseas to
undertake sales, marketing and provide ongoing service. Alternatively, they might outsource production.
Eventually, the organisation may progress to the point where all of the production, marketing and
servicing functions are integrated overseas. Figure 4.18 lists some ways an organisation can configure
its activities as it expands internationally. Corporate operations are usually only deemed ‘global’ when
all this activity is fully integrated in a range of overseas countries, with sales and marketing occurring in
many countries.
FIGURE 4.18 International growth options
Configuration Domestic Country A Country B

Integrated domestic firm Design
Production
Marketing
Sales
After-sales service
Customers
Export: foreign agent/ Design
distributor Production
Marketing
Sales
After-sales service
Customers
Export: foreign Design
sales subsidiary Production
Marketing
Sales
After-sales service
Customers
Foreign production Design
subsidiary Production
Marketing
Sales
After-sales service
Customers
Integrated foreign Design
subsidiaries Production
Marketing
Sales
After-sales service
Customers
Source: CPA Australia.
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OBJECTIVES OF MARKET ENTRY
One of the main reasons for market entry will be the pursuit of growth based on the knowledge gained
from, for example, the external analysis conducted in module 2. Other reasons include access to resources,
such as:
• mineral resources, such as oil, iron ore and copper
• agricultural products
• human resources, whether in terms of plentiful supplies of low-wage labour or scarce supplies of highly
skilled people.
Table 4.15 is an example of how to consider the strategic objectives of market entry by an organisation.
For example, the first row includes typical considerations for determining why an organisation would want
to enter a new market — specifically, what are its expectations of market entry? The objectives columns
relate to the market itself and the resources required to enter that market successfully. The enablers columns
support successful market entry; they can be broken down into learning (i.e. what is the organisation
learning by doing this) and what is required for coordinating the activity and operating in multiple
markets. The remaining rows detail various other considerations and the objectives and enablers related
to them.
TABLE 4.15 Sample strategic objectives of market entry
Considerations Objectives Enablers
Market Resources Learning Coordination
Expectations Market Access to natural Understand state-of- Set up base for

penetration and resources the-art technology global or regional
development Access to skilled Close to best development
Capture a share low-cost labour practices Establish logistic
of the market Access to Learn to compete centres
suppliers in difficult and Close to financing
sophisticated markets institutions
Key performance Growth Costs Know-how Speed

indicators (KPIs) Market share Quality Process improvement Control
Gross margin Supply access Synergies
Timing Window of First-mover in As soon as the Three stages:

opportunity order to pre-empt country is recognised • initiation
First-mover resources as ‘competence’ • growth
versus follower centre • coordination
Type of countries All types Resource-rich Countries with Hubs

prioritised as countries strong technological
a function of and know-how
market potential, infrastructure
quality and
competitive
context
Mode of entry Depending Wholly owned Joint venture Representative office

upon risks, (if allowed and R&D centre Global HQ
opportunities, if low risk)
Observatory Regional HQ
timing and skills Joint venture
Logistic centre
All modes of entry (if requested)
may apply Training centre
Long-term
sourcing Financial HQ
contracts
Source: Adapted from P Lasserre, 2002, Global Strategic Management, Palgrave Macmillan, London, p. 190. Reproduced with
permission of Palgrave Macmillan.
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QUESTION 4.13
Chinese ridesharing service DiDi Express competes with the likes of Uber. It has been rolling out to
different Australian cities since 2018, when it launched in Geelong. It has since become available in
Melbourne, Newcastle, Brisbane and the Gold and Sunshine Coasts, south and north of Brisbane.
DiDi provided more than a million trips in Brisbane in the year since launching. The rideshare
service on the Gold Coast will be available as far north as Stapylton and as south as Coolangatta.
In the Sunshine Coast, it will be available from Caloundra and Beerwah in the south through to
Noosa up north. These three areas combined are home to around three million people.
Perhaps surprisingly, Didi was not prioritising the five million-strong Sydney market.
‘Launching in Sydney isn’t part of our short-term strategy, however, we ultimately look forward to
bringing our rideshare service to the Sydney market, where we have seen a need for a safe, reliable
and value-for-money rideshare service,’ spokesperson Dan Jordan told Business Insider Australia.
Eyeing further expansion in an already crowded and competitive market, DiDi claims it holds a
competitive edge.
‘We’re on average about 10% more affordable than the other ride sharing services,’ DiDi
spokesperson Dan Jordan said, according to My GC.
To help it gain a foothold, the service is offering a number of promotions to attract drivers and
riders alike. While its drivers are normally charged a 5.5% service fee, those who sign up the service
before September 23 will be granted a four-week grace period.
Then there are incentives for passengers who sign up for DiDi on the Gold Coast and Sunshine
Coast. Those who signed up on the DiDi-Rider App before September 23 will get 50% off their first
five trips — which is valid for 21 days and capped at AU$10 per trip. Those who get the app after
September 23 will get 50% off their first three trips, which is valid for only 14 days and capped at
AU$10 per trip.
Jordan told Business Insider Australia in an email that Geelong was chosen as DiDi’s first
Australian market largely due to it having the highest ridesharing penetrations of any city in
Australia at the time.
‘Following the success of Geelong, Melbourne was chosen as the next destination as an
expansion of the service in Victoria in a city that had embraced rideshare,’ he said.
‘DiDi has taken time to build a strong foundation in Australia and gain an intimate knowledge
of the market before expanding its rideshare service nationwide. We have taken a collaborative
approach and listened to the community to ensure we can provide a truly localised mobility solution
to Australians.’
Produce a table similar to table 4.14 relating to DiDi’s entry to the Australian market.
Source: S Masige, 2019, ’DiDi, the ‘Uber of China’, has launched in two more Queensland markets – but still no Sydney’,
Business Insider, www.businessinsider.com.au/didi-launches-gold-coast-australia-no-sydney-2019-9.
MARKET ATTRACTIVENESS
Identifying geographic regions that have strong growth potential, especially when the organisation is
operating in a saturated local market, is a critical task.
Any country offering a market of sufficient size and with sufficient rate of growth is potentially
attractive. However, relevant considerations include the distribution of income among the population
in the country, the stability of growth and the existing degree of local and international competition
in the market. The countries with the largest and most mature markets are regarded by the large
multinationals as the most important to be in. These include the United States, Japan, Germany, France
and the United Kingdom. Countries with the fastest-growing markets, including China and India, are also
considered attractive.
Small and medium-sized organisations tend to internationalise by becoming familiar with their neigh-
bouring country markets. Such organisations feel confident in operating in countries that have similar
business cultures to their own. For example, in the Asia–Pacific region, many small organisations operate
in several neighbouring countries, often through extended families and acquaintances. Although these
organisations are often small in scale, the cumulative total of this international business activity is
substantial and may generate a dense pattern of trade and create international business links.
Selecting the right market to enter is critical to the chances of success, which in turn influences
the likelihood of further overseas investments. An early failure in overseas expansion can set back the
internationalisation of an organisation by many years.
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The organisation needs to be able to answer the following questions about potential markets
(Lasserre 2003).
• Do the market potential and competitive conditions offer prospects that will enable the organisation,
with its competitive advantages, to generate returns equal to or higher than the cost of capital?
• Will the specific investment in some significant way develop the organisation’s capability, assets or
competitiveness with regard to competition in other markets?
• Are the risks of operating in this particular market acceptable for employees, shareholders and the
organisation’s reputation?
To answer these questions and fully evaluate the expansion opportunity, market research and intelligence
must be gathered, to include the following.
• The size and value of the proposed market — this might be in terms of the number of units sold,
which can be roughly calculated by multiplying the number of customers by the average sales per
customer and the number of sales per customer per year. It is important to remember that what might be
considered a large opportunity by one organisation may be considered insignificant by another — it is all
relative.
• Market growth — all the factors applied to remote environment analysis can be applied to understand
what is driving the growth of this segment and confirm whether it is attractive in terms of future growth.
• Market profitability — all the factors applied to industry analysis in module 2 can be applied to
understand what is driving the profitability of a particular industry or segment and to confirm whether
it is attractive in terms of future profitability.
The organisation must decide on the degree of accuracy required in gathering this information.
In general, a generous tolerance on market size is permissible under the following conditions:
• when an investment is very small within the total market
• when the study is a preliminary scan of the market and/or
• when the key objective is to decide how something, rather than what, is going to be achieved.
On the other hand, a high degree of accuracy would be expected when:
• the investment is large within the total market, and the investor aims to achieve a significant share
within it
• market sizes from different years are needed to show a trend and/or
• it is necessary to isolate segments of the market that could be attractive targets.
In international markets, in addition to the size and growth of demand, the nature of demand can
influence investment decisions. As the gross domestic product (GDP) of a country grows, there is a
significant impact on disposable income and the growth of the middle class. (Both India and China now
have a large middle class with significant disposable income, which explains the arrival of the luxury
goods industries in these markets.) What may have once been expensive consumer goods in developing
countries, such as refrigerators, washing machines, televisions and telephones, become mass consumer
goods acquired by increasing numbers of working families. To gauge the potential of new markets overseas,
the following factors are relevant to consider.
• Obsolescence and leapfrogging of products — the international product life cycle theory of marketing,
whereby products reaching saturation in advanced markets can be produced in developing markets for
consumers experiencing this product for the first time, may be displaced by the leapfrogging of products.
The diffusion of ideas and technology is now so rapid in the world that even people entering the market
for the first time want state-of-the-art products if they can obtain them. For example, in China, where
landline telephone technology was not widespread, consumers ‘leapt’ from not having telephones at all
to using advanced mobile telephony.
• Prices — in different countries people will pay for some products even if they are scarce and expensive.
For example, alcohol is more expensive in Australia than in many other countries due to higher
government taxes on alcoholic beverages. In China, the price of imported Australian milk is around
five times the price of milk in Australia. This is because the Chinese perceive Australian milk as high
quality, nutritious and safe (Grigg & Murray 2014). The expenditure patterns of consumers will vary in
different countries according to what they view as essential.
• Substitution — in some countries it is possible to find substitutes for products that are highly valued in
other societies. For example, in Hong Kong, the cheap and efficient public transport system reduces the
market for automobiles significantly.
The next consideration is how the product will get to market. Relevant factors include the following.
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• Distribution — how will the customers in the market be reached? Does anyone have control over
distribution channels to reach these customers? Can new methods of distribution be established?
• Value proposition — it is likely that the target customers are already being served, so it is important
to consider and understand what it is about the product or service being offered that could entice these
customers away from competitors. Is the offer better than the current suppliers’ offer to the proposed
customer segment? If so, how?
The organisational capabilities required to enter the market (as well as their availability) that need to be
considered include the following.
• Resources — does the organisation have the resources to enter the market? If not, how can it get them?
• Capacity — does the organisation have the capacity to supply the market? If not, how can it get it?
• Service — does the organisation have the capacity to service the market? If not, how can it get it?
After a comprehensive assessment of the relative attractiveness of different markets and a decision to
proceed with overseas expansion, the organisation must develop an effective entry strategy. Successfully
entering and operating in a foreign market requires the right decisions with regard to the following.
• Selection of market — identifying the market to enter that is the most promising.
• Entry objectives — why the organisation is entering the new market and what it hopes to achieve.
• Timing of entry — when to enter to achieve the greatest impact.
• Scale of entry — what level of investment to make to maximise opportunity and minimise risk.
• Mode of entry — what operation is most feasible and will provide the best platform for lasting
success.
Modules 5 and 6 describe evaluation, risk assessment and management, and implementation.
MARKET DEVELOPMENT RESOURCES

Gathering the data required for a rigorous analysis of overseas investment options is a demanding task.
Traditionally, this would involve travelling to the country concerned to talk to government authorities,
and prospective partners and clients. This remains a popular approach. For example, several organisations
run executive tours of China to familiarise organisations with the initial considerations for investing there.
Some organisations commission private research, but this can be costly compared to accessing information
through desktop research and the various government and business facilitation organisations that issue
information globally. For example:
• The IMD World Competitiveness Yearbook is prepared by the Swiss-based business school IMD,
measuring 61 countries across 340 criteria.
• The World Bank compiles an index in which countries in a region are benchmarked against one
another and then against Organization for Economic Co-operation and Development (OECD) averages
(World Bank Group 2017a). The World Bank Group’s Doing Business website (www.doingbusiness.
org) contains updated OECD, regional and country reports measuring and commenting on the relative
competitiveness of different countries (World Bank Group 2017a).
• Many local organisations, such as chambers of commerce, provide extensive information to support
trade in their region. For example, the website of the Hong Kong General Chamber of Commerce
(www.chamber.org.hk) contains a wealth of information about its activities.
The data that the World Bank’s Doing Business surveys provide allow for an overall comparison of the
ease of doing business internationally in terms of:
• procedures necessary to set up an organisation
• relative costs involved in employment
• degree of investor protection
• international tax rates in the countries concerned
• other indices relevant to an organisation entering a new market.
The surveys also include figures on how many days it takes to start up an organisation with respect to
negotiating different regulations. For example, it takes 2.5 days in Australia and Singapore and 79.5 days
in Brazil. New Zealand had the fastest time, with only one day needed to start an organisation.
To establish a company in Australia, Brunei, Hong Kong and several other countries, zero or close to
zero capital is required, whereas India requires 13.8% and the Slovak Republic (Slovakia) 17.8% of the
annual income — such high costs must seriously depress small business formation. The relative strength of
corporate governance and investor protection in the Asia–Pacific region currently ranges from very strong
protection in New Zealand, Singapore and Hong Kong, to little protection in Vietnam and Laos.
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The World Bank’s Doing Business website also contains special reports on issues such as tax compliance
(World Bank & PwC 2017). For example, the Middle East makes it easy for organisations to comply with
taxation requirements. This information, combined with the fact that many countries in the region offers
generous tax concessions to organisations setting up operations there, may inform the strategic decision-
making process to establish operations in the Middle East.
It is cost effective to use resources such as those previously described for business research rather than
to commission research, especially in the initial stages of expansion.
Organisations (such as those noted in appendix 4.1) can assist in market development in foreign markets
by enhancing awareness and knowledge of potential differences between the home market and a new
geographic market.
While global expansion has obvious growth benefits for mega-retailers that have reached saturation point
in their own markets, there are substantial risks. Despite the wealth of available information, organisations
can still get it wrong. See example 4.14, which discusses hardware chain Bunnings’ failed attempt to enter
the UK homewares market.
EXAMPLE 4.14
Bunnings — How the $1.7b UK Disaster Unfolded

Homebase UK was a British home improvement retailer and garden centre with stores across the
United Kingdom and Republic of Ireland. Australia’s Bunnings hardware chain considered it a ‘renovation
opportunity’. Bunnings acquired Homebase’s operations — 265 well-located stores and a business that
turned over about $3 billion but made only $40 million a year.
Bunnings’ management had spent years studying the UK market and planning for its entry. Bunnings
would acquire the business but leave it largely untouched while opening some pilot Bunnings-branded
stores to test various iterations of its Australian format. Only after it had proven a format would it roll it out
across the larger chain by re-formatting and re-badging the Homebase network as Bunnings.
Within two years, Bunnings had exited Homebase, taking a huge loss. It was later described as ‘the
most disastrous retail acquisition in the UK ever’.
‘Bunnings wholly underestimated the complexity of the UK market,’ says Richard Lim, chief executive
of Retail Economics. ‘The shop environments didn’t live up to customers’ expectations, while product
selection failed to resonate with their core customers. These self-inflicted wounds have been an incredibly
expensive lesson for the retailer’.
Now read appendix B at the end of the study guide for further information.
Based on table 4.14; Bunnings entered the UK market on expectations of:
• achieving market penetration and development
• capturing a share of the market.
On that basis growth, market share and gross margin are suitable KPIs.
The window of opportunity was the acquisition of Homebase, but it should be noted that Homebase’s
key competitor, B&Q, was Bunnings’ first choice, but was ultimately rejected on the basis of complexity,
as B&Q was also operating in other international markets (whereas Homebase was only operating in the
United Kingdom and Ireland).
Market Attractiveness
The United Kingdom is a mature market with English as the main language and a large population. In
assessing market attractiveness, the following issues were relevant to Bunnings.
• Do the market potential and competitive conditions offer prospects that will enable the organisation, with
its competitive advantages, to generate returns equal to or higher than the cost of capital? Homebase
was expected to be a ‘renovation’ opportunity. Bunnings was acquiring 265 well-located stores and
a business that turned over about $3 billion but made only $40 million a year. The intention was
to eventually re-format and re-badge the Homebase network as Bunnings after testing and iterating
concepts till one that worked in the United Kingdom was found, and to accept modest profits in
the interim.
• Will the specific investment in some significant way develop the organisation’s capability, assets or
competitiveness with regard to competition in other markets? The gameplan was simple. Bunnings
would acquire the business but leave it largely untouched while opening some pilot Bunnings-branded
stores to test various iterations of its Australian format. Only after it had proven a format would it roll it
out across the larger chain.
• Are the risks of operating in this particular market acceptable for employees, shareholders and the
organisation’s reputation? Unlike Masters’ entry to the Australian market, Bunnings’ entry to the United
Kingdom wasn’t to be a greenfields strategy but the acquisition of an established business to lower
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the risk. The stores were under-performing but generating modest profits, so on face value the risks
were low.
However, Australian management did not follow the original plan of leaving Homebase and the
concessions alone and collecting the modest profits the business was generating until the pilots had
produced something that worked for United Kingdom. To address underperformance, they removed
local management and replaced them with Australian managers, doing what one analyst described as
‘. . . they’ve arrived in England with a Bunnings format and really plonked Australia into England and that
was never going to work.’
So while the market was attractive, with good distribution, capacity and service, the value proportion
for the market just wasn’t there and the resources used (Australian management) didn’t understand the
market sufficiently to realise that what works in Australia won’t necessarily work in other markets.
Consequently, Bunnings did not achieve the growth, market share or gross margin they would have
planned for based on poor execution, rather than unsound reasoning or poor evaluation of the opportunity.
Many of the issues experienced by Bunnings were based on implementation post acquisition (and
this is explored further in module 6). Despite proper due diligence and the seeming attractiveness of
the acquisition as a market expansion strategy, huge value was destroyed for Bunnings shareholders by
management’s inability to effectively operate the Homebase business post acquisition. Capability was
another area that was underestimated. Bunnings had no experience in expanding overseas, so perhaps
it would have been more appropriate for them to have focused on the strategic objective for market entry
as being learning — however, if that was the case Homebase may not have been the most appropriate
acquisition target.
Source: Adapted from S Bartholomeusz, 2018, ‘Going off script: how the $1.7b Bunnings UK disaster unfolded’, The Age, 28
May, www.smh.com.au/business/companies/going-off-script-how-the-1-7b-bunnings-uk-disaster-unfolded-20180528-p4zh
vw.html.
Evaluation of product, service and market expansion options is discussed in module 5 and considerations
and requirements for their successful implementation is dealt with in module 6.
COMMON MODES OF ENTRY INTO NEW

GEOGRAPHIC MARKETS
The choice of entry mode depends on market circumstances and the strategic objectives of the organisation.
The critical elements informing this decision are the assessment of the market attractiveness of the
country, and whether the organisation intends to invest only in limited commercial activities or to make
a significant investment in developing assets, building competencies and engaging in significant local
production of goods and services. Finally, the ownership of the enterprise is crucial, depending on whether
the organisation is ready to become part of a joint venture or is committed to full control and ownership
of the overseas assets.
The major modes of new product and market entry are summarised in figure 4.19 and detailed in the
following subsections.
Exporting
Exporting is often the first stage in the internationalisation of an organisation. The idea of exporting often
occurs simply because orders are received from overseas or because organisations realise that competitors
are exporting to overseas markets. Exports offer the opportunity to significantly increase sales revenue
for both manufacturing and service organisations. Organisations are attracted to exporting not simply
to expand their markets, but also to open up the prospect of higher profitability. Profits may be higher
for overseas sales because there is less competition or because the market is at a different stage in the
life cycle of the product. Overseas sales may involve different tax regimes or regulations on prices that
can be managed to raise profits. Inevitably, however, exports also involve additional costs related to
transport, distribution and servicing. These costs must be taken into account when considering the benefits
of exporting.
Organisations pass through a number of stages as they progress towards becoming experienced large-
scale exporters. For example, exporting may begin by responding to requests for their product from
overseas as opposed to consciously developing international business, but as overseas business grows,
the desire to have more control over the export and sales process develops.
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FIGURE 4.19 Modes of entry
Acquisition
Exporting
Greenfield Foreign
site direct Licensing
investment
Modes
of entry
Joint
Franchising
ventures
Strategic
alliances
At the same time, organisations seek to use their distinctive capabilities to create greater competitive
advantage, which also influences their desire to establish their own export marketing and sales networks
around the world.
Exports may be achieved directly or indirectly by the means described in table 4.16.
TABLE 4.16 Approaches to exporting
Approach Description Pros Cons
Indirect Indirect selling is through an Limited effort or additional Growth is dependent on

selling intermediary that takes on the resources required. the performance of a third
responsibilities of obtaining the No need to divert party.
goods and exporting them to organisation’s resources Customer feedback
overseas customers. to learn or implement is gained through an
Intermediaries can be specialist different business systems intermediary rather than
agents or international trading to support export activity. directly so opportunities to
organisations handling many further develop and grow
organisations or products. are hard to assess.
Export Export management organ- Export management Supply continuity has to be

management isations are large-scale companies specialise in assured.
organisations intermediaries that serve buying and selling and have
and trading as the export arm of major established networks they
organisations manufacturers; they select can access for sales.
markets, distribution channels Typically deal with larger
and promotional campaigns, and volumes and have
offer exclusive representation in cost benefits based on
defined territories. economies of scale.
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Direct selling This may begin with a network More control over the Supply continuity has to be
of sales representatives before export and sales process. assured.
developing into an overseas Easier to use own May need sophisticated
marketing and sales department. distinctive capabilities to pricing agreements so
Direct selling to retailers is create greater competitive that customers can’t
another possibility, as retail advantage. exploit differences in
chains have grown in scale Ability to leverage process across distribution
and coverage across many established distribution channels.
countries. Consumer products outlets that customers
can be sold to different customer have e.g. international
groups such as international supermarket chains.
supermarket chains
(e.g. Walmart, Ahold) and reach
stores around the world. This
offers exporters the chance to be
‘born global’.
Direct selling The internet offers an opportunity Quick and easy to set Unless set up properly,
via the for enterprises of all sizes to up and establish a the cost of distribution for
internet sell and market their goods website with e-commerce small organisations may
worldwide. The internet is functionality for a small make goods being offered
quicker and cheaper to use for organisation. More complex uncompetitive.
marketing and sales and can if lots of products are being Being found by customers
improve customer service. sold. online can be challenging.
Lots of options for Systems and processes to
organisations to use return goods need to be in
distribution company place.
services for transport of
goods, with strong tracking
capabilities.
Indirect This option has evolved through Very easy to set up and Maybe competing against
selling via platforms like Amazon, eBay and transactions are processed multiple organisations
the internet Alibaba as an online marketplace by the marketplace offering the same or similar
model. operator. products from around the
Operator has scale that world.
attracts customers and Systems and processes to
search engine functionality return goods need to be in
to help them find specific place.
products.
An export strategy that effectively negotiates each stage of the international business transaction chain
is required and encompasses:
• ordering
• credit checks of buyers
• transport
• customs
• financial transactions
• distribution
• servicing.
Mistakes at any stage in this chain of transactions may be costly. Such mistakes may include
misunderstanding the complexity of customs clearance, choosing unreliable agents or distributors, failing
to modify products to other countries’ standards, or failing to print servicing and warranty messages
accurately in the local language.
Licensing
In licensing agreements, an organisation (the licensor) grants rights to another organisation (the licensee)
in a country or region for a set period. The licensee pays a royalty to the licensor. These rights may be
exclusive, meaning the licensor may not award these rights to another party for the particular country or
region for a specified time. Alternatively, the licence may be nonexclusive, in which case the rights may be
awarded to multiple parties in a country or region that may compete in the marketplace at the same time.
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Licences are usually defined in terms of the IP and intangible assets involved, which include:
• patents, inventions, formulas, processes, designs and patterns
• copyrights for literary, musical or artistic compositions
• trademarks, trade names and brand names
• franchises, licences and contracts and
• methods, programs, procedures and systems.
These are discussed further later in this module.
When technological change is rapid, licensing and cross-licensing agreements (where the parties
exchange licences) become a reasonable way of conducting international business. The payments for
licences vary according to contracts based on the sales potential. Sometimes, developing countries insist
that licensees should be able to export licensed goods and, in addition, licensors demand higher royalties.
Licensees normally must make an up-front payment to cover the immediate costs of technology transfer,
which involves the transfer of tacit knowledge through consultation and adaptation; it is not simply the
transfer of reports or blueprints.
Example 4.15 examines how the ABC public broadcaster can license brands and products.
EXAMPLE 4.15
ABC — Licensing Arrangements

Australian broadcaster ABC creates a range of entertainment programs. Its brand portfolio includes Giggle
and Hoot, Play School, Bananas in Pyjamas, The Deep, Prisoner Zero, triple j and Rake.
ABC has a licensing team that specifically manages licensing activity and supports brand owners
(e.g. the owners of the Bananas in Pyjamas brand) and their licensees to develop branded products across
a range of end-uses. For example, Bananas in Pyjamas characters could be used on children’s crockery
(e.g. plastic plates, bowls and mugs), toys and on clothing. A licensor would acquire rights through a
licence agreement with the ABC to use the brand on single or multiple product types (e.g. a different
manufacturer may have the licences for apparel and children’s crockery).
There may be a one-off fee to secure a licence, as well as agreed royalty payments based on sales
performance. Licences are usually restricted to specific geographic markets (e.g. countries or even regions
within countries) and licensors have performance targets to meet (e.g. minimum sales target) or they risk
losing the licence, which can then be awarded to another organisation.
Another important ‘right’ that is licensed by the ABC is the right to broadcast television shows or formats
that they have created. The rights to shows created in Australia by the ABC can be licensed to be broadcast
by other broadcasting companies around the world either ‘as is’ or as a format that is adapted to the local
context. Game shows are a popular format that have been licensed, and in both directions (i.e. content
created elsewhere has also been licensed to be broadcast in Australia).
Licensing arrangements involve fewer costs and operational complexities for the licensor. However, the
licensor does not learn about the market where its licences are being used.
Finally, there is a risk in licensing advanced technology to overseas organisations, because there is
always the possibility that rival organisations will copy proprietary technology. This is often referred to as
technology leakage.
Franchising
Franchising is a system in which one party (the franchisor) licences another party (the franchisee) to
use its business system. Essentially, the franchisee is buying access to a proven product/service offer and
business system, including, for example, a standard store layout design, proprietary equipment, supplies
of materials and ongoing business system development, promotion and market.
Franchising is thus a more highly developed form of licensing. Along with the exchange of IP, there is an
ongoing relationship between the franchisor and the franchisee in which the franchisor offers operational
assistance to the franchisee in the form of sales promotion, training and business advice.
Essentially, the franchisee is buying access to a proven product/service offer and business system,
including, for example, a standard store layout design, proprietary equipment, supplies of materials and
ongoing business system development, promotion and market.
For this, the franchisee pays an amount up front to purchase the franchise and then pays ongoing
fees to the franchisor to pay for the costs that the franchisor incurs in terms of, for example, centrally
organised marketing, training, product development and provision of business systems. A typical franchise
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agreement also locks the franchise into purchasing centrally from the franchisor. The franchisor gains
savings from economies of scale and bulk purchase and in so doing can ensure the quality of inputs
across franchises.
For franchise operators, growth is necessary to increase revenue and profits. This often means franchises
must look overseas if they are to grow after they have reached saturation point in their domestic markets. In
encouraging the overseas expansion of the franchise, the franchisor may deal directly with local franchisees
in different countries or establish a master franchisee in a region or country with the rights to develop other
franchisees in this territory.
In the past, most international franchises were US organisations, such as McDonald’s, which dominated
the fast-food industry in many countries. However, as the formula for effective franchise delivery and
standards of technology and service have become more widely disseminated, successful franchises have
originated in other parts of the world. These have often projected differentiation rather than standard-
isation. For example, Pret A Manger originated in London and offers fresh, handmade and chemical-
free food combined in restaurants featuring chrome art deco interiors. Pret A Manger now operates
internationally — in the United Kingdom, Hong Kong, France and the United States (with 35 outlets
in New York).
The local Australian market is not large enough to support large-scale franchises, and in expanding
overseas, most franchises first try New Zealand and then move on to markets such as Singapore, India,
Hong Kong, China or the United Kingdom. For example, Australian organisation Boost Juice (which sells
juices and smoothies) now operates in 14 countries including the United Kingdom, Indonesia, Kuwait
and India.
QUESTION 4.14
Why might an organisation like Boost Juice choose to franchise its operations? What are the
advantages and disadvantages involved?
Strategic Alliances
A strategic alliance is a formal, mutually agreed upon commercial collaboration between organisations.
The partners of the alliance exchange and/or integrate selected business resources for mutual benefit, but
they remain separate, entirely independent organisations.
Strategic alliances take many forms. Organisations may choose an alliance that involves simple market
exchanges or cross-licensing agreements, or they may form a more complicated partnership that includes
cooperative manufacturing arrangements or joint ventures (discussed in the next section).
Alliances are formed for joint marketing, sales, distribution, production, design collaboration, technol-
ogy licensing or R&D. Relationships can be vertical between a vendor and a customer, horizontal between
vendors, local or global. Alliances are often established formally in a joint venture or partnership.
Strategic alliances offer several advantages, including improved competitive positioning, entry to new
markets, access to critical skills, and sharing of the risks or costs of major development projects.
Other benefits include economies of scale, resulting in:
• increased versatility
• reduced costs through increased production
• enhanced purchasing and financial arrangements
• a stronger negotiating position with suppliers, customers and/or regulatory agencies
• greater access to critical resources
• opportunities for large-scale marketing efforts.
Strategic alliances are broad and can cover product development, manufacturing and marketing.
Some examples of strategic alliances include the following:
• airline alliances (e.g. Star Alliance, with 27 member airlines) that offer incentives through loyalty reward
programs for customers who choose member airlines
• combined product or service offerings to attract a larger customer base (e.g. Coles–Shell and
Woolworths–Caltex fuel alliances)
• IT global strategic alliances (e.g. between HP and Microsoft) that share technology, engineering and
marketing resources to better meet their customers’ requirements.
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Aiming for simplicity and flexibility in the scope of an alliance rather than for broad and all-
encompassing equity participation is often helpful. The key to success is simple and focused partnerships.
Three factors add to the complexity of alliances:
1. complicated cross-holdings and equity
2. cross-functional coordination and integration needs
3. the breadth and scope of joint activities.
To manage the boundaries between partners, the interface between them can be:
• structured as an independent legal entity
• managed by both or one of the parent organisations
• simply administered by a joint committee.
If the alliance involves manufacturing and marketing a new product on a worldwide basis, an indepen-
dent entity is required. But if the aim is simply marketing each other’s existing products (common with
airline alliances), rules to determine the marketing parameters will suffice. Irrespective of the objectives
of the alliance, the process of collaboration creates a flow of information across the boundaries of
competing organisations. Ensuring the full exploitation of knowledge sharing and preventing the outflow
of knowledge the organisation wishes to retain demand precise arrangements and understandings.
Alliances, unlike acquisitions, are based on the equality of both partners. It is useful to remember that
alliances need not be permanent. Around half of all cross-border strategic alliances terminate within seven
years, so it is important for managers to have a good idea of what comes next. Most alliance organisations
are eventually purchased by one of the partners, and termination of the alliance does not mean failure.
However, the prevalence of early terminations suggests it is important to consider whether parties are
likely to be buyers or sellers. Understanding the sequence of likely future transactions is important because
alliance partners will be competitors in the future.
QUESTION 4.15
Why do organisations form strategic alliances?
Joint Ventures
A joint venture is a specific type of strategic alliance. It involves two or more separate organisations jointly
setting up a new entity that has equity and assets. Partners in a joint venture share control and decision
making and are usually governed by specific legal and accounting requirements.
Joint ventures take many forms, including joint ventures between:
• high-technology and other leading organisations
• multinational organisations and state industries
• international organisations and smaller, local organisations in developing countries.
They are a popular means by which international organisations share ownership of a venture with a local
organisation. In some cases, it may be the only option. Governments, particularly in developing countries,
often insist on the joint venture form as a means of securing technology transfer and retaining some degree
of ownership and control of the business development in their economy. This was the case in China in the
1980s and 1990s in many industry sectors.
The joint venture is often a preferred means of market entry for international organisations, as it can be
a way of reducing establishment costs and minimising risks by working with a partner who is informed
about the local market, culture and the tax, legal and political systems. Large international organisations
will often enter joint ventures in a range of countries, initially with a limited purpose — for instance,
to explore the market or to produce and sell a particular product suited to the market. However, if a joint
venture is working well, the international partner may redefine and expand its objectives. While some joint
ventures are short-lived, others may prove viable for many years.
Organisations of any size can use joint ventures to strengthen long-term relationships or collaborate on
specific projects, such as a bid on a particular project or tender. The organisations involved will form a
consortium, and if successful, they will complete the project and then dissolve the consortium or joint
venture. As such joint ventures are usually designed to have a limited life span and only cover part of an
organisation’s activity, thus limiting commitment and exposure.
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Whatever the aims, the joint venture agreement needs to:
• recognise what each partner is contributing to the venture
• identify what the joint venture is expected to achieve and by when, as well as what will happen if
expectations are not met
• establish the approaches to measuring performance.
A clear agreement is an essential part of building a good relationship and of concluding a business
relationship effectively and professionally without loss to business reputation. Therefore, a contractual
joint venture, such as a distribution agreement, should always include termination conditions.
Problems with joint ventures are likely to arise if:
• the objectives of the joint venture are not clear and well communicated
• the joint venture partners contribute different levels of expertise, commitment, investment or assets to
the venture, contrary to the original agreement
• different cultures and management styles result in poor integration, understanding and cooperation
• insufficient leadership and support are provided in the early stages
• the joint venture partners are not aligned in their approach to business.
Also, circumstances often change. For example, as an overseas market matures, a joint vehicle that
was developed for market entry becomes less necessary. So, at a time when foreign banks, including
Credit Suisse and Morgan Stanley, were signing preliminary agreements in 2007 with mainland China
joint venture partners in anticipation of early movement on approvals in Beijing, they were also abandoning
joint ventures in other parts of Asia. In India, the investment banking fee pool became sufficiently large
for several foreign banks to exit joint ventures with local partners and continue on their own.
Foreign Direct Investment
Foreign direct investment (FDI) can occur through:
1. the establishment of a new business overseas (a so-called greenfield site)
2. the acquisition of an existing overseas business (a so-called brownfield site).
For many years, FDI in the form of acquisitions and greenfield investments was heavily concentrated
in the advanced industrial countries (specifically in North America, Europe and Japan). However, as
developing countries have eased their restrictions and regulations on foreign ownership, more FDI has
been directed towards the developing world (most significantly towards China and India in recent years).
In the 1990s and early 2000s, it seemed as if every multinational organisation in the world was eager to
secure entry into China. Initially, in most industrial sectors, overseas organisations wishing to invest in
China needed to form joint ventures. However, from the mid-1990s, wholly foreign-owned investments
were increasingly allowed. China has adopted the position that it is possible to secure technology transfer,
skill development and retention of profits while allowing greater autonomy for overseas organisations.
Establishment of a New Business Overseas
An organisation can have full ownership and control of a foreign enterprise if:
• the foreign government allows foreign ownership in key industry sectors
• the international organisation has vital resources, such as patents, trademarks, designs and operational
processes it does not wish to transfer to another partner
• the potential overseas market is large enough and growing at a rate that will allow the international
organisation to compete successfully
• the international organisation has the capital and resources to make the investment, and the risk appetite
to launch the venture.
A wholly owned foreign enterprise allows the organisation to share a common organisational culture,
appoint its own managers, manage investment and earnings, determine strategic development and integrate
this within the global strategy of the organisation as a whole.
The attraction of investing and setting up a new overseas organisation (a ‘greenfield operation’) is the
chance to start a new organisation with new people, plant and equipment. An original image for the
organisation may be created with marketing, and customers will not have any preconceptions. Often, a
greenfield investment will mean state-of-the-art technology and products.
Acquiring an Existing Overseas Organisation
The decision to acquire an existing organisation (a ‘brownfield operation’) in an overseas market will
depend on the quality and attractiveness of organisations available for purchase. It was often the case with
long-established European organisations that they were not for sale because the small number of family
and related shareholders had no intention of parting with the organisation at any price. Similarly, in Japan
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for a long time, there was a reluctance to sell organisations, let alone sell them to foreigners. In this sense,
organisations are often seen as a legacy to pass on from one generation to another rather than as a bundle
of assets to be bought and sold. However, in other circumstances, whole industries are put up for sale —
for example, in the mass privatisation that took place in many countries in the 1980s and 1990s. In the
United Kingdom, all of the public regional water organisations were privatised in the 1980s, and several
were acquired by the French organisation Vivendi.
An acquisition is when one organisation buys another and ends up controlling it. A merger is when
one organisation integrates with another and shares control of the combined organisations with the
other owner(s).
Acquiring an organisation that is already operating in a desired market is an alternative to establishing
a subsidiary. An acquisition strategy can bring more immediate results, possibly with less expense and
risk than starting a new subsidiary business operation. Blending the culture and operational practices of
an organisation operating in a different market with those of the home organisation may take time, but it
may be more readily achievable than starting from scratch in an unknown market. These considerations
are discussion in module 6 in more depth.
Example 4.16 describes the objectives and details of Coca-Cola’s acquisition of the coffee company
Costa Ltd.
EXAMPLE 4.16
Coca-Cola — Acquiring Costa

In 2018, the Coca-Cola Company announced its intention to acquire UK Coffee Company Costa Ltd from
parent company Whitbread PLC for $US5.1 billion, giving Coca-Cola a strong coffee platform across parts
of Europe, Asia–Pacific, the Middle East and Africa, with the opportunity for additional expansion.
An extract from the media release announcing this acquisition has been provided. Read the extract and
answer the following questions.
The Coca-Cola Company to Acquire Costa
In August 208 the Coca-Cola Company announced its intention of acquiring UK Coffee Company Costa
Ltd from parent company Whitbread PLC for US$5.1 billion, giving Coca-Cola a strong coffee platform
across parts of Europe, Asia–Pacific, the Middle East and Africa, with the opportunity for additional
expansion. Costa operations include a leading brand, nearly 4000 retail outlets with highly trained baristas,
a coffee vending operation, for-home coffee formats and Costa’s state-of-the-art roastery.
For Coca-Cola, the expected acquisition adds a scalable coffee platform with critical know-how and
expertise in a fast-growing, on-trend category. Costa ranks as the leading coffee company in the United
Kingdom and has a growing footprint in China, among other markets. Costa has a solid presence with
Costa Express, which offers barista-quality coffee in a variety of on-the-go locations, including gas
stations, movie theatres and travel hubs. Costa, in various formats, has the potential for further expansion
with customers across the Coca-Cola system.
The acquisition will expand the existing Coca-Cola coffee line-up by adding another leading brand and
platform. The portfolio already includes the market-leading Georgia brand in Japan, plus coffee products
in many other countries.
Costa also provides Coca-Cola with strong expertise across the coffee supply chain, including sourcing,
vending and distribution. This will be a complement to existing capabilities within the Coca-Cola system.
‘Costa gives Coca-Cola new capabilities and expertise in coffee, and our system can create oppor-
tunities to grow the Costa brand worldwide,’ said Coca-Cola President and CEO James Quincey. ‘Hot
beverages is one of the few segments of the total beverage landscape where Coca-Cola does not have a
global brand. Costa gives us access to this market with a strong coffee platform.’
Coffee is a significant and growing segment of the global beverage business. Worldwide, coffee remains
a largely fragmented market, and no single company operates across all formats on a global basis.
‘The Costa team and I are extremely excited to be joining the Coca-Cola Company,’ said Costa Man-
aging Director Dominic Paul. ‘Costa is a fantastic business with committed and passionate associates,
a great track record and enormous global potential. Being part of the Coca-Cola system will enable us
to grow the business farther and faster. I would like to say a huge thank you to our customers and to
everyone in the Costa team who have helped us build the business to this position, and I look forward to
the next exciting chapter in Costa’s vision of Inspiring the World to Love Great Coffee.’
Transaction Details
The purchase price is US$5.1 billion. Upon the closing, the Coca-Cola Company will acquire all issued and
outstanding shares of Costa Limited, a wholly owned subsidiary of Whitbread. This subsidiary contains
all of the existing operating businesses of Costa.
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Whitbread will be seeking shareholder approval for the transaction, which is expected to take place
by mid-October. The deal is subject to customary closing conditions, including antitrust approvals in the
European Union and China. It is expected to close in the first half of 2019.
Because Coca-Cola expects the transaction to close in the first half of 2019, there is no change to 2018
guidance. The company’s long-term targets also remain unchanged.
Source: Adapted from Coca-Cola press release, 2018, www.coca-colacompany.com/press-releases/coca-cola-to-
acquire-costa.
QUESTION 4.16
1. How would you describe the strategic objectives for market entry via acquisition of Costa?
2. In terms of market entry and FDI, how would you classify Coca-Cola’s acquisition of Costa?
3. Costa operations include a leading brand, nearly 4000 retail outlets with highly trained baristas,
a coffee vending operation, for-home coffee formats and Costa’s state-of-the-art roastery.
How would you classify the acquisition of the coffee vending operation in terms of the Ansoff
product/market matrix?
MERGERS AND ACQUISITIONS

Two other important approaches to acquisitions are horizontal and vertical integration.
Horizontal integration describes the merger with, or the purchase of, a competitor. Instead of relying
on creating growth internally (organic growth), this approach provides a rapid path to growth while also
reducing the amount of competition in a marketplace. There are sometimes legal requirements that prevent
this type of action to ensure markets remain competitive.
Vertical integration involves moving up or down the value chain. (Refer to module 2 for a detailed
explanation of the value chain.) Moving up the system is called ‘backward integration’. This involves either
acquiring control of suppliers or developing new supply operations. Moving down the system is called
‘forward integration’. This involves either gaining control over customers or developing new customer
outlets and distribution operations.
The most important argument for vertical integration is to obtain strategic control of the value chain.
This can give advantages of certainty, quality control or supply reliability. Gaining cost control is another
possible advantage. This can occur by avoiding marketing and purchasing costs for two links in the value
chain, such as the elimination of supplier margins.
There are several risks associated with vertical integration.
• There is often little capability overlap between different stages of the value chain. For example, a retailer
is, more often than not, unlikely to be an effective manufacturer, and the converse is also true.
• Vertically integrated organisations are generally more volatile in activity and profitability than non-
vertically integrated organisations because changing demand at one stage of the value chain also affects
the other stages.
• As vertically integrated organisations supply their output to internal customers, they may become less
concerned with cost control in their internal operations than their market-based competitors.
• Vertical integration can create organisational inflexibility. If the technology from one stage of the value
chain becomes outdated or the distribution channel used for the products or services being sold changes,
the vertically integrated organisation may find itself more inflexibly committed than its non-vertically
integrated competitors.
The critical aspect for an organisation to consider if it is thinking about vertical integration is whether
it has the capabilities, or whether it can acquire them, to be successful in a new area of operations.
A good example of a vertically integrated global industry is the oil industry. Multinational organisations
such as Shell, ExxonMobil (see example 4.17) and BP operate in all or most stages of the oil supply
chain, from crude oil exploration, drilling, transportation and refining through to the sale of petrol. These
organisations need a wide range of technical and commercial skills to successfully operate each link in the
value chain.
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EXAMPLE 4.17
ExxonMobil — Key Activities

The following information relates to ExxonMobil’s key activities
Upstream
The strengths found in our ingenuity and global organization allow us to explore for and develop all
resource types across the globe, relying on industry-leading technologies and capabilities to do so safely
and responsibly.
Our understanding of the global hydrocarbon endowment, coupled with our unique geoscience
capabilities, allows us to identify and prioritise the development of the highest quality resources. With
our experience and applied technologies, we can develop more oil and gas reserves at both new and
mature fields. Advances in seismic imaging, reservoir simulation, drilling and facility design allow us to
explore and develop deposits that were previously unidentified or unreachable.
Major projects can be complex and capital intensive, which places a premium on execution excellence.
ExxonMobil’s long history of a disciplined approach to investment, technological leadership and opera-
tional excellence positions us well to lead the industry in safely developing the most challenging projects.
These projects include a diverse portfolio of conventional and unconventional opportunities; including oil,
natural gas, heavy oil and deepwater projects.
Chemical
ExxonMobil Chemical is one of the largest chemical manufacturing companies in the world. Our unique
portfolio of commodity and specialty businesses generates annual sales of nearly 25 million tonnes of
prime products.
We operate major manufacturing facilities in key markets around the world, and our products serve as
the building blocks for a wide variety of everyday consumer and industrial products.
We process feedstocks from ExxonMobil’s Upstream and Downstream operations, supplemented by
market sources, to manufacture chemical products for higher-value end-uses. We focus on product lines
that capitalise on advantages in scale and technology, building on our strengths in advantaged feedstocks,
lower-cost processes, and performance products.
Downstream
As the largest global refiner, the majority of our refining capacity is integrated with our lubricants
and/or chemical businesses. ExxonMobil’s global Fuels & Lubricants organization drives the efficient
development and deployment of global best practices and new technologies.
We manufacture and distribute products derived from crude oil and other feedstocks. Our global
network of manufacturing plants, transportation systems and distribution centres provides fuels, lubricants
and other high-value products to customers.
We are the world’s leading supplier of lubricant basestocks and the largest global marketer of finished
lubricants. Supported by a highly trained field force, a strong distributor network and abundant supply,
ExxonMobil delivers high-quality products and application expertise to customers around the world.
We also create long-term value by selling high-quality products and services daily to millions of
customers across the globe. We market our Synergy™ fuels and other products to millions of customers
worldwide through Esso, Exxon and Mobil-branded retail service stations, as well as global business-
to-business segments — Industrial, Wholesale Fuels, Aviation Fuels & Lubricants, and Marine Fuels &
Lubricants.
Natural Gas and Power Marketing
Reliable supplies of natural gas and access to power are fundamental to the world’s economic growth and
increased prosperity. ExxonMobil employs a global team of commercial experts to maximise the value of
the company’s gas, natural gas liquids and power interests in meeting the growing needs of consumers
around the world.
With our detailed knowledge of global markets, we are able to capitalise on expanding natural gas and
power markets. Natural gas, as an abundant lower-carbon fuel source, is expected to play an increasingly
important role in powering the world’s economic growth over the coming decades. ExxonMobil is active
and well positioned across the natural gas value chain in most major markets. Our global presence,
combined with our ability to apply unique expertise across our Upstream, Downstream, and Chemical
businesses, provides us with an important competitive advantage and leading capability to help meet the
world’s growing natural gas and power demands.
While ExxonMobil strives to provide the energy to meet increasing global demand, we maintain a
relentless focus on safe operations. Safety is and always will be our number one priority.
Source: Exxon Mobil, n.d., ‘Business divisions’, http://corporate.exxonmobil.com/en/company/worldwide-operations/
business-divisions
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QUESTION 4.17
Thinking about example 4.17, for each stage of the supply chain (crude oil exploration, drilling,
transportation, refining, sale of petrol), what capabilities do you think a vertically integrated
organisation in the oil industry must have in place to operate successfully?
Value of Mergers and Acquisitions

The essential purpose of engaging in mergers and acquisitions (M&As) is to enhance the value of the
organisations involved. In theory, the economics of M&As suggest that a merger or acquisition may
be justified only if the combined entity is worth more than the value of the independent entities before
the merger.
According to Lasserre (2003), M&As can strategically create the following types of value.
• Consolidation — bringing together organisations operating in the same business area is called a
horizontal M&A (e.g. Electrolux/Zanussi, SmithKline/Beecham and BHP Billiton).
• Global reach — this involves merging with or acquiring overseas organisations that provide an extension
into international markets (e.g. Vodafone/Mannesmann).
• Vertical integration — organisations that supply or buy each other’s products merge.
• Diversification — organisations come together from different business domains (e.g. Sony, an electron-
ics and entertainment organisation, taking over Columbia Pictures, which produces films and music).
• Options — an organisation acquires a firm in a new market or working with a new technology to monitor
its evolution (e.g. in both the software and biotechnology businesses, it is a frequent practice to buy up
interesting innovators).
There are two critical aspects to M&A value creation.
1. Short-term one-off value — short-term value realisation may come from the one-off post-merger
realisation of cash benefits through tax concessions, disposal of assets, debt leverage or possibly
immediate cost savings.
2. Long-term strategic value — this comes from competitive advantage gained from the merger or
acquisition. The competitive advantage provides enhanced efficiency through greater economies of
scale and specialisation, differentiation with a wider range of products, or accelerated growth or
enhanced markets. It is this type of strategic value that can cause significant, long-term change to the
trajectory of the firm.
M&A failure is often attributed to the focus of M&As on financial matters and systems of due diligence
at the expense of the intangible assets that are critical to a successful merger, such as organisational culture,
human capital, organisational structure and corporate governance.
Table 4.17 presents summary guidelines for M&As (CIPD 2003).
TABLE 4.17 M&A guidelines
M&A success/failure
factors Description
Strategic motive Maintain focus on the business objectives to be achieved through this particular
merger or acquisition
Management involved in Put the basics of legal compliance, communication, loyalty building, human
the process resources processes and procedures, and corporate citizenship in place
Culture Keep in mind the long-term goals to be achieved through the merger or acquisition
so as to maintain focus on the compatibility of different cultures
Difference in size Plan ahead so as to prepare for a change in organisational size
Organisational structure Ensure from the beginning that expertise in organisation and people management is
integral to decision making and planning
Comprehensive Ensure that the consequences of the merger or acquisition are examined from all
examination of all stakeholder views, before proceeding
stakeholders
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(continued)

M&A success/failure
factors Description
Analysis of future capital Analyse and predict the total cost of the merger or acquisition to ensure that it can
needed be accommodated and that the process will prove profitable
Ambiguity Accept from the start that business performance will depend on learning to manage
the risks and uncertainties that this specific merger or acquisition will bring, due to
ambiguity
Control system Judge the speed required for different aspects of integration by considering their
impact on the performance of the organisation and people
Sources: Adapted from S Finkelstein & CL Cooper, 2010, Advances in Mergers and Acquisitions, Emerald Group Publishing,
Bingley, United Kingdom; CIPD (Chartered Institute of Personnel and Development) 2003, International Mergers and Acquisitions:
CIPD Guide to the HR Role in Their Success, CIPD, London, p. 8.
ADVANTAGES AND DISADVANTAGES OF DIFFERENT

ENTRY MODES
There is no one optimal entry mode. Often, organisations will graduate from one entry mode to another as
resources become available and new opportunities arise.
Facing largely unknown markets with incomplete information and experiencing uncertainty, organisa-
tions generally undertake the expansion process in a series of increments. At each stage in the development
of the new market activity, a decision has to be made regarding the extent of resources to be committed,
the amount of risk involved, the control of the enterprise and the potential profit involved.
A comparison of the positives and negatives of different entry modes — in terms of finance, speed
of entry, market penetration, market control, political exposure, leakage of technology, complexity and
potential for return — suggests careful judgement is necessary (see table 4.18).
TABLE 4.18 Comparing various entry modes
FDI:
Strategic Joint wholly FDI:
Export Licensing Franchising alliance venture owned acquired
Upfront Low Low Medium Low Medium High High

investment,
financial and
managerial
Speed of Quick Medium Medium Medium Quick Slow Quick

entry
Market Low Medium/ Medium Medium Medium/ Medium High

penetration low high
Control Low Nil Low Medium/ Medium High High

of market high
(customer
knowledge)
Political risk Low Low Medium Low/ Medium High High

exposure medium
Technology Low High High High High/ Low Low

leakage medium
Managerial Low Low Medium High High High High

complexity
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Potential Low Low risk Medium risk Low risk Medium/ High risk High risk
financial High return Medium Medium high risk High/ High/
return* return return High/ medium medium
Low
payout Medium Medium medium return return
payout payout return High High
Medium payout payout
payout
* Note that return refers to the percentage return, whereas payout refers to the dollar value return.
Source: Adapted from P Lasserre, 2002, Global Strategic Management, Palgrave Macmillan, London, p. 205. Reproduced with
permission of Palgrave Macmillan.
Table 4.19 summarises the characteristics, benefits and risks of each mode of entry, allowing compar-
isons to be made among them. This should be used as a general guide, as the mode of entry most suitable
to an organisation will depend on its current performance, future direction, market competitiveness and
a variety of other factors. A benefit–risk analysis should be conducted with reference to the particular
organisation.
TABLE 4.19 Summary of the characteristics, benefits and risks of each mode of entry
Typical financial
Mode Characteristic arrangements Benefits Risks
Export • Sending • Options in terms of • Relatively low risk • Relatively long time to
products who pays distribution • Low investment grow market share
offshore for and freight (aim required • Market share limits
distribution to pass onto • Learn the market • Supply chain costs
customer/buyer) including customs
duties, insurance and
freighting costs
Licensing • Allowing • Possible up- • Sharing risk • Chance that other

outside front licence fee • Limited investment parties might be able
organisations for specified required to exploit the product
to use products/services • Benefit from • Control issues includ-
branding, and markets licensee’s local ing marketing and
products, IP • Ongoing fees, knowledge brand management
etc. when typically at an agreed • Legal costs and
certain royalty rate based on reputation costs in
conditions sales protecting IP
are met • Retention of
licence for a fixed
period or based on
performance
Franchis- • Developing a • Up-front fee for • Central purchasing • Quality and cost
ing centralised purchase of the • Economies of scale controls difficult to
and franchise and higher quality achieve when entering
standardised • Ongoing fees for • Brand and international markets
business corporate services, product/service • Growth needed as a
model to sell such as central consistency prime revenue stream
to individuals marketing
who then • Requirements
operate their to purchase
franchise as centrally that enable
a business franchisor to capture
owner additional margin
negotiated with
suppliers from bulk
purchasing on behalf
of franchisees
(continued)
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Typical financial
Mode Characteristic arrangements Benefits Risks
Strategic • An agreement • Contractual • Share selected • Over-commitment yet

alliance between arrangement operations while underperformance of
organisations established up front maintaining alliance organisation
for a set based on respective independence • Outflow of knowledge
period that contributions of • Cost effective • Uncertainty of
leverages alliance partners • Reciprocal brand assets, cash flow
the products, promotion and and performance of
services or marketing other organisation
knowledge of • Easy entry to
the others new markets
Joint • Organisations • Contractual • Shared risk • Sharing IP/IP leakage

venture that share arrangement for • Local market • Management and
costs, sharing of profits and knowledge, control issues
resources losses established including • Determining
and profits up front based government links, remuneration levels
when they join on respective supply chain
together to contributions of joint specialisation
expand into a venture partners and reputational
certain market • Additional gover- advantage
or product nance and reporting • May be the only
offering requirements and way to gain access
accountabilities for to a strategic
the joint venture market for the
entity organisation
Wholly • Purchase of • Owning entity • Keeps control with • Size of investment

owned an existing responsible for all parent company • Finding a suitable
subsidiary— organisation aspects of business • Faster to company to acquire
brownfield or facility in operations, profits implement — • Difficulty in aligning
(existing) the foreign and losses immediate the acquired
acquired country by expansion into the organisation with the
the parent market parent organisation
organisation • Already evident e.g. systems,
• Full control systems, resources, reporting, organisa-
and process and local tional culture
ownership knowledge • Managing country and
for parent cultural requirements
organisation without the right
knowledge
• Managing expatriate
deployments
• Business infrastructure
may be dated and
unproductive
Wholly • Facility built • Owning entity • Keeps control with • Risk of acquisition
owned from scratch responsible for all parent company from larger market
subsidiary— by parent aspects of business • Can establish players
greenfield organisation operations standardised • Large investment
(new) • Operations operations and required, and high
develop- resourced and practices risk due to managerial
ment developed • Full ownership and and political exposure
from the control over the • Lack of local
bottom up facility knowledge
• Form of direct • Managing expatriate
foreign investment, deployments
so is timely • State-of-the-art
business infrastructure
can be deployed

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ACCOUNTING ISSUES ASSOCIATED WITH
MARKET EXPANSION
A strategy that involves moving into new markets, or diversifying the products or services offered, will
bring with it new accounting challenges not present in the existing organisation. Such issues produce
additional costs and levels of complexity for an organisation. It is vital that these costs and complexities
be anticipated and budgeted for as part of the business case for the strategy implementation; they must
be included in the operating budget of any program of strategy implementation. The identification and
assessment of these issues can span both the external and internal analyses. For example, considerations
such as taxation and governance will be identified during external analysis, but they must also be considered
when assessing the internal capabilities to meet any additional requirements in these areas. These issues
can affect the decision of whether to enter a new market.
Foreign Exchange Risks

Foreign exchange risk is a prominent issue for organisations because of the international nature of
business. It used to be an issue faced solely by large multinational organisations, but it is now often an
everyday occurrence for organisations of any size. It is vital that accountants have a clear knowledge and
understanding of how foreign currency transactions can affect their financials and how to account for them
correctly. IAS 21 The Effects of Changes in Foreign Exchange Rates provides guidance on how to account
for foreign currency transactions; this standard can be accessed through the CPA Australia website.
Exposure to exchange gains and losses can occur in a number of ways as an organisation expands because
of the many different methods of expansion available, including the following.
• Market development by expanding into new geographic areas without a physical presence in those
countries. Where an organisation is domiciled and carries out all of its operations in one country, any
foreign exchange risk may be minimised. If an organisation changes its operating strategy to incorporate
online or international sales or purchases, there can be a risk of exchange losses or gains. These risks
can be from both the customer and supplier side of the organisation and must be considered as part of
any business expansion strategy.
• Entering a new international market by establishing a wholly owned enterprise. When an organisation
establishes a physical presence in a foreign country on its own behalf, it will be exposed to significant
exchange risks. In its new market, the organisation will carry on operations in the local currency. This
means the financial statements for the foreign operation will reflect minimal exchange risks. However,
the process of consolidating these reports into the reports of the parent organisation will reflect any
exposure to such risks. The initial funds to establish the foreign operation would have been provided
by the parent organisation to pay establishment costs in the foreign currency. Senior staff would likely
have been sent from the parent organisation and would therefore have significant salary costs.
• Product development and diversification. When a decision is made to diversify into new products, there
is often a high probability that the capability to manufacture all or part of the new product does not
exist in the home country. The introduction of exchange risk to the costing of a product can create
complications because it introduces an aspect of uncertainty to the production costs, which must be
acknowledged in all costing activities.
Where any of these issues arise, it is likely that the organisation will encounter foreign exchange risks
associated with the contracts it has entered into. The addition of exchange risks can add significantly to
the costs of products due to fluctuations in exchange rates and the need for specialised staff to account for
such transactions. It can add to the complexity of the reporting process because to manage the exchange
risk, the organisation may decide to enter into currency hedging, including forward exchange contracts or
other tools. (These instruments are discussed in detail in the Financial Risk Management subject.)
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Example 4.18 provides an illustration of some of the issues surrounding foreign exchange.
EXAMPLE 4.18
Foreign Exchange Risks

XYZ Co Ltd is based in the United States and has established a wholly owned enterprise in the Philippines.
It is earning most of its revenue in the local currency, the Philippine peso. The customers, who are mostly
Filipino, are likely to demand that they be invoiced in pesos. The product being sold is primarily being
imported from Europe; the R&D activity behind the product is carried out in Europe; and many of the
managers are Europeans who insist on being paid in euros.
The reporting currency of the parent organisation is US dollars, so all of the transactions and balances
will need to be converted into US dollars for reporting purposes.
As a consequence, numerous transactions in different currencies will need to be translated into US
dollars, each with the potential for gains and losses. The business may decide to undertake currency
hedging, but this would add complexity and cost. The qualifications and experience level, and hence the
cost, of the necessary qualified personnel to manage and report on these more complex transactions
would probably increase.
The complexities and costs of operating in multiple currencies need to be foreseen at the time of strategy
formulation and included as a factor when deciding on a market development strategy.
Preparing Multiple Sets of Reports

All organisations are familiar with preparing reports. However, implementing an expansion strategy can
create a need to prepare and lodge multiple sets of accounts for different operating entities and in different
jurisdictions. Generally, a set of accounts, which are also used as the basis for filing a tax return in each
market of operation, will be required in each jurisdiction and for each entity. Depending upon the strategy
being implemented, an organisation may have a number of entities operating in different geographic
locations or, if the expansion has been one of acquiring new entities in the same domestic market, there
may be a number of entities with different reporting dates and different requirements.
All jurisdictions have a prescribed ‘financial year’, which is the standard accepted reporting period for
that jurisdiction, but this can vary between locations. Some countries have a 31 December year end, others
a 30 June year end, and yet others a 31 March year end. This is complicated further by the fact that many
entities elect to use a ‘substituted accounting period’, which means they select their own year end. This
creates an additional level of complexity for the finance and reporting function, particularly if related
entities have different year ends. These issues can affect the reporting function, regardless of whether the
expansion is domestic or international, as shown in example 4.19.
EXAMPLE 4.19
Different Reporting Dates

LDC Co Ltd (LDC) is based in Sydney, Australia. The organisation purchases a new entity, PTL Co Ltd (PTL),
which is based in Melbourne, Australia. The management of LDC identifies several accounting issues as a
result of the acquisition. LDC reports using a year end of 30 June, while PTL uses a substituted accounting
period and has a year end of 31 December. The different year ends make it more complex to accurately
show inter-organisation transactions in both sets of accounts. There is also greater difficulty reconciling
inter-entity loan accounts, as well as dividends paid from one organisation to another. Although both
entities are in the same country, they must ensure that their accounting staffs are suitably qualified to deal
with the complexities arising from the different year-end dates.
The preparation of multiple sets of accounts can create an unwelcome additional administrative burden.
Depending on the size and scale of the operations of the foreign entity, its accounts may need to be audited,
as will the group accounts, adding further complexity and cost without additional revenue. These costs must
be factored in when an organisation considers its strategy for market development.
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Incompatible IT Systems
An important cost to be considered when deciding on a strategy for market development is the potential
need for new or upgraded IT systems. If an organisation chooses to develop its own operation in the new
market, the necessary infrastructure and expertise may be developed over time as the new enterprise grows.
However, if an organisation uses a market development strategy of acquiring an existing operation in a new
market, it must factor into the acquisition cost any costs related to necessary changes to the operation’s
existing IT systems. Integrating or combining systems could be costly and difficult.
Greater complexity is added when acquiring new organisations that use different accounting packages
from those used by the acquiring entity, especially if the parent entity is trying to consolidate reports
from different operating entities. Of particular note are instances when data from one entity needs to be
manually entered into a second system to report consolidated performance. Although it may appear that
the answer is to simply ensure the preferred accounting package is implemented across all entities, this
is more complex than it may initially seem. Some factors to be considered are the cost of installing and
establishing the package at the new location, including any relevant licensing fees, potential software or
other system upgrades required to operate the package, and the availability of qualified staff to implement
the package and to train existing staff in the use of the new system.
Another key factor to consider is data integrity. For example, if all current year information is to be
transferred to a new system, decision-makers must take into account how the annual reports will be
prepared and by whom. There can be serious problems if this transition is not managed well.
Varying Business Conduct Standards

Market development activities often take organisations into unfamiliar parts of the world. The corporate
governance, business conduct and disclosure standards typical of the new market may differ greatly from
those generally employed by the parent organisation. All countries have their own independent legal
systems with laws governing business conduct in their jurisdictions.
Legislation, such as the Corporations Act 2001 (Cth) in Australia or the Organisations Act (Cap. 50,
1994 Revised Edition) in Singapore, sets the framework for business operations in each jurisdiction.
Corporate legislation governs business in such areas as appointment and duties of a board, issue and trading
of shares and reporting requirements. Such legislation is generally quite strictly enforced, with breaches
often resulting in hefty fines and/or custodial sentences. It is imperative that organisations and associated
individuals adhere to the relevant legal requirements of each country in which the organisation operates,
as penalties vary significantly between countries and can be severe.
In addition to company law, many countries legislate in the area of consumer law to protect consumers
and ensure free trade within national boundaries. Regulations often include requirements to ensure goods
for sale are of safe construction and to prevent organisations from using unfair practices to gain an
advantage over other businesses. For example, India regulates its consumer market by use of the Consumer
Protection Act 1986, while in China the rights of the consumer and general business conduct are covered
by a group of statutes including the Product Quality Law of the People’s Republic of China 2000.
Alternatively, the parent organisation may be subject to various legal constraints. For example, the
Sarbanes–Oxley Act 2002 (US) and the Foreign Corrupt Practices Act 1977 (US) are both particularly
relevant for organisations with operations in the United States. A market development strategy requir-
ing international operations must take into account the legal requirements governing both its existing
operations and its planned international operations. The legal consequences for the organisation should
be carefully assessed in terms of the internal capabilities of the organisation before any strategy of
international expansion is implemented. Regulation can add a significant cost to operations, including
the need to have qualified staff to establish any required frameworks and monitor regulatory compliance.
Some organisations prefer to make sales via distributors in highly regulated and complex markets as a
result of the additional costs they can incur.
Taxation
All countries have their own taxation systems. These generally encompass income tax and include other
state and national taxes, such as sales taxes.
Taxation rates and compliance requirements vary significantly from one country to another. These
variations can add significant levels of complexity and costs to business operations and reporting
requirements. Issues such as foreign currency transactions, multiple reporting deadlines and different
methods of reporting all add to the complexity of the accounting function. The differences in taxation laws
between countries also require that an organisation have access to a taxation expert. Such an expert can be
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found by recruiting staff with relevant skills or enlisting the services of a local taxation firm. Regardless
of the approach used, securing such expertise will add a further cost to the business.
Any plan to enter a new national market requires careful investigation of the taxation requirements and
benefits applicable at that time and for your specific industry.
The taxation consequences of expanding into an overseas location can vary significantly. Additional
constraints or concessions may apply, depending upon the type and nature of the industry. If an industry
typically incurs losses during the start-up stages, an organisation in that industry would be well served by
choosing a country that allows losses to be carried forward. If an industry typically incurs losses at various
stages throughout its life cycle, an organisation may be best served by selecting a country that allows both
the carry-back and carry-forward of losses. If an organisation is operating in more than one country, it
may be advantageous to choose a country with the same year-end date as its home country or one that
allows the use of a substituted accounting period so the year ends for all the businesses can be aligned,
thus simplifying reporting.
Any discussion of taxation compliance must include broad-based consumption taxes and state duties.
These taxes are levied by different levels of government and can add to the compliance requirements of
the organisation. Consumption taxes include various sales taxes, such as the goods and services tax (GST)
in Australia and value-added tax (VAT) in the United Kingdom. In some countries, these taxes are levied
by state governments and thus vary from state to state, whereas in other countries they are levied at the
national level. The collection, reporting and payment of such taxes add a further level of complexity to
the operations of the organisation, so it is important to consider such taxes before making the decision to
expand internationally.
Transfer Pricing
The issue of transfer pricing from a taxation perspective is important and is closely related to the different
corporate tax rates that exist. Transfer pricing relates to the prices set for the internal exchange of goods or
services between different parts of an organisation (which may be in different countries). All prices must
be set at market value, and market value often depends on the geographic location in which a given part
of the organisation is operating.
Obviously, governments are not keen on organisations’ limiting their tax bill in this manner and take
action to limit abuses of transfer pricing. Many countries impose significant fines and penalties for breaches
in this area. Rules and regulations are in place to ensure organisations place proper values on transfers,
and these are strictly enforced.
The major accounting firms provide detailed reports on transfer pricing, including the rules, regula-
tions and penalties for major trading nations. They also provide transfer pricing advisory services for
organisations to optimise their operating, tax and legal structures. This area is incredibly complex and
each transaction, or set of transactions, needs to be assessed on its merits. Additional information can be
obtained from organisations such as the Australian Taxation Office and the OECD. It is important to note
that transfer pricing is not a strategy that can be pursued, rather it is an issue that should be taken into
consideration when entering into overseas markets.
QUESTION 4.18
Identify and discuss some of the ways in which accounting issues can affect the potential success
of a strategy of international expansion. Refer to the previous section and the discussion of new
market development in section 4.6 generally.
The accounting issues we have just discussed must be considered as part of a careful analysis of internal
capability and market attractiveness prior to any decision to operate in a new geographic market. All
organisations will have varying internal capabilities, and each strategy will differ in its requirements. All
of these considerations can potentially add complexity and cost to the accounting and reporting function
and, thus, to overall operational costs. As a result of increased reporting and compliance costs, and the
need for significant investment in systems, there is also a risk that the general administrative overhead
burden for the organisation will increase. Further, as operations become more complex, there is a greater
need for highly qualified and experienced finance personnel, which will add further costs to operations.
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as follows.
KEY POINTS
• A business may seek growth by expanding into new geographic markets.
• Entry to international markets can provide access to new customers, achieve cost efficiencies,
establish a regional base or hub, and facilitate access to new resources, including knowledge
resources.
• An organisation considering entering a new market should consider its objectives in terms of the
market and the resources required, and enablers in terms of learning achieved and coordination
required.
• Organisations should assess market potential by assessing competitive conditions, whether an
investment in market entry will return improved capabilities, assets or competitiveness and the
level of risk.
• Organisations can commission private research to provide market intelligence to inform expansion
into new markets, but it is more cost effective to use data compiled by various government and
business facilitation organisations.
• The major modes of entry into new geographic markets are: exporting, licensing, franchising,
strategic alliances, joint ventures and FDI (acquisition or establishing a greenfield site).
• Mergers and acquisitions provide a method of market entry. Their success depends on strategic
alignment with business objectives, management buy-in, successfully merging corporate cultures,
dealing with the change in organisation size and structure, properly understanding all stakeholders,
analysing future capital needs, managing risk and implementing appropriate controls.
• Market expansion raises a number of issues directly related to accounting, including foreign
exchange risks, the need to prepare multiple accounts, potential incompatibilities in information
systems, inconsistent standards for business conduct, differing tax regimes and transfer pricing.
• Where market entry is achieved through a merger or acquisition, management must be involved to
ensure legal compliance, communication, loyalty building, HR processes and corporate citizenship
issues are properly attended to.
4.7 INTELLECTUAL PROPERTY

The term intellectual property (IP) refers to ‘unique, value-adding creations of the human intellect that
result from human ingenuity, creativity and inventiveness’ (Kalanje n.d., p. 2).
The different types of IP rights include trade secrets, utility models, patents, trademarks, geographical
indications, industrial designs, layout designs of integrated circuits, copyrights and related rights, and new
varieties of plants. Consider, for example, The Coca-Cola Company, which has a patent for its recipe for
its Coca-Cola soft drink, or a pharmaceutical organisation that obtains a patent for a new medicine it has
developed for reducing blood pressure.
Key categories of IP include the following.
• Patents — ‘a patent is an exclusive right granted for an invention — a product or process that provides
a new way of doing something, or that offers a new technical solution to a problem’. Examples include
pharmaceutical products and the Apple iPhone.
• Trademarks — consumers are able ‘to identify and purchase a product or service based on whether
its specific characteristics and quality — as indicated by its unique trademark — meet their needs’.
Examples include McDonald’s Golden Arches and Nike’s Tick Mark.
• Copyright — ‘copyright laws grant authors, artists and other creators protection for their literary and
artistic creations, generally referred to as “works”’. Examples include music performers, movies and
brand duplication.
In most countries, national legal systems of IP rights exist. The granting of an IP right by a government
provides the owner of such legal property with the right to exclude all others from commercially benefiting
from it for a defined period of time. This protection is in place to create incentives for organisations to invest
in innovation and benefit from capturing the value they create for a specified amount of time.
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IP Australia is the Australian government agency that administers IP rights and legislation relating to
patents, trademarks, designs and plant breeder’s rights and provides support for business to protect and
manage their IP so that they can capture value from their investment and efforts in its creation. A range of
resources are freely available on their website at www.ipaustralia.gov.au.
IP STRATEGY
The importance of IP to businesses varies. For businesses that are heavily focused on technological
innovation, intellectual property management is of critical importance to achievement of their strategy
and so they will have a well-developed IP strategy. That strategy could include creation of IP through
their own R&D efforts or by commissioning or acquiring rights to IP created elsewhere. Universities and
Research Institutes are key organisations that create IP, but unless they protect it, it is of no interest to
a large organisation for commercialisation, as no organisation is going to invest potentially millions of
dollars (and in the case of new pharmaceutical drugs potentially billions) and assume all the risks involved
in taking a product a new product to market unless they can capture the benefits associated with its success.
Where organisations create IP that they do not wish to commercialise themselves, IP rights provide
the holder with several opportunities, including sale, licensing, and various types of strategic business
partnerships or alliances for commercialisation. R&D Corporations (RDC’s) in Australia generally follow
this model of investing in research to create IP in areas that will advance their specific industry, and
licensing IP to organisations with the capability and resources to commercialise it for the overall benefit
of the stakeholders that funded the research.
IP protection is also extremely important for organisations that have portfolios of valuable brand names.
For example, Treasury Wine Estates (TWE) manages its IP with a comprehensive mix of trade mark
registrations, surveillance and enforcement actions. TWE has more than 4000 trade mark registrations
in place around the world. It monitors the online and physical market and its supply chain partners to
identify any misuse of its trade marks, and backs up this monitoring program with a willingness to enforce
its IP rights by legal means, including court action where necessary.
Organisations can sometimes deliberately choose to make their IP freely available, or open source. This
is common for technology-based businesses. For example, Moodle (n.d.), a Western Australian Company,
is the largest open source learning platform and management system in the world. A whole ecosystem
of developers, educators, administrators and certified Moodle Partners has developed around use and
development of the platform, which enables courses to be cost-effectively hosted online by users in schools,
universities and workplaces. The approach of developing a community of users and developers means that
the platform has enormous capability and functionality and continues to develop.
Other organisations may only think about IP in a reactive way or limit their IP protection to trademark
and copyright considerations. This is generally the case for SMEs.
Win Win Parenting offers workplace parenting education, selling their solutions to employers to enhance
and complement existing organisational social responsibility initiatives on employee wellbeing, equity and
diversity. Their programs aim to support working parent to more effectively manage the interface between
work and family. They also support corporate initiatives to increase the participation of women in the
workforce and in supporting more women to reach senior executive positions.
Example 4.20 describes what SME Win Win Parenting did to protect their business identity in key
international markets once they had decided the focus of their international expansion.
EXAMPLE 4.20
Win Win Parenting — International Expansion

Since founding Win Win Parenting in 2013, Dr Rosina McAlpine’s education programs have been helping
working parents across Australia balance work–life priorities.
‘When parents struggle at home to manage parenting challenges and meet the many demands of family
life, it can have a negative spill over at work. Win Win Parenting workplace education programs provide
working parents with practical tools so they can be confident and effective at home, and come to work
ready to be focused and productive — that’s the win-win,’ says Rosina.
Taking ‘Win Win Parenting’ International
After establishing a strong business at home in Australia, working with clients such as Lendlease,
Macquarie Bank and Deakin University, Rosina set her sights on expanding Win Win Parenting into
international markets.
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‘We have two business models, we sell business to consumer and we sell business-to-business. It
was really important for us to get IP protection in the English-speaking countries so that we could sell
internationally,’ says Rosina.
With that in mind, Rosina along with Colin — her husband and Win Win Parenting co-founder — began
the process of filing for trademark protection in the United States, the United Kingdom and New Zealand.
The Application Process
‘We started the process of applying for IP protection with an attorney in Australia. However, this was very
expensive — being a start up at the time when we were first filing made it prohibitive,’ says Rosina. ‘But
we still had to protect our IP. It was by asking lots of questions and just by trial and error that we were
able to do it by ourselves.’
Rosina and Colin decided to apply using the Madrid Protocol; a treaty that allows you to extend the
protection of your trademark registration internationally, meaning Win Win Parenting could apply for all
three selected countries at once rather than go through their individual IP offices.
The process wasn’t without its challenges for Win Win Parenting. ‘In Australia, for our first trademark
we ticked every goods and services category that looked like it was relevant. However, what we didn’t
realise was that we had to go with those same many categories using the Madrid Protocol and it’s a lot
more expensive than in Australia so it cost a fortune,’ says Rosina.
‘I’m not suggesting you delete or not use categories that are important to your trademark — but be
selective, we ticked anything that looked even remotely like we might use it in the future, and this can be
a costly mistake,’ says Rosina.
Not only was this costly, but when it came to their US application, they were required to narrow the
scope of their goods and services to meet US requirements. ‘In Australia the categories are very broad. For
example, in Australia category 9 is “downloadable webcasts, webinars, podcasts and video recordings”.
For the United States, we had to specify the content by adding words to the effect of ”featuring information
on communication skills, parenting, families, work-family interface, and child development and life-skills
education” to meet the requirements for the USPTO.’
Throughout the application process, Rosina and Colin recall receiving a number of official letters that
initially shocked them. Their advice? ‘Don’t be scared by the language — words like ”total provisional
refusal” sounds like you’re out: game, set and match, but that is not the case. Be forewarned that you will
probably get a refusal, and know that often all you’re going to have to do is to ask for guidance and then
provide a response with more detail.’
Tips for Other Businesses
If, like Win Win Parenting, you think you’re ready to take your business global, it’s important to do your
research beforehand.
‘Have a strategy,’ says Rosina. ‘In our case, we had three aspects of our business we needed to protect,
and we started with our company name and logo. Look at all the things you need to protect, and then
prioritise them in order of importance considering the funds you have to take them forward. Australia is
relatively inexpensive when compared to international offices. Have a plan and then go step-by-step. If
you come to a roadblock or a refusal — ask for help from the IP office and then respond. That’s how we
have achieved our success.’
For Win Win Parenting, the process of going global is still ongoing. ‘I feel like we’ve overcome so many
rejections, so many “needs to respond” that now, no matter what they say we can overcome it. We now
have a number of our trademarks successfully through the entire process from beginning to end, and that
process has taken just over a year. It’s not over yet, I think we still have at least another year to go. Persist
and you’ll succeed in the end,’ says Rosina.
Source: Adapted from IP Australia, n.d., www.ipaustralia.gov.au/tools-resources/case-studies/how-wollongong-company-
win-win-parenting-are-going-global.
QUESTION 4.19
With reference to example 4.20:

1. What market entry strategy do you think Win Win Parenting has used to expand internationally?
2. What would you expect to see on the Win Win Parenting IP register?
3. Explain the accounting issues Win Win Parenting will need to tackle once they have entered their
selected international markets
IP is an important strategic consideration, and advice should be sought even for organisations that do
not consider IP to be important as the IP assets in a business can have value that is a consideration in the
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sale of a business. All businesses should have a register of their IP and its status — that is, a listing of the
detail of all the IP inherent in the business.
IP RIGHTS INFRINGEMENT
A key consideration of new product development is the freedom to operate with IP, whether it has been
created by the organisation itself or whether the use of specific technology or know-how is being licensed
from another organisation.
Organisations must confirm the ownership of any IP that they plan to use. They can expend considerable
effort and expense on creating and establishing new markets for products generated with IP they think they
own; however, only later do they discover that they may, in fact, have infringed another organisation’s IP.
This can lead to costly litigation. This is a strategy often discovered too late by small to medium-sized firms.
They use all their resources to establish a market position, only to find out that a large competitor has been
watching and waiting for them to finish creating and establishing a market for a new product or service before
challenging their right to use the technology, product or service. Importantly, a challenge may simply be on a
component of the IP being used, but without it, the product or service cannot be provided.
For example, in the pharmaceutical industry, it is common for organisations to have multiple layers of
patents on a product, known as primary, secondary and tertiary patents. Such patent protection acts as a
strong deterrent to competitors. An example is GlaxoSmithKline’s asthma reliever medication, which has
a primary patent (on the chemical molecule salbutamol) and a secondary patent on the delivery device (a
metered-dose, CFC-free inhaler). When the primary patent expired several years ago, GlaxoSmithKline
was protected from generic competitors launching a competing product for a year because of the secondary
patent it held.
PROTECTING IP RIGHTS
If an organisation invests in IP rights (e.g. patents and trademarks), it must also be prepared to invest in
protecting those rights in a number of market jurisdictions. If it cannot afford to do this, it risks investing
in a product and/or brand that will be diluted in value by counterfeiting of some sort.
Counterfeit products cost organisations billions of dollars each year, especially in the mass consumer
goods market (e.g. the movies and content on DVDs or from online streaming services, such as Netflix;
designer watches; computer software). This means that an organisation cannot fully exploit the financial
rewards that are due to it from the resources and intellectual capital invested. Because it has not earned as
much, it has fewer resources to devote to its next product, service or invention. That might mean there is
no next product, and consumers worldwide are denied the benefit.
Example 4.21 describes fashion house Burberry’s use of technology to combat counterfeiting of its
products. Technology insight 4.6 examines the steps Bangladeshi entrepreneur Mustafa Jabbar has taken
to protect the Bangla language keyboard and software he invented and has continued to develop over the
past 30 years.
EXAMPLE 4.21
Burberry — IP Protection
Burberry is one of the most counterfeited brands in the world, so it makes perfect sense that this is an
area where it has already put AI and machine learning technology to work.
The brand uses technology provided by Entrupy. Entrupy originally started out as a solution to
authenticate art. It uses data collected to teach algorithms to differentiate between fake and authentic
items. Every item that is authenticated helps the algorithms learn and improve.
The software is capable of determining from one photograph of a tiny section of a product whether or
not the product is genuine. It does this through examination of minute details in the texture and weaving,
and can reportedly spot a counterfeit with 98% accuracy. The technology thus provides a way for Burberry
to identify and take action against online advertising for counterfeited products.
Source: Adapted from B Marr, 2017, ‘The amazing ways Burberry is using artificial intelligence and big data to drive
success’, Forbes, www.forbes.com/sites/bernardmarr/2017/09/25/the-amazing-ways-burberry-is-using-artificial-
intelligence-and-big-data-to-drive-success/#6067c6a24f63.
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Technological Innovation
Technological innovation may be:
• a product innovation or a process innovation
• a disruptive innovation or a sequential innovation
• a radical innovation or an evolutionary innovation.
The protection of intellectual property created as part of innovation is a balance between enabling
creators to earn a return on their investment in the creation of their innovation and allowing others to
compete and improve on the innovation.
Patents are generally organisations’ most preferred protection of IP. In fact, the number of patents
generated by an organisation or unit within an organisation is often held up as a measure of the
organisation’s overall innovation. A shortcoming of this approach is that it focuses only on the invention
side of innovation. Innovation must also involve implementation.
To understand the breadth of IP issues in innovation, consider the history of the Bijoy Bangla Software
and Keyboard Layout.
In the late 1980s, Bangladeshi journalist Mustafa Jabbar developed software and a keyboard layout
(using Apple Mac keyboard hardware) that allowed for efficient typing of the hundreds of characters that
make up the Bangla language. Over the years, Jabbar’s company has improved the software and ensured
it will run on all mainstream platforms. It has proven the most popular solution for typing Bangla and in
2018 was declared Bangladesh’s national standard for Bangla script writing.
IP protection of Jabbar’s innovation has been centrally important to the success of his company. Initially
the Bijoy system was protected as a literary work under copyright law and later versions have also been
protected by copyright. When releasing the second version of the software in 1992, Jabbar applied for
a patent, but the responsible government department lacked the resources and knowledge to properly
assess the technology and so declined the patent application. Jabbar applied again in 2004 and a patent
was eventually granted in 2008. It remains the only software patent in Bangladesh. Jabbar also registered
the Bijoy logo to protect its use.
While a team of developers now work on the Bijoy system, Jabbar retains the legal right to all IP
developed by his staff.
Jabbar’s company has licensed manufacturing and sale rights to more than 30 other companies in
return for licensing fees.
Despite the IP protections Jabbar has put in place, the success of the Bijoy system has seen extensive
piracy of the software and the manufacturing of counterfeit keyboards. The Bangladeshi customs
department has agreed to prevent the importation of counterfeit hardware. To combat the software piracy,
Jabbar reduced the price of his product so it was not significantly more expensive than the pirated
versions. This proved a successful way to combat sales lost to pirated versions where legal protections
are largely ineffective.
A competing company with a similar product had approached Jabbar for permission to use the Bijoy
keyboard layout with some modifications, but the parties were unable to reach agreement. The competitor
proceeded anyway and Jabbar began legal proceedings. Eventually the two parties settled, with the
competitor withdrawing its keyboard from sale.
Jabbar suggests the pattern of economic development of the entire world will be determined by the
sort if IP each country develops, protects and exploits.
Source: Adapted from C Kalanje, Role of Intellectual Property in Innovation and New Product Development, World
Intellectual Property Organisation (WIPO), www.wipo.int/sme/en/documents/ip_innovation_development_fulltext.html;
www.wipo.int/sme/en/documents/ip_innovation_development_fulltext.html; www.wipo.int/ipadvantage/en/details.jsp?id
=2624.
as follows.
KEY POINTS
and markets.
• In essence, IP refers to original creations and it is protected by a set of legal rights such as rights
relating to trade secrets, patents, trademarks and copyrights.
• Organisations that rely on innovation require a well-developed IP strategy to both create or
otherwise access IP and protect IP in order to preserve the competitive advantage it creates.
• Organisations must take steps to ensure they do not infringe the IP of others.
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4.8 LEADERSHIP
As described in module 1, an organisation’s leaders are responsible for deciding and establishing an
organisation’s values, mission and goals. The managers throughout the organisation are then responsible
for the implementation steps required to operate in accordance with the values and mission and achieve
the goals. In effective organisations, leadership is often a role performed not only be top management, but
also by management and non-management personnel throughout the organisation.
Organisational culture and structure are important enablers of innovation, new product, service and
market development. Example 4.6 described 3M’s culture of innovation and some of the initiatives it has
in place to encourage innovation, including targets for new products and services, and incentives and
recognition for staff.
That doesn’t happen by accident. The organisation’s leaders need to promote, create and sustain a culture
where innovation is allowed to happen continuously and an environment where people are willing and able
to do the hard work required to bring new products and services to different markets.
An organisation has to be aligned around the importance of innovation to their current and future success,
and that has to be embedded as part of the culture. It can’t be an add-on function that is a specific business
unit’s responsibility — it needs to be an organisational capability that is valued and resourced.
It is the ability to innovate over and over again that underpins competitive advantage for an organisation.
According to Hill et al. (2014), leadership for innovation has three critical components.
1. Leaders create collaborative organisations. Innovation needs to be collaborative because it often
emerges from the interplay of ideas that happen when diverse expertise, experience and points of view
come together and challenge conventional viewpoints.
2. Leaders foster discovery-driven learning. Innovation generally needs experimentation and learning
from trial and error (recall design thinking and the approaches described in earlier sections of this
module). Innovation usually involves failure, re-calibration and iteration until a suitable solution is
found.
3. Leaders support and encourage integrative decision making. The leader has to be able to resolve
problems, disagreements and conflicts by being able to combine potential solutions and optimise
solutions by integrating the best components from a range of sources without being unduly influenced by
any particular organisational group or faction. The leader also has to make sure that potential solutions
aren’t dismissed too early so they are exposed to sufficient testing, integration and iteration in case they
are part of the final solution.
The role of the leader is to create the environment and manage the organisations talent to create a balance
between unleashing individual talent and harnessing collective talent, because innovation is a team sport.
The six paradoxes that innovation leaders need to balance are shown in figure 4.20.
FIGURE 4.20 Six paradoxes of leading innovation

Continually ask yourself where on the continuum your organisation falls, and what
adjustments should be made.
UNLEASH HARNESS
Individual identity Collective identity

Support Confrontation
Learning & development Performance
Improvisation Structure
Patience Urgency
Bottom-up Top-down
Source: L Hill, G Brandeau, E Truelove & K Lineback, 2014, Collective Genius, Harvard University Review Press, p. 41,
figure 2.1.
Organisational systems and designs that support the innovation process are also important and need to
be considered by management in the context of the specific organisation, industry or technology and their
respective stage in the lifecycle. Project management systems are important for collaboration, visibility
and reporting of projects and their progress, as are clear and transparent criteria, systems and processes for
the funding of projects (and for when to kill them) (discussed in more detail in module 5). A system that
is appropriate for a start-up would be very different than the system a large global organisation needs.
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Given the risks associated with new activities, some larger organisations operate their innovation
activities within separate (wholly owned) entities. The basis for doing this is often to enable greater agility
and responsiveness to market feedback than the parent company. IP is often held by the entity and, at the
same time, risk can be quarantined, with the subsidiary company acting as an incubator for new products
and services that might eventually be managed by the parent company.
Organisational managers are responsible for making sure the right people come together to make
innovation happen, and to manage the tensions that their diverse perspectives, skills and experience will
inevitably bring.
Tom Kelley’s 2005 book, The Ten Faces of Innovation, describes key roles that are necessary for
innovation. His ‘ten faces’ are personas that describe the personality and skills of the team members that
IDEO have observed to be integral to innovation success. The personas are summarised in table 4.20.
TABLE 4.20 IDEO’s 10 faces of innovation personas
Learning personas Organising personas Building personas
The anthropologist The hurdler The experience architect

Constantly gathering new Skilled at overcoming obstacles Designs compelling experiences
sources of information to expand and roadblocks that go beyond functionality and
knowledge and grow Refuses to give up, tenacious and connect at a deeper level with
Challenges assumptions and what perseveres customers’ latent or pressed needs
people think they know
The experimenter The collaborator The set designer

Tries new things out constantly, Helps bring eclectic groups Creates a stage on which team
using trial and error together and tries new combi- members can do their best work
Takes calculated risks through nations and multidisciplinary Transforms physical environments
experimentation approaches to developing into powerful tools to influence
solutions behaviour and attitude
The cross-pollinator The director The caregiver

Explores other industries and Puts together a talented cast and Anticipates customer needs and
cultures, translates what they see crew and helps spark their creative goes beyond mere good service
and learn and overlays to fit the talents Anticipates customer needs and is
needs of the organisation ready to look after them
The storyteller
Builds internal morale and external
awareness through compelling
narratives and storytelling that
resonates with audiences
Source: Adapted from T Kelley, 2005, The Ten Faces of Innovation, Doubleday, p. 8–12.
After reading table 4.20, you will see that these personas represent the capabilities needed to drive and
develop new product, service and market opportunities, and you will have been able to relate them to the
new product, service and market development approaches that have been described and explained in this
module.
QUESTION 4.20
Refer back to the description of Coca-Cola’s acquisition of Costa in example 4.16. The hot beverage
sector is one of the few segments of the total beverage landscape where Coca-Cola does not have
a global brand, but Costa gives Coca-Cola access to this market with their strong coffee platform.
What are the aspects that are important for Coca-Cola’s leadership to consider, to ensure that
the benefits of this acquisition are achieved?
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Leadership has to support and organise the resources to come up with ideas, experiment, prototype, fail
and start again to generate options for an organisation’s growth. Management of resources, budgets and
performance metrics for innovation has to take into account the many assumptions that are inherent at this
front-end stage of option development, and that primary customer research and approaches such as design
thinking and keeping discover and definition separate from solution development are done that way to
reduce risk and increase the likelihood that the options scoped can be successful.
Example 4.22 revisits 3M (previously described in example 4.6), with a focus on how the company’s
top leaders support the company’s innovation program.
Technology insight 4.7 examines the concept of open innovation, which will be discussed in detail in
module 7.
EXAMPLE 4.22
3M — Leadership
CEO Mike Roman
The chairman and CEO leads more than 90 000 employees across four business groups: health care,
consumer, safety and industrial, and transportation and electronics. He promotes four priorities to drive
performance and growth and deliver value to all stakeholders:
• portfolio
• transformation
• innovation
• people and culture — including an emphasis on ethics and social inclusion.
Mike Roman has 30 years’ experience with 3M, beginning as a senior design manager and progressing
through roles including eventually chief operations officer and chief strategist before becoming CEO. He
has experience across countries, having worked in the United States, Europe and Asia.
Senior vice-president (VP), innovation and stewardship and chief technology officer, John Banovetz,
says ‘Leadership is about ... creating an environment that unlocks the full potential of teams and individuals
and, as a result, achieves even high performance and more engaged employees’. John Banovetz focuses
on driving change, challenging the status quo and helping develop the company’s next generation of
leaders.
Source: Information from 3M, 2020, ‘Corporate officers’, https://investors.3m.com/governance/corporate-officers/defau
lt.aspx
Open Innovation
As innovation increasingly integrates multiple technologies and becomes pressured by time, companies
are forced to look outside their own boundaries for ideas and expertise. The evidence that boundary
spanning stimulates innovation is overwhelming. This is true whether we are considering R&D teams
within organisations, inter‐firm alliances, interpersonal networks, or clusters of firms concentrated within
industrial districts. Building on the principle that the gains to collaborative knowledge sharing outweigh the
risks of one’s proprietary knowledge being expropriated, an increasing number of firms are adopting open
innovation — an approach to innovation that seeks, exploits, and applies knowledge both from inside
and outside the organisation. According to Henry Chesbrough: ‘Open innovation is fundamentally about
operating in a world of abundant knowledge, where not all the smart people work for you, so you’d better
go find them, connect to them, and build upon what they can do.’ Open innovation takes many forms.
Most extensive are open‐source software communities, such as Linux where thousands of independent
developers contribute to the Linux operating system. Increasingly, open innovation has been embraced
by large, established companies.
IBM’s Innovation Jam is one element of IBM’s extensive collaborative innovation network. It is a massive
online brainstorming process to generate, select, and develop new business ideas. One Jam was based
upon an initial identification of 25 technology clusters grouped into six broad categories. Websites were
built for each technology cluster and, for a 72‐hour period, IBM employees, their families and friends,
suppliers, customers, and individual scientists and engineers from all around the world were invited to
contribute ideas for innovations based on these technologies. The 150 000 participants generated vast
and diverse suggestions that were subject to text mining software and review by 50 senior executives and
technical specialists who worked in nine separate teams to identify promising ideas.
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The next phase of the Jam subjected the selected innovation ideas to comments and review by the
online community. This was followed by a further review process in which the ten best proposals were
selected and a budget of US$100 million was allocated to their development. The selected business
ideas included a real‐time foreign language translation service, smart healthcare payment systems, IT
applications to environmental projects, and 3‐D Internet. The new businesses were begun as incubator
projects and were then transferred to one or other of IBM’s business groups. As well as divisional links,
the new ventures were also subject to monthly review by IBM’s corporate top management. IBM has since
extended its jam methodology to address a widening array of issues.
Sources: OM Bjelland & RC Wood, 2008, ’An inside view of IBM’s innovation jam’, MIT Sloan Management Review, Fall
issue, pp. 32–43.
As described in the module preview, finance professionals have an important role in information,
analysis in advice as part of the strategy process. Whether acting in formal or informal leadership roles, in
management or in a role that supports organisational leaders and managers, CPAs need to be able to draw
upon the content of this module to answer the key questions in table 4.21.
TABLE 4.21 Key questions for finance professionals to consider and answer
Concepts/models/approaches that can be used to answer the

Key questions key questions
What are the key strategic options • Ansoff product/market matrix (market penetration, product
available to the organisation? What is development, market development, diversification)
the best way for the organisation to • Other alternatives to products and markets
approach the Ansoff matrix options?
Why is innovation so important, • Competitors keep progressing, so doing nothing is going

and how does it relate to new product backwards
development? • Innovation is the art of introducing something new
• Strategic alignment and a culture that supports innovation are
crucial
What is new product development, and • Key success factors for new product development
what is needed to be successful in new • Stages of the new product development process
product development? • IP protection
• IP considerations
What is new market development, • Strategic objectives of market entry

and what is needed to be successful • Assessing market attractiveness
in new markets? • Market development resources
• Key success factors for new market development
What are the different ways an • Common modes of entry (exporting, licensing, franchising, joint
organisation can enter new geographic ventures, strategic alliances, wholly owned foreign enterprises,
markets? M&As, greenfield operations)
What are the various advantages and • Common modes of entry (exporting, licensing, franchising, joint
disadvantages of the different market ventures, strategic alliances, M&As, greenfield operations)
entry modes? What is needed to be
successful for each?
What are the key accounting issues • Accounting issues in new market entry (foreign exchange, multiple
associated with different geographic accounts, reporting dates, IT systems, business standards,
markets? taxation, transfer pricing)
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as follows.
KEY POINTS
• Organisational leaders establish the mission, vision and goals of the organisation, which provide
the context for developing strategies related to development of products, services and markets.
Leadership and management play an important role in supporting innovation by creating a culture
of collaboration, fostering discovery and learning and encouraging integrative decision making,
including creating an environment in which people feel empowered to challenge assumptions.
• Organisational leaders need to balance a series of competing priorities in order to enable
innovation. These are individual versus collective identity; support versus confrontation; learning
and development versus performance; improvisation versus structure; patience versus urgency;
and bottom-up versus top-down management.
• Managers need to provide organisational systems and designs that support the
innovation process.
• Organisational managers are responsible for making sure the right people come together to
make innovation happen, and to manage the tensions that their diverse perspectives, skills and
experience bring.
• Management must be able to make decisions around resources, budgets and performance metrics
for innovation that take into account the many assumptions that are inherent during development
of strategic options.
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REVIEW
This module began with a discussion of innovation — the process by creating a new product, service or
process that will create value for the customer and the organisation. It is difficult to sustain a competitive
advantage in the fast-changing contemporary business environment. Thus innovation is an ongoing task
and leaders and managers must create a culture that encourages it. The SWOT analysis from module 3
can be extended to direct the development of innovation efforts so they are response to the organisation’s
strengths and weaknesses and its external opportunities and threats.
The Ansoff product/market matrix was presented as a tool to consider strategic options in a systematic
way. It classifies strategic options into market penetration, product (and service) development, market
development and diversification. The module examined new product, service and market development in
detail, and presented approaches to consider and develop these options.
Design-thinking, human-centred design, Blue Ocean strategy, the role of IT and the emerging trend
of embedding product components in services were described as approaches to new product and service
development.
Issues relating to identifying and evaluating new markets were discussed, along with different ways
the organisation could approach entering a new market. Various intellectual property strategies were
discussed including protection of IP through legal means and conversely sharing of IP to support open
platforms and innovation. Finally, the module considered the key tasks of leadership for innovation —
creating collaborative organisations, fostering discovery-driven learning and supporting and encouraging
integrative decision making.
Having established strategic options for new product, service and market development using the
approaches described in this module, module 5 will describe the development of the strategy, including
evaluation of the different options, ensuring the options chosen are cohesive and deciding on the strategy
to be adopted.
APPENDIX 4.1
SOURCES OF INFORMATION FOR INTERNATIONAL MARKET EXPANSION
International organisations that can be used as sources of accurate and current economic and business
research include the following.
1. The International Monetary Fund (IMF) conducts research and, among other activities, grants loans
for technical assistance and training. As stated on its website, the purpose of the IMF is ‘to foster global
monetary cooperation, secure financial stability, facilitate international trade, promote high employment
and sustainable economic growth, and reduce poverty around the world’.
Information on the IMF’s activities is publicly available at: www.imf.org.
2. The World Bank provides loans, grants and credits for many uses, such as education, health, public
administration, infrastructure, financial and private-sector development, agriculture, and environmental
and natural resource management. According to its website, the World Bank is a:
vital source of financial and technical assistance to developing countries around the world. We are not a
bank in the ordinary sense but a unique partnership to reduce poverty and support development (World
Bank Group 2017b).
Information on the World Bank’s activities is publicly available at: www.worldbank.org.

3. The World Trade Organization (WTO) aims to help producers of goods and services, exporters and
importers conduct their business. The WTO is involved in administering trade agreements, providing
a forum for trade negotiations and dispute resolution, and technical training in developing countries.
The WTO’s role in dispute negotiation operates at the highest levels only, generally in disputes between
large national industry bodies.
Information about the WTO, including its mission statement, is publicly available at: www.wto.org.
• The Organization for Economic Co-operation and Development (OECD), according to its website, ‘uses
its wealth of information on a broad range of topics to help governments foster prosperity and fight poverty
through economic growth and financial stability’. It continually monitors events in OECD countries and
others, and collects data to enable short- and long-term projections to be formulated on various economic
topics.
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The OECD issues guidelines on a variety of issues, including guidelines for multinational enterprises,
which apply to all entities operating, or wanting to operate, their business on a multinational scale.
Information on the OECD’s activities is publicly available at: www.oecd.org.
REGIONALLY-FOCUSED ORGANISATIONS
1. Austrade is an Australian government organisation that offers assistance to Australian companies
looking to develop export markets and to foreign entities wanting to establish trade within Australia.
Austrade can assist with business introductions in an organisation’s target market, offer details on how to
invest in Australia and provide assistance for Australian organisations in meeting the costs of expanding
into new export markets.
Information about Austrade’s activities is publicly available at: www.austrade.gov.au
2. Asia–Pacific Economic Cooperation (APEC) is an organisation with 21 member countries from the
Asia–Pacific region. APEC’s goal is the facilitation of economic growth, cooperation, trade and
investment in the Asia–Pacific region. As noted on its website:
APEC is the only inter-governmental grouping in the world operating on the basis of non-binding
commitments, open dialogue and equal respect for the views of all participants … Decisions made
within APEC are reached by consensus and commitments are undertaken on a voluntary basis
(APEC n.d.).
Information about APEC is publicly available at: www.apec.org

3. The Singapore Economic Development Board (EDB) seeks to attract foreign investment into Singapore.
The EDB is a government agency established with the goal of enhancing the economy of Singapore
by increasing foreign investment and expanding existing domestic organisations. The EDB invests
alongside business to encourage selected industries to enter the Singapore market and strengthen the
Singapore economy. The agency has a number of incentive programs designed to make entry and
operation in the Singapore economy an attractive option for foreign organisations.
Information relating to the operations of the agency and the many incentive schemes is available at:
www.edb.gov.sg
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MODULE 5
STRATEGY
DEVELOPMENT
LEARNING OBJECTIVES

5.1 explain the key concepts, components and frameworks applicable to the development of an
organisation’s strategy
5.2 evaluate strategic options and risks by applying the appropriate frameworks
5.3 evaluate and recommend strategic themes applicable to a specific organisational context
5.4 develop the strategy applicable to a specific organisational context
5.5 appraise how the roles of management and leadership drive the development of the strategy.
ASSUMED KNOWLEDGE
• describe the overall strategic process and the role of leadership in strategy.
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PREVIEW
Module 4 described key approaches to new product, service and market development, to help identify
suitable areas for growth and begin the strategy development through identifying options. Module 4
described the notion that successful new product, service and market development requires the entire
organisation to focus on providing value to the customer as well as efficiently and effectively utilising
strategic resources and capabilities. In this way, the organisation seeks to establish and sustain a
The focus of this module is the next stage of the strategy process, strategy development, as illustrated in
figure 5.1. Strategy development involves analysing the effectiveness of strategic options and thus choosing
which options to pursue to achieve the organisation’s strategic goals. The strategic development process
results in the creation of the strategy, which serves as a roadmap for the business to execute. This module
presents the factors to be considered in building the strategy to match the organisation’s context. The
examples in the module show how these factors apply in a diverse range of organisational contexts.
FIGURE 5.1 Strategy development

Strategic analysis:
(Module 2)

Strategic analysis:
(Module 3)
Where do we want to go? How will we

get there?
• Consider strategic drivers
• Evaluate strategic options
• Perform a risk analysis on strategic options
• Develop and evaluate strategic themes
• Establish KPMs

(Module 7)
The outcome of the strategy development process is an organisational strategy that is ready to implement
and that aims to achieve the organisation’s goals.
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ROLE OF THE CPA IN STRATEGY DEVELOPMENT
As a finance professional, the CPA has an important role to play in strategy development. In particular, the
CPA has core expertise in:
• forecasting: identifying and managing business intelligence, data and analytics and contributing reports
to future forecasting strategy
• market analysis: during market scanning and review of previous cycles, the CPA engages in data
collection, business modelling, analysis and integration of data into decision making; the CPA is key to
understanding the profitability and market returns in any given industry
• financial statement analysis: reporting on financial data past and present including tax reporting and
other financial reporting requirements to highlight the organisation’s current financial position and
capability.
Activities such as benchmarking data, forecasting and trend analysis, and maintaining compliance
are core to strategic success. The CPA is involved in observing market performance of competitors
and positioning the organisation projections for success against those of the competitive marketplace.
During the strategy development cycle, the CPA offers interim analysis, reporting on performance against
budget and forecast, and informing of contingency planning, if required, when performance does not meet
projection. This is a vital contribution to ensure risk management and reduce any negative impact from
misaligned strategy, market influences, financial overruns and changes in forecasts. The CPA is a valued
member of the change and implementation team and is not only focused on financial analysis but is the
key to driving change for a positive financial outcome for the organisation. The contribution of the CPA
supports evidence-based decision making.
The role of the CPA is evolving with the CPA becoming a core contributor to aspects of decision
making beyond financial matters. As sustainability and corporate social responsibility (CSR) are becoming
more important aspects of organisational goals, the CPA has a crucial role to play in developing and
implementing meaningful non-financial metrics and clearly communicating outcomes.
The role of the CPA continues to evolve in other functions of the business including supporting
marketers’ measurement of brand equity value, digital enterprise measurement and value and project
management tracking and reporting. This is not an exhaustive list, but each of these functions requires
the ability to assign value through both financial and non-financial measures in a meaningful way.
5.1 ALIGNING VISION, MISSION, VALUES, GOALS

AND STRATEGY
Developing an organisation’s strategy is a systematic process. Key decision makers within the organisation
monitor and scan internal and external environments, collect data, and regularly analyse and examine the
data to identify areas for development, growth and future strategic emphasis and focus. These stages were
discussed in the preceding modules. This module focuses on building strategic options and themes. These
strategic options and themes effectively connect the current position of the organisation with the desired
future state and goals.
As discussed in module 1, an organisation’s vision describes where the organisation wants to be in the
future and offers a set of priorities and ideals. The mission explains in broad terms how the organisation
will achieve its vision. Values establish the principles for decisions and conduct. Goals are the outcome of
the organisation targets in order to achieve the vision and the mission.
The strategy development process leads to the formulation of strategic options for the organisation,
which are grouped under cohesive strategic themes. Strategic initiatives are the activities that must
be performed to implement the desired strategies and are discussed in module 6. Aligning the vision,
mission, values, goals, resulting strategic themes, initiatives and related actions is essential to success-
ful strategy development. Together these practices result in an executable strategy for the business.
Figure 5.2 shows the sequence of activities in the development stage of the strategy process, leading to the
implementation stage.
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MODULE 5 Strategy Development 297

FIGURE 5.2 Strategy development process
Develop
Evaluate Group the Develop key strategic
Identify
options and options into performance initiatives
strategic
perform risk strategic indicators (activities to
options
assessment themes and metrics implement
the strategy)
VISION AND STRATEGY DEVELOPMENT

The process of creating and defining strategy initially requires an organisation to develop an understanding
of ‘What does the organisation do?’ and ‘Why does it do it?’ Answering these questions helps management
to define the future direction of an organisation. As discussed in module 1, the organisation’s vision is the
overarching, high-level description of the expected position and role of the organisation at a future point.
Example 5.1 presents the vision of Google.
EXAMPLE 5.1
Google’s Organisational Vision

To provide access to the world’s information in one click (Google 2020).
A successful vision statement focuses on the future of the business and provides the company’s
direction. Google’s vision statement is clear, aspirational and highlights a purpose-driven organisation.
The vision statement implies a direction and outcome for the firm to aspire to. This vision statement
communicates the focus of the firm — ‘provide information’, the market goal — ‘the world’ and the
action — ‘access’. Each of these factors would form part of Google’s strategy development.
Example 5.2 presents the vision of a fictitious organisation, the Museum of Sport Memorabilia (MOSM),
which will be used throughout this module to demonstrate strategy development and present you with
opportunities to apply your learning in a structured way. More information on MOSM is provided in
Appendix 5.1 and throughout the module. MOSM is dedicated to the teaching of sports history and display
of sporting memorabilia. Based in Canberra in the Australian Capital Territory, MOSM was established 10
years ago and operates as a not-for-profit organisation. While MOSM has never developed or implemented
a formal business plan, at some level, a business strategy has been in place. MOSM’s organisational vision
(as seen in example 5.2) incorporates the provision of sporting information with sharing and portraying a
passion for memorable moments in the history of sport.
EXAMPLE 5.2
MOSM’s Organisational Vision

An elite sporting museum examining the past, revealing the present, envisaging the future. A sporting
moment happens once. A second in time, captured for eternity. It lives in the minds of the people:
people who competed, who were there, and who pass on their stories from generation to generation.
They become a blueprint for what we value and an inspiration for all.
QUESTION 5.1
Module 1 introduced a set of questions that can be used to assess the effectiveness of the way in
which an organisation has stated its vision. These are as follows.
• Does it convey a picture of what the future will look like?
• Does it appeal to the long-term interests of members, employees, customers, partners and other
stakeholders?
• Does it comprise realistic, attainable goals?
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• Is it clear enough to provide guidance in decision making?
• Is it general enough to allow individual initiatives and alternative responses considering changing
conditions?
• Is it easy to communicate; can it be clearly explained in five minutes?
• Is it ambitious enough to force people out of comfortable routines? (LSIS 2009, based on
Kotter 1996, p. 67.)
Examine MOSM’s vision statement against each of these questions. Based on this, evaluate the
overall effectiveness of MOSM’s vision statement.
MISSION
As discussed in module 1, an organisation’s mission states its reason for being and describes how it will
achieve its vision. The mission is a high-level position and helps capture the organisation’s fundamental
purpose. This is critical for all organisations and assists the firm in ensuring strategic alignment. Strategic
alignment occurs when all aspects of the firm and the strategy work in the same direction towards the
same organisational goals. An organisation’s mission and vision should complement each other and align
with the values and strategic goals of the business. Example 5.3 describes Google’s mission statement. It
focuses on the key factors included in the vision statement (see example 5.1) and elaborates to include the
activities of organising, universal accessibility and usefulness.
EXAMPLE 5.3
Google’s Mission Statement

Google’s mission is:
To organise the world’s information and make it universally accessible and useful (Google 2020).
A successful mission statement drives the company and shapes organisational culture. Google’s vision
statement outlines the core business goal that employees should work towards. These aspects are core
to the strategies that are developed to achieve the vision and strategic goals.
Example 5.4 presents MOSM’s mission statement.
EXAMPLE 5.4
MOSM’s Mission Statement

MOSM’s mission focuses on specific changes to the customer-based and operational processes of
the organisation. The mission statement aims to communicate how through digital technologies, MOSM
provides an exciting and educational experience physically and online.
MOSM Mission
To explore Australian values through sport by:
• developing and exhibiting a relevant collection
• delivering innovative education programs and exhibitions, including through digital delivery and
edutainment
• providing an entertaining and knowledgeable environment for local, national and international
audiences
• providing exceptional customer service to enhance the customer experience using in-house and
online edutainment.
Note that the MOSM mission statement given in example 5.4 states that the factors that shape the
organisational culture include sporting history, communication and technology delivery of physical and
online channels. The mission statement underpins the core business goal/s that employees should work
towards. These aspects are core to the strategies that are developed to achieve the vision and strategic
goals. This process is core to this module and as you move through the module, you will see how these
align with strategy development.
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VALUES
As discussed in module 1, values are guiding principles that direct the organisation’s journey and help
prioritise its goals, decisions and behaviours. Shared values are core to strategy and should be driven
by the leadership team, reinforced by managers and adopted by stakeholders. These guiding principles
should not be compromised and are an essential base from which the organisation can achieve its strategic
goals. They also enable staff to flourish by providing them with a common cause. Values help managers to
make trade-off decisions about the organisation’s direction when faced with competing interests. Google’s
values are listed in example 5.5. Appendix 5.1 notes MOSM’s values as ‘Pride, commitment, community,
dedication and leadership’.
EXAMPLE 5.5
Google’s Values
• We want to work with great people.
• Technology innovation is our lifeblood.
• Be actively involved.
• Do not take success for granted.
• Do the right thing, do not be evil.
• Earn customer trust and user loyalty and respect every day.
• Sustainable long-term growth and profitability are key to our success.
• Google cares about and supports the communities where we work and live (Google 2020).
Google’s values show the core focus on the guiding principles of the business. Note the values include
focus on the key factors identified in the mission and vision including a focus on innovation and technology
and the performance driven factors such as working with great people, active involvement and long-term
profitable relationships with customers.
GOALS
People work most effectively when they focus on well-defined goals and clear direction from management
drives employee motivation. As described in module 1, goals are best expressed to teams in terms of the
‘SMART’ acronym, meaning that they are:
• specific
• measurable
• achievable
• relevant
• timely.
The leadership team is core to developing the organisation’s goals, which are specific outcomes intended
to contribute to the organisation’s overall mission. As the organisation and its people gradually achieve its
goals, this ultimately results in achieving the vision. There are various tools that managers and leaders can
adopt to support the communication and measurement of goal achievement. For example, the balanced
scorecard (BSC) approach (described in module 3) is one tool that can be used to help managers and
the leadership team track and improve progress towards goals. Example 5.6 demonstrates the use of a
BSC to communicate and establish measures for specific goals that contribute to MOSM achieving its
overall strategy.
EXAMPLE 5.6
MOSM’s Goals
MOSM wants to achieve its goals within the next four years. The previous goals are set out using the four
perspectives of BSC (discussed in module 3), which helps demonstrate the links between these goals
and communicate strategies moving forward.
In figure 5.3, the BSC presentation of the organisation’s goals considers a key question for each of
the four key organisational components, including:
1. customer
2. financial
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3. internal process
4. learning and growth.
Figure 5.3 effectively shows how the areas or perspectives are interrelated and shows the manager the
areas to focus on and the goals to achieve them.
For example, to achieve the vision for MOSM, customer satisfaction and an increase visitor numbers
must reach a certain level (customer perspective). However, this will not be possible without a greater
number of volunteers who are well-trained in performing their role (learning and growth perspective).
Without proper structure and process, including accreditation and project management, the organisation
will also fail to reach its financial targets in terms of growing the market and becoming more cost-efficient,
and therefore not meet its overall vision and mission.
FIGURE 5.3 MOSM goals
Financial: To succeed financially,

how should we increase growth and
improve inefficiencies?
• Increase revenue to $9.5m

• Decrease total operating cost
to $1.8m
Customer: To achieve our vision, Internal process: To satisfy our

how should we appear to our shareholders, what business must
customers? we excel at?
• Customer satisfaction of 90% Vision, mission • 100% on time delivery
• Increase visitor numbers and values of projects
to 200k • Quarterly care of collection
• 30% repeat visitors • Museum accreditation
Learning and growth: To achieve

our vision, how will we sustain our
ability to change and improve?
• Increase the number of

volunteers to 375
• Increase number of training
days to 4 p/a
• Retain 90% of high performers
We know that MOSM’s vision focuses on specific changes to the customer-base and operational
processes of the organisation. The mission statement aims to communicate not only physical channels
but also digital technologies
QUESTION 5.2
What other goals could be included in the BSC in figure 5.3, considering the innovation and
technology goals of MOSM?
LEADERSHIP AND MANAGEMENT ROLES IN

STRATEGIC ALIGNMENT
The leadership team (which, in this context, includes the senior executive and managers from functional
departments) is core to building the mission and vision and developing the resulting values, goals and
strategy. Leaders and managers in the organisation must recognise when an existing vision, mission and
strategy are no longer working, and when it is time for a new direction. The leadership team plays an
important role in ensuring the firm can be agile, evolve and maintain a strong future.
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As discussed in modules 2 and 3, businesses must analyse external and internal environments using
quality data and from this, they must develop the skills and agility to move on strategic change and
identify new opportunities developing a strong direction for the future. This can be a challenge and the
common failure to do so is evident in brands once considered iconic that are no longer viable or evident
in the market. For example, a failure to recognise and respond to new technology-based product entry
(digital photography) and changing market trends contributed to the decline for photographic equipment
and accessories company Kodak.
The core skills and tasks of leadership and management in strategy development include:
• reflecting on previous performance and the influences from the external environment and competitors
• constructing a strong understanding of internal capabilities and expertise
• generating news ideas and directions focused on potential new customers and new markets
• developing an innovative, visionary and design-led business that focuses on strategies that meet the
needs of future growth and sustainability
• building a strong organisational culture with a strategic focus
• making evidence-based decisions, capturing data through business analytics and building a strong body
of metrics and evidence to support decisions
• building agility and responsiveness into the business for a strong future.
The role of leadership within the business needs to be visionary and create momentum and belief in the
strategy to move it forward. The business executive needs to empower managers to monitor and promote
the generation of ideas, evidence-based decision making and reporting of performance metrics against
the strategic goals. Strong leadership and management are all about building a framework for strategic
development, monitoring performance and considering the future.
QUESTION 5.3
Refer back to MOSM’s mission based on Australian values through sport (see example 5.4) and note
the core values of ‘Pride, commitment, community, dedication and leadership’ (see appendix 5.1).
Explain some of the key activities the leadership team should be conducting to reinforce adoption
of MOSM’s values.
as follows.
KEY POINTS
5.1 Explain the key concepts, components and frameworks applicable to the development of an
organisation’s strategy.
• An organisation’s strategy is intended to achieve the organisation’s goals.
• An organisation’s goals are developed from its vision, mission and values and may be expressed
using a framework such as the balanced scorecard.
• The strategy development process leads to the formulation of strategic options for the organisation,
which are grouped under several strategic themes.
• Strategic initiatives are the activities that must be performed to implement the desired strategies.
• Aligning the vision, mission, values, goals, resulting strategic themes, initiatives and related actions
is essential to successful strategic development.
5.5 Appraise how the roles of management and leadership drive the development of the strategy.
• Organisational leaders and managers are responsible for establishing and then ensuring the
alignment of an organisation’s strategy with its vision, mission, values and goals.
• Leaders are particularly important in establishing the vision, mission and values that define the
purpose of the organisation, how it will act and the principles upon which its decisions and activities
will be made.
• Managers are particularly important in ensuring the organisation and its personnel act in accor-
dance with the organisation’s values and towards achieving its goals.
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5.2 STRATEGIC DRIVERS AND CONSIDERATIONS
The stages of the strategy process described in the earlier modules bring the organisation to the point at
which it can consider its strategic options. Example 5.7 describes the current challenges for MOSM and
the findings of MOSM’s internal and external analyses, and offers a strengths, weaknesses, opportunities
and threats (SWOT) analysis for consideration in strategy development.
EXAMPLE 5.7
Museum of Sport Memorabilia (MOSM)

Facing growing competition and an expanding tourism industry in the ACT, MOSM conducted an analysis
of its current internal and external operating environment. Key findings of the analysis (using representative
Australian statistics) are shown below, including a SWOT analysis in figure 5.4.
MOSM Key Findings about the External Environment
• In 2018–19, Australia’s tourism industry contributed AU$57.3 billion to the Australian economy. This
accounted for 3.1% of national Gross Domestic Product (GDP).
• Australian tourism expenditure is forecasted to grow by 5% per annum.
• Australia’s population is currently growing by approximately 381 600 each year, with Australia’s annual
population growth (at the end of June 2019) equating to 1.5%. The ACT recorded the third strongest
growth rate in the June quarter of 2019, at 1.5% (an increase of 6330 persons).
• International arrivals to Australia are expected to increase 9.7%, from 9.4 million visitors in 2018–19
to 9.8 million international visitors in 2019–20. Although in a downward trajectory, the Chinese market
continues to be the largest share of international visitors. Other visitor markets experiencing growth
include India, Indonesia and Malaysia.
• In the year ending 2019, approximately 2.9 million domestic tourists visited the ACT.
• Digital tourism and online visitation using virtual reality is becoming popular in all levels of school
education.
• Potential onsite tourism is influenced by search to a digital interface.
• The majority of international visitors to the ACT (46%) are travelling for recreational reasons, while most
domestic visitors to the ACT (33%) are travelling for family and personal reasons.
• MOSM’s (fictitious) major competitors include the ACT Wildlife Sanctuary, the National Gardens and the
Sovereign Sky Deck. Several competitors have made substantial improvements to their attractions.
• Of the ACT’s top nine tourist attractions, MOSM has the fewest visitors, at approximately 150 000 per
annum. The number-one competitor brings in 1 200 000 visitors.
• International visitors increased by 11.2%, domestic visitors increased by 16.4% and overnight domestic
visitors increased by 10.5%, all above the Australia average.
Source: Information from Tourism Research Australia, 2020; Visit Canberra Corporate, 2020.
MOSM Key Findings about the Internal Environment

Customer Findings
• Last year’s visits to MOSM were 35% higher than predicted.
• The largest customer segment was school groups (45% of all sales), followed by adults (38%).
• Some customers have complained about the noise levels of the school groups.
• School group visits are capped at 150 students daily.
• Customer satisfaction is 78%.
• Repeat visitors account for 12% of patronage.
Financial Findings
• Due to school group discounts, the average yield (revenue) per customer was AU$7.15; the original
budget was AU$11.35 per customer.
• Total expenditure for the previous year was AU$2.6 million.
• The previous year’s revenue forecast was set at AU$7.25 million.
• Actual revenue in the previous year was AU$8 million, due to higher than expected visitor numbers.
• Sponsorship money accounts for 45% of total revenue.
• Merchandise sales are not substantial.
• The highest expenditures are wages (57%), maintenance (14%) and volunteer costs (10%).
Employee Findings
• MOSM has 50 full-time employees, 13 casual staff members and 300 volunteers.
• In addition to these findings, MOSM visitors were surveyed on overall satisfaction, price, customer
groups, marketing and areas for improvement. A SWOT analysis was also conducted collaboratively
with MOSM staff.
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FIGURE 5.4 MOSM’s SWOT analysis
• Location near major soccer stadium • Lack of secure ongoing funding

• Sporting focus • Under-resourced
• Collection of exhibits • Core funding from one revenue stream
• School programs (sponsorship)
• Customer satisfaction • Overemphasis on certain sports

• Non-competitive marketing campaign
• Minimal web presence
• Low sales of gift shop merchandise
• Availability of car parking
• Food and beverage facilities
• Noise levels and management of larger
tour groups
• Limited digital interface and interactive
virtual reality of exhibitions
• Increasing visitor count • Insufficient funding

• Funding • Competitors — one of many iconic
• Diversifying the collection attractions
• Decreasing relevance of collection
• Increasing public awareness through new
channels (e.g. online and as part of the • Other tourism outlets are more developed
sporting precinct) with digital channels, seen as a laggard
• Adopting a digital strategy including in the marketplace
virtual reality of exhibitions • Digital visitation may cannibalise
• Adopting a communication strategy and onsite visitation
digital presence to attract new tourists
• Using digital visitation figures for metrics
and performance evaluation
The analysis in example 5.7 shows how the internal and external factors (discussed in modules 2 and 3)
can be used to give a snapshot of the current market and organisational challenges, which are core to the
strategic development process. The gaps between the external environment and the internal environment
become the strategic drivers and support the performance assessment framework discussed in module 3.
These are used to establish specific goals focused on the strategic factors and build strategic options.
Approaches to developing strategic options were considered in module 4. Key to the analysis in
example 5.7 is increased customer expectation for digital interfaces and digital innovation found in the
external assessment and this will become core to the strategic opportunities and threats moving forward.
The analysis also suggests that the major players are more developed in capitalising on the increased
interest in tourism and visitor attractions in Canberra. Interestingly, the ACT has performed very well
in the tourism sector and MOSM should be able to develop a better market position and target these
visitors through an integrated marketing and communications strategy and innovative growth strategies.
The knowledge that the other attractions are doing better than MOSM is a driver for MOSM to look more
closely at its offering and how it meets the targets. This also informs the recognition that a threat could
exist where the other attractions may be more advanced in digital development than MOSM and already
be capturing digital visitation, customer awareness through digital presence and metric and performance
capture through digital search and usage.
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QUESTION 5.4
Module 4 discussed the concept of embedding products into services so that aspects of service
creation and delivery could be commoditised. Examples include the use of technologies such as
artificial intelligence (AI) and chatbots to communicate with customers, taking the place of human
customer service representatives for some communications (Sawhney 2016). Consider the role
of operations excellence and innovative service delivery. Evaluate the potential of these types of
technologies to play a role in building a strategic advantage for MOSM.
The performance assessment framework discussed in module 3 provides insight to the strategic
direction required for the future. The identification of strategic drivers creates competitive advantage. The
organisation must ensure it possesses, develops or acquires the resources and capabilities needed to pursue
its strategy. The need for technology and innovation is an example of a capability needed to support the
strategic drivers at MOSM. In module 3, we examined operational and organisational and people drivers
as components of current performance. Along with products and services, these now become ‘levers’ that
an organisation must consider and manage as the basis of the strategic options to reposition MOSM for
competitive success. The role of these in building towards strategic initiatives are shown in the framework
in figure 5.5.
FIGURE 5.5 Operational, organisational and people, product and services levers
Strategic drivers and factors for success

Developing the strategy
What choices should we make to uniquely position
ourselves?
What differentiates us from our competitors?
New markets and products/services
Providing customer value
Channels
Internal capabilities, people and organisation and operational
excellence
Operational Organisational and people Product and services

levers levers levers
What are the core activities How do we encourage, motivate and How do we build products
that we must do well? fulfil our people's needs and that capitalise our
build expertise? customers' needs?
Strategic themes Strategic themes Strategic themes

What are the categories What are the categories What are the categories
within which we can within which we can group within which we can group
group our strategic options? our strategic options? our strategic options?
Increasing revenue and Workforce structure New markets, new products
reducing costs Building skills Building value and benefits
Efficency and effectiveness Building business capabilities
Flexibility and agility and expertise
Growth
Build strategic initiatives: the specific actions to achieve our goals

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The framework in figure 5.5 depicts how strategic driver decisions are made, how strategic decisions
are made with regard to which options to choose, and the basis of their point of difference and impact in
the market. The leadership team must develop possible ways to deliver on the strategic driver decisions
to ensure the strategy development creates competitive advantage and a point of differentiation in the
industry, and is supported by internal capabilities and expertise. The specific activities required to deliver
on the strategic driver decisions are known as strategic initiatives and support strategy implementation (see
module 6). Management assigns specific activities and responsibilities to staff to implement the strategy.
Part of this role includes identifying and addressing any gaps in capabilities.
STRATEGIC DRIVERS
The purpose of examining strategic drivers is to determine ‘Where are we going, and by when with what?’.
For example, an organisation may have the option of developing a new product for a different industry, or
of pursuing new customer markets with the existing product and may need to do this in the next business
cycle. The strategic drivers relate to the market opportunity for the new product and customer demand
for a product with benefits that the business can provide. What the business can provide is determined
by its internal resources and capabilities and the ways in which it can use its operational and people and
organisational levers.
Figure 5.5 lists questions an organisation can ask to identify the strategic drivers that differentiate it from
competitors. Within these drivers, an organisation can develop any number of strategic options to pursue
and build competency. Many of these were described in module 4. Figure 5.6 lists some options aligned
to strategic drivers.
FIGURE 5.6 Strategic options by strategic driver
Industry
• Expand into a fast-growing industry.
• Expand into an emerging, high-risk industry.
New markets
• Focus more attention on a certain market.
• Pursue new geographic markets with the same product/service.
Products/services
• Maintain current products and develop new, related services to support those products.
• Eliminate unprofitable products or services that are not aligned with the overall vision and goals.
Customers
• Pursue a new customer market with the same product/service.
• Target full-price customers, moving away from discounted customers.
Channels and operations
• Target customer spending by building an online retail presence.
• Target 24-hour service by building omnipresence.
• Use social media to attract new customers.
• Create new customer acquisition strategies using referral and incentive.
• Develop traditional channels using exemplary customer experience and unique experiences.
QUESTION 5.5
Based on figure 5.5, the following strategic options were identified for MOSM.
• Expand into the hospitality industry by developing a five-star restaurant attached to the museum.
• Position MOSM as a world-class sporting attraction and focus more attention on the domestic
market.
• Maintain and develop the current collection as MOSM’s main product offering.
• Target full-priced customers, moving away from the reduced-price school group customers.
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• Use social media to attract untapped customers.
• Provide a modern experience at MOSM through interactive displays and digital edutainment.
With reference to figures 5.3 and 5.6, align the strategic options listed for MOSM with the
categories of strategic drivers.
OPERATIONS
The development of strategic options requires consideration of how the strategy could be achieved through
the organisation’s operations. The strategic direction and the implementation options will always have
some effect on the operational drivers of revenue, cost and/or growth. For example, the strategic option
to pursue a new channel for product distribution ultimately aims to increase revenue but will also impact
on costs through the resources required to develop the channel. New product distribution channels require
substantial initial capital investment to get started, and a successful new channel development would grow
the organisation considerably.
An organisation needs to consider the effect of different strategic options; that is, how will the activities
undertaken to pursue one strategic option affect other options and the organisation more broadly? This
will determine the overall best outcome for the organisation and guide the choice of which strategic
options to adopt. In the context of operations, this generally relates to the interactions of revenue, costs
and growth.
Consider that MOSM develops a new strategic option: ‘Develop digital delivery and digital service
support’. Figure 5.7 illustrates how this strategic option relates to the product and service strategic driver
for MOSM and how this then links with operations. The strategic option was suggested to create a positive
impact on revenue per customer because the delivery of the service, such as the employment of tour guides,
can be minimised. The risk of this option, however, is that it may not lead to greater overall growth, market
interest or revenues, because the lack of personalisation may reduce the attraction’s appeal and thus reduce
the total number of customers. The organisation therefore needs to consider additional options to address
and minimise this risk (e.g. conduct promotional initiatives or add a premium personalised service as an
option). This example shows the nexus between operations and the implementation of broader strategies.
It should be noted that MOSM also suggests improving operational layout through relocation of other
revenue-producing activities such as the store and increasing admission fees to ensure that other revenue
is also being sought.
FIGURE 5.7 Linking the strategic driver, strategic option and operations, example 1
Building revenue
Greater revenue per
customer and per group
through perceived
value from technology
Reducing costs
Strategic driver Strategic option
Build efficiency Standardise process
Develop digital Streamline
of operations elements and
delivery and digital process and
streamline delivery
service support resources
costs using technology
Growth through new

markets and
communication
Customer acquisition
strategy — attract new
digital and edutainment
customers

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Figure 5.8 is a second example of the links between a strategic driver, strategic option and operations
for MOSM. In this case, the strategic option is to use technology to develop the current collection.
This option could potentially lead to an increase in revenue as more consumers may become interested
in the new collection items and presentation. However, there will be a greater cost associated with
this investment for MOSM as they will need to purchase new products and technology. The risk
associated with growth is dependent on whether the organisation can successfully attract customers with its
updated collection.
FIGURE 5.8 Linking the strategic driver, strategic option and operations, example 2
Increase revenue
Increased product
offering in the
portfolio will
result in increased
revenue
Strategic option
Maintain and develop Reduce costs
Strategic the current Reduce costs using
driver collection as MOSM’s Build product and digital support, AI and
Product and main product offering, service capabilities robotics; however,
services: new adopting a digital of operations costs of delivery
offerings virtual reality and for a new product
improved layout may increase
and process
Growth through new

customers, new
markets
New product for new
consumer interest
will develop new
market
Example 5.8 presents some further options MOSM has considered along with the effect of each on the
operational drivers.
EXAMPLE 5.8
MOSM Operational Drivers

MOSM also considered several further strategic options.
1. Decrease the discount given on school group admission prices.
2. Conduct promotional initiatives to attract adult visitors, at full admission prices.
3. Offer event and hospitality services to take advantage of the prime location and facilities at MOSM.
4. Strategically relocate the merchandise and gift store.
5. Increase all admission prices.
The consequences of each of these options for the operational drivers can be analysed as follows.
1. Decrease the discount given on school group admission prices.
– Revenue: higher prices will increase the revenue from each school group but may decrease overall
revenue if fewer school groups choose to come to MOSM because of the higher price. If demand
is price elastic (sensitive to small changes in price), then school groups will not come at the higher
price. MOSM needs to be flexible and agile with pricing and delivery.
2. Conduct promotional initiatives to attract adult visitors, at full admission prices.
– Revenue: acquire additional revenue from the new adult visitors at full admission prices.
– Cost: expend costs to develop promotional initiatives.
3. Offer event services to take advantage of the prime location and facilities of MOSM.
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– Revenue: collect additional revenue from renting the MOSM facility for events.
– Costs: providing the new services will incur costs (e.g. for extended staff hours, lighting, heat/air
conditioning, possibly also a permit for serving alcohol).
– Growth: greater service offerings will attract customers after-hours.
4. Strategically relocate the merchandise and gift store so that visitors pass through it to exit.
– Revenue: increase revenues from the sales of more gifts.
– Cost: costs associated with relocating the merchandise and gift store.
5. Increase all admission prices.
– Revenue: collect additional revenues from admissions.
This section has shown how operations within the firm and the supply chain are core to the development
of strategic options for the firm. The next section shows the importance of considering the organisational
and people drivers.
ORGANISATION AND PEOPLE

Figure 5.5 suggests workforce structure, building skills, and business capabilities and expertise are key
organisational and people drivers, meaning they can be used as levers to implement strategic options and
that the strategic options chosen will affect these drivers.
The successful implementation of strategic options often requires a different organisational structure
(e.g. establishing a new team to pursue a new product distribution channel). An organisation’s structure
may be team-focused or hierarchical. Staff may require training to develop new skills. All the aspects of
capabilities discussed in module 3 can be applied here to determine what resources and capabilities the
organisation needs in order to achieve the strategic option that has been identified.
An example of the link between strategic options and the organisational and people drivers is shown
in figure 5.9. MOSM’s strategic option — Expand into hospitality industry by developing a five-star
restaurant — relates to the industry strategic driver, because it involves a move into a completely different
industry. This option is linked to all aspects of the organisational and people drivers (shown on the
right-hand side of figure 5.9) and highlights the significant change that would be needed to successfully
implement this option. A move into another industry will require employment of new staff; new training,
policy and procedures; and a possible restructure to ensure a management hierarchy that can manage this
strategy. Example 5.9 describes the organisational and people drivers linked to some new strategic options
MOSM has considered.
FIGURE 5.9 Linking the market’s strategic driver with a strategic option to the organisational and people levers
Structure
Separate
management
and staffing may
be required
Strategic option Skills

Strategic driver
Expand into the Organisational Completely new
New markets to
hospitality and people skill sets required
include
industry with a driver for daily
supplementary
five-star operations
services
restaurant
Capabilities
Build hospitality
skills and
operational
processes
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EXAMPLE 5.9
MOSM Organisational and People Competencies

MOSM also considered several other strategic options that require the organisational and people drivers
to be analysed.
1. Increase the number of volunteer hours, to reduce costs relating to full-time staff.
2. Provide training to full-time employees geared towards enhancing the customer experience.
3. Review processes and procedures to make them more efficient.
These three strategic options link to the organisation and people levers (i.e. workforce structure, building
skills and business capabilities and expertise) as follows.
1. Increase the number of volunteer hours, to reduce costs relating to full-time staff.
– Structure: to grow the number of volunteer hours, the MOSM structure may need to be reorganised.
2. Provide training to full-time employees geared towards enhancing the customer experience.
– Skills: training involves up-skilling.
– Capabilities: training also helps to develop capabilities.
3. Review processes and procedures to make them more efficient.
– Capabilities: the review process will enhance the operational environment.
PRODUCTS, SERVICES AND MARKETS

Success in new product, service and market development in any organisation requires the whole organisa-
tion to understand and focus on what the customer values and the benefits they desire. Understanding the
customer value equation alone is not sufficient for success. The firm must build the strategic capability to
develop and execute an aligned strategy that is more effective than the competition.
The success of new products and services and the successful development of a new market are
heavily influenced by various key success factors. While the presence of the key success factors is not
enough to guarantee success, they are strong determinants and the choice among strategic options should
consider them.
Product and Service Key Success Factors

The following determinants of the success of new product or service development should be considered
when developing strategic options.
1. Understanding users’ needs — consumer feedback and ideas, and consumer input to product and service
development help ensure products and services meet consumer needs and provide what they value. It
should be recognised too that understanding consumers can help the organisation generate ideas and
develop products and services that create a need or want.
2. Ability to successfully market and launch — the success of a new product or service is tied to the ability
to market and launch it.
3. Efficiency of development — development of a product or service needs to be comprehensive in order to
ensure its success in the market. The more efficient and structured the development, the fewer problems
will arise once the product goes to market. Although it is important to be thorough, timeliness and
flexibility are also required to allow employees the freedom and authority to make judgement calls
when need be.
4. Effective use of outside technology and external communication — leveraging such knowledge will give
the organisation an insight into the market and current conditions. The increasing popularity of social
media and the ease of global communications has increased the importance of leveraging the wide array
of knowledge available to inform product and service development and implementation.
5. Seniority and authority of responsible managers — senior management must provide total support
to the research, generation and implementation of a new product into the market. Ultimately, new
product success is dependent upon commitment from top management and a collaborative approach
throughout the organisation. This can often be achieved by delegating decision making to lower levels of
management throughout the organisation’s departments to further foster a creative and proper working
environment. (Adapted from Cooper & Kleinschmidt 2000.)
The above factors affect how a product or service may be developed (see module 4), the prospects of
success of the product or service and thus influence the development and choice of strategic options (the
focus of this module), and inform how a new product or service should be implemented as part of the
overall strategy (see module 6 for more on implementation).
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In choosing strategic options, it is essential to think about the key success factors for a new product or
service and simultaneously consider why an option may not be an optimal choice.
The development and ultimately the choice of strategic options need to avoid the following.
• Developing the wrong product or service — properly following the strategic analysis process should
avoid this, and ongoing monitoring of the external environment should alert the organisation to any
change in the market that may make the product or service redundant or uncompetitive.
• Lacking a point of difference or newness — following the product and service development process
should ensure the product or service has a customer benefit beyond what is currently available, has
a relevant point of difference from competitors and will be perceived as genuinely new or improved.
(Adapted from Blank et al. 2012.)
Many of the problems that arise for new products and services are driven by assumptions about what
the customer wants and what they value, and about competition in the marketplace. These reflect a failure
to properly follow the strategy process, in particular the strategic analysis.
Key Success Factors for New Market Development

As described in module 4, entering new markets with new products or finding new groups of consumers
with existing products is core to market development.
There are several key success factors that heavily influence the successful development of new markets,
either from a geographical or customer-base perspective, including the following.
• The identifiable benefits of expanding into the new market must be in line with the long-term strategic
goals of the organisation.
• The organisation must ensure that it has sufficient cash reserves to finance the new organisation until
such time as it becomes self-supporting.
• The organisation must ensure that it has sufficient expertise to execute the new position and strategy.
• The organisation should perform both internal and external analyses.
The development and choice of strategic options should consider these market development key success
factors.
The development and choice of strategic options related to market development should also reflect risk
factors, including risks associated with:
• entry into new markets where consumers and competitors are unknown or poorly understood
• entry into international markets where business and customer culture are poorly understood
• targeting markets that have different demographics, psychographics, and culture compared with existing
markets
• diversifying into markets not strongly aligned with strategic knowledge and capabilities.
It is too often the case that the attractions of new markets and customer targets blind organisations to
the fact they do not have the resources and capabilities to overcome the disadvantages of working in an
unfamiliar market. Organisations often do not adequately think through what is required to build a unique
strategy and deliver value to their new customers. As a result, expensive investments often have to be
written off, when less ambitious strategies may have worked well.
THE INTERACTION OF DRIVERS AND LEVERS

The successful implementation of strategic options requires simultaneous changes and actions in relation
to all relevant drivers and levers.
Consider the situation of a retail organisation that currently only operates out of physical premises. It is
investigating the strategic option of expanding into a new distribution channel by offering an online website
for viewing products and making purchases. The strategic option of targeting customer online spending
links to the operational levers (e.g. the cost of establishing the online store) and people and organisational
lever (e.g. the development of the employees’ skills). These and other links are shown in figure 5.10.
It is crucial to consider drivers and levers simultaneously and think critically about how each strategic
option ties in with them. An important part of the strategy development process is prioritising the
strategic options, with more important or beneficial options taking priority over less significant options
(prioritisation is discussed in more detail later in this module).
Example 5.10 examines the strategic options Zara could pursue.
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FIGURE 5.10 The interaction of the channel strategic driver, operational levers, and people and organisational
levers associated with a strategic option
Revenue
Revenue from
new customers
and additional
sales
Costs
Set-up costs,
ongoing fees and
charges
Operational
levers
Growth
Significant growth
Strategic option
Strategic driver
Target customer Structure
Channels
online spending Unchanged or
reorganised
Organisational Skills
and people Additional
levers training, website
maintenance
Capabilities
Technological
capabilities and
logistics
management is
required
EXAMPLE 5.10
Zara — Strategic Options

Previous modules have explored clothing retailer Zara’s business. Consider the rollout of Zara stores
nationally. The Zara online store has a large loyal customer base and it has been argued that the
relative lack of penetration of the physical retail offering is a result of its customers’ preference for
online purchasing.
Consider what strategic options Zara could explore to draw customers into the store, increase store
visitation and promote the customer experience created by the retail outlet.
Zara could seek to develop complementary online and in-store appeals for customers. For example,
Zara could adopt any or all of the following to increase visitation to its retail outlets.
1. ‘Click and collect’, whereby purchases are made online and the customers collects their items from
the store instead of having them delivered.
2. Showrooms, showing and pre-season launches, whereby customers gain exclusive benefits by visiting
a store.
3. Personal fittings for online profile, whereby customers visit the store for a personal fitting session
to better understand the fit of Zara’s sizes suit their body.
4. Store only stock, where some items are not available for purchase online.
Module 3 introduced Kaplan and Norton’s balanced scorecard (BSC). At the core of Kaplan and
Norton’s view is the alignment of strategy development, strategic drivers, operational levers, people
and organisational levers (all discussed in this module) and implementation, monitoring and adaptation
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(see module 6). These alignments and interdependencies are illustrated in figure 5.11. It is important to
note that these interactions occur and must be considered and managed regardless of whether the BSC is
used. The BSC is one way of understanding strategy and performance, but there are many others.
FIGURE 5.11 Interaction of strategy, strategic drivers, levers and implementation
Strategy Strategic
process 1. scenarios
Strategy
• Organisational goals
• Strategic priorities
• Strategic gaps
2. 6.
Strategy Monitoring and
development adaptation
Strategy
3.
5.
People and
Strategy
organisational
implementation
drivers and levers
4.
Operational
drivers
and levers
Budget, sales
Individual
and operational
scorecards
plans
QUESTION 5.6
Kmart Australia is a chain of budget department stores. Imagine that Kmart is considering
the implementation of a new inventory tracking system to better understand consumer tastes
and preferences and in turn to increase turnover and reduce wastage. Using the framework in
figure 5.5, analyse this strategic option, including the operational and organisational and people
levers.
as follows.
KEY POINTS
• The framework for performance assessment can be adapted to examine strategic options.
• The assessment of strategic options looks at the interrelationships between changes in strategic
drivers, operational and organisation and people drivers and levers, and markets, products and
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services. This assessment helps the organisation understand what strategic options are possible,
how they can be achieved and what the outcomes might be.
5.4 Develop the strategy applicable to a specific organisational context.
• The strategic drivers, operational drivers and organisational and people drivers are unique to
an organisation.
• The strategy must be developed to fit with these drivers and the interaction of these drivers must
be considered and coordinated in order to ensure the strategy can be successfully implemented.
5.3 EVALUATING THE STRATEGIC OPTIONS AND

DETERMINING THE STRATEGIC FIT
After the strategic options are determined, the next task is to evaluate the options relative to the current
industry to determine their ‘strategic fit’ with the organisation. This exercise is useful for determining
which options will help the organisation to fulfil its vision and mission.
While many strategic options might be commercially viable, they must also have a compelling strategic
rationale. That is, an option must be viable in the context of the organisation’s external environment and its
internal performance and capabilities. Options must also be operationally feasible and give the organisation
a competitive advantage.
There are several approaches for evaluating which options are the most appropriate and will result in the
organisation fulfilling its vision and mission. The following sections review several approaches to evaluate
strategic options and their fit with the organisation:
• value/effort assessment tool
• weighted criteria evaluation tool
• evaluation using business analytics.
VALUE/EFFORT ASSESSMENT
The value/effort assessment tool evaluates the potential impacts of the strategic options. The options are
plotted in four quadrants according to value contribution and level of effort, as shown in figure 5.12. Value
refers to revenue, profit or return. Effort includes factors such as resourcing, time, cost and risk.
FIGURE 5.12 Value/effort assessment
Low-hanging Blood, sweat

fruit and tears
Value
Delegate Dead
or dump ducks
Effort
Source: Adapted from Minds at Work, n.d., www.mindsatwork.com.au.
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The Four Quadrants
• Low-hanging fruit — high-value and low-effort options should always be pursued.
• Blood, sweat and tears — high-value and high-effort options require time and resources but have
great potential to create high value for the organisation. These options should seriously be considered,
including the possibility of focusing on fewer options because of the extensive effort needed to realise
each option.
• Delegate or dump — low-value and low-effort options can often be delegated as tasks to the lower
levels of the organisation. Alternatively, given the minimal value creation, these tasks can be dumped
(rejected) altogether if they do not provide sufficient value.
• Dead ducks — low-value and high-effort options are not worth extensive effort, given the expected
limited value.
The value/effort assessment should be the first check point of the strategy evaluation process, because it
can immediately eliminate dead ducks and prioritise low-hanging fruit options (i.e. the easiest option with
the best return). This then gives a prioritised list which has culled the options with little return on effort.
This assessment tool can be used when determining which strategic themes to pursue. Example 5.11 works
through the value/effort assessment of two strategic options for Lululemon Athletica and shows how the
value/effort framework can offer insight into which options should be chosen.
EXAMPLE 5.11
Value/Effort Assessment for Lululemon Athletica

The luxury activewear brand, Lululemon Athletica, is evaluating two strategic options to expand
its business:
1. advance the use of the business’s speciality fabric in the design of all products
2. initiate a community campaign: ‘Lululemon fitness and wellness’.
These options can be evaluated using the value/effort assessment.
Firstly, while the business currently invests in the manufacturing of the original speciality fabric,
the business wishes to advance the use of this fabric to ensure that all products are longer-lasting,
environmentally friendly and comfortable. This option requires effort, but could result in further customer
attraction and increased sales. Thus, it is likely to be classified as ‘blood, sweat and tears.’ Based on this,
this strategy requires effort, and should offer some solid returns.
Secondly, Lululemon Athletica is looking to initiate a community campaign, encouraging consumers
to join their local ‘Lululemon fitness and wellness’ program. This option requires limited effort and could
result in increased customer satisfaction and sales. Thus, this option is considered ‘low-hanging fruit.’
Based on the value risk assessment this strategy is easy to implement and may result in positive returns.
QUESTION 5.7
Using the value/effort assessment from figure 5.12, evaluate MOSM’s strategic option of ‘provide
a modern experience at MOSM through interactive displays’.
WEIGHTED CRITERIA EVALUATION TOOL

The aim of the weighted criteria evaluation tool is to objectively compare and focus on the strategic
options that show the most promise in terms of opportunity, size and capability to implement. Table 5.1
provides a template that can be customised to evaluate strategic options and determine how feasible each
option is for the organisation. Options are rated based on the evaluation criteria.
TABLE 5.1 Sample template for evaluating and comparing new strategic options
Evaluation criteria Maximum points Option 1 Option 2 Option 3
Size and value 10
Growth potential 10
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(continued)

Evaluation criteria Maximum points Option 1 Option 2 Option 3
Profitability 20
Return on investment 5
Internal rate of return (IRR) 10
Distribution access 5
Value proposition 5
Capabilities 5
Resources 5
Capacity 5
Service 5
Risks 10
Corporate social responsibility (CSR) 5
Total (in this case out of 100) 100
The organisation weights each of the evaluation criteria to reflect their importance.
For example, in table 5.1 profitability receives a weighting of 20 points, whereas distribution access
receives a weight of only 5 points. This reflects the much greater value placed on profitability over
distribution access for this particular example. A different organisation might consider distribution access
to be far more important and would thus weight it accordingly. The options are evaluated against the criteria
by allocating a score between 0 and the maximum points for each criterion.
The criteria and weighting of each evaluation criterion should be adjusted to suit the needs of the
organisation and which evaluation criteria they rate more and less important. Organisations should bear
in mind that a focus only on financial results without attention to long-term sustainability and non-
financial aspects will likely struggle to achieve ongoing strategic success. Similarly, organisations that
pay insufficient attention to financial criteria are unlikely to succeed.
Explanations for Evaluation Criteria

The evaluation criteria chosen would vary between different organisations. The following list explains the
criteria used in the sample template in table 5.1.
• Size and value — this criterion relates to the market size, including how much of that market the
organisation can realistically expect to capture, and over what time frame. However, if, for example,
the product is new to the market or there is no established market need, intelligent assumptions and
approximations often have to be used.
• Growth potential — this criterion relates to the expected growth, growth factors and sustainability of
the strategic option. Recall the growth factors discussed in module 2. It is important to consider whether
this growth will be sustainable in the long term.
• Profitability — this criterion relates to the expected profitability of the option: the same, better or worse
than average? Recall the profitability factors discussed in module 2.
• Return on investment — this criterion assesses whether the cost of implementation will provide a positive
return on investment.
• Internal rate of return — this criterion assesses the expected internal rate of return. The higher the
option’s internal rate of return, the more attractive the option is to pursue.
• Distribution access — this criterion looks at how the market access can be achieved. Can existing
distribution channels be used? Do you need to rely on a distribution partner? What incentives are required
to obtain distribution access?
• Value proposition — this criterion assesses the option’s fit with the organisation’s portfolio of products?
(The next section examines portfolio management considerations for an organisation and is relevant
in assessing this criterion.) The customer views must also be examined. Is this option better than what
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customers currently receive? What are the key points of difference of this offering? Does the organisation
have this information, and can it be articulated in a compelling way that will entice the customers away
from their current supplier?
• Capabilities — this criterion looks at whether the organisation has the capabilities to implement the
option (i.e. skills, people, track record).
• Resources — this criterion assesses what resources are needed to implement the option. This includes
people, time and money. Evaluation against this criterion should also include the need for special
equipment.
• Capacity — like resources, this criterion may look at whether there are enough people and access to
equipment to implement the option (i.e. available machine time and staff).
• Service — this criterion assesses whether the organisation has the infrastructure to handle customer
service aspects.
• Risks — this criterion looks at the risks associated with the strategic option. Risks are discussed in more
detail later in this module.
• Corporate social responsibility — this criterion measures the social accountability of the strategic
option. Does the option enhance the societal contribution of the organisation?
There is an interesting tension between scoring all criteria highly and identifying an option that
provides some sort of competitive advantage. The weighted evaluation tool is intended to help objectively
assess and compare strategic options. As part of the assessment, organisations must consider risk.
Risk is an important factor that must be clearly understood and mitigated against, but also accounted
for in the evaluation of options and strategy development. (Risk assessment is discussed in detail in
section 5.4.)
Example 5.12 shows use of the weighted criteria evaluation tool to evaluate strategic options for
Lululemon Athletica.
EXAMPLE 5.12
Weighted Criteria for Lululemon Athletica

Using the weighted criteria evaluation tool, Lululemon offers a score against each criteria within the
score range and uses this to evaluate the two strategic options for Lululemon Athletica as discussed
in example 5.11. This activity is completed by the manager/s in charge of the strategy and requires their
judgement on each of the criteria.
1. Advance the speciality fabric to be more long-lasting, environmentally friendly and comfortable.
2. Initiate a community campaign — ‘Lululemon fitness and wellness’ in major cities.
The scores are shown in table 5.2.
TABLE 5.2 Weighted criteria evaluation tool
Evaluation criteria Maximum points Option 1 Option 2
Size and value 10 5 5
Growth potential 10 5 5
Profitability 20 15 5
Return on investment 5 0 5
Internal rate of return (IRR) 10 5 10
Distribution access 5 5 5
Value proposition 5 5 5
Capabilities 5 0 5
Resources 5 0 5
Capacity 5 0 5
(continued)
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Evaluation criteria Maximum points Option 1 Option 2
Service 5 5 5
Risks 10 5 10
Corporate social responsibility (CSR) 5 5 5
Total (in this case out of 100) 100 55 75
Note from table 5.2 that option 2 provides the most value to the organisation with a total of 75 out
of 100 points, with limited risk (reflected in a favourable, that is high, score against risk) and high return
on investment. The alternative strategy equates to 55 points out of 100, with an unfavourable risk rating
(reflected in a low score against risk) and low capacity and resources to achieve the strategy. Lululemon
Athletica should consider investment in option 2 to expand its business.
Note that both the value/effort assessment and the weighted criteria evaluation tool offer similar
evaluation of strategy. These tools are used to help visualise all of the elements of strategy development.
QUESTION 5.8
Using the evaluation criteria in table 5.1, evaluate MOSM’s strategic options to:
(a) decrease the discount given on school group admission prices
(b) increase the number of volunteer hours, to reduce costs relating to full-time staff
(c) review processes and procedures to make them more efficient.
Briefly describe why the ranking was given to each particular option.
EVALUATION USING BUSINESS ANALYTICS

The growing field of business analytics can be used to evaluate strategic options and inform strategic
development through its focus on discovering and communicating patterns in data. Data is collected from
a range of external and internal sources, including business transactions, customer and employee surveys,
competitor and industry analysis, macro-economic statistics and financial performance. Underpinning this
data collection is the supporting IT infrastructure, which also provides storage and retrieval functions.
These IT systems can now hold significantly greater amounts of data, but an even more important
development is the ability to analyse that data.
Patterns in data are identified through statistical modelling and algorithms. These models also incor-
porate probability analysis to evaluate the likelihood and outcomes of certain events taking place. This
is where business analytics, supported by information technology, can be used to evaluate new strategic
options. Examples of applied analytics range from supporting decisions about the best marketing mix of
products to making strategic acquisitions of competitors. Analytics can also help to determine strategic
fit and select the best strategic option for the organisation, ensuring that qualitative assessments are
supported and validated by quantitative analysis. Technology insight 5.1 examines the use of predictive
and prescriptive analytics to help organisations evaluate outcomes from strategic options and choose what
course of action to take.
Predictive and Prescriptive Analytics

Approaches to data analytics may be categorised into descriptive, predictive and prescriptive analysis.
• Descriptive analytics examines historical data and uses it to explain past organisational successes and
failures.
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• Predictive analytics applies algorithms (rules) to historical and current data to calculate the probabilities
of future events, including those that relate to organisational success or failure.
• Prescriptive analytics builds on predictive analytics by indicating what actions the organisation should
take, based on the probabilities of future events, and what the likely outcomes will be.
It is clear then that all three types of data analytics can help the organisation understand its past
and future performance. Predictive and prescriptive analytics in particular can help the organisation
evaluate and choose between strategic options. Prescriptive analytics can further help the organisation
understand how it will need to manage its strategic drivers, and operational and organisational and
people levers, as well as its products, services and market development, in order to achieve strategic
outcomes.
Prescriptive analytics draws on a wide range of data types and responds dynamically to new information
and new learning. While the concept of using data to choose between options is long-established, the
power of predictive and prescriptive analytics has grown greatly in recent years with the advent of big
data and the development of advanced data analytics using information technology.
Specific business applications of predictive and prescriptive analytics include understanding the
effectiveness of an advertising campaign, the lifetime financial value of a customer, the likelihood of
customers switching to a competitor based on product changes and many others.
Understanding and interpreting data is also critical in providing support for choosing strategic paths or
projects in a company. WorkSafe Victoria (WorkSafe) provides an example of using analytics to help
determine strategic priorities. It is responsible for regulating workplace health and safety in Victoria,
Australia and provides the insurance for people who are injured at work. As part of the annual business
planning cycle, tens of thousands of compensation claims are reviewed and analysed. One of the most
difficult parts of strategy development is to estimate future macro changes in industry and the labour force
in order to prioritise where current prevention-focused initiatives should be resourced.
For example, the chance of a workplace injury occurring is not only related to the current level of risk
at a workplace but also influenced by other factors such as:
• the movement of workers from industries such as manufacturing to construction and to new service-
related industries
• an increase in labour-hire employees who work across multiple sites and for multiple client employers
• changing community awareness about how stress-related injuries occur and the need for them to be
reported and managed
• the performance of the broader Australian economy and the effects on capital expenditure, pressure to
increase productivity and employment levels.
To evaluate these influences, modelling can be undertaken to estimate the correlation between different
external environment changes and the possible reduction of injuries if an initiative is delivered. This is
inherently difficult to do because many factors may affect the injury rate. Business analytics help to identify
and analyse these variables in a more accurate manner.
Analytics can also help with specific decisions — such as whether to attempt an acquisition of a
competitor and, if so, the price that should be offered. Historically, a merger or acquisition would involve
the target company ‘opening their books’ to the potential buyer to help develop an accurate appreciation of
the target’s financial and strategic position. While this still occurs, companies use analytics of external and
internal data to find out more about their competitors. For example, an iron ore mining company looking
to merge with a competitor will:
• collate data on futures positions for iron ore prices and likely hedging strategies of the target to help
forecast future revenues
• examine its own transport costs per kilometre and estimate the target’s costs with a high degree of
accuracy to determine a combined average cost per kilometre
• review detailed economic data on the target’s customer markets further down the value chain to identify
buying trends and forecast future sales volumes
• analyse information on asset integrity to estimate up-front maintenance and capital replacement costs
for equipment that may be acquired through the merger.
Such business analytics should lead to more effective negotiation and better integration if the acquisition
is approved and implemented.
As discussed in previous modules, the variety and volume of data now available to organisations
represents both a resource and challenge. Technology insight 5.2 examines the data lake concept and how
it helps organisations preserve the potential value of unstructured data for use in analysis.
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Data Lakes
Internal and external data captured by organisations is generated by many devices, sensors, web pages,
web forms and transactions systems or may be imported from external data sets. Much of this data is
essentially unstructured — it is in many different formats and its contents vary. Conventionally, unstructured
data is manipulated and filtered to impose structure and order, allowing for analysis. However, this process
eliminates much of the rich nature of the data and thus can reduce the insights available from the data.
In addition, the manipulation and filtering suitable for one type of analysis may be inappropriate for later,
different analyses, meaning the data is less than optimally useful.
The development of data lakes is helping to overcome these problems. A ‘data lake’ is a system that
can store data in its raw, unstructured form. It also can store structured data, but more importantly the
system can transform data for use in analytics while still preserving the original data.
As such, data lakes serve as a knowledge repository where the sources are kept intact. Figure 5.13 is
a visual representation of how different data lakes operate and support analytics.
Some companies have built enormous success on the basis of their data lakes. Google is the
standout example. However, a data lake’s strength is also its weakness. By enabling the storage of
unstructured data in virtually any format, the data set can easily become so vast and unmanaged that it
becomes impossible to meaningfully extract and analyse the data. This situation is sometimes referred to
as a ‘data swamp’ (Olavsrud 2017).
FIGURE 5.13 Using business analytics and data
HOW DO DATA LAKES WORK?

The concept can be compared to a water body, a lake, where water flows in,
filling up a reservoir and flows out.
The incoming flow represents
STRUCTURED DATA 1 multiple raw data archives ranging
1. Information in rows and columns from emalis, spreadsheets,
2. Easily ordered and processed social media content, etc.
with data mining tools
UNSTRUCTURED DATA
1. Raw, unorganised data
2. Emails
3. PDF files
2 4. Images, video and audio
5. Social media tools
The reservoir of water is a dataset,
where you run analytics on all the data.
3 The outflow of water is the Through this process, you

analysed data. 4 are able to ‘sift’ through
all the data quickly to
gain key business insights.
Source: Ayra Analytics, n.d., www.ayraanalytics.com.au/706-2.
Example 5.13 looks at the use of predictive analytics in shaping the online marketing strategy of an
automotive service company.
EXAMPLE 5.13
Using Analytics to Align Marketing Expenditure with Revenue

Opportunities
Cardinal Path is a consultancy that helps organisations use data to achieve competitive advantage. It
was engaged by a company offering automotive servicing that wanted to know how to form an online
advertising strategy that would effectively translate into sales; that is, that would result in a customer
booking a service and attending the business’s premises.
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To understand how various online interactions translated to physical sales, the organisation examined
in-store data, transaction data and the data collected from interactions with the organisation’s website and
online advertising. In doing so it was seeking to identify which online interactions lead to offline purchases.
Some findings were predictable, such as people looking online at information urgent repairs fol-
lowing through with a purchase. Others were less obvious. For example, the research found that
potential customers who subscribed to the business’s newsletter were likely to book in soon after for
routine maintenance services. The analysis identified that this behaviour was driven by expectations that
they will receive a discount offer soon after signing up for the newsletter. These insights enabled the
business to shape its online promotional activities to generate patterns of customer behaviour that aligned
with the business’s goals.
Source: Adapted from D Booth, 2016, ‘What can predictive analytics really do? Three case studies in seeing the future’,
Marketing Land, 28 March.
as follows.
KEY POINTS
5.2 Evaluate strategic options and risks by applying the appropriate frameworks.
• Strategic options may be evaluation using:
– the value/effort assessment tool
– the weighted criteria evaluation tool
– business analytics.
• The value/effort assessment tool plots strategic options against their value and the effort required.
This classifies them into:
– low-hanging fruit — high-value and low-effort options that should always be pursued
– blood, sweat and tears — high-value and high-effort options that should be considered
– delegate or dump — low-value and low-effort options that can be delegated to the lower levels
of the organisation or abandoned
– dead ducks — low-value and high-effort options that are not worth the effort.
• The weighted criteria evaluation tool compares strategic options and focuses attention on those
that show the most promise in terms of opportunity, size and capability to implement. The options
should be evaluated based on the following criteria, weighted to reflect relative risks: size and
value; growth potential; profitability; return on investment; internal rate of return; distribution
access; value proposition; capabilities; resources; capacity; service; risks; and corporate social
responsibility.
• Business analytics focuses on discovering and communicating patterns in data collected from
external and internal sources, including business transactions, customer and employee surveys,
competitor and industry analysis, macro-economic statistics and financial performance.
• Predictive analytics is an application of business analytics that uses data and modelling to forecast
the outcomes of different strategic options.
• The use of evaluation frameworks to examine and understand strategic options enables an
assessment of each option’s strategic fit; that is, how well the option aligns to the organisation’s
strategic drivers, operational drivers and organisational and people drivers, and resources and
capabilities.
• The use of evaluation frameworks to assess options against the organisation’s capabilities ensures
the strategy that is developed is a suitable for the organisation’s unique context.
5.4 RISK ASSESSMENT

Risk is the threat that an event, choice or associated action will affect the organisation’s ability to achieve
the option’s goals or outcomes. As described in module 1, organisations have different risk appetites.
Risks must be evaluated against the benefits that are hoped to be achieved by implementation so that the
organisation can make informed decisions about the balance between risks and returns.
Risk assessment is a constant and iterative process. Understanding the risks associated with strate-
gic options and more broadly, strategic development is imperative to an organisation’s longevity and
success. Many successful and large Australian organisations invest heavily in annual risk assessments.
These assessments outline all risks associated with the organisational strategy as well as potential
mitigation strategies.
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This section will examine the risks inherent in strategic development. A risk assessment framework is
offered encompassing how to identify and mitigate risks. Further, techniques for quantifying costs and
benefits is explained. Effectively using these frameworks and techniques will help an organisation with
selecting the most appropriate strategic option/s as well as executing the chosen strategic option.
RISK MANAGEMENT FRAMEWORK

Figure 5.14 shows a generic risk assessment framework that an organisation can apply.
FIGURE 5.14 Risk assessment framework
Identify Identify risk category and risk issue.

risk issues Typical risk categories:
• financial risk
• strategic risk
• operational risk
• management effort.
Determine
What could cause exposure to the risk?
possible causes
Determine possible How could the option be impacted by

consequences the consequences of this exposure?
Determine current How likely is it that option will be

likelihood exposed to risk?
Determine Prioritise risks into high, significant,

risk rating moderate and low.
The purpose of the five-step risk assessment process is to identify and assess the risks of each strategic
option. It is necessary to rate the consequences and likelihood of those risks and then decide how to mitigate
or manage those risks. Risk management measures help control the high-level risks by keeping them to an
acceptable/reasonable level. Options available include eliminating the source of the risk or, if that is not
possible, changing policies and procedures to reduce the likelihood or severity of the risk. An important
step is to keep reviewing the process and renewing the approaches to managing risk.
The five steps of the risk assessment framework are described in more detail in the following sections.
Step 1: Identify Risk Issues

An organisation faces many risks when developing and implementing a new strategy. These include
operational risk, political risk, strategic risk, legal risk, technological risk and reputation risk, all of which
should be considered when trying to decide between alternative options.
Table 5.3 shows an approach to risk management that focuses on the strategic risks that an organisation
faces. These strategic risks concern the way that the organisation develops and sustains competitive
advantage through building resources and capabilities.
Step 2: Determine Possible Causes

The primary question that an organisation should answer in this step is: ‘What is the source of the risk?’
This may be difficult to identify; however, sources of risk can be both broad and specific. Sources of
risk can range from customer feedback and complaints to varied skills and lower levels of knowledge
to incompetent or broken resources. Determining sources of risk will help later in the process, when
evaluating how to mitigate the risk and implementing such procedures.
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TABLE 5.3 Examples of strategic risks
Risk Examples of less extreme

categories Examples of more extreme risks risks
Project R&D project Failed new business

Potentially extreme risk because research may be development projects
completely wasted, possibly limiting the organisation’s
ability to successfully compete in the future
Customer Priority shift Increasing customer power that

Customers completely change their purchasing patterns demands lower prices
and stop buying the organisation’s product completely
Transition Business design shift A single business process that

Fundamental change in technology or business that makes becomes obsolete
the current operation obsolete
Competitor Unique competitor Gradual share gainer

Rare and inimitable value proposition offered by competitor
Brand Brand collapse Gradual loss of relevance

Reputation for a key component disintegrates
Industry No-profit zone Supplier power increases

Possibly less extreme, but an industry may be unable to leading to higher prices being
make any profits paid by the organisation
Stagnation Volume permanently flat or declining Short-term recession or decline

Declining market area in volumes
Source: Adapted from A Slywotzky, 2008, ‘Finding the upside advantage in downside risk’, Strategic Finance, November,
figure 1, p. 10.
Step 3: Determine Possible Consequences

The organisation must determine all the possible consequences of the risk, and then evaluate possible
impacts on its values and vision. Indirect financial consequences such as reputation and community are
key considerations. In addition, direct financial impacts should also be considered.
Table 5.4 provides a consequence rating matrix. As shown, the consequence of a risk can range from
insignificant, where the impact can be absorbed, to catastrophic, where it could potentially lead to the
collapse of the organisation.
TABLE 5.4 Consequence rating matrix
Consequence category
Insignificant Minor Moderate Major Catastrophic

An event, An event, the A significant A critical A disaster with
the impact consequence event that can event that potential to lead
of which can of which be managed with proper to collapse of the
be absorbed can be under normal management organisation
through normal absorbed but circumstances can be
activity management endured
is required
to minimise
the impact
Shortfall of funds for <5% 5–10% 10–20% 20–50% 50–100%

operation
Negative impact on Minor Broader National news Repeated Severe impact

image/reputation local press local press attention national news on reputation of
coverage coverage attention key stakeholders/
supporters
(continued)
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Personnel and Loss of one Loss of two Loss of three Loss of four Loss of five key
resourcing staff member staff members key personnel key personnel personnel or CEO
or board or board or board or CEO and significant
member members members number of board
Consequence factors
members
Community/ Loss of one Loss of two Loss of a Loss of a Loss of major
supporters supporter supporter significant number of supporter base
group groups supporter significant with significant
group supporter backlash on the
groups organisation
Donors Loss of donor Loss of a Loss of a Loss of key Loss of key donors
number of significant donors due due to significant
donors or a donor due to a to a negative negative events
significant negative event event (e.g. fraud)
donor
As an example, personnel and resourcing consequences can range from the loss of one individual (which
will be of little consequence) to an entire leadership team (which could be catastrophic and threaten the
viability of the organisation). Similarly, organisations can lose one aspect of community or donor support
or unanimous support.
Step 4: Determine Current Likelihood
At this stage, you should assess the likelihood that the organisation will be exposed to each specific risk,
considering such factors as:
• anticipated frequency
• the external environment
• the procedures, tools, skills currently in place
• staff commitment, morale, attitude
• history of previous events.
There are five commonly used categories of the likelihood of each risk.
1. Almost certain — the event is expected to occur in most circumstances.
2. Likely — the event will probably occur in most circumstances.
3. Possible — the event might occur at some time.
4. Unlikely — the event could occur at some time, but only in exceptional circumstances.
5. Rare — the event may occur only in exceptional circumstances.
Step 5: Determine Risk Rating
Table 5.5 examines the inherent risk in terms of the consequence and likelihood ratings. As shown, some
risks are unlikely to occur and, if they do occur, will have relatively minor consequences. This outcome set
is considered quite low in overall risk. By contrast, other risks are almost certain and can be catastrophic —
these are extreme risks.
TABLE 5.5 Inherent risk table
Consequences
Likelihood Insignificant Minor Moderate Major Catastrophic
Almost certain High High Extreme Extreme Extreme
Likely Moderate High High Extreme Extreme
Possible Low Moderate High Extreme Extreme
Unlikely Low Low Moderate High Extreme
Rare Low Low Moderate High High

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Example 5.14 applies the inherent risk table approach to two risks facing MOSM and example 5.15
demonstrates how MOSM would work through the steps of the risk assessment framework.
EXAMPLE 5.14
MOSM Risk Rating

Part of MOSM’s risk assessment would consider the potential for a fire occurring at the new MOSM
hospitality venue.
If effective safety measures are established and followed and safety equipment is installed and
maintained, this event is unlikely. However, if it was to occur, there would be catastrophic implications.
This is an extreme risk, as shown in table 5.6.
TABLE 5.6 Risk of a fire at MOSM
Consequences
TABLE 5.7 Risk of a dissatisfied school group leader
Consequences
Dissatisfaction of a school group leader that brings their class to MOSM is another risk MOSM
must manage.
This risk is possible, but the loss of one school group is insignificant to the overall revenue, especially
considering the discounted school group ticket price and the focus on a segment shift to high-value
customers. This presents a low risk, as shown in table 5.7
EXAMPLE 5.15
MOSM Risk Assessment

The risk assessment process can be applied to MOSM’s strategic focus on improving customer
satisfaction.
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Step 1: Potential Risks
Customer satisfaction of visitors to MOSM is currently at 78% and the strategic goal is to lift it to 90%.
There is a risk that this figure may not be achieved, and even the possibility that customer satisfaction
may decline.
Step 2: Determine Possible Causes
There are a range of possible causes, three of which have been identified.
1. There have been complaints by customers about the noise level of school groups.
2. The plans to raise prices may also lead to reduced satisfaction, if customers do not feel the new prices
reflect value for money.
3. Different volunteers have varied skill levels, which may result in lower levels of knowledge about the
exhibits, and a reduced ability to provide general customer service.
Step 3: Determine Possible Consequences
The classification for consequences of these three areas have been assessed as ranging from insignificant
to minor. This is because it is estimated that customer satisfaction problems are not expected to see a
decline in revenues of over 10% (minor), nor lead to the loss of more than one major donor or support
group (insignificant). An overall classification of minor has been selected.
Step 4: Determine the Current Likelihood
In this situation, the likelihood of failing to achieve the customer satisfaction target or even seeing a
reduction in current satisfaction levels is possible.
Step 5: Determine the Risk Rating
The overall risk rating in this scenario has been assessed as moderate. This is a combination of the minor
consequence level and the possible likelihood classification.
RISK TREATMENT
After completing the five-step risk assessment, management should have a good perspective on each
option’s potential risks and effects on the organisation’s stated goals, and the broader impact on the
organisation overall. The objective is to develop cost-effective options for treating each risk, which might
involve:
• eliminating the risk of the strategic option/initiative
• accepting the risk and ‘taking a chance’ on the strategic option
• acting to reduce the potential negative consequences of the risk; or redesigning the strategic initiative in
support of this
• transferring the risk, completely or partially, to another party and have the strategic option/initiative
underwritten by third parties such as supply chain member. This is known as ‘risk sharing’.
Any control or mitigation strategy will reduce the likelihood of a risk occurring, or the potential impact
that may arise if the risk occurs. As risk management is an ongoing process, existing control measures will
need to be continually monitored for their relevance and effectiveness and changed if required.
RISK ASSESSMENT USING BUSINESS ANALYTICS

As noted earlier, business analytics that harness the power of IT can be used to determine strategic fit and
evaluate strategic options. In addition, business analytics can provide organisations with quantitative risk
assessments that help to determine:
• the likelihood or consequence of a given risk event
• the likely outcome of a given risk treatment strategy.
Risks can come from the external environment and/or from the organisation’s internal environment.
Business analytics effectively assists an organisation in understanding the specific market in which it
operates. For example, a significant risk when embarking on a new strategy within the external environment
is whether the current market is large enough to sustain the organisation (in terms of revenues and
profitability). IT systems can be used to assess risk by tracking specific events or analysing various data
sets collected from the organisation’s environment. These risk assessments can include probability analysis
as well as stress testing. Based on the risk assessment, treatment plans can also be analysed, enabling
the organisation to select its preferred courses of action based on set criteria (e.g. profitability, market
share, potential for business disruption). Example 5.16 examines some simple analytics that could inform
Lululemon Athletica’s risk assessment.
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EXAMPLE 5.16
Business Analytics and Lululemon Athletica

Lululemon Athletica is looking to advance its current fabric design. They wish to make the fabric more
long-lasting, environmentally friendly and comfortable. However, as found in the strategic fit evaluations,
there is a risk associated with this strategic option — lack of customer acceptance.
Lululemon Athletica wants to analyse current operational data to evaluate the risk more effectively and
treat it accordingly.
Considerations for analysis would likely include:
• economic outlook of manufacturing companies to ensure that they have the resources to achieve such
investment
• economic outlook of the business itself to ensure it can pursue such an investment in the long term
• economic outlook of household disposable income
• the effect of new entrants on profitability
• current consumer expectations and sentiment
• current societal environmental agenda.
Results from this internal and external analysis using business analytics would better inform Lululemon
Athletica of the current market trends. Ultimately, this would provide a more accurate and meaningful risk
assessment, whereby strategies could be developed to enhance the longevity and success of the chosen
strategic option.
Example 5.17 explains how the insurance company Budget Direct considered and mitigated risks,
developed an effective organisational strategy and became one of the leading insurance providers
in Australia.
EXAMPLE 5.17
Overcoming Risks for a New Entrant — Budget Direct

Founded in 2000, Budget Direct Insurance is an Australian provider of car, home and contents, travel and
life insurance. Budget Direct’s vision is to ‘cut the cost not the cover’ and aims to do this by providing
competitively priced general insurance. The insurance industry is constantly evolving. As a new provider,
Budget Direct Insurance has always operated in a competitive market. With this, it was imperative for
Budget Direct to perform an extensive risk assessment in order to identify and overcome the risks in this
competition-driven market.
The last decade has seen numerous entrants to the industry. Following many consolidations and
mergers, six companies now cover 85% of Australia’s general insurance industry. Smaller organisations
generally focus on specific product segments (e.g. only car, travel or home insurance). All new entrants
and existing competitors have stayed in business, resulting in an overcrowded market. Intra-industry
competition is strong due to increased levels of transparency in pricing and policy (e.g. different products
can be easily compared online), and a demand for greater information. In conjunction with industry
risks, insurance products have a high level of risk, with the increase in natural disasters and the
growing numbers of cars on the roads. These accidents or disasters cannot be controlled and are often
unforeseeable.
These industry characteristics contribute to the risky nature of the general insurance industry. Budget
Direct entered the industry in the initial phase of overcrowding and extreme competition. As a result,
it faced a relatively higher risk than most other general insurance providers when it entered the
market in 2000.
With these risks in consideration, Budget Direct effectively positioned itself as a cost-effective insurance
option for the ‘average’ Australian consumer. It utilised simple marketing factors to appeal to consumers
and ultimately, attain their business. Through the investment in staff training initiatives, Budget Direct
ensured that its employees were able to provide quality and efficient service as well as solve customer
complaints and issues. With all of this in mind, Budget Direct ensured that it provided a personal and
reliable service to its consumers. As a result, Budget Direct has won Australia’s Money Magazine Insurer
of the Year three years in a row.
Source: Adapted from Budget Direct, 2020, ‘Awards’, www.budgetdirect.com.au/about-us/awards.html.
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QUESTION 5.9
Demonstrate the risk assessment process by considering MOSM and its strategic option of
targeting full-priced customers and moving away from discounted school groups. Develop a
mitigation strategy for the risk/s identified. Suggest some business analytics that could support
the development of this strategy.
QUANTIFYING COSTS AND BENEFITS

Greater rewards often entail greater risks. An informed decision about whether a risk is worth the reward
can only be made based upon an understanding of the scope and scale of both the risks and rewards
available. A great idea must be supported by quantitative calculations.
‘What-if’ Analysis
One approach to quantifying risks and rewards is the what-if analysis. This approach requires an
estimation of the benefit of the successful implementation of an option.
For example, if an organisation’s annual revenue is AU$100 million and a new product is expected to
account for a maximum of 20% of organisational revenue, the value to the organisation is approximately
AU$20 million. The organisation can then determine the impact of expected risks on achieving the expected
value, by multiplying the total value by the estimated percentage risk. For example, if the organisation
thought a competitor could enter the market, it may estimate a 50% reduction in return, and so the likely
value of the option would be AU$10 million. However, if, for example, the organisation had global
patent protection for its product (perhaps it is a manufacturer of pharmaceuticals), then it may assess
the risk of a competitor entering the market at 0% and so the total expected value would remain at
AU$20 million (although this is unlikely as competitors will generally come up with a product equivalent
that will erode the organisation’s market share).
CALCULATION: WHAT IF ANALYSIS
Value to the organisation = annual revenue × percentage return of organisational revenue

Impact of risk = value to the organisation × estimated percentage risk
This is a simplistic approach, but the aim is to apply the same approach to all the available strategic
options in order to objectively determine which options are most promising. More detailed analysis
can then be carried out on the options that are most promising, using specific tools and approaches for
modelling what-if scenarios.
QUESTION 5.10
Due to the rising number of consumers preferring vegan and vegetarian options, McDonald’s
Australia has taken some steps towards introducing vegan and vegetarian menu options. Suppose
that the organisation’s annual revenue in Australia is approximately AU$4 billion. A new vegan and
vegetarian menu is expected to account for 5% of organisational revenue. With many other fast-
food outlets introducing vegan and vegetarian menus, McDonald’s is predicting a 75% reduction in
return. Using the ‘what-if’ calculation, calculate the impact of the risk.
Cost–Benefit Analysis
Another widely used modelling approach is a cost–benefit analysis. This approach determines if the
costs exceed the benefits. The cost–benefit analysis should be calculated based on the expected time
period over which costs will be incurred and benefits received. Discounting all the costs and projected
benefits back to net present value provides an indication of the total expected costs and benefits in
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today’s dollars and facilitates the comparison of alternative options that may have different time periods
and durations.
As costs are usually much easier than benefits to quantify in dollar terms, the focus of most sensitivity
analysis is on quantifying and modelling expected benefits. This may stimulate a lot of debate and one
way to get agreement is to model a range of values (e.g. best-case and worst-case scenarios), although
multiple benefits and combinations of benefits can make this a complex exercise. Example 5.18 presents
a cost–benefit analysis for a strategic option that could be considered by Nike.
EXAMPLE 5.18
Nike Cost–Benefit Analysis

Nike is considering investment into the following strategic option:
expanding the product range by developing a new wide-foot shoe.
Perform a cost–benefit analysis and quantify the respective costs and benefits as appropriately as
possible. Using business analytics here would be helpful.
The cost–benefit analysis of this option is shown in figure 5.15.
FIGURE 5.15 Cost–benefit analysis of expanding the product range
Costs
Description Price
• Design of the shoe $10 000

• Material procurement $50 000
• Manufacturing of the shoe $1 000 000
• Testing of the design $20 000
• Distribution throughout stores $50 000
Total costs: $1 110 000

Benefits
Description Price
• Increased product range $500 000

• Increased customer attraction $500 000
from a new demographic
• Increased customer sales $1 000 000
• Increased customer satisfaction $500 000
Total benefits: $2 500 000
As demonstrated, through a cost–benefit analysis, the benefits of this strategic option outweigh
the costs.
TIMING RISKS
Other competencies to consider when evaluating strategic options include speed to market and the time
lag before competitors enter. For example, the faster a product can be brought to the market, the better, as
maximum profits are reached due to limited competition.
Organisations regularly face the market challenge of launching a new product before it is 100% ready
or waiting until all the problems with the product are fixed. Profits will be eroded by costs associated
with product failures and returns, not to mention reputation risks the organisation may incur from
customer dissatisfaction. The computer software industry has taken this path several times in the past. An
organisation that chooses to ‘go early’ needs to be confident that it has the customer service and systems
and processes in place to make it easy for customers return goods and/or get repairs done, in order to
minimise possible damage to its reputation. Example 5.19 describes one of many examples in which the
computer industry has released software that immediately needs patching.
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It can be as expensive to move too early as it is to leave investments too late. Judging the best window
of opportunity is paramount. For example, if the objective is market penetration, the move must be made
when sufficient demand exists, but competition is not too intense.
EXAMPLE 5.19
Windows 10 Update
Microsoft is one of the world’s most successful and innovative companies. However, Microsoft inherited
an extreme timing risk associated with attempting to increase the speed to market of an update of its
Windows 10 operating system in October 2018. Facing the imminent release of Apple’s Mojave operating
system, Microsoft released an update — Windows 10 version 1809 — that contained a ‘bug’ that deleted
user data including documents, pictures and music.
Microsoft’s focus on increasing its speed to market resulted in inadequate testing of the update. The bug
resulted in extreme user dissatisfaction and damage to the organisation’s reputation. Microsoft quickly
developed and implemented a newer update that fixed many of the problems with the troublesome
version.
Source: M Hanson, 2019, ‘Windows 10 October 2018 Update problems: how How to fix them’, TechRadar, 5 March,
accessed January 2020, www.techradar.com/au/how-to/windows-10-october-2018-update-problems-how-to-fix-them.
as follows.
KEY POINTS
5.2 Evaluate strategic options and risks by applying the appropriate frameworks.
• All strategic options have associated risks. A risk assessment is an ongoing process that helps
understand the risks.
• A risk assessment framework involves identifying risk issues, determining possible causes,
determining possible consequences, determining the current likelihood and determining the
risk rating.
• Once each risk is assessed, the organisation can accept the risk or take steps to eliminate, reduce
or transfer the risk.
• A what-if analysis is a way to quantify the impact of risks, which allows comparisons between
different strategic options.
5.5 INTEGRATING STRATEGIC OPTIONS

Once the strategic options have been evaluated and the associated risks have been assessed, the next step
is to ensure the strategic options are developed so they will work successfully together.
Consider the following three strategic options identified by MOSM:
1. decrease the admission discount given to school groups
2. conduct promotional initiatives to attract adult visitors at full admission prices
3. offer event services to take advantage of the prime location and facilities at MOSM.
These options all support the goal of growing revenues and customer visits and hence appear to be
compatible. The three options may be grouped together into a broader strategic option:
Optimise the revenue mix by improving yield and ensuring that revenue streams include ticket sales,
merchandising and events to reduce the potential risk of one revenue stream (see Appendix 5.1).
Broad strategic options that group together related narrower options are sometimes referred to as
strategic themes.
This process of developing broad strategic options or themes involves deciding which component
option(s) to pursue and making sure they are properly integrated with each other. While many options may
be commercially viable (i.e. the value to be gained outweighs the effort from the value/effort framework),
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options must also have a strategic rationale (i.e. options need to be viable in the context of the organisation’s
external environment, stakeholder needs, internal performance and capabilities from the weighted criteria
evaluation framework). Options also need to be operationally feasible and create a competitive advantage
for the organisation.
The process of combining options into broader strategic options or themes can be ambiguous. However,
the process helps to simplify the communication of organisational strategy by clearly showing a concise
link between the vision and mission and the strategic options that are required to achieve the goals. This
leads to the delivery of specific, valuable and effective business results. Figure 5.16 shows the alignment
of broad strategic options or themes with the framework introduced in figure 5.5. Example 5.20 groups
specific strategic options into broader themes.
FIGURE 5.16 Aligning broad strategic options
Strategic drivers
Developing the strategy
What choices should we make to uniquely position ourselves and ensure
future success?
Strategic drivers
What differentiates us
from our competitors?
Industry
Markets
Products/services
Customers
Channels
Organisation and
Operations tactics people tactics
What are the core How do we encourage,
activities that we must motivate and fulfil our
do well? people’s needs?
Revenue Structure
Costs Skills
Growth Capabilities
Broad strategic options

(strategic themes)
What are the categories
within which we can group
our strategic options?
EXAMPLE 5.20
MOSM — Grouping Strategic Options

MOSM critically evaluated its various strategic options, deciding on four broad options (themes). These
broader options form the basis of MOSM’s strategy. The broad strategic options and the components that
make them up are shown in table 5.8.
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TABLE 5.8 MOSM’s broad strategic options (themes)
Broad strategic option (theme) Component strategic options
1. Strategically position the brand in the • Strategically position MOSM in the marketplace
marketplace to promote MOSM as a world- as a world-class sporting attraction and focus
class sporting attraction; include social media more attention on the domestic market.
platforms as the key marketing tool. • Use social media to attract untapped customer
channels.
2. Retain a relevant collection (product) to • Maintain the current collection and continuously
ensure MOSM’s continued relevance and develop it, as MOSM’s main product offering.
thereby increase visitor numbers and • Increase customer visitors by targeting
encourage repeat visitation. full-priced customers, moving away from the
reduced-price school group customer segment.
3. Optimise the revenue mix by improving yield • Decrease the admission discount given to
and ensuring that revenue streams include school groups.
ticket sales, merchandising and events in • Conduct promotional initiatives to attract adult
order to reduce the potential risk of one visitors at full admission prices.
revenue stream. • Offer event services to take advantage of the
prime location and facilities at MOSM.
4. Ensure that future growth is supported • Provide training to full-time employees to give
by enhanced systems and processes, them knowledge to enhance the customer
a supportive and dynamic culture, an experience.
improved organisational structure, sufficient • Review processes and procedures to enhance
human resources and the right operating the operational environment.
environment.
EVALUATING STRATEGIC OPTIONS USING

RUMELT’S CRITERIA
It is now time to bring together all the analysis in order to evaluate the broad strategic options available
to the organisation. As apparent from the content of this module, there are several ways that options can
be evaluated.
Strategic options focus on the longer-term health of the organisation and require evaluation of factors
that are not directly observable or easily measured. Rumelt’s criteria (cited in Mintzberg & Quinn 1996)
offer a strategic framework to compare and prioritise strategic options that look beyond what is currently
known. These criteria integrate the industry, market and internal analyses that were completed in earlier
modules as well as the concepts covered in this module. Rumelt’s four evaluation criteria are:
1. external consistency
2. internal consistency
3. feasibility
4. competitive advantage.
External Consistency
External consistency is concerned with whether the strategic option is consistent with the external
environment. For instance, while the option might be internally consistent (e.g. with a focus on high quality
and high margins), the industry may face a structural change, requiring the organisation to compete on scale
economies where product differentiation is rapidly reducing among competitors. In such a case, seeking
to differentiate on high quality may not be consistent with the demands of the emerging environment.
Table 5.9 provides a guide to the types of external environment questions to assess the consistency of a
strategic option.
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TABLE 5.9 Checklist for external consistency
Typical questions to ask
How does the business strategic option fit with the industry’s life cycle?
How does the business strategic option fit with trends in the external environment that are influencing future
industry growth? (See the STEEPLE model factors in module 2.)
How does the business strategic option support emerging trends in the industry?
How does the business strategic option fit with emerging markets in the industry?
How does the business strategic option fit with trends in the external environment that are influencing future
industry profitability? (See Porter’s five forces model in module 2.)
How does the business strategic option fit in the competitive environment? How will it change how the organisa-
tion is positioned relative to competitors?
If the business strategic option means entering an industry that the organisation is not already in, what impact will
it have on competition and market share?
How does the business strategic option change the factors of competition in the industry?
How does the business strategic option fit with industry key success factors?
How does the business strategic option fit with developments in global markets?
How does the business strategic option change the industry value chain?
QUESTION 5.11
In 2019, the Coles supermarket chain developed and implemented three strategic options, which
are linked together under the broad strategic option of growing environmental concern and agenda.
These include:
1. removal of plastic bags
2. development of reusable and sustainable packaging bags
3. energy efficiency initiatives, such as night blinds on refrigerators and anti-condensate heaters
on freezers.
Several market factors including the recent climate change debate and the world’s environmental
concern demonstrate how this strategic theme supports external consistency.
Consider Coles’ strategic initiative to build a sustainable strategy and remove plastic bags,
develop sustainable packaging and use energy reduction strategies. Complete the external con-
sistency checklist and highlight the core information that supports external consistency.
Source: Adapted from Coles, 2020, ‘Environment’, www.coles.com.au/corporate-responsibility/sustainability/environment.
Example 5.21 illustrates a strategic option that is not externally consistent. EB Games followed a weak
strategy. Had it aligned its approach to the external market influences of a digital interface or diversified
digital strategy, its future may have been more promising.
EXAMPLE 5.21
EB Games
EB Games invested heavily in the broad strategic option of physical distribution of products. Their
strategy involved an ‘over-cluttered’ physical store with large amounts of each gaming product available.
Unfortunately, EB Games was forced to announce the closure of 19 stores across Australia in the early
weeks of 2020. This once highly successfully technology and gaming store attributes its downfall to rising
online competition.
Upon analysis, it is evident that EB Games did not respond to external market trends, such as the rise
of the online market, changing consumer expectations and choice, reduced foot traffic in physical retail
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precincts and increased leasing prices within retail precincts. As a result, EB Games’ strategy failed. They
should have considered and invested in product differentiation into other technological sectors as well
as market penetration into the online sector (e.g. streaming of games). Adopting a disruptive strategy EB
Games could have diversified into streaming through strategic alliance with a major streaming platform
and had better external consistency.
Source: Adapted from A Carey 2020, ‘EB Games set to shut down at least 19 Australian stores within weeks’,
News.com.au, 9 January, www.news.com.au/finance/business/retail/eb-games-set-to-shut-down-at-least-19-australian-
storeswithin-weeks/news-story/97799125c891a8844875c8221bc47f4a.
Internal Consistency
Internal consistency aims to answer the question: ‘Are the functional strategies (see module 1) that will
follow from the business strategy and the desired goals internally consistent with each other?’ Table
5.10 helps to answer that question. For instance, a business strategy that seeks to achieve the highest-quality
products and services, number-one market share and the highest shareholder return is almost certainly not
internally consistent. ‘Highest quality’ generally implies a smaller market share. It is often associated with
higher costs, and there is no guarantee that this will automatically lead to the highest shareholder return
(which might, for instance, be achieved by a ‘value for money’ pricing strategy). For example, is the
theme consistent with the organisation’s strategy, key stakeholder requirements, the strategic capabilities
it possesses and its current performance? These questions extend the SWOT analysis of the organisation
(see modules 3 and 4) by considering the organisation’s strengths and weaknesses, and specifically how
they will enable or hinder the strategic theme being evaluated.
TABLE 5.10 Checklist for internal consistency
How does the business strategic option fit with the organisation’s strategy?
How will the business strategic option contribute to achieving the strategy?
How does the business strategic option meet stakeholder requirements?
What impact will the business strategic option have on organisational revenue and costs?
What impact will the business strategic option have on the organisation’s current products and services?
How does the business strategic option fit with the organisation’s current portfolio of products, services or
markets in development?
What impact will the business strategic option have on the organisation’s reputation and/or brand in the market?
How will the business strategic option change the organisation’s value chain?
What will happen if the organisation does not implement the business strategic option?
Are there any reputation risks associated with the business strategic option?
Does the organisation have the capabilities for success in this strategic option? If not, can the required
capabilities be obtained?
QUESTION 5.12
Telecommunications companies are constantly focused on the strategic theme of increased

revenues and customer attraction. Australia was shocked in August 2018 when the third and fourth
largest telecommunication companies in Australia, Vodafone and TPG, announced plans to merge.
The merger was opposed by the Australian Competition and Consumer Commission (ACCC) on
the basis it would substantially reduce competition, but the Federal Court disagreed, allowing the
merger to proceed. The Court found there was no realistic prospect TPG could roll out its own
mobile network and thus become an independent competitor against Telstra, Optus and Vodafone.
It said it was a ‘rationale and business-like solution’ for Vodafone and TPG to merge to be able
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to compete more effectively against Telstra and Optus. The ACCC was considering an appeal,
maintaining TPG could establish its own network.
This merger is an example of internal consistency within the telecommunications industry.
The head of TPG, David Teoh, said the merger would create Australia’s third ‘fully integrated
telecommunications operator’. The merger is expected to enable:
• more effective competition against smaller and new competitors
• stronger links with suppliers and other partners
• greater investment in new technologies, such as 5G mobile.
Consider the combined entity formed as a result of the Vodafone and TPG merger. Complete the
internal consistency checklist and highlight the core information supporting internal consistency.
Source: Adapted from D Ziffer & N Khadem, 2020, ‘Telcos Vodafone and TPG can merge after court clears bar-
rier’, 13 February, ABC News, www.abc.net.au/news/2020-02-13/tpg-v-vodafone-merger-approved-by-court-over-accc-
opposition/11960786; N Arboleda, 2018, ‘TPG, Vodafone Australia to merge in bid to compete against Telstra, Optus’,
CRN, www.crn.com.au/news/tpg-vodafone-australia-to-merge-in-bid-to-compete-against-telstra-optus-511716.
Feasibility
Many organisations aim for very high growth rates or to be number one in their industry. While desirable,
these aims may not be feasible for the organisation (which is perhaps number 10 in the industry, has not
grown for some time and does not have the products, human resources or managerial capability to achieve
these idealistic targets). Many organisations seek stretch targets in their business strategy, but the targets
must be within the range of the organisation’s capabilities.
While we have already focused on identifying an organisation’s overall strategic capabilities and
strengths and weaknesses in module 3, the checklist provided in table 5.11 can help to assess the
organisation’s capabilities in relation to the strategic theme being evaluated. Note that capabilities are
considered under feasibility as well as internal consistency — this is because the capabilities required to
fulfil the strategic options are relevant under both considerations.
TABLE 5.11 Checklist for feasibility
Are the cost–benefit projections for the business strategic theme robust? What are the key assumptions and
dependencies on which they are based?
What capabilities are required to implement the business strategic theme and does the organisation have them?
Can capabilities that the organisation does not have be easily sourced elsewhere to implement the business
strategic theme?
Do current staff have the skills to implement the business strategic theme and, if not, can the skills be
easily acquired?
Has the organisation done something similar to this particular business strategic theme in the past and was
it successful?
If the organisation wasn’t successful at implementing something similar to this particular business strategic theme
in the past, what evidence is there to suggest that it would be successful this time around?
Can the organisation access the capital required to implement the business strategic theme?
What government or other support would the organisation require to implement the business strategic theme?
Does the organisation have the capacity to service additional demand that the strategic business theme is
projected to create?
What are the key risks inherent in implementing the business strategic theme and how can they be minimised
or managed?
What will be the impact on the organisation if the worst-case scenario of implementing the business strategic
theme is realised?
(continued)
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Does the organisation have the capability and resources to implement the business strategic theme in a
timely way?
Are there some key decision points to be considered in implementing the business strategic theme that mean
investment and other risks can be minimised/managed?
Who owns the IP associated with the business strategic theme and does the organisation have freedom to
operate with it?
QUESTION 5.13
To remain competitive in the market, increase revenues and enhance customer satisfaction,
stationery supplier Officeworks is pursuing the broad strategic option of expanding the service
and product offering. To do so, in 2019, Officeworks chose to invest in a product enhancement/d-
ifferentiation and market penetration strategy through the acquisition of Sydney-based PC repairs
and tech support company, Geeks2U.
As Officeworks has the financial capability, robust performance and resources to execute this
acquisition, this is an example of feasibility to achieve the desired strategic theme.
Consider the checklist for feasibility and apply this to the Officeworks acquiring Geeks2U.
Source: Adapted from B Foye, 2019, ‘Officeworks buys PC repairs and tech support provider Geeks2U’, CRN, 4 March,
www.crn.com.au/news/officeworks-buys-sydney-based-pc-repairs-and-tech-support-provider-geeks2u-519987.
Competitive Advantage
The primary question to ask for this criterion is: ‘Does the strategy create or maintain a basis of
competitive advantage?’ The proposed strategy may be attractive (e.g. high-quality customer relationships)
but competitors also aim for this position, so no competitive advantage will accrue (though there will be
significant benefits to customers). Furthermore, many organisations assume that, because they are trying
to achieve a position, it is a desirable one; however, unless this position creates an advantage compared
with competitors, it may not be worth the effort.
It is difficult to create competitive advantage. Many organisations face a very small window of
opportunity for realising a competitive advantage. Organisational capabilities are therefore critical to
realising competitive advantage — the key question is how long it will take others to copy what the
organisation has done and possibly do it even better and at a lower cost. That is why it is important to
develop strategic capabilities, as outlined in module 3. In the global environment, competitive advantage
is increasingly difficult not only to achieve, but also to maintain. The checklist in table 5.12 provides a
guide to the types of questions to ask as part of an assessment of a strategy for competitive advantage.
These questions are like the four tests for strategic capabilities outlined in module 3.
TABLE 5.12 Checklist for competitive advantage
What will the business strategic option deliver to the organisation in terms of benefits?
What is it about the business strategic option that will be valued by customers?
What is it about the business strategic option that will be difficult for competitors to copy?
What is it about the business strategic option that will make the organisation superior to what its competitors
are offering?
What will the business strategic option deliver that is rare or unusual?
What is it about the business strategic option that will make it difficult for competitors to offer substitutes?
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What is it about the business strategic option that makes it appropriate for this organisation, and not another, to
implement it?
Does the organisation have any unique competitive advantages in its operations, systems and processes, people
skills, research and development, marketing, manufacturing equipment, intellectual property, etc. that would
enable it to succeed with this particular business strategic option where competitors would fail?
What is stopping anyone else from implementing this particular business strategic option?
How are competitors likely to react if the organisation implements the business strategic option?
Are there any reputation risks associated with the business strategic option?
Does the organisation have freedom to operate with intellectual property required for the business strategic
options in specific markets and, if so, which ones?
QUESTION 5.14
With the growing number of fashion retailers entering the online market, one of the largest online
stores, The Iconic, faced the challenge of remaining competitive and profitable. With this, the
organisation transformed its mission: ‘Our mission is customer liberation. This is understanding
the customer’s emotional journey when they buy apparel — it’s not just buying clothes, it’s an
expression of the individual.’
As a result, the organisation invested in the strategic theme of becoming more customer focused.
To achieve this, The Iconic implemented several product and service development strategies. For
example, the organisation heavily invested in creating a personable service with an emotional
attachment. Further, the company aimed to create better relationships with its suppliers to deliver
better prices for consumers.
Ultimately, these strategies were a success and created a competitive advantage for the organ-
isation. The company COO, Anna Lee, stated, ‘Becoming a more customer-focused organisation
has been one of the best things to ever happen to The Iconic.’
Consider the strategy of The Iconic to become more customer centric by investing and by
improving supplier relationships. Using the competitive advantage checklist, show how the online
store could enhance competitive advantage by building better relationship with the supplier.
Source: Adapted from V Mitchell, 2018, ‘The Iconic: becoming customer-focused transformed the business’, CMO,
www.cmo.com.au/article/644382/iconic-becoming-customer-focussed-transformed-our-business/.
In practice, it is difficult to create a genuine strategic competitive advantage. A competitive advantage

provides the focus of discussion and evaluation; however, maintaining that competitive advantage is just
as important. How can the competitive advantage be maintained? How quickly are competitors catching
up or advancing on that advantage? Competitive advantage is generally held for a short period, because it
is only a matter of time before competitors imitate the advantage and are back on a level playing field.
Example 5.22 uses Rumelt’s criteria to evaluate one of MOSM’s broad strategic options.
EXAMPLE 5.22
MOSM
Rumelt’s four criteria can be used to evaluate the suitability of the MOSM’s broad strategic option:
Optimise the revenue mix by improving yield and ensuring that revenue streams include ticket sales,
merchandising and events in order to reduce the potential risk of one revenue stream (see Appendix 5.1).
The desire by customers for ‘new venues’ for events, and thus for marketing MOSM as an event location,
appears to be externally consistent. While visitor numbers to the ACT are expected to grow, the industry
is characterised by a large degree of competition. Unless there is strong demand, it may be difficult to
limit discounts and still retain the same attendance levels, as customers may choose to go elsewhere, so
improving yield by increasing price may not be externally consistent.
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Raising prices appears to be internally consistent and linked to the focus on providing an enhanced
customer experience. MOSM may not have staff with the skills to provide ‘event services’ in a professional
manner, so without some additional training or hiring new staff, this is not likely to be internally consistent.
Feasibility
The organisation can make the required changes to optimise the revenue mix as it does not require
substantially more capabilities to change the prices and add new product lines. Offering MOSM as a
new event location may be slightly more complicated and require some event professionals, so this is
likely to be feasible but more difficult.
The key issue is whether this option will be valued by customers. In the case of the ticket price
increases, customers may only feel that this is of value if they receive more products or services in
return. For example, this may require improvements to the collection of exhibits. With respect to offering
MOSM as an event location, MOSM would have to successfully market itself as a well-located and unique
venue. MOSM needs to consider the industry analysis it would have previously conducted (see module 2),
specifically the industry key success factors it needs to achieve, and carefully review its competitors, as
customer value will be linked to comparisons between alternative types of entertainment venues.
QUESTION 5.15
The global paper manufacturing and trading industry involves the conversion of pulp into bulk
paper, newsprint, industrial packaging or tissue for use in the production of a wide range of paper
products, such as paper stationery, tissues, containers, books and newspapers, which are sold
through a number of distribution channels.
The industry in Australia is mature and has been characterised by a continued rationalisation
of products and brands, a slow rate of technological change and a high rate of mergers and
acquisitions. Major manufacturers compete strongly for market share and increasing export
activity, as only low domestic growth is possible.
Future growth of the industry is predicted to be low in all segments: the only exception is that
of printing and writing papers, where it is expected to have an overall low to medium growth.
Key factors inhibiting growth are the tight environmental and other compliance regulations. These
regulations place Australian manufacturers at a disadvantage to international competitors who do
not have to comply with such stringent measures. Further, the reduced import tariff rates make
cheaply produced overseas products more attractive in price for local consumers, particularly
in the lower-value product areas. For the industrial and packaging segment, substitutes in the
form of plastic packaging, which has the benefit of being seen as more recycling-friendly, have
compounded the low growth.
Profitability will be squeezed for manufacturers as they must comply with increasingly stringent
environmental regulations and increasing prices for energy and water. They also need to invest in
high-cost plant and equipment to keep manufacturing efficient and therefore competitive. At the
same time, they are battling cheap imports, the strengthening of buyer power as fewer major
customers emerge, and the industry’s continual move towards globalisation.
The threat and availability of substitutes with low switching costs in most segments is high.
Organisations operating in this industry need to be customer- and market-focused, using new
product development to stimulate demand. They also need to have in place an efficient distribution
system as competition is price sensitive. A focus on international markets, particularly highly
industrialised markets that have a very high consumption per capita and developing Asian markets,
provides the best opportunity for growth for Australian manufacturers.
Organisational Information
Paper Co. is a listed Australian company that manufactures, sells and distributes communications
papers and high-performance packaging in the Australasian region. It also sells paper globally.
It aims to move from being a domestic paper manufacturer to become a leading supplier of
communications paper and high-performance packaging, servicing a global market. Organic
growth is to be achieved via product or marketing innovation and a focus on sales and marketing to
leverage its brand strengths. Other growth would be through acquisition, where acquisitions deliver
improved shareholder value.
The company has two major business units: communication papers (which are distributed
through a number of its own inhouse merchants) and packaging papers (which the company
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sells through its Australian Paper division). Paper Co. also owns plantation and pulpwood oper-
ations, which provide over 70% of the company’s annual pulpwood supply on a constant basis.
Manufacturing is carried out by 11 paper machines, one coating machine, six pulp mills and two
recycling plants at four locations around Australia.
Following a number of global acquisitions, the only major developed market that is not directly
serviced by the company is the large but modestly growing European market.
Superior financial performance in terms of return on assets (ROA), gross margins and earnings
before income tax (EBIT) margins compared to industry and key competitor averages means that
the company competes on the basis of low cost.
Overall the company’s performance is assessed as strong. The major contributing factors are:
• strong financial performance, with good share price gain over the last five years and good sales
growth and financial ratios compared to industry and key competitor averages over the period
• strong customer performance, with the highest market share in segments operating in the
domestic market, making Paper Co. the second-largest global paper merchant
• strong learning and growth performance, with sound product and technological innovation.
The company’s most significant competitive threats are the two major competitors that have
developed substitute paper and plastic packaging solutions, including innovative fresh fruit and
vegetable packaging and plastic packaging substitutes. Also, imports in the printing and writing
segment are eroding the company’s domestic market share.
Business Strategic Option
An exciting new technology has just been piloted by the company. In this process, bleached,
chlorine-free pulp is produced from previously unusable annual crop fibres, predominantly wheat
straw. Wheat straw requires less energy and fewer chemicals to pulp than wood and is commer-
cially viable at considerably higher throughput rates than conventional chlorine-bleach processing
plants. The process is environmentally friendly, since it is chlorine-free, reduces greenhouse
emissions (by reducing the amount of wheat straw burnt), uses straw (which is an annual by-product
of wheat production), and has no noxious waste products. Water usage is also around 75% lower
compared with normal pulp mills as the process cleans and recycles its own water. This technology
has the potential, upon successful user acceptance testing of its output, to radically change the
paper manufacturing process globally and improve margins significantly.
Trials of the new technology have recently progressed to commercial quantities after success-
ful sample production. Further, a full-scale test has just been completed with a major tissue-
manufacturing company, with promising results.
Having been granted a global patent for the process, the challenge now is to leverage Paper Co.’s
investment in the development of this technology to get the best return for shareholders. Given the
significant potential of this new technology, such as the significant cost and environmental savings
it offers, Paper Co. has decided to incorporate the new technology into its manufacturing processes
and license the technology to other domestic and global manufacturers due.
The technology will be managed through a separate entity to hold the global patent and licences,
which will also operate manufacturing on a contract basis using the new technology. This new
company would manage global licensing agreements as well as continue the product and process
development required to stay ahead of the competition and maintain the value of licences to use
the technology.
The capital required to build the manufacturing plants would be raised by floating part of
the equity of the new company, Enviro Technology Ltd, on the Australian Securities Exchange.
Feasibility studies have already been conducted into possible sites for new production plants
using the new technology. Consultants have identified two preferred sites in Australia, due to their
excellent access to wheat straw, water, natural gas for electricity and steam generation, labour
and general services. A site in Victoria has been selected as the location of the first mill, at a
commissioning cost estimated to be approximately AU$115 million, with other mills requiring a
similar level of investment funding to be raised.
Based on the information given, consider the strategic option of using the new technology
presented in the case. Evaluate this strategic option for Paper Co. using Rumelt’s criteria (i.e.
external consistency, internal consistency, feasibility and sustainable competitive advantage).
What information do you still require in order to further evaluate this strategic option?
Rumelt’s criteria provide a methodical approach for choosing, prioritising and coordinating strategic
options. Once those tasked with the strategic management of the organisation have received information
and advice on the strategic options available to the organisation, they move on to finalising the strategy.
Pdf_Folio:339

as follows.
KEY POINTS
5.3 Evaluate and recommend strategic themes applicable to a specific organisational context.
• Strategic themes are broad strategic options that gather together more specific related strategic
options.
• The process of developing broad strategic options or strategic themes involves deciding which
option(s) to pursue and making sure they are properly integrated with each other.
• Rumelt’s criteria offer a strategic framework to compare and prioritise strategic options. Rumelt’s
evaluation criteria are:
– external consistency
– internal consistency
– feasibility
– competitive advantage.
5.6 FINALISING STRATEGY DEVELOPMENT

All of the steps in strategy development described throughout this module require the close involvement
of leaders and managers. Leaders set the overall direction and have a particular interest in the alignment of
the strategy with the organisation’s vision and mission. They are also concerned that the strategy reflects
the organisation’s values and of course that it will help the organise achieve its goals.
In order to help choose and prioritise strategic options, management must understand how each strategic
option relates to the organisation’s strategic drivers, operational drivers, and organisational and people
drivers. Each of these is involved in determining which strategic options are feasible and optimal, and
each will be affected by the steps necessary to implement the strategy (implementation is discussed in
module 6). Various evaluation tools can be used to compare options and to provide information to enable
risk management.
An important part of the senior managers’ roles is to bring specific strategic options together into broad
cohesive options or themes that support particular organisational goals. Managers must then evaluate
each of these broad options to determine how they match the organisation’s environment, whether the
organisation is capable of implementing them and whether they can establish a competitive advantage for
the organisation. Based on this, the organisation’s senior management can choose which options to pursue
and thus move to finalise the strategy.
To complete the strategy, management needs to create a high-level implementation plan and establish
meaningful key performance indicators (KPIs). Key performance measures (KPMs) are used to link
the strategic options back to the organisation’s goals and to measure the success of the strategy after it has
been implemented.
The strategy for MOSM is summarised in figure 5.17. The full strategy appears in appendix 5.1.
SETTING KEY PERFORMANCE METRICS

Managers must determine the best set of KPMs to assess how well the strategic goals are being achieved.
These measures should directly address the organisation’s goals. As an example, the MOSM goals in figure
5.17 include increasing revenue and lowering operating costs. Thus, overall, revenues and costs should
be carefully tracked across the whole organisation, and for specific products or services so that MOSM
can identify areas that are meeting growth and cost control targets. From an internal process perspective,
specific measures are needed to track project completion speed because on-time delivery is important.
Furthermore, the museum accreditation process might be measured by focusing on the stages completed
and the expected dates of application submission and receiving accreditation. As noted, learning and
growth could be directly measured through the number of volunteers and volunteer hours, the turnover rate
of employees and volunteers, and the number of training days. Customer satisfaction could be measured
by surveying customers’ experiences and tracking the numbers of new and repeat customers.
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FIGURE 5.17 Summary of MOSM’s strategy
VISION
An elite museum examining the past, revealing the present, envisaging the future.
A sporting moment happens once. A second in time, captured for eternity.
It lives in the minds of the people: people who competed, who were there, and who pass on
their stories from generation to generation.
They become a blueprint for what we value and an inspiration for all.
MISSION

• delivering innovation through education programs and exhibitions
• providing an entertaining and knowledgeable environment for local, national and
international audiences
• providing exceptional customer service to enhance visitor experience.
VALUES
Pride, commitment, community, dedication and leadership.
GOALS
Financial: increase revenue and decrease total operating cost.

Internal processes: on-time delivery of projects, care of collection and museum accreditation.
Learning and growth: increase the number of volunteers, retain high performers, and
increase the number of training days for full-time equivalent.
Customer: increase customer satisfaction, increase visitor numbers and increase
percentage of repeat visitors.
STRATEGIC THEMES
1. Strategically position the brand in the marketplace in order to promote the MOSM as
a world-class sporting attraction. The strategic positioning process is to include social
media platforms as the key marketing tool.
2. Retain a relevant collection (product) in order to ensure MOSM's continued relevance and
thereby increase visitor numbers and encourage repeat visitation.
3. Optimise the revenue mix by improving yield and ensuring that revenue streams include
ticket sales, merchandising and events to reduce the potential risk of one revenue stream.
4. Ensure that future growth is supported by enhanced systems and processes, a supportive
and dynamic culture, an improved organisational structure, sufficient human resources and
the right operating environment.
Metrics Control and Contingencies

A focus on reporting financial outcomes directly related to financial performance can sometimes lead
organisations to overlook the importance of creating, capturing required data and using metrics as part
of finalising the strategy. The responses that will be made to different levels of performance against the
metric should be a part of the metric definition.
Metrics and Performance
Measuring strategic performance can decrease possible failures and minimise their impact by adapting and
implementing a new approach and by altering and reducing excessive expenditure.
Several types of metrics exist in strategy to aid with data capture and measurement with the following
the most popular:
• marketing and brand metrics
• customer acquisition and satisfaction metrics
• market attractiveness and value metrics
• business profitability
• digital effectiveness and search.
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Each of these metrics quantify the aspects that are actually supporting performance and can inform
strategic drivers and aid management in evidence-based decision making.
REVIEWING THE STRATEGY

By this point the strategy has been informed by detailed analysis, evaluations and reviews. An important
step prior to implementation is to conduct a formal and detailed pre-implementation review.
The strategy process can take several months to develop and during that time, the external environment
is subject to change, so what initially was the right strategy may no longer be appropriate. Examples of
changes in the external environment include unique global events, actions by competitors, and changing
government policy or regulations that significantly affect the industry.
Internal changes that affect costs or capabilities may also have occurred, such as difficulty in obtaining
funding for major products or the resignation of important employees. The strategy must be reviewed to
identify any modifications needed to respond to internal and external changes.
Review sessions should also consider expected customer and competitor responses once the strategy
is implemented, and how the organisation will respond to different unfolding scenarios (e.g. delays in
implementation).
The review period may also be a useful time for organisational leaders to initiate discussions with major
stakeholders, so that future direction is clearly and effectively communicated to them, ensuring they do
not feel ignored or side-lined.
A final test of whether the strategy is ready to be implemented is to test for alignment with the
organisation’s vision and strategic goals. Module 1 presented seven questions that should be asked to
ensure there is a clear vision closely linked to the organisation’s goals and strategy. If the senior managers
and leaders of the organisation cannot clearly and succinctly answer these questions, especially ‘Is it easy
to communicate; can it be successfully explained in 5 minutes?’, this may be an indication that further
refinement and clarification is necessary.
Table 5.13 outlines key questions that you should be able to consider when conducting your strategy
development
TABLE 5.13 Key questions for strategy development
Key questions for CPA to consider in Concepts/models/approaches that can be used to answer
strategy development the key questions
What are the key components of the The components of vision, mission, values, goals, strategic
strategic development process and how are drivers and factors and strategic themes can be discussed in
these strategy components aligned? order to determine: What do we want to be? How are we going
to get there? How do we articulate what we want to achieve, and
what is success? And how do we implement?
How does an organisation develop the After completing the analysis offered in modules 2 and 3 and
strategy? developing the strategic options assessed using:
• the operational factors and organisational and people factors
• the organisation can develop targeted strategies to achieve its
vision.
How does an organisation prioritise the • Value/effort assessment

options available in terms of size and • Weighted criteria evaluation tool (size and value, growth,
potential organisational impact? profitability, distribution access, value proposition, capabilities,
resources, capacity, service, risks, CSR)
How does an organisation assess the risks • Risk management framework

inherent in the possible options and their – identifying risks
implementation? – risk rating: consequences and likelihood.
• Risk assessment (understanding risk, types of risk)
How does an organisation develop strategic • Strategic themes are groupings of strategic options
themes and why? • Making the choice of which options to pursue
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How does an organisation evaluate the Rumelt’s criteria (external consistency, internal consistency,
shortlist of themes developed which are the feasibility and competitive advantage)
best strategic fit?
How does an organisation articulate the Creating the strategy

strategic actions and decisions?
This module has detailed the information and analysis, decisions on what to pursue and achieve, and
the priority of these. Module 6 concerns strategy implementation. Taken together, modules 5 and 6 will
provide the organisation with a comprehensive and detailed strategy to execute over the coming years.
QUESTION 5.16
Wesfarmers’ strategy to take its Bunnings business into the UK market has been described in
earlier modules. The analysis supporting the entry into the new market appeared to be sound,
but ultimately the strategy failed. Referring to appendix B, use Kotter’s seven questions to evaluate
whether the vision, goals and strategy were aligned.
1. Does it convey a picture of what the future will look like?
stakeholders?
3. Does it comprise realistic, attainable goals?
4. Is it clear enough to provide guidance in decision making?
conditions?
6. Is it easy to communicate; can it be clearly explained in five minutes?
7. Is it ambitious enough to force people out of comfortable routines?
as follows.
KEY POINTS
• The final stage of strategy development is to create an implementation plan, key performance
indicators and key performance metrics. These guide implementation and provide the basis to
monitor and assess the implementation of the strategy and performance of the strategy itself.
• A strategy requires a high-level implementation plan that includes meaningful key performance
indicators (KPIs) and key performance measures (KPMs).
5.5 Appraise how the roles of management and leadership drive the development of the strategy.
• Organisational leaders and managers conduct a formal, detailed review of the strategy prior to
proceeding to implementation.
• Any changes that have occurred in the external environment during the development of the strategy
should be evaluated to ensure the strategy remains appropriate or to prompt revisions to the
strategy, as necessary.
• Any changes in the internal resources and capabilities of the organisation should be evaluated to
assess whether they affect the ability to implement the strategy.
• Leaders may also engage with stakeholders to communicate the future strategic direction.
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REVIEW
Having identified options for new product, service and market development in module 4, this module
explained the key concepts and frameworks used in developing the strategy, including identifying
and evaluating strategic options, performing a risk assessment, ensuring the strategy aligns with the
organisation’s context and ensuring the options adopted are integrated with each other. Organisational
leaders and managers have numerous decision-making responsibilities during strategy development,
and this culminates in the final step in strategy development: to review the strategy and develop key
performance indicators and key performance metrics. These ready the strategy for the implementation
stage, which is discussed in module 6.
Module 5 began by reviewing the organisation’s vision, mission, values and goals. These establish the
broad purpose of the organisation, its specific aims and the principles by which it will conduct itself in
pursuing its objectives. The organisation’s strategy must align with its vision, mission, values and goals.
This should be a guiding approach throughout strategy development as well as serving as a final check
before the strategy is readied for implementation.
The module then examined the strategic drivers, introduced in module 3, and how the organisation’s
operational drivers, organisation and people drivers, and markets, products and services are both used to
enable the organisation to pursue its strategy (acting as ‘levers’) and affected by the strategy (as outcomes).
It is crucial to understand what actions the organisation must take and the effects those actions will have
in order to develop strategic options.
Strategic options can be assessed using various methods, including a value/effort assessment, which
prioritises options based on the trade-off between the value they create and the effort they require. Another
approach is to use a weight criteria evaluation tool, which provides for objective analysis of evaluation
criteria and thus provides a way to incorporate the varying characteristics and outcomes of each strategic
option into an overall ‘score’, which aids comparison with alternative options. Data analytics, including
predictive analytics, are increasingly sophisticated and can provide insight into likely outcomes from
particular strategic options.
All strategic options involve a degree of risk. The organisation must conduct a risk assessment in order
to understand how to manage the risks involved with each strategic option it considers.
Strategic options are often expressed in focused terms. It is useful to gather various related options into
a single broader strategic option, sometimes referred to as a strategic theme. These broader options can
be evaluated against Rumelt’s criteria to test for external consistency, internal consistency, feasibility and
competitive advantage. In this way the organisation ensures the strategic options are compatible with the
organisation’s capabilities, environment and overall goals.
Finalising the strategy involves a final review for alignment with the organisation’s vision and goals and
establishing key performance indicators and metrics that can be used to establish performance expectations,
measure performance and prompt corrective action if performance falls short.
Once the strategy is finalised, the organisation develops detailed implementation plans, including
projects, programs and an approach to change management. Module 6 discusses this final phase of the
strategy process.
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APPENDIX 5.1
MUSEUM OF SPORT MEMORABILIA (MOSM), STRATEGY 2018–21
Museum of Sport Memorabilia

Strategy 2018–2021
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Where are we today?
The tourism industry in Australia
© CPA Australia 2020.

2
Australian and ACT Tourism Industry
The tourism industry in Australia is estimated to be valued at over ACT Tourism Forecasts 2017–2025
$2.11 billion and offers jobs to nearly 300 000 people. In 2018- (annualised growth rate – 4.5%)
Thousands of int'l visitors p.a
2019, Australia’s tourism industry accounted for 3.1% of national

Gross Domestic Product (GDP). 2200
2000
1800
The Australian tourism industry is expected to grow at 1600
1400
approximately 1.5% per annum to 2025. This is the same as the 1200
national population growth percentage. 1000
2017 2018 2019 2020 2021 2022 2023 2024 2025
The ACT recorded the third strongest population growth rate in the
June quarter of 2019 at 1.5%. In 2019, approximately 2.9 million Top
Top 5 ACT tourist
5 Victorian countries
Tourist of origin
Countries of Origin
interstate tourists visited the ACT. The majority of travellers visit the
Thousands of tourists p.a
ACT for recreational reasons as well as personal reasons. 450

400
350
China will be the largest market for international tourists visiting the 300
250
ACT with nearly 400 000 visitors expected in 2025. Other markets 200
experiencing strong tourism growth within the ACT include India, 150
100
Malaysia and Indonesia. 50
0
2017 2018 2019 2020 2021 2022 2023 2024 2025
China New Zealand United Kingdom

United States India

3
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Australian Tourism Industry
As part of the tourism industry, MOSM is influenced by political, economic, social and technological factors.
Political Economic
• Changing government regulations and policies. • Increases in the Australian dollar may:
• Potential for additional federal funding/support from the • decrease expected incoming international tourist
federal government. numbers
• State government and Tourism ACT relationships and • encourage interstate travellers to go overseas rather
influence. than interstate.
• City of Canberra relationships and influence. • Australian economic conditions affecting consumer
• Canberra City Residents Group. sentiment and household spending.
• Economic conditions affecting availability of sponsorship
and funding.
Tourism
Social Technological
Industry
• Changing consumer sentiment and choice. • Growth in technological advancements.
• Effect of national psyche on sport in Australia. • Accessibility of new technology.
• Nationalism and flow on-effect from Olympic success. • Contemporary requirements of interactive displays and
• Multiculturalism. the complexity of multimedia.
• Cost to service changing museum landscape.
• Increasing digitisation of collections.

4
ACT Tourism Attractions
The tourism industry is extremely competitive and Canberra has a number of attractions with which the Museum of Sports Memorabilia (MOSM) competes
against to gain visitors. A number of MOSM’s competitors have recently undergone large developments.
Canberra Attractions The market—visitors to attractions

p.a (thousands)
1400
Canberra offers a great diversity of attractions for both domestic and
international tourists. These are all within great proximity to public 1200
transport and accommodation. Whether you are travelling solo, as a 1000

couple or as a family, Canberra successfully caters for everyone! 800
600
General admission to the National Museum of Australia in Canberra is 400
free. However, costs apply for some special and rare exhibits. 200
Attendance at the museum sits at just under 700 000 visitors per annum.
Visitors
0
be Sa CT
M s
SM
ar k
So be u a y
re M m
The National Zoo and Aquarium in Canberra has just under 800 000
er
n
an A uar
lG c
N n S eu
ve rra ri u
de
e
th
A
O
na D
visitors per annum and charges $47 for an adult and $26 for a child (this
O
ig us
a t
C l ife he
rr nc
i o ky
q
i ld f t
is a large increase from 2017 rates).

W o
T lery
at
AC al
MOSM also competes against other Canberra attractions including the

an
lG
ACT Wildlife Sanctuary, National Gardens and the Sovereign Sky Deck.
na
io
at
N

5
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Where are we today?
Current performance of MOSM

6
MOSM Visitor Statistics
Total patronage up to February 2020 was approximately

200 000 visitors per annum which was 35% more than originally
forecast. It should be noted, however, that the original forecast
for the museum is considered to have been set conservatively.
Actual ticket Sales to February 2020

School groups are the largest visitor segment, comprising 45%
of all ticket sales. Adults are the next largest group at 38% of all
ticket sales (to February 2020). 3% 1%
5% Schools
The yield (financial return after investment) as at February 2020
8%
Adults
was $7.15 per visitor, against the budgeted yield of $11.35 per
visitor. This difference in expected yield compared to the original Concession
45%
forecasted figure could be due to the large numbers of school
Family
groups attending at relatively low price.
38% Children
It is thought that the large numbers of school groups have Groups
detracted from the experience for other visitors due to noise and
lack of crowd control, particularly around the interactive displays.
The cap for school groups has now been reduced from 200
pupils to 150, at any one time in order to lessen this impact.

7
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MOSM Revenue and Expenditure
Revenue FY2020
Revenue
MOSM revenue for the last financial year was $8 million against a
budget of $7.25m for the same period. The difference can be
attributed to greater than expected ticket sales.
Admissions
45%
A breakdown of income received shows a strong reliance on Sponsorship
sponsorship income which accounts for 45% of total revenue. 55%
Merchandise sales have been much lower than expected (the
original forecast was $90 000) and are $30 000 as at February 2020.
The difference in expected sales is influenced by the large
proportion of school groups that are visiting the museum generally,
as they have very limited discretionary spend and are not
encouraged to browse or purchase. The present product mix may Costs FY2020
also require revisiting. 2% 1%
4% Salaries & wages
5%
Facility maintenance &
Expenditure repairs
Volunteer on-costs
7%
Breakdown of expenditure shows the highest proportion of spend for
Consultancy & legal fees
the last financial year was on salaries and wages, maintenance, and 10%
volunteer on-costs. 57% Marketing & promotions
14% Overheads
Curatorial & exhibitions
Staff on-costs

8
MOSM Market Research

Market research initiated by MOSM was carried out to understand the visitor profile and key market segments of MOSM visitors. The research aims to
improve understanding of the behaviour, needs and expectations of the visitor market. It was also designed to monitor service performance and
product experience and provide feedback on possible improvements to MOSM content. Some of the key results from the survey are outlined below:
Satisfaction • 78% were satisfied with the overall experience at MOSM.

• 93% were either satisfied or very satisfied with the items on display.
with MOSM
• 96% were satisfied with the variety of sports covered.
• 99% were satisfied with the Museum’s staff.
Entrance price • 84% of respondents felt that MOSM entrance price represented 'excellent or very good' value for money.
• Only 1 person of the sample of 200 people that were interviewed felt that it was 'poor value for money’.
Types of • 72% of respondents said that the purpose of their visit to Canberra was holiday/leisure/sightseeing.
• 72% of respondents were male, and 44% of these were from another state in Australia.
visitors
Marketing and • 48% of respondents found out about MOSM through family/friends/colleagues.
• 12% of people found out about MOSM through the internet.
promotions
• 9% of people found out about MOSM via television.
Areas for • MOSM sports memorabilia available for purchase at the shop.
• Availability of car parking.
improvement
• Food and beverage facilities.
• Noise levels and management of larger tour groups .

9
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MOSM SWOT Analysis
A SWOT analysis facilitated with MOSM staff revealed that the team had many common perceptions and ideas for MOSM.
• Location near a sports stadium. • Lack of secure ongoing funding.
• Sporting focus. • Under-resourced.
• Collection of exhibits. • Core funding from one revenue stream (sponsorship).
• Schools program. • Perception that the collection has an emphasis on certain sports.
• Customer satisfaction. • Non-competitive marketing campaign.
• Minimal web presence.
• MOSM sports memorabilia available for purchase at the shop.
• Car parking availability.
• Food and beverage facilities.
• Noise levels and management of larger tour groups.
• Increasing visitor count. • Insufficient funding and/or withdrawal of sponsorship.
• Funding—sponsorships, philanthropy, government. • Competitors (other events, attractions, museums).
• Diversifying the collection. • Content becomes stale and loses relevance.
• Increase public awareness through new channels
(e.g. online – website and social media)

10
MOSM Organisational Structure

There are currently 50 FTE positions within MOSM, as well approximately 13 casual and 300 volunteer staff. The organisational structure model as
outlined below was derived through the funding, rather than the needs of the museum.
Admin Assistant
GM Museums GM Personal
Assistant
Librarian/Library Exhibitions & Funding Development Marketing & Comms

AV Coordinator Tourism Manager Exhibition Producer
Manager Collections Manager Manager Manager
Assistant Librarian Registrar Education & Public Front of House

Programs Manager Manager
Assistant Librarian—
Cataloguing Curator
Bookings Officer
Cataloguer
Curatorial Assistant
Volunteer Program
Guides & Volunteers
Library Technician Coordinator
Assistant Registrar
Admin Officer Senior Tourism
Services Officer
Archivist Education Officer
Tourism Services
Officer
Volunteers Public Programs
Coordinator Tourism Services
Officer
Library Assistants

11
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Where are we today — Summary
Performance has seen visitor

numbers higher than budgeted;
however yield is less than International tourism to the ACT is
budgeted. expected to grow at 4.5% per
annum to 2025. Growth will
Figures to February 2020 primarily be from China and India.
Actual Budget
Total Visitors 200 000 110 000
Average Yield $7.15 $11.35 Revenue is higher than budgeted;
however, it is thought that original
budget was conservative. Costs have
so far been higher than forecast
Figures to February 2020

Actual Budget
Revenue $8m $7.25m
The organisational structure, as it Costs $2.6m $1.0m The tourism industry in the ACT is
presently stands, does not very competitive, with MOSM
sufficiently support the demands competing in the educational,
of the current operating cultural and sporting attraction
environment. markets.

12
Where are we going

to, and by when?
Vision, Mission, Values, Goals

13
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MOSM Vision and Mission
MOSM Vision
An elite sporting museum examining the past, revealing the present, envisaging the future.
A sporting moment happens once. A second in time, captured for eternity. It lives in the minds of the
people: people who competed, who were there, and who pass on their stories from generation to
generation. They become a blueprint for what we value and an inspiration for all.
MOSM Mission

• delivering innovative education programs and exhibitions, including through digital delivery and
edutainment
• providing an entertaining and knowledgable environment for local, national and international
audiences
• providing exceptional customer service to enhance the customer experience using inhouse and
online edutainment.

14
MOSM Values and Goals

MOSM Values
Pride
Commitment
Community
Dedication
Leadership
MOSM Goals
Financial Increase revenue and decrease total operating cost
Internal processes On-time delivery of projects, care of collection and museum

accreditation
Learning and growth Increase the number of volunteers, retain high performers, and
increase the number of training days for full-time equivalent staff
Customer Increase customer satisfaction, increase visitor numbers and

increase percentage of repeat visitors

15
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MOSM Goals Expanded
The goals outlined below are based on the current assumptions of the demand and costing tool and the figures do not include costs, revenues or additional
visitation expected from any new initiatives.
Financial Customer
Goal Year 1 Year 2 Year 3 Year 4 Goal Year 1 Year 2 Year 3 Year 4
Revenue $8m $8.5 $9.0 $9.5 Increase customer 78% 83% 90% 90%
satisfaction
Cost $2.6m $2.3m $2m $1.8m
Increase visitor numbers 150k 180k 200k 200k
Increase % of repeat visitors 12% 18% 25% 30%
A world-class sporting museum

examining Australia’s past, revealing
the present, envisaging the future.
Learning and Growth Internal Process
Goal Year 1 Year 2 Year 3 Year 4 Goal Year 1 Year 2 Year 3 Year 4
Increase number of 300 320 350 375 On-time delivery of 85% 100% 100% 100%
volunteers projects
Increase number of 2p/a 4p/a 4p/a 4p/a Collection care Yearly Quarterly Quarterly Quarterly
training days
Museum accreditation No Yes Yes Yes
Retain high performers 80% 90% 90% 90%

16
How are we going to

get there?
Strategic Options

17
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MOSM Key Strategic Options
To adhere to the vision, mission and values as well as attain the goals, MOSM devised the following strategic options:
• Expand into the hospitality industry with a five-star restaurant attached to the
museum.
• Position MOSM as a world-class sporting attraction and focus more attention on

the domestic market.
• Maintain and develop the current collection as MOSM’s main product offering.
• Target full-priced customers, moving away from the reduced-price school group
customers.
• Use social media to attract untapped customer channels.
• Provide a modern experience at MOSM through interactive displays.

18
MOSM Optional Strategic Options
• Decrease the admission discount given to school groups.
• Conduct promotional initiatives to attract adult visitors at full admission prices.
• Offer event services to take advantage of the prime location and facilities at
MOSM.
• Strategically relocate the merchandise and gift store so that visitors pass
through it to exit.
• Increase all admission prices.
• Increase the number of volunteer hours, to reduce costs relating to full-time

staff.
• Provide training to full-time employees to give them knowledge to enhance

customer experience.
• Review processes and procedures to enhance the operational environment.

19
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Operational Tactics
Strategic options are analysed using the Strategic Driver and Tactics Framework.
MOSM considered how the strategic options would require the operational tactics to
be analysed.
Possible specific changes that could be made to achieve the overall strategy:
• Decrease the discount given on school group admission prices.
• Conduct promotional initiatives to attract adult visitors, at full admission prices.
• Offer event services to take advantage of the prime location and facilities of
MOSM.
• Strategically relocate the merchandise and gift store so that visitors pass
through it to exit.
• Increase all admission prices.

20
Organisational and People Tactics
MOSM considered how the strategic options would require organisational and
people tactics to be analysed.
Possible specific changes that could be made to achieve the overall strategy:
• Increase the number of volunteer hours, to reduce costs relating to full-time

staff.
• Provide training to full-time employees geared towards enhancing the customer

experience.
• Review processes and procedures to make them more efficient.

21
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MOSM Broad strategic options (Strategic Themes)
With the strategic options analysis conducted, a planning workshop with the MOSM senior management team and key MOSM individuals was held. The
following broad options or themes were developed to illustrate the future direction of MOSM.
1. Strategically position the brand in the marketplace to promote MOSM

as a world-class sporting attraction. Include social media platforms as
the key marketing tool.
2. Retain a relevant collection (product) to ensure MOSM’s continued

Vision
relevance and thereby increase visitor numbers and encourage repeat
visitation.
Mission
3. Optimise the revenue mix by improving yield and ensuring that
revenue streams include ticket sales, merchandising and events to
reduce the potential risk of one revenue stream.
Values
4. Ensure that future growth is supported by enhanced systems and

processes, a supportive and dynamic culture, an improved Goals
organisational structure, sufficient human resources and the right
operating environment.

22
MOSM Strategic Initiatives

Specific strategic initiatives are developed in order to achieve each broad strategic theme.
Strategy 1 — Position the brand

Strategically position the brand in the marketplace in order to promote MOSM as a world-class sporting attraction. The strategic positioning process
is to include social media platforms as the key marketing tool.
The key initiatives to complete Strategy 1 ‘Position the brand’ are:

1.1: Update the MOSM Marketing Plan with clear actions to support the MOSM strategy
1.2: Develop an online marketing strategy for MOSM, with particular focus on social media
1.3: Develop and implement an engagement strategy for members of sponsors’ organisations
Strategy 2 — Retain a relevant collection

This strategy aims to retain a relevant collection (product) in order to ensure MOSM’s continued relevance and thereby increase visitor numbers and
encourage repeat visitation.
The key initiatives to complete Strategy 2 ‘Retain a relevant collection’ are:

2.1: Develop an acquisitions strategy for MOSM
2.2: Catalogue and digitise the photo and print library across all collections
2.3: Conduct an assessment of the significance of items across all collections

23
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Strategy 3 — Optimise the revenue mix
This strategy aims to optimise the revenue mix by improving yield and ensuring that revenue streams include ticket sales, merchandising and
events in order to reduce the potential risk on one revenue stream.
The key initiatives to complete Strategy 3 ‘Optimise the revenue mix’ are:
3.1: Review admission prices with a view to increasing prices

3.2: Grow museum sponsorship
3.3: Grow merchandise sales through revising the product mix
3.4: Offer gift vouchers online and through alternative channels to broaden the reach; target adult customers
3.5:Implement an events service for sporting teams to hold functions at MOSM after opening hours
Strategy 4 — Support growth

This strategy aims to ensure that the future growth of MOSM is supported by enhanced systems and processes, a supportive and dynamic culture,
an improved organisational structure, sufficient human resources and the right operating environment.
The key initiatives to complete Strategy 4 ‘Support growth’ are:
4.1: Develop and implement a training course for all FTE on the current collection and sporting history
4.2: Conduct a review of the organisational structure, particularly option of part-time employment, and implement changes as required
4.3: Work with the finance team to better understand GST implications on MOSM and not-for-profit (NFP) status
4.4: Simplify and streamline the operational environment

24
How do we implement the strategy?

Operationalising the plan
(to be discussed in Module 6)

25
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Report Card
Year 1 Year 2 Year 3
Strategic Feb- Jun- Oct- Jan- Jul- Oct- Jan- Jul- Oct-
Strategic Options Owner Apr-Jun Apr-Jun
Theme May Sept Dec Mar Sept Dec Mar Sept Dec
Update MOSM Marketing Plan with clear actions to suppo FO
1.1
MOSM strategy
Position the Develop an online marketing strategy for MOSM, with pa SF
1 1.2
Brand focus on social media
Develop and implement an engagement strategy for me FO
1.3
of sponsors' organisations
PM
2.1 Develop an acquisitions strategy for MOSM
Retain a
2 Relevant Catalogue and digitise photo and print library across all DA
2.2
Collecton collections
2.3 Conduct significance assessment across all collections DA
AT
3.1 Review admission prices with a view to increasing prices
JH
3.2 Grow museum sponsorship
Optimise the CS
3 3.3 Grow merchandise sales through revised product mix
Revenue Mix
Offer gift vouchers online and through alternative channe SW
3.4
broaden the reach; target adult customers
Implement events service for sporting teams to hold func JH
3.5
MOSM after opening hours
Develop and implement training course for all full-time LT
4.1
employees on current collection and sporting history
Review organisational structure, particularly part-time RW
4.2
Support employment, and implement changes as required
4
Growth Work with the finance team to better understand GST BS
4.3
implications on MOSM and not-for-profit (NFP) status
RW
4.4 Simplify and streamline operational environment
Green Initiative is progressing as specified and approved

Orange Initiative is in risk of becoming a Red
Red Initiative is outside of acceptable tolerances and requires immediate attention

26
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organization.
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net.au/news/2020-02-13/tpg-v-vodafone-merger-approved-by-court-over-accc-opposition/11960786.
OPTIONAL READING
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Innovation Management, vol. 11, no. 3, pp. 330–48.
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/sites/darcytravlos/2012/11/28/three-trends-underlying-apples-iphone-market-share-surge.
Pdf_Folio:360

MODULE 6
STRATEGY
IMPLEMENTATION
LEARNING OBJECTIVES

6.1 explain the key concepts, components and frameworks applicable to implementation of strategy
6.2 evaluate factors that impact successful implementation of strategy and change management
6.3 evaluate the implementation of strategy and its performance in the context of emerging and changing
circumstances
6.4 appraise how the roles of management and leadership drive the implementation of the strategy.
ASSUMED KNOWLEDGE
• describe the strategic process up to the implementation stage.
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PREVIEW
In modules 2 and 3, we considered the strategic analysis of both the internal and external environments.
This provided the foundation for developing strategic options in module 4. In module 5, we considered how
to translate those options into strategic themes and initiatives, ensuring they align with the organisation’s
vision, mission and values. This module focuses on implementation — the fourth and final stage of the
strategy process (see figure 6.1).
FIGURE 6.1 The strategy process: strategy implementation

(Module 1)
Strategic analysis:
(Module 2)
Strategic analysis:
(Module 3)

(Module 7)
How do we implement the strategy?

• Design and develop the implementation plan.
• Determine how to align the organisation to the plan.
• Manage change.
• Manage projects.
• Monitor implementation and performance.
This module considers the key aspects of implementing strategy. We will start with developing the
organisation’s implementation plan using the McKinsey 7-S implementation framework to ensure all key
areas of implementation are addressed, using examples to highlight where this works well as well as
when the 7-S framework is not used to its full planning potential and implementation is not always as
desired. Next we will turn our attention to change management and how to navigate the changes required
to implement strategy successfully including identifying and overcoming resistance to change. Lastly,
we consider the more practical aspects of implementation by looking at managing projects, monitoring
implementation, performance and risk with appropriate contingency planning and alternative strategies in
place as required.
Implementation is a process that consists of a range of practical tasks that are concerned taking strategic
options from idea to embedding into the business-as-usual environment to deliver on the organisation’s
strategy and enable a competitive advantage. In rational terms, strategy implementation is ‘a process
by which strategies and policies are put into action through the development of programs, budgets, and
procedures’ (Wheelen & Hunger 2008, p. 16).
Strategies lead to organisations being changed in some substantial way. It is extremely difficult to
implement a strategy successfully unless the organisational change implications are considered and
actioned. Hence, an integrated approach to strategy implementation and change management is required —
how the technical, political and cultural systems have to be changed to support the strategy must be included
in the strategy implementation plan.
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Effective organisational change requires effective change leadership, including managers and change
agents who can apply ‘behavioural science knowledge to the planned development and reinforcement of
organisational strategies, structures and processes for improving an organisation’s effectiveness’ (Waddell
2016, pp. 5, 19). It requires an appreciation that the strategy process is a fluid process of continual learning.
This is because no matter how well developed a strategy is, it often requires adjustments as more is
learned about the organisation’s external and internal environments. Indeed, this is the reason strategy
implementation should never be considered in simply an operational manner. It requires input from across
the organisation and sound leadership to ensure the right resourcing, people and measurement decisions
are made at every point in the implementation process (Hitt, Jackson, Carmona, Bierman, Shalley &
Wright 2017).
Leaders have a special role to play in creating a culture receptive to change, in particular, by effectively
communicating what is required, by being supportive, including paying attention to people’s concerns, and
involving everyone. Effective leaders make change happen because they are able to elicit more positive
responses to change than negative responses (Oreg & Berson 2019).
A strategy is also more likely to be successfully implemented if sound project management practices
are used. Project management is a ‘framework of methodologies, tools and techniques’ that enable the
‘efficient delivery of outputs (on time, on costs and according to specification)’ (Zwikael & Smyrk 2019a,
p. 13; Zwikael & Smyrk 2019b).
This module describes the strategy implementation process in detail and concludes with a discussion of
the implications for leaders and managers, including how they need to prepare for future challenges.
6.1 DESIGNING AND DEVELOPING

IMPLEMENTATION PLANS
Our model of the strategy process (explained in module 1 and used throughout the study guide) identifies
strategy implementation as the final stage of the strategy process. It is the stage at which the decisions
that the organisation’s leaders and managers have made are translated into specific plans that align the
organisation’s strategy and its structure, systems, style, skills, staff and shared values. These considerations
are described by the 7-S framework, which is a useful framework to design and develop implementation
plans and also to ensure they are implemented effectively. The next section of the module describes this
framework in detail.
Implementing a strategy requires the organisation to change. An organisation’s leaders should create
an organisational culture that is receptive of change and able to adapt. Achieving this will help specific
change management measures that need to be taken as part of strategy implementation. The change
management process associated with strategy implementation is described in detail in section 6.3.
A culture that successfully deals with change also helps the refinements and revisions of the strategy that
inevitably arise as new issues or information emerges during its development and implementation. This is
truer than ever when we consider the hypercompetitive and digitally connected nature of the contemporary
business environment. In practice, therefore, implementation is a vital and ongoing process that managers
and leaders must orchestrate and direct for the future competitive success of their organisation.
Strategy ceases to be thinking and becomes reality when it is embedded in business activities. This
is achieved when managers align detailed plans, actions and initiatives, and individual key performance
indicators (KPIs) with the higher-level strategy. These are all part of the implementation plan and set the
criteria for making day-to-day decisions during the implementation stage. Although a portion of a strategy
is likely to be implemented as part of normal operations, it is more usual that a strategy will be implemented
using project methods and best practice systems of governance, especially at large organisations, and it
represents a considerable investment of time and money. Many of the changes required to implement a
strategy are therefore achieved through projects. Related projects are often grouped together into programs
to ensure interdependent changes are effectively and efficiently coordinated. Building specific activities,
programs and projects into long-term and short-term plans helps to ensure that the strategy is visible,
change is delivered and employees are held accountable for results. Section 6.4 of the module explains
how project management methods are used to ensure the projects associated with strategy implementation
are effective.
As with all important aspects of an organisation, it is important to monitor and manage both the
implementation of the strategy and the performance of the strategy in achieving its intended outcomes. Both
require establishing valid measures and putting in place systems that effectively respond to any issues that
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MODULE 6 Strategy Implementation 363

arise. As mentioned above, the dynamic business environment means an organisation’s strategy evolves
over time in response to emerging information, changes in the organisation’s external environment and
monitoring of how well the strategy is performing in terms of achieving the organisation’s objectives. It
becomes clear that the strategy process is an iterative one and that the seemingly discrete stages in the
process are in fact revisited as necessary to ensure the strategy responds to emergent issues. Section 6.5 of
the module looks at monitoring implementation and performance — and thus at the information leaders
and managers use to guide the strategy during the implementation phase.
Organisations that implement strategy faster than their competitors are likely to provide higher levels
of value for customers. O’Reilly and Caldwell et al. (2010) showed that the progress of strategy
implementation is greatest in organisations in which the various levels of management adopt a greater
number of implementation strategies. Strategy implementation is therefore integral to every manager’s job
and thoughtful and prescient implementation leadership is integral to implementation success.
Inevitably various challenges can occur in aligning the organisation’s strategy and its structure, systems,
style, skills, staff and shared values. Indeed, many organisations experience an inability to execute on
strategy. Instead they become stuck in a loop of analysis or unable to make decisions in the context of
uncertainty. The organisation may lack also lack specific implementation capabilities or the knowledge
to translate the options identified into strategic themes and goals. That is, they lack the ability to
operationalise the strategy (Zubac 2016). Implementation can also be derailed by resistance to change,
politics and power games within the organisation. Section 6.6 examines some of these issues and how the
organisation’s leaders and managers can firstly avoid them and secondly, as necessary, resolve them.
As mentioned above, the business environment is changing at an unprecedented pace. Fortunately, the
information available to organisations and the means by which that information can be analysed to inform
decisions are also advancing rapidly. This is both an advantage and a challenge. We will examine the role
of technology where appropriate throughout the module before concluding with a general examination
of the future challenges and opportunities facing the leaders and managers tasked with formulating and
successfully implementing their organisations’ strategies.
as follows.
KEY POINTS
6.1 Explain the key concepts, components and frameworks applicable to implementation of
strategy.
• Implementation is the last stage of the strategy process.
• Implementation plans assign responsibilities, budgets and resources.
• Implementation plans are dynamic — it must respond to changes in the organisation’s environment
and circumstances.
6.2 Evaluate factors that impact successful implementation of strategy and change management.
• Implementation failures often relate to the inability of an organisation to operationalise its strategy
— through an inability to manage projects, initiate change or align strategy with the organisation’s
vision and mission.
6.3 Evaluate the implementation of strategy and its performance in the context of emerging and
changing circumstances.
• Implementation plans are dynamic — they must respond to changes in the organisation’s environ-
ment and circumstances.
6.4 Appraise how the roles of management and leadership drive the implementation of the
strategy.
• Management seeks to align plans, actions, initiatives, KPIs and reward systems with the organisa-
tion’s strategy in order to embed the strategy across all business activities.
• Management must ensure the strategy is visible, that the necessary changes occur in the
organisation and that employees are held accountable for outcomes.
6.2 THE 7-S FRAMEWORK

The 7-S framework, developed by McKinsey & Company in the 1980s, presents implementation as
interconnected and complex. It shows that, for the implementation process to unfold as planned, a number
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of issues and activities have to be engaged with simultaneously. It also serves as a useful framework to
design the implementation plan to achieve this.
The 7-S framework makes it easier for leaders and managers to understand what they should be
concentrating their attention on when implementing a strategy (Watson 1983). It is often said that managers
are most effective when given operational tasks to complete while leaders thrive when they are put in a
position where they can positively contribute to the organisation’s culture. Implementation responsibilities
can also be divided along ‘hard’ and ‘soft’ lines. The ‘hard’ elements are strategy, structure and systems.
If a manager gets these three elements right, the organisation should be effective from an operational
standpoint. The ‘soft’ elements are style, skills, staff and shared values. Compared to managers, it is leaders
who have the most capacity to impact how these four elements interact to change the organisation. Leaders
tend to possess means for impacting these elements. Of course, this delineation between responsibilities is
not clearly defined or rigid in practice and leaders and managers will share responsibility for most aspects,
with the balance dependent on the individual organisation.
Figure 6.2 presents the framework graphically, illustrating the connected activities of strategy, structure,
systems, style (of leadership), staff and skills. In the middle of the framework are shared values, denoting
the centrality of organisational culture to the process of implementation and change.
FIGURE 6.2 The McKinsey 7-S framework
Structure Strategy
Shared
Systems Style
values
Skills Staff
Source: Adapted from RH Waterman Jr, 1982, ‘The seven elements of strategic fit’, Journal of Business Strategy, vol. 2, no. 3, p. 70.
The framework illustrates a useful way of thinking about the organisation, using different perspectives
to ensure that a particular strategy or plan is properly integrated. The 7-S framework can be used to assess
many types of strategic change initiatives. It is useful to create an action plan that captures progress by
documenting an organisation’s current situation and where it aims to be against each of the 7-S factors, as
shown in table 6.1.
TABLE 6.1 Application for the McKinsey 7-S tool
Shared
Strategy Structure Systems Style Staff values Skills
Before
After
Source: MindTools.com, 2014, ‘The McKinsey 7-S Framework’, www.mindtools.com/pages/article/newSTR_91.htm, © Mind Tools
Ltd 1996–2015. All rights reserved. Reproduced with permission.
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All seven components are described in the following sections.
Strategy
The approach the organisation takes to setting direction and competing in the marketplace.
• What is our strategy?

• How do we intend to achieve our objectives?
• How do we deal with competitive pressure?
• How are changes in customer demands dealt with?
• How is strategy adjusted for environmental issues?
Structure
The hierarchy of positions, levels of management, delegation of authority and financial responsibility, and
arrangement of workflow.
• How is the company/team divided?

• What is the hierarchy?
• How do the various departments coordinate activities?
• How do the team members organise and align themselves?
• Is decision making and controlling centralised or decentralised? Is this as it should be, given what we’re doing?
• Where are the lines of communication? Explicit and/or implicit?
Systems
The different systems and processes of activity, including the flow of information and physical resources
through the organisation.
• What are the main systems that run the organisation? Consider financial and HR systems as well as communi-
cations and document storage.
• Where are the controls and how are they monitored and evaluated?
• What internal rules and processes does the team use to keep on track?
Style
The way in which managers focus their attention and how they approach particular tasks and activities.
Style is closely linked to values and behaviour, and observing management behaviour and responses helps
with understanding how an organisation will approach future issues.
• How participative is the management/leadership style?

• How effective is that leadership?
• Do employees/team members tend to be competitive or cooperative?
• Are there real teams functioning within the organisation or are they just nominal groups?
Staff
The employees and subcontractors of the organisation.
• What positions or specialisations are represented within the team?

• What positions need to be filled?
• Are there gaps in required competencies?
Shared Values
The things that most people within an organisation hold as being important (i.e. how customers are treated,
types of products the organisation wants to create, desired levels of quality).
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• What are the core values?
• What is the corporate/team culture?
• How strong are the values?
• What are the fundamental values that the company/team was built on?
Skills
The capabilities of the organisation as a whole, derived from the combined abilities and knowledge of
individuals within the organisation.
• What are the strongest skills represented within the company/team?

• Are there any skills gaps?
• What is the company/team known for doing well?
• Do the current employees/team members have the ability to do the job?
• How are skills monitored and assessed?
Source: Boxed text adapted from MindTools.com, 2014, ‘The McKinsey 7-S Framework’, www.mindtools.com/pages/article/
newSTR_91.htm. © Mind Tools Ltd 1996–2015. All rights reserved. Reproduced with permission.
Example 6.1 uses the 7-S framework to analyse how Google and its parent company Alphabet have
aligned the organisations and their strategies.
EXAMPLE 6.1
Alphabet: G is for Google

Google is one of the best-known corporate brands in the world. Its share price has enjoyed remarkable
growth, achieving a 23.4% compound annual growth rate from 2004 to the end of 2016.
When Google CEO Larry Page hired new CFO Ruth Porat — known as ‘the most powerful woman
on Wall Street’ and a veteran of IPOs with technology start-ups including Amazon and eBay — he
said ‘We’re tremendously fortunate to have found such a creative, experienced, and operationally strong
executive … I look forward to learning from Ruth as we continue to innovate in our core — from search
and ads, to Android, Chrome, and YouTube — as well as invest in a thoughtful, disciplined way in our next
generation of big bets.’
Google had become two businesses: a revenue- and profit-producing search business and a set of
revenue- and profit-consuming businesses, including projects such as a self-driving car and wearable
‘Google glasses’ that would allow users a unique internet experience. Google executives hoped that Porat
could help the company balance the need for fiscal discipline in the core while investing prudently in new
product categories.
Under Porat’s watch, Google restructured, unveiling a new corporate parent, Alphabet, that would act
as an umbrella for all of Google’s varied businesses, from Android to the X lab, home of many ‘moonshot’
products. Each unit of Alphabet would report its own financial performance, which pleased investors
hungry for more transparency in the company’s investment strategy. Investors drove up Google’s shares
another 4% on the day of the announcement.
Alphabet aimed to improve performance in another way: by separating business units that had different
strategic imperatives, Alphabet hoped to create strategic ambidexterity across business units. Mature
businesses, such as Search and YouTube, would need to focus on current business performance and had
to be managed by a different set of rules than the ‘big bets’ about which Page spoke. Revenues and costs
mattered in the core, but the logic of potential and investment would determine which of the big bets paid
off in future growth.
In the six months following the restructure, Google (Alphabet) shares appreciated 44%, even though
the company introduced no new products of note, nor make any significant acquisitions. The company
created shareholder value by acquiring the human capital it needed to manage in the rapidly changing
world of technology, and because it aligned its organisation and processes with the emerging demands
of its strategy. Put simply, Google’s executive team focused on strategy implementation, which proved to
be just as valuable as strategy formulation.
Ruth Porat came to Google with a clear objective for change: help Google, now Alphabet, control costs
in a world where search became a mature business and to provide greater transparency to investors. The
way she executed on those goals, at least in the early stages, centred around the firm’s accounting and
financial reporting systems — the essence of measurable performance in any organisation. With clear
budget targets and rules for managing the different business units that make up Alphabet, Porat and
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other executives could hold individual managers accountable for business performance. Finally, Google
had always rewarded high performers, and Porat’s own compensation package proved that Alphabet
would continue to reward those who executed well.
Strategy: Google’s original strategy focused on creating software to facilitate internet searches, and
moved into related applications such as Google Maps and Gmail. Google’s strategy shifted over time to
include hardware as well as software with investments in activities and products such as a self-driving
vehicle.
Structure: With the formation of Alphabet, a holding company, Google moved from a functional structure
to one that created separate business units that were focused on particular technologies or product
markets. The restructuring offered better transparency about operating performance, but it also increased
focus on the demands of each market.
Systems: Part of Google’s logic in bringing Ruth Porat in from Morgan Stanley lay in her knowledge
about how to create and implement sophisticated financial control systems.
Staffing: Ruth Porat represented a very high-profile outside hire for Google. She lacked knowledge in
the technology sector, but she brought a unique set of valuable skills that Google needed to continue to
grow profitably.
Skills: Google considers itself primarily a software company, and if you want to get hired you’d better
have outstanding software engineering skills. In fact, Google screens 20 000 software engineers each year
through a software-programming tournament called Google Code Jam. Software engineers compete with
each other in a timed software-coding tournament, and the top 50 get job offers at Google.
Style: Founder Larry Page is on record as saying that he looked forward to learning from a direct
report, demonstrating a responsive style to staff and encouraging change. Page also speaks of ‘big bets’,
demonstrating an innovative mindset.
Shared values: With the two distinct types of business units Google operates, it became necessary
to create separate business units so as to be able to maintain shared values within each unit and avoid
conflict between revenue-producing established units and ambitious speculative technology units.
Source: Adapted from JH Dyer, P Godfrey, R Jensen & D Bryce, 2017, Strategic Management: Concepts and Cases, 2nd
edition, John Wiley and Sons Inc.
QUESTION 6.1
Earlier modules have analysed Wesfarmers’ strategy to take its Bunnings hardware and homeware
business into the UK market by acquiring the established Homebase business in the UK. As
earlier modules have outlined, the strategy appeared sound, but the strategy implementation was
a failure.
Re-read appendix B at the end of the study guide, then using the case facts to support your
response, use the 7-S framework to analyse why Wesfarmers were unsuccessful in entering the
UK market.
The following sections provide greater detail about three of the 7-S elements that need to be aligned to
the strategy if an organisation is to achieve strategy implementation success. These three elements that are
those most associated with allowing the organisation to become operationally effective: structure, systems
and staff.
STRUCTURE
Organisational structure, also known as organisational design, is critical for effective strategy implemen-
tation. It is a broad concept that considers what it means to organise. It explains the relationships and
configurations of these which allow the organisation to operate, that is, create value for customers and as
a result create value for the organisation’s owners and other stakeholders. It is also the means by which a
balance can be achieved between stability and the need for change.
Organisational design aims to create an organisational structure that supports the strategic goals that
have already been developed. The structure comprises the methods that an organisation uses to divide
and coordinate its labour into distinct tasks and positions, setting out levels and roles, responsibilities and
reporting lines.
Organisational processes and relationships connect and coordinate managers and employees both within
and across units or functional areas. Organisational design should be appropriate to the challenges and
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operational requirements confronting the organisation. As a means of regulating behaviour to achieve a
common purpose, an appropriate organisational design is critical for effective strategy implementation.
In short, organisational design provides the means by which strategy is orchestrated and delivered
throughout the organisation.
The following subsections explain the basic components of organisational structure and how various
drivers may influence organisational design choices.
Components of Structure
The three main components of organisational structures are as follows.
1. Complexity — the degree of differentiation, horizontally and vertically between jobs and units.
Horizontal differentiation relates to how much variation there is between units and between employees
at the same level of the organisation. High degrees of horizontal differentiation are often associated
with relatively flat hierarchies in organisations, in which managers are responsible for larger numbers
of employees undertaking a wide variety of tasks and hence employees often have a degree of autonomy
in their work. Vertical differentiation relates to how many levels there are in the organisational hierarchy
and thus relates to how communication and control occurs between levels.
2. Formalisation — the degree to which jobs in an organisation are standardised and specified through
the use of written job descriptions, policies and procedures. The more formalised an organisation is
generally the more consistent and predictable behaviour will be across the organisation. Formalisation,
however, comes at the expense of flexibility and may deter innovation. Over-dependence on rules
and procedures can decrease employee engagement and also hinder their ability to respond to unique
customer needs.
3. Centralisation — the degree to which authority to make decisions is concentrated in one or a few roles
or positions in head office or one country as opposed to when it is decentralised and local managers
have the authority to make decisions about their part of the organisation, including how it should operate
strategically. A decentralised structure can also empower employees to make decisions quickly and
while closely involved in the problem that needs to be solved. Centralisation on the other hand can
improve coordination and consistency throughout the organisation. The extent of centralisation versus
decentralisation is a balancing act between coordination, control and consistency and speed, flexibility
and responsiveness.
In practice, organisations usually adapt a hybrid mix of these structural components to suit their
particular circumstances, as determined by the particular products and services they offer and the
characteristics of their industry and environment.
Drivers of Structure
Organisational structure should be considered one of the tools for the implementation of strategy. In simple
terms, an organisation should establish a structure that enables operational tasks to be performed in the
simplest fashion, without creating undue problems and complexity. The primary driver in choosing a
structure should be an organisation’s purpose or mission. Some examples include the following.
• Strategy — if an organisation wants to respond to the local markets in which it operates, it may adopt a
decentralised structure to achieve greater flexibility.
• Environment — a stable environment accommodates a more rigid and routine structure, while a changing
and uncertain environment requires a more flexible and adaptable structure.
• Technology — mass production technologies generally call for taller and more centralised structures
while digital technologies often result in flatter structures.
• Size — when an organisation reaches a certain size it is forced to decentralise, as exercising control from
the top becomes too difficult.
• People and culture — highly skilled and independent professionals usually demand a decentralised
structure and autonomy.
In summary, the choice of structure, how the organisation is designed, must reflect the strategic
challenges that an organisation faces in relation to the degree of change and uncertainty in its environment,
the optimal degree of control, and the organisation’s knowledge requirements. For instance, in response to
globalisation and developments in technology, organisations may restructure and downsize. They may aim
to break down functional and middle management bureaucracies and create flatter, decentralised structures.
These strategic changes are designed to create new organisational forms that are lean, flat, responsive
and innovative.
Example 6.2 describes why The Big Issue social venture has adopted a centralised structure.
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EXAMPLE 6.2
The Big Issue

The Big Issue was first published in the United Kingdom in 1991. The street magazine, based on a similar
social enterprise — Street News — operating in New York, is intended to provide people who are homeless,
at risk of becoming homeless or otherwise marginalised with an opportunity to earn an income by selling
copies of the magazine, and thus improve their confidence, self-reliance and socioeconomic situation.
The success of the magazine — and its principle of ‘a hand up, not a hand out’ — in the UK led to its
expansion into multiple international markets, including Australia in 1996. The magazine industry at the
time was stable (and growth was possible by moving into niche markets) and The Big Issue would have
no direct competitors. Fittingly for a magazine that would be sold on the streets, the first Australian edition
was launched from the steps of Melbourne’s Flinders Street Station.
Vendors buy copies of the magazine for AU$4.50 and sell them for AU$9. They keep the AU$4.50
profit. In 24 years of operation in Australia, circulation has increased from 7000 copies to 31 000 copies
per edition and total sales of the magazine have exceeded 12 million copies, generating a total of AU$30
million for its vendors. Its most successful vendors make an amount close to the minimum wage.
However, things weren’t always so bright. In 2004, less than 10 years after its Australian launch, The Big
Issue found itself technically insolvent, owing more than AU$250 000 to a business owned by its previous
chair and unable to pay its staff.
The organisation appointed ANZ Bank senior executive Sonya Clancy in 2004 to try to rescue The Big
Issue. Clancy set about addressing the problems quickly to ensure the enterprise’s future. Not only did she
succeed, but she went on to lead the organisation to add five further social enterprises to its operation:
The Women’s Subscription Enterprise, The Big Issue Classroom, the Community Street Soccer Program,
the Homes for Homes affordable and social housing program and The Big Idea.
Clancy’s first steps were to negotiate a grace period with creditors and appoint a new CEO to restructure
the enterprise. Clancy introduced fiscal discipline and required executives to prepare reports for the board,
and board members to actually read them ahead of meetings, as part of formalising and centralising
decision making.
In addition to the restructure, new CEO Steven Persson established a code of conduct and a compulsory
training program for vendors. This was intended to combat occasional instances of poor behaviour that
threatened the general goodwill the public held towards The Big Issue.
To improve the appeal of the magazine, Clancy and Persson appointed award-winning journalist Alan
Attwood as editor. Attwood spent the next 10 years focused on content quality. In 2016, former New
Idea deputy editor Amy Hetherington took over as editor, expanding the content scope and updating the
magazine’s design. The magazine is also now sold in digital format online — for the same AU$9 as the
print copy.
The Big Issue has stable annual turnover of around AU$5.5 million and The Big Issue magazine is
believed to generate a social return of AU$5.50 for every AU$1 invested, with most of the benefit arising
from vendors’ reduced demand for health, social and justice services.
Consider why Sonya Clancy would adopt a centralised structure.
• Strategy. Sonya Clancy needed to apply tight fiscal restraint to stem financial losses which required a
centralised structure of decision making to keep a close monitoring of expenses.
• Environment. The Big Issue is in a stable environment as there were no direct competitors, the magazine
industry is relatively stable and operates in a niche market
• Technology. The Big Issue magazine requires mass production and sophisticated technology due to
printing 31 000 magazines every fortnight and effectively distributing to 7000 vendors. Technology also
increases economies of scale.
• Size. The number of vendors could dictate a more decentralised structure; however, due to the nature of
the vendors (regulation of behaviour, low-skilled) and the type of product means that a more centralised
structure would be appropriate.
• People and culture. The vendors are homeless and most would be unskilled in the production and
distribution of magazines so they would require more management, training and direction.
Source: Information from K Walker, 2020, ‘How NFP The Big Issue restored financial sustainability’, Company
Director Magazine, https://aicd.company directors.com.au/membership/company-director-magazine/2020-back-
editions/february/how-nfp-the-big-issue-restored-financial-sustainability; J Gerrard, 2017, ‘This is what the lives of Big
Issue sellers tell us about working and being homeless’, 22 September, The Conversation, https://theconversation.com/this-
is-what-the-lives-of-big-issue-sellers-tell-us-about-working-and-being-homeless-83965; The Big Issue, 2020, ‘About The
Big Issue’, www.thebigissue.org.au/about-the-big-issue/about/; The Big Issue Australia Facebook page.
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QUESTION 6.2
In the mid-1990s, most of the world’s large oil companies were structured around a corporate head
office that coordinated and controlled a few major divisions. This divisional structure typically
comprised: upstream (exploration and production), downstream (refining and marketing), and
petrochemicals. BP announced its intention to transition from this traditional structure to one
inspired by the technology companies of Silicon Valley. Instead of looking at the other oil majors
as its competitors it looked at the return on average capital employed of companies like Microsoft
and adopted that as a benchmark.
BP dismantled its divisions and created about 150 business units each headed by a business unit
leader who reported directly to the corporate centre. The 150 business units were organised into
15 ‘peer groups’ — networks of similar businesses that could share knowledge, cooperate on
matters of common interest, and challenge one another. Processes were adopted that foster
learning and tie people’s jobs to creating value and fostered the creation of an abundance of teams
and informal networks or communities in which people eagerly share knowledge.
In this new structure, business unit heads were made responsible for operational perfor-
mance and senior management were made responsible for strategic direction and managing
external relations — especially with governments.
The approach to structuring BP was based on the following principles.
• Individual business unit leaders (such as refinery plant managers) are given broad latitude for
running the business and direct responsibility for delivering performance.
• The corporate organisation provides support and assistance to the business units (such as
individual refineries) through a variety of functions, networks, and peer groups.
• BP relies upon individual performance contracts to motivate people.
Ten years later, a new BP CEO announced a major restructure to achieve a radical change in
culture to address a lack of consistency and a problem with over-complexity that had led to a failure
to successfully implement the company’s strategy. The restructure would include streamlining the
business into two main units: exploration and production (upstream), and refining and marketing
(downstream). An alternative energy division was also created to focus on low-carbon growth
options and other strategies for BP’s future. One analyst described the change as ‘copying Exxon’
and said it would keep things simple, and ensure unit managers have both responsibility and
accountability. Some centralised functions were to be shifted to the main business units. The CEO
said managers would consult more with frontline staff and that all staff and managers would be
held accountable for aspects of the business under their control.
In early 2020, a new BP CEO announced a restructure that would combine the upstream and
downstream units. He said the old structure had served the company well, but that the business
needed to become more integrated and focused to meet changing stakeholder expectations,
including the transition to a low-carbon economy. Teams were put in place that were structured
around its production: exploration, production, distribution, and functional branches were placed in
head office to support each team. The restructure announcement was accompanied by a statement
committing to achieving net zero emissions by 2050.
With reference to the relevant components of organisational structure and using the table below
as a framework, evaluate the suitability of each structural change given BP’s strategic goals at the
time of the change.
Component of organisational
Strategic goals at the time structure Suitability of the change
Increase return on average Complexity: complex

capital employed Formalisation: not formal
Centralisation: decentralised
Focus on new energies and Complexity: not complex
future strategies Formalisation: formal
Centralisation: decentralised
Focus on meeting changing Complexity: complex
stakeholder expectations Formalisation: formal
Centralisation: centralised
Source: Adapted from R Grant, 2019, Contemporary Strategy Analysis, 10th edition, John Wiley & Sons,
Chichester, United Kingdom.; T Macalister, 2007, ‘Hayward outlines restructuring to BP staff’, The Guardian,
www.theguardian.com/business/2007/oct/11/2; M Farmer, 2020, ‘BP sets out new purpose and 2050 net-zero emissions
plan’, 12 February, Offshore Technology, www.offshore-technology.com/news/bp-net-zero-plan.
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Principles of Organisational Designs
Two key requirements in shaping the design of an organisation are to determine the optimal level of
centralisation or decentralisation and the degree to which an organisation is mechanistic or organic
(discussed later in this section) in its design. Organisations will not be purely one or the other
(i.e. completely centralised and mechanistic or completely decentralised and organic) but in practice
will contain elements of both dimensions. From a strategy implementation perspective, it is important
to understand which of these design principles is more prevalent, how appropriate the design is for the
organisation’s environment, and the implications of the design for the achievement of strategy.
Centralisation Versus Decentralisation
A centralised organisation has many levels of management, vests decision-making authority at the top, has
narrow spans of control and is consequently hierarchical. A decentralised organisation, on the other hand,
has fewer levels of management, devolves decision-making authority to junior and middle levels, has wide
spans of control and, therefore, takes on a flatter shape.
Strategic leaders must determine the degree to which they should centralise or decentralise their
organisation’s structure. In recent years, organisations have shifted towards greater decentralisation and
more employee empowerment, and away from authoritarian and centralised structures. This shift is based
on the view that authority should be pushed down to where decisions are made, making the organisation
more responsive to its marketplace by empowering and motivating its employees.
Trends towards centralisation or decentralisation are cyclical and may change with economic cycles.
For example, if a business is in a phase of decline, organisations often centralise control to manage costs
and supervise employees more closely.
In recent years, many organisations have increasingly outsourced certain activities. This is consistent
with the decentralisation concept. The core motivation for outsourcing is that the outside contractor can
perform services better or more cost-effectively than the organisation. A recent development in this process
is the development of cloud services that allow organisations to outsource IT infrastructure and related
services to specialist providers. Outsourcing thus allows the organisation to concentrate its energies and
resources on its key value chain activities where it needs strategic control to build capabilities and achieve
competitive advantage. Critics contend that extensive outsourcing involves considerable risks. It can hollow
out a company, leaving it at the mercy of outside suppliers in relation to quality and control issues, and
depriving it of the skills and capabilities needed to shape its own destiny.
Advocates contend that outsourcing decreases internal bureaucracies and renders the organisational
flatter, less hierarchy and gives it more flexibility to respond to customers’ changing demands. The athletic
apparel company, Nike, is a case study in outsourcing. Nike keeps its design, marketing and distribution
in-house while outsourcing virtually all production of its shoes and sporting apparel. Another example is
the automobile company, Toyota, which uses a network of approximately 200 different suppliers of parts
and expertise. The flexibility that comes from outsourcing also allows organisations to access higher levels
of knowledge and expertise.
Although outsourcing presents opportunities, it also presents potential sources of significant risk that
need to be carefully managed. For example, Nike experienced a PR disaster in the 1990s when its then use
of sweatshop labour in its supply chain became headline news around the world.
Mechanistic Versus Organic Systems
An organisation’s strategy, design, structure and context must match. The organisation’s environment is a
major determinant of its design. Research in this area (Mintzberg & Quinn 1996) identifies two contrasting
organisational patterns: mechanistic and organic.
In mechanistic systems:
• people are viewed as a resource to be managed as parts of a machine
• there are many rules and regulations
• motivation techniques tend to be extrinsic (e.g. related to pay)
• the management style is authoritarian
• there is high centralisation and formalisation
• power is exercised through formal authority and influence.
In organic systems, on the other hand:
• people are viewed as unique and the most important resource
• an organisation’s culture is highly valued and is supported with the use of guidelines and symbols (rather
than rules and regulations)
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• motivation techniques tend to be intrinsic (related to the nature of the work itself)
• the management style is more participative
• the structure is decentralised
• there is greater proactivity and tolerance of ambiguity
• power is exercised through expertise.
The underlying organising principle is different for each pattern. Mechanistic systems emphasise
hierarchical control while organic systems focus on adaptive self-regulation.
This research has been revisited by Kessler and Nixon et al. (2016). These authors note that the employee
experience is more important than previously suggested and should more heavily impact organisational
design decisions.
Successful firms in stable environments generally use mechanistic designs. Successful firms in changing
environments tend to have more organic characteristics. Banks, for example, tend to have more mechanistic
structures in order to follow rules and regulations. By contrast, advertising agencies tend to feature organic
structures that facilitate creativity and innovation — key requirements for success in the advertising
industry.
Technology insight 6.1 examines how digital platform companies exhibit aspects of centralisation and
extreme decentralisation in the way they are structured and operate.
Organisational Design in Digital Platform Companies

Every business needs to make and implement decisions about the extent of centralisation and decen-
tralisation of the organisation and to adapt the balance over time as circumstances change. Digital
platform businesses, such as eBay, Uber and Airbnb, which provide a platform that connects suppliers
and customers who then transact via the platform, present an interesting combination of centralisation
versus decentralisation.
Platform businesses can only succeed if they engender trust between their users and a key way to do
this is to create a set of strict standards governing how all parties must act. Rideshare platform Uber,
for example, has standardised service levels across its markets and will only allow drivers who adhere to
these standards. Other than whether to accept a fare or not, Uber drivers have very little input into how the
service is provided. Uber’s app collects data on service performance and uses this as a way to monitor
and enforce consistency. In this way Uber achieves extreme levels of decentralisation in a physical sense
while exercising tight control often associated with a centralised model. Later in the module, we discuss
organic versus mechanistic models of organisational design. Uber’s system in relation to its rideshare
providers is highly mechanistic.
Accommodation share platform Airbnb, by contrast, allows its providers reasonable freedom to
establish their own quality of service and pricing. It uses a review system whereby providers and customers
review each other, thus the system self regulates the quality of service. To encourage higher quality, Airbnb
promotes those providers who offer higher quality, thus providing an incentive to all to lift the quality of
their offering.
QUESTION 6.3
LJ Hooker is one of the foremost names in the Australian real estate industry with a high level of
market recognition. Founded in 1928, the company expanded steadily to become Australia’s largest
agency in the 1950s and a truly national network of agents by the 1960s. Over time the company
expanded into related areas, including commercial and residential development. In the 2000s, the
company moved into mortgage brokerage under the business name ‘LJ Hooker Home Loans’ using
a network of mobile brokers.
A few years ago, LJ Hooker sold the home loans business. It is now controlled by RAMS Home
Loans founder John Kinghorn and former RAMS executive Paul O’Regan, who have embarked on
a new ‘LJ Hooker Home Loans’ strategy. Part of the strategy is to expand sufficiently to become a
major player in the home loan market. It is pursuing this through a franchise model that parallels
the structure of the LJ Hooker real estate business.The group aims to eventually have up to 65
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franchisees across the country, each operating one or more LJ Hooker Home Loans stores that
will service specific geographic markets. Each franchisee will be expected to recruit multiple loan
writers.The franchise network will be a mix of new franchisees and existing brokers who are
required to transition to the new business model.
O’Regan differentiates the LJ Hooker Home Loans model from traditional mortgage broking.
Traditional mortgage brokers connect borrowers with a suitable lender drawn from a large pool
of banks, building societies and other loan providers in return for an upfront and/or trailing
commission, whereas LJ Hooker has formed strategic partnerships with Macquarie, Advantedge
and Pepper Money to fund all of the loans. To maximise leverage of the popular and respected LJ
Hooker brand, all loans will be offered as ‘LJ Hooker Home Loans’.
The business is also seeking to benefit from the LJ Hooker real estate agency network’s potential
to provide a strong flow of customer leads. LJ Hooker real estate agents and the LJ Hooker real
estate website direct customers seeking home loans to the LJ Hooker Home Loans business. The
company has also formed a strategic partnership with real estate data and analytics specialist
CoreLogic to generate further leads from outside the agency network. This ‘digital lead generation’
translates industry data into specific leads that loan writers can choose to investigate.
The company is seeking entrepreneurial franchisees who are motivated to aggressively grow the
business. To ensure franchise owners and loan writers are focused purely on pursuing leads and
converting them to loans, all back office processing has been outsourced offshore.
O’Regan said ‘we’ve got a good formula… ensuring the LJ Hooker Home Loans side of the
business is a “like-for-like” model with the realestate franchise business.’Each franchisee’s loan
book is ‘equivalent to a real estate business’ property management book in terms ofrecurring
income and asset value,’ he said.
Using case facts, evaluate whether the structure of LJ Hooker Home Loans is an organic or a
mechanistic system.
Case fact Mechanistic or organic Evaluation
Franchise offering
Branded LJ Hooker Home Loan

stores
Only three funders
Each franchisee having multiple

loan writers
Entrepreneurs to grow the

business
Processing all of its business

offshore
Strategic partnership with

CoreLogic
Using digital lead generation
Source: J Mitchell, 2016, ‘Kinghorn returns to mortgages with franchise model’, The Adviser, 6 December,
www.theadviser.com.au/breaking-news/35471-kinghorn-returns-to-mortgages-with-franchise-model; LJ Hooker Home
Loans, www.ljhookerhomeloans.com.au; LJ Hooker, www.ljhooker.com.au; LJ Hooker Home Loans 2016, Exclusive
dealing notification, 8 July, www.accc.gov.au/public-registers/authorisations-and-notifications-registers/exclusive-dealing-
notifications-register/lj-hooker-home-loans-pty-ltd-notification-n99186; MPA 2016, ‘LJ Hooker Home Loans’ new business
model’, 19 December, Mortgage Professional Australia, www.mpamagazine.com.au/sections/business-strategy/lj-hooker-
home-loans-new-business-model-228754.aspx.
SYSTEMS
The second 7-S component that we will discuss in detail concerns the key considerations for managing
systems and processes, particularly the flow of information through the organisation.
The management of information and knowledge provides an important foundation for both securing
and maintaining strategic capability. Companies that improve their IT systems will be able to increase
their competitive advantage and therefore their profit. Most large companies now see it as mandatory to
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use big data — the vast data sets generated by internet-connected devices — to analyse customers and
build market knowledge. Areas where companies can use big data include:
• leveraging customer information from all points of customer interaction
• reducing loyalty program drop-out rates
• increasing customer acquisition through improved targeted marketing communications
• adjusting prices dynamically based on supply and demand for certain products and services
• enhancing post-purchase services.
In addition to enhancing customer experiences and increasing sales, companies can use their technology
systems and business analytics to achieve:
• real-time inventory management control
• predictive maintenance optimisation of machinery and equipment
• increased service reliability, speed and quality
• improved advertising and marketing information in online media
• automated purchasing processes
• improved post-purchase services.
Information and knowledge management helps to provide distinctive or superior service and achieve
competitive advantage, whether for a service or product provider. The importance of information systems
at FedEx is illustrated in this extract:
Our networks reach more than 220 countries and territories, linking more than 99 per cent of the world’s
GDP. Connecting people with goods, services, ideas and technologies creates opportunities that fuel
innovation, energize businesses and lift communities to higher standards of living.
FedEx is a global leader in express distribution. FedEx provides real-time package tracking for each
shipment using one of the world’s largest computer and telecommunications networks. FedEx is continually
developing innovative technologies such as blockchain, computerised tracking systems and satellite
operations systems that allow delivery in any weather conditions. FedEx deals with huge amounts of data,
and employs sophisticated technology to allow for its efficient management. (FedEx 2020)
To effectively monitor strategy implementation, managers need timely feedback on implementation

initiatives so they can steer these initiatives to a successful conclusion. Without this timely feedback, there
is a danger that early initiatives will fail to produce the expected results, or that the implementation process
will start to drift. Such feedback allows managers to detect problems early and adjust either the strategy
or its method of implementation.
Timely feedback through an organisation’s management systems helps an organisation’s management to
understand whether their strategies are having the desired result and plan for contingencies if needed. An
organisation that knows immediately how customers view its new product or service can quickly address
issues and modify the product or service to increase sell-through opportunities. It is not enough just to
store the large amounts of structured and unstructured data. Organisations need to manage the speed of
data collection, variety of data formats and variability of data points before they can accurately monitor
project implementations and confidently make timely decisions about their strategies.
Technology insight 6.2 describes the consequences for supermarket chain Woolworths when it failed to
align and adequately prepare systems issues ahead of implementation of a project.
Systems Breakdown
Woolworths is one of Australia’s leading supermarket chains. It had long relied on a computerised system
to record individual store data and generate a weekly profit-and-loss report for each individual store
manager, along with providing numerous other reports and data. As the technology was 30 years old,
the company sought to transition to SAP merchandising systems — which would provide much greater
capabilities, flexibility and position the company for its future information needs.
Unfortunately the transition became a case study in failed implementation.
Many of Woolworths’ business processes were not formally documented. This meant there was no
source of information to consult about what the new system needed to do. Because the system was
30 years old, many who had worked on the system had left the company. This problem was exacerbated
by the six-year process that ended up being required to make the transition — many more people left
during that time, leading to even more loss of organisational knowledge.
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The cost of the deficiencies in the organisation’s ability to capture organisational knowledge and
assemble the necessary information to support the new technology implementation took two forms:
AU$200 million in transition costs, and an 18-month period during which individual store managers were
unable to access their weekly profit-and-loss reports. It is impossible to know how the loss of access to
the information in those reports affected other aspects of performance downstream as managers worked
without basic information.
The principles that can be taken from Woolworths’ experience include that systems, staff and skills are
all interrelated, and that implementation cannot be successful if it begins without the necessary planning,
information and resources in place to support it.
Example 6.3 examines Zara’s use of information systems.
EXAMPLE 6.3
Zara’s Systems and Implementation Prowess

Fashion label Zara’s success can be attributed to its ability to collect timely information about fashion
trends, customers’ buying preferences and inventory through its management information system.
Zara’s use of systems to achieve their strategy of sustainable provider of fast fashion across international
markets can be analysed with reference to appendix A in table 6.2 as follows.
TABLE 6.2 Zara systems analysis
Case fact Justification with rationale
Making new designs available to the stores where Increasing opportunities for customers to visit the
the demand for them exists in no longer than store and keeps merchandise turning over; also
15 days creates a desired effect of want
Unique ability to manage its extensive network of Reduces costs and therefore keeps the organisation
designers and global supply chain profitable
Collect customer insights on daily basis through This provides customer insights on product
the use of instore scanning technologies preferences and therefore can produce fashion that
customers want at the price they want.
Analyse trends Provides information to designers which enables

merchandise to be produced that customers want
Keep track of inventory Avoid build-up or demand lags which then creates
shelf space for more designs to come in and creates
more opportunities for customers to visit
Collation of information Ability to collect and report the information back

in a timely manner enables designers to capitalise
on trends
QUESTION 6.4
Using case facts to support your response, examine how Zara has used their systems to:
(a) provide superior customer service
(b) achieve competitive advantage.
Example 6.3 highlights the importance of information systems. There are two key considerations relating
to IT systems. First, improved systems can lead to efficiencies and other quantitative benefits to increase
competitive advantage and profit. Second, systems also provide feedback on how well strategy initiatives
are being achieved. Big data and business analytics provide important information to managers. This can
help them track strategy implementation and guide strategic decision making, as noted in the discussion
of data analytics and big data in earlier modules.
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STAFF
The third 7-S component to be discussed in detail concerns the key considerations for managing teams
during change. Change management is an important part of leadership responsibilities, especially in how
it relates to organisational culture, but specific initiatives to achieve change are often implemented at
management level. Below we will talk about the staff aspect of the 7-S framework, including culture,
but we will talk in more detail about the role of culture in change management in section 6.3.
Managing Teams
In recent times, increasing competition and complexity in the business environment have led to a greater
use of self-organising teams in organisations. Factors such as the rapid pace of change and innovation
in the business environment, and the increasing application of technology, have made decision making
more complex. Teams are formed to better manage and cope with these conditions, and to provide a more
supportive and social environment for individuals.
The ability to work and cooperate in teams is an important managerial competency. Organisations need
individuals who can manage teams and help others to develop to their full potential during the process of
implementing strategy. As workers become more highly skilled and self-directed, managers must become
more participative in their approach. This means managers need to involve others in decision making
and issues that affect them, encouraging and empowering the team, providing recognition for effective
performance, building team spirit and morale, and creating a common vision and purpose. Taken together,
these skills can help team members to develop a sense of responsibility for the team’s work and respect
for the diversity of team members.
Managing Culture
Culture is generally described as the norms that evolve in working groups, the dominant values espoused
by an organisation (e.g. product quality and customer service) or the philosophy that guides everyday
decision making.
Culture can be viewed as a property of a given set of people who have common experiences which has
led to a shared view. This shared view is eventually taken for granted. Culture in this sense is a learnt
product of group experience. Schein (1985, p. 9) defines culture as:
a pattern of shared basic assumptions that was learned by the group as it solved its problems of external
adaptation and internal integration, that has worked well enough to be considered valid and, therefore, to
be taught to new members as the correct way to perceive, think and feel in relation to those problems.
In changing environments, the capacity to implement new strategies and operating practices is necessary
for an organisation to achieve superior performance and a sustainable competitive advantage. This requires
a culture that is adaptive to both organisational and environmental change and supportive of organisational
strategy. Culture is a pervasive and implicit property of organisations, and manifests in the taken-for-
granted beliefs and ways of doing things, and in the values, attitudes and language of managers and
employees. A culture of loyalty, trust and respect will certainly enable a previously inflexible workforce to
adapt and change more readily. It will be much more difficult to make significant strategic changes when
there is an entrenched culture that is resistant to change.
An organisation’s strategic capability is embedded in its culture. That is, an organisation’s robust and
inimitable strategic capabilities are driven by shared values and ways of operating that have become routine
and therefore part of an organisation’s culture. This will affect its ability to develop new ways of thinking
and doing things. Managers may be trapped in their existing culture, unable to respond to major changes
in the business environment that require ways of thinking and operating that differ from the current norms
and routines. As a result, the established culture becomes a source of resistance that only allows gradual
change and leads to strategic drift or inertia.
Developing a Strategy-Supportive Culture
As highlighted in the 7-S framework, having a good fit between an organisation’s strategy and its culture
is a prerequisite to strategy implementation. Employee values and attitudes produce the behaviour and
performance required to carry out an organisation’s strategy. It is important to diagnose the parts of the
present culture that either support the strategy or are detrimental to it. Those responsible for implementing
the strategy must change those aspects of the culture that hinder or prevent effective execution.
It is more difficult to change the ‘deeper elements of culture (values and basic assumptions)’ than its
surface elements ‘such as norms and artefacts’ (Waddell et al. 2016, p. 342). Managers need to convince
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employees that the implementation is not cosmetic or superficial. In this respect, inclusive communication
is important as a means of gaining employee involvement and buy-in to the implementation process.
Managers should strive for a results-oriented culture that inspires people to do their best and is conducive
to superior strategy execution.
Two hallmarks or indicators of an effective culture are:
1. managers who are committed to enduring business principles and stakeholders rather than to specific
operating practices
2. employees who are receptive to a level of risk-taking, innovation and change that is appropriate to the
organisation and its industry.
An example of efforts to alter organisational culture is Pfizer, the global pharmaceutical company, in
its 2011 annual review. Pfizer’s review focused on efforts to alter organisational culture to support the
implementation of a new company strategy. Pfizer called employees ‘co-workers’ and described colleagues
as ‘owners of the business’, a cultural alteration that allowed management to ‘advocate for and drive long-
term, well-aligned strategies that advanced Pfizer’s mission’ (Pfizer 2011).
Because culture can constrain strategy implementation, managers must analyse the organisation’s
culture, manage within its boundaries, and be appreciative and realistic about the extent to which the
culture can be changed. Managing the following people and cultural issues are important ways of building
a strategy-supportive culture as part of the strategy implementation process.
• Manage inter-group conflicts within the organisation. Conflicts between groups can prevent the
development of a shared understanding, which is important for facilitating the implementation process.
• Ensure effective communication. Everyone within the organisation needs to understand the strategy and
how it will benefit the organisation.
• Achieve consensus on change. An organisation needs a common language and shared assumptions about
how it will operate to succeed in implementing its strategy.
• Achieve consensus on criteria for measuring results. If members hold divergent views about how to
evaluate performance, they cannot implement strategy in a coordinated manner. Metrics should be
established as part of the implementation plan and should be clearly linked to strategic goals.
• Undertake culture maintenance. An organisation’s culture, once established, needs to be maintained
and at times changed. Organisational culture can integrate people so that they work together in the
implementation process. Cultural change may be targeted as part of preparing to implement strategy,
but it is not a once-only task. Managers must ensure cultural changes become embedded, but also that
further change takes place as necessary.
Additional steps for aligning culture with strategy include role modelling and coaching. Managers must
realise that their visible behaviour is an important mechanism for communicating to employees the new
assumptions, values and practices that are required.
Selecting people for key positions is another important step in the management of culture. Implementers
of strategy must determine the kind of core management team they need to execute the strategy successfully
and then find the right people to fill each role. Cultural change can be accelerated if managers recruit
and select new members according to the criteria that fit the organisation’s strategic direction and
new culture.
Fostering a strategy-supportive culture requires the encouragement of a culture of innovation and
performance that employees can thrive in. A high-performance culture can make champions out of people
who excel.
Waddell et al. (2016) provide the following advice if attempting to change a culture in a real-life practice
setting in support of the strategy.
1. Formulate a clear strategic vision.
2. Display top management commitment.
3. Model change culture at the highest levels of the organisation through executives’ own actions.
4. Modify the organisation’s structure, human resource systems, information and control and management
styles to support organisational cultural change.
5. Select and socialise new employees and terminate deviate employees.
6. Encourage ethical and legal behaviours and sensitivities.
Organisations must develop the capacity to implement new strategies and organisational practices
in a changing and complex environment. Example 6.4 shows the importance of a positive alignment
between culture and strategy at the Bendigo and Adelaide Bank Group. Its focus on making banking easy
for customers is supported by leadership, empowering staff, mutual support and teamwork that shares
knowledge, values diversity and emphasises openness to change.
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EXAMPLE 6.4
Culture and Strategy Aligned — Bendigo and Adelaide Bank Group

The Bendigo and Adelaide Bank Group was formed by the combination of more than 80 organisations,
some of them dating back to the 1850s. Bringing together so many organisations under a single brand
and implementing a consistent culture represents a major challenge, but it is one the Group has met well.
Today, the Group is Australia’s fifth largest retail bank, with more than 7000 staff working to meet the needs
of more than 1.7 million customers.
The Group’s vision is to be ‘Australia’s bank of choice’. Its strategy involves reducing complexity to
make it easier for customers to do business with the bank, investing in capabilities to future-proof the
business and telling the Group’s story to engage with more Australians.
Addressing the Group’s 2019 annual general meeting, CEO Marnie Baker said she believes the bank’s
culture is what sets it apart. She highlighted what she described as a ‘deep sense of purpose and a
strong set of values’. These values include teamwork, integrity, performance, engagement, leadership
and passion.
In terms of teamwork, for example, the Group says, ‘We work together, encourage diversity and respect
the unique contribution of each individual’. Key teamwork commitments include sharing information,
collaborating and being open to change. In terms of leadership, the Group encourages all to show initiative,
be accountable and empower others. Leaders are expected to encourage two-way communication and
support and guide each other.
Baker subscribes to the idea that everyone should benefit from a financial transaction — the investor,
the borrower, the shareholders and society itself.
Bendigo and Adelaide Bank Group consistently rank among Australia’s most trusted brands and as the
top-rated company for customer experience.
Bendigo Bank evidently has a strategy-supportive culture.
• Staff work together. This increases work skills, cooperation and increases in employee morale.
• Encourage diversity. This creates open-mindedness and opportunities to learn and engage with
each other.
• Respect the unique contribution of each individual. This improves employee relationships and helps
engage people with the organisation.
• Key teamwork commitments. This includes sharing information.
• Being open to change. This demonstrates an encouragement of innovation which creates organisational
growth opportunities.
• Leaders are expected to encourage two-way communication and support and guide each other. This
encourages staff to be involved. This also demonstrates inclusive communication that makes staff feel
supported and hence more satisfied.
Source: Adapted from Bendigo and Adelaide Bank, 2020, ‘About us’, www.bendigoadelaide.com.au/about_us; C Pedler,
2019, ‘Bendigo Bank stays confident in its strategy after challenging year for banks’, Bendigo Advertiser, 29 October, www.
bendigoadvertiser.com.au/story/6464297/bendigo-bank-stays-confident-in-its-strategy-after-challenging-year-for-banks.
QUESTION 6.5
Australia has long been a powerful force in international competitive swimming, with Olympic
Games medal tallies regularly exceeding expectations. Australia commits substantial funding to
its swim program and its highest potential swimmers. The team’s disappointing 2012 London
Olympics performance was met with heavy criticism and a review was put in place to analyse what
went wrong.
The review found the team exhibited a toxic culture that involved numerous actions at odds
with competitive success — bullying, an obsession with social media, abusing prescription drugs,
ignoring curfews and misusing alcohol. While no one incident was seen as ‘truly grave’, added
together they constituted a substantial problem. During the Games, swimmers focused on their
own goals and objectives, unable to recognise the synergies that could ensue by working well with
each other as part of a team.
The report pointed to a lack of leadership as a big part of the problem. The issues were seen as so
obvious that they should have been met with a strong, unified response from coaches, staff and the
senior competing athletes. Instead, team cohesion and discipline were absent and individualism
prevailed. The review said, ‘the team dynamic became like a schoolyard clamour for attention
and influence’.
The review recommended steps be taken to ensure leaders saw leadership as a personal matter,
not just a functional one. In time, there was a clear-out of many of the members of the old
administration. Swimming Australia was advised to create an ethical framework to make clear what
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values the organisation and its members should adopt and exhibit. Other specific steps included
tighter regulations on swimmers’ behaviour, including restrictions on social media use.
At the 2016 Rio Olympics, the Australian swim team again fell well short of expectations. There
were reports the team had isolated itself from the rest of the Australian contingent at the Games,
but swimmers Mack Horton and Kyle Chalmers both said it was strictly a performance issue, not a
team culture one.
Analyse why the ‘toxic culture’ of Swimming Australia impacted the team’s performance, using
case facts to support your analysis.
Source: Adapted from S Lane & S Spits, 2013, ‘Review slams “toxic” culture in swimming’, Sydney Morning
Herald, 19 February, www.smh.com.au/sport/swimming/review-slams-toxic-culture-in-swimming-20130219-2eoee.html;
W Smith, 2013, ‘Review slams Australian swimming’s toxic culture’, The Australian, 19 February, www.theaustralian.
com.au/sport/review-slams-australian-swimmings-toxic-culture/news-story/967f45d22641509afcb3760aedb626dd.
Managing Across Cultures

For international organisations, the task of managing culture to support strategy becomes more complex,
because a variety of national cultural contexts must be understood. Stakeholders from different parts of
the world have different attitudes, expectations and standards towards work, authority, equality, the way
business is conducted and how relationships are formed. International organisations must be sensitive to
the values and attitudes that prevail in the countries and societies where they operate. For this reason,
it is important to identify and understand the national and regional cultures in which an international
organisation operates.
follows.
KEY POINTS
strategy.
• The 7-S framework is a model for understanding what is required for successful implementation of
strategy.
• The 7-S framework examines systems, structure, strategy, style, staff, skills and shared values. It
emphasises the importance of organisational culture in the implementation of strategy and change.
• The 7-S framework can be used to align systems, structure, strategy, style, staff, skills and
shared values in order to maximise the prospects of successful organisational change and strategy
implementation.
strategy.
• Managers and leaders share responsibility for aligning the aspects of the 7-S framework to achieve
successful strategy implementation.
• The leaders and managers of an organisation can use the 7-S framework to guide an action plan
— the ‘before’ and ‘after’ states of each of the factors can be described.
• It is crucial to create a strategy-supportive culture.
6.3 CHANGE MANAGEMENT

Module 1 introduced how leaders and managers need to create an environment in which the organisation
is able to change as necessary to suit its strategy. This section examines how change management theory
can be used to achieve successful strategy implementation outcomes.
Change management is designed to ensure that an organisation and its people transition effectively
from the current state to future states, and in so doing support the realisation of business benefits as
articulated in the strategy. In the context of strategy, change management is about effectively leading
and managing individuals, teams and the organisation to successfully adopt the changes needed to achieve
required or desired business results.
Strategic initiatives, programs and projects are the most common vehicles for change, assisting an
organisation to move from its current state to its desired future position. These programs and projects may
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last for several years, working through phases of change to achieve the strategic goals. An organisation
may be on a ‘change journey’ for an extended period of time, adding to the challenges and reinforcing the
need for a formal change management approach.
Organisational change management may be required for different levels and stages of the strategy
process. For example, stakeholder engagement and communication are key at the vision-setting stage.
They help to build momentum within the organisation and guide thinking and decision making.
Organisational change activities occur parallel to, and are integrated with, the broader activities of the
project, program or initiative. These change activities cannot be performed independently or in isolation —
coordination is critical for success.
KEY COMPONENTS OF CHANGE MANAGEMENT

This section describes key components of implementing change (as shown in figure 6.3), which are
additional to the need for an adaptive culture discussed earlier. To achieve strategic goals requires the
successful implementation of the changes identified as necessary to reach those goals. The following
sections outline the general components of change and then examine some specific change management
models.
FIGURE 6.3 Key components of change
Communication
Business impact Change readiness Stakeholder

Change strategy
assessment assessment management
Change Strategy
A change strategy sets the tone and context for the whole change initiative. It involves up-front thinking
and analysis to ensure a consistent response throughout a project or program. A change strategy defines
the scope and nature of the change, develops a change vision or the case for change, and creates a plan
that identifies which organisational activities will be performed, when, and by which members of the team
or organisation.
Business Impact Assessment

The business impact assessment analyses the impact of the change on the organisation to determine where
the impact will be the heaviest. It informs the:
• next iteration of the change strategy and plan
• communication strategy and plan
• stakeholder management plan
• business case (if it has not already been signed off).
This assessment phase is very valuable because it often provides managers with new information that
had not been considered earlier.
Change Readiness Assessment

Change readiness assessments determine how prepared the organisation is to adopt the new ways of
working, in terms of processes, policies, structures and provision of new services. These assessments
inform risk assessments and project and launch plans, and also influence where managers need to spend
more or less of their time in order to make the strategy successful. Change readiness assessments identify
training requirements and assist with business transition planning.
Stakeholder Management
When using an organisational change management approach, stakeholder management is not an activity
that organically occurs during normal business activity. It is focused and planned, and its goal is to
identify affected stakeholders then make sure they understand the change, are aligned with the future
state and participate appropriately during the strategy implementation. In module 3, you developed a plan
for identifying and evaluating the organisation’s various stakeholders. You should now review this plan
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because you have come to understand the impact of the strategy in more detail, building on your earlier
work identifying and evaluating strategy’s effect on stakeholders.
Communication
Communication in a change context is the ongoing exchange of information that helps everyone in the
organisation understand the change and prepare themselves for the new ‘to-be’ strategic model. To be
effective, communication should be proactively planned.
A strategic communication plan for developing the communications infrastructure that will support
communications throughout a change initiative. A communications strategy provides a clear statement of
the approach to be used for the development and execution of all communication activity and defines the
parameters for delivering key messages to stakeholders. A communications strategy typically includes:
• communication goals
• communication audiences
• key messages
• communication methods and tactical communication planning
• communication measurement and evaluation.
A strategic communication plan makes it possible to schedule specific communication pieces, including
who (will communicate), to whom, when and what. The plan can then be tracked and analysed throughout
the organisational change process to help ensure that employee and senior leadership expectations of a
project remain in line with reality. In addition, the plan establishes which communication channels and
vehicles are to be used and from whom the messages, and how to reinforce those messages once they
are sent.
Communicating an organisation’s strategy to all managers and employees who are affected by the
implementation, and who have a role to play in its execution, is a challenging task, particularly in trying
to gain both understanding and commitment from key people. Another communication issue relates to the
lack of buy-in and ownership of the strategy from key managers and employees. The communications are
less likely to be understood and accepted if only a small group of people were involved in the development
of the strategy.
Example 6.5 describes the potential to use technology for communication and describes how very
different communication approaches or styles can be adopted by senior leaders.
EXAMPLE 6.5
Leveraging Technology for Communication

Technology, particularly the internet and its related technologies, has transformed communication within
organisations over the past 30 years. While technology facilitates many communications related to the
day-to-day operations of the organisation, it also has transformed the way organisations’ top leaders
communicate with the people in the organisation.
One example is to the use of webinar technology to conduct regular (say, monthly) Q&A sessions with
groups within the organisation. These can be targeted at specific groups, such as the leaders’ direct
reports, at business units or departments or even the entire organisation, if well managed. A Q&A webinar
enables leaders to speak directly to staff and for staff to speak directly to leaders. Two-way communication
is more effective than one-way communication so offers a way for leaders to better ensure everyone is on
the same page in relation to strategy implementation.
Another example is the online equivalent of a ‘fireside chat’ where a leader speaks more informally
with the organisation’s people, using storytelling and other methods to help create and promote a culture
aligned to the organisation’s mission and values. CEO blogs are an example of this and Virgin chief Richard
Branson’s blog — www.virgin.com/richard-branson — is one of the best known. His blog topics (open
to all in the organisation and to anyone else interested) talks about a range of business and personal
issues, from how he met his wife, the books he reads and his holiday activities through to advice on
how to delegate and the social contribution business can make to communities. Engagement with an
organisation’s leaders on this more informal basis can be a powerful influencer over the way culture and
the values embedded in culture form and permeate an organisation.
Technology-based communication platforms can also be used as mere distribution mechanisms. For
example, the managing partner of an international commercial law firm distributes its annual report to its
stakeholders including 14 000 employees in 78 offices across 46 countries electronically via its website
and social media. Its key partners receive a hard copy.
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QUESTION 6.6
Compare and contrast Virgin chief Richard Branson’s communication method and message with
the managing partner of the international commercial law firm.
QUESTION 6.7
The Emerald Aged Care Facility had an exemplary reputation for providing its older residents with
high-quality service and care. However, the management team discovered that some of its patients
were very unhappy about being woken so early by the nursing staff in order to take their tablets
and shower.
Management investigated the problem and discovered that the nursing staff found that in order
for everyone to have breakfast around 8 a.m., they had to give some residents their tablets and help
them to shower earlier than residents would like.
After an extensive consultation process with residents, their families and staff, the management
team decided it was important to develop teams who would help residents get ready for breakfast
when they wanted to and at a pace that suited them. To achieve this, they decided the organisation
needed to be restructured to align the structure better with Emerald Aged Care’s existing ‘The
Happiest Residents’ Strategy. Management recognised that, despite consulting with all staff across
the organisation about what the restructure involved and what it was intended to achieve, the old
process of moving up and down the corridor, from room-to-room had been in place for a long time
and it would be all too easy for staff to revert back to old practices.
It was essential, therefore, to put the right communications in place. The project team’s com-
munications manager developed a three month implementation plan. Permanent staff were given
newsletters and regular emails, and casual staff received SMS messages about how the process
would change and the specific reason why it needed to change. Posters were also put up in staff
kitchens and staff work stations. Regular updates were given to team leaders about what was
working and what was not when the new process was put in place, which was discussed in their
smaller team meetings. Positive feedback then followed about how the new process was leading
to healthier and happier residents which was also communicated back to residents’ families and
senior management.
The project initiative was considered a success. Residents who enjoyed sleeping in could and
staff did not have to race up and down the corridor anymore to ensure residents had their breakfast
on time.
Using case facts, analyse why Emerald Aged Care’s communication strategy was successful with
reference to:
• communication goals
• communication audiences
• key messages
• communication methods
• tactical communication planning
• communication measurement and evaluation.
A STRUCTURED APPROACH TO MANAGING CHANGE

A structured approach to managing change will help to ensure a successful outcome, with the end
vision achieved. Figure 6.4 provides a model to use when thinking about change. Have all of the key
considerations been covered? If the program or initiative is experiencing any of the symptoms described
in the ‘Successful change’ column, what is missing?
Figure 6.4 prompts the following key questions when assessing a change program.
• Has a compelling case been clearly articulated? If this element is missing, there may be inertia. If it is
not clear why change is required, people will move slowly or make little effort to change.
• Is there a clear vision? If this element is missing, there may be confusion about the change. People will
be unsure about the merits of the change if it is not clear what is changing.
• Is there a well-defined strategy? If this element is missing, there may be diffusion of effort. Without a
clear road map for achieving the vision, people will focus on tasks that may not deliver on the desired
end state.
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• Are there adequate resources? If this element is missing, there may be frustration because people will
be discouraged if there is not the budget or means to achieve the vision.
• Is there organisational/physical capability? If this element is missing, there may be fatigue because the
organisation does not have the necessary skills to lead the change.
• Is there sufficient motivation? If this element is missing, there may be crawl. If people are not enthusiastic
about the change, they will move slowly and change will take longer than anticipated.
• Are there robust communication mechanisms? If this element is missing, there may be doubt. Without
adequate communication about the change and its progress, people will be uncertain about the likelihood
of success.
FIGURE 6.4 Key elements for successful change
Organisational/ Robust
Compelling Clear physical Sufficient communication Successful
+ + Well-defined + Adequate + + +
case vision strategy resources capability motivation mechanisms = change
+ + + + + = Inertia
+ + + + + = Confusion
+ + + + + = Diffusion
+ + + + + = Frustration
+ + + + + = Fatigue
+ + + + + = Crawl
+ + + + + + = Doubt
Each of these elements is critical to successfully implementing strategy and achieving lasting change in
the organisation.
Example 6.6 describes how Nike implemented a change program to create transparency and ethical
conducts in its supply chain following revelations of abusive labour practices within its suppliers.
EXAMPLE 6.6
Nike’s Shift Towards a Sustainable Supply Chain

In April 2005, Nike surprised the business community by releasing its global database of nearly 750
factories worldwide. No laws required the company to disclose the identity of its factories or suppliers.
Yet, between the early 1990s and 2005, Nike went from denying responsibility for inhumane conditions
in its factories to leading other companies in disclosure. This response to a supply chain crisis was a
strategic shift. This shift illustrates how a firm can use transparency to mitigate risk and add value to their
business.
In the early 1990s Nike executives began to see reports of abusive labour conditions in their supplier
factories as a risk to their brand image. Nike’s traditional line denying responsibility for conditions in
these factories no longer satisfied a growing number of customers. On top of that, media images of
children sewing Nike soccer balls and running shoes sent social activists, academics and journalists
into a costly anti-Nike campaign. Nike leaders realised they were facing a supply chain crisis. They
needed a new strategy to deflect the growing criticism and improve their suppliers’ performance. Starting
with the creation of a new labour practices department, Nike introduced a series of changes to enable
better monitoring of sources of risk associated with suppliers’ labour practices. These changes included
the following.
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• Conduct a basic audit. Nike introduced the SHAPE internal monitoring system to provide it with an initial
assessment of whether a proposed new factory was near satisfying the code of conduct. Factories
flagged as high risk would also undergo a more comprehensive ‘M-audit.’
• Create a corporate responsibility and compliance division. Senior management created a new division
to facilitate the integration of corporate responsibility issues throughout the business. This brought
together sustainability and compliance employees working across product groups.
• Assign field managers. Nike assigned field managers to the various regions. They were responsible for
monitoring day-to-day compliance with labour laws and the Nike code.
• Establish a global database. Head office developed a comprehensive database to help track the global
supply chain and access audits conducted in the field.
• Initiate external expert review. In 2004, Nike invited a panel of external experts to review a draft of
its 2004 corporate responsibility report. The committee concluded that Nike would not receive the
credit it craved from the NGO community unless it released the names and addresses of its entire
factory database.
These monitoring and enforcement systems created confidence internally, which was necessary before
releasing the list externally in 2005. Nike turned this unprecedented response to its supply chain crisis into
a lucrative marketing opportunity that outweighed competitive risks associated with factory disclosure.
It advertised its new transparency as evidence of its new commitment to labour practices. In fact, the
company turned its full disclosure into a badge of honour among the apparel industry.
Source: Adapted from B Tobah, 2012, ‘Just Do It: How Nike turned a supply chain crisis into opportunity’, Net-
work for Business Sustainability, 23 January, www.nbs.net/articles/just-do-it-how-nike-turned-a-supply-chain-crisis-into-
opportunity.
QUESTION 6.8
Using figure 6.4 as a framework for your response, justify why Nike’s shift to a more sustainable
supply chain strategy would be considered a lasting change, supporting your response with
case facts.
Kotter’s Eight-Step Process for Change

One of the most popular frameworks for ensuring successful change outcomes is Kotter’s (1995) process
for leading successful change. Kotter’s change model emphasises the need of management to make change
happen and identifies eight steps that every organisation must go through to achieve its strategic objectives.
Kotter suggests that poor performance in any one of these areas will lead to failure when trying to
transform an organisation.
The first step of Kotter’s model is to establish a sense of urgency when the strategy is to be implemented.
This will require effective communication of the gaps in the present strategy by the senior executive team,
as they are models for the rest of the organisation.
The second step is to create a guiding coalition to build urgency and momentum for the change. It is
crucial to identify key people from different areas of the organisation who are willing and able to manage
the change and work as a team early in the process.
The third step is to develop a vision and strategy. A clear picture of the future helps the organisation to
align, concentrate and coordinate everyone’s efforts towards a final goal. The vision should be inspiring
enough to motivate everyone to take the proper actions in the right direction, and needs to be tangible
enough to implement. People need to know what they are aiming for and what the ‘to-be’ state looks like.
The fourth step is communicating the change vision. Communication should be embedded in all actions
of the change. Managers can emphasise the vision in daily decisions and through everyday communication
channels. They should also demonstrate appropriate behaviours that reinforce the vision.
The fifth step is empowering broad-based action, which enables others to implement the change. The
organisation should empower the change managers to change structure and processes so that they align
with the change vision, facilitating the readiness for change, and removing any obstacles.
The sixth step is to generate short-term wins. It is important to celebrate small achievements to let
everyone know that the effort is paying off and to motivate the team. The change team should design
several short-term targets which can be achieved quickly and reward people who made the wins possible.
Wins make it more difficult for negative people to resist the change or encourage dissent.
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The seventh step is ‘consolidating gains and producing more change’ (Kotter 1995). Kotter strongly rec-
ommends avoiding declaring victory too early. Instead, he suggests analysing the change implementation
and improving it where appropriate through continuous improvement and new programs. Irrational and
political resistance to change takes time to dissipate. It is all too easy for the changes to be reversed by
resisters (Kotter 1996).
The last step is to ‘anchor new approaches in the culture’ (Kotter 1995). It is fundamental to make
sure the change has been implemented and embedded clearly in behaviours, shared values and the daily
operations of the organisation.
These eight steps are summarised in figure 6.5.
FIGURE 6.5 Eight steps to transform an organisation
The 1. Establish a 2. Form a

3. Create a 4. Communicate
organisation sense of powerful
vision the vision
now urgency guiding coalition
7. Consolidate 5. Empower
The 6. Plan for and
8. Institutionalise improvements others to act;
transformed create short-term
new approaches and produce still eliminate
organisation wins
more change obstacles
Source: Adapted from JP Kotter, 1995, ‘Leading change: Why transformation efforts fail’, Harvard Business Review, vol. 73,
no. 2, March–April, p. 61.
Example 6.7 describes the steps Uber took to transform a dysfunctional culture that threatened to derail
the company’s future.
EXAMPLE 6.7
Uber: A Cultural Transformation

The sharing economy — those businesses that provide a digital platform to connect suppliers and
buyers — is sometimes known as ‘the Uber economy’, such has been Uber’s profile and pervasiveness.
Starting as a rideshare platform before diversifying into food delivery and labour supply, Uber’s business
model has proven one of the most disruptive of recent times.
All of this, including at the time a market valuation of about US$70 billion, had been achieved
despite a company culture that had been identified as creating a ‘hostile’ work environment. An internal
investigation generated 47 recommendations for change, including making managers more accountable
for employee morale, creating a more diverse workforce, including valuing and respecting that diversity,
increasing transparency of performance reviews, introducing a zero-tolerance harassment policy, and
prohibiting intimate relationships between supervisors and subordinates. It also recommended Uber
abandon some cultural values that had supported poor behaviour, including ‘Always be hustling’ and
‘principled confrontation’.
As the report came out, CEO Travis Kalanick began an indefinite leave of absence, leaving the company
in the hands of a leadership structure consisting of 14 separate roles, some of which were currently vacant,
including Chief Financial Officer and chief operating officer.
One analyst noted: ‘You can change your company’s policies, but without new leadership your culture
won’t change because the policies and the people won’t be aligned’.
Eventually Kalanick, widely considered to personify the dysfunctional culture are Uber, was forced
out. When replacement CEO Dara Khosrowshahi joined Uber, it was with the objective of bringing
about fundamental cultural change. His approach makes an interesting study in how to transform
an organisation.
Khosrowshahi quickly moved to fire more than 20 employees who had been involved in public scandals
and brought in new people to head up operations and marketing: Chief Operating Officer Barney Harford
and Chief Marketing Officer Rebecca Messina. Harford was charged with change management. Harvard
Business School professor Frances Frei had joined two weeks before Khosrowshahi with the task of
clarifying the mission that all Uber employees should be working towards, ensuring consistent, planned
Pdf_Folio:386

and targeted communications internally and externally and achieving consistency of culture across the
entire organisation. Khosrowshahi thus quickly established urgency and formed a powerful coalition at
the top of the company to lead the cultural change.
The vision established was to improve Uber’s reputation among employees and customers, to act with
honesty and integrity and to provide a safe workplace for all employees.
Frei said one of the surprising things was that the vast majority of employees actively wanted to improve
and so one of the biggest obstacles was figuring out how to roll out training to so many people quickly. This
was accomplished by establishing a corporate education program to teach Harvard-designed courses in
leadership and strategy. To overcome the need for employees or tutors to travel, Uber implemented a
system whereby the lecture is delivered live to video camera, with each student also beamed back to a
wall of screens surrounding the lecturer, creating a virtual lecture theatre. Some 40% of Uber’s employees
signed up in the first two months.
Source: Adapted from G Bradt, 2019, ‘How the Uber change agent survives his own change’, Forbes, 8 June, www.
forbes.com/sites/georgebradt/2019/06/08/how-the-uber-change-agent-survives-his-own-change/#26392c5f6539; M della
Cava, 2017, ‘Can Uber really change?’, USA Today, 16 June, www.usatoday.com/story/tech/news/2017/06/16/uber-travis-
kalanick-holder-report/102889068; N Zipkin, 2017, ‘Uber needs to recreate its company culture. Here’s what you canlearn
from its mistakes’, Entrepreneur.com, 15 June, www.entrepreneur.com/article/295844; B Carson, 2018, ‘Inside Uber’s effort
to fix its culture through a Harvard-inspired “university”’, Forbes, 3 February, www.forbes.com/sites/bizcarson/2018/02/03/
inside-ubers-effort-to-fix-its-culture-through-a-harvard-inspired-university/#166260b21695.
Example 6.8 discusses how Pat Regan set QBE on the road to recovery following a series of writedowns
related to acquisitions.
EXAMPLE 6.8
QBE’s Turnaround
QBE Insurance is one of Australia’s largest insurance companies and provides services to markets in
Australia, the Asia–Pacific, Europe and North America.
CEO Pat Regan describes himself as a ‘good communicator’. He based his approach to creating
change at QBE on a core set of skills and approaches: visibility, communication — and a necessary
degree of ruthlessness.
QBE was established in the 1880s and was listed on the ASX in 1973. It has achieved considerable
growth through a high-profile acquisitions strategy, particularly in the first decade of this century. However,
those acquisitions became a source of problems for QBE, with the acquired businesses leading to a series
of profit downgrades, peaking with the announcement of AU$1 billion in impairments, shocking investors
and leading to a AU$4 billion drop in the company’s market value in the course of one day.
In response, Regan’s change challenge at QBE when he took over as CEO in 2018 aimed to establish
a culture of accountability and ensure that accountability was evident in everything QBE did. Regan says
despite the company’s growth and long history its leaders had ‘never really created a sense of what QBE
was’ and he wanted to reverse this to be leaders in insurance industry in customer satisfaction.
Prior to Regan’s appointment QBE’s businesses were run autonomously by local management teams
on the basis that this was necessary and justified by the local managers’ expertise and experience in their
home markets. There was little contact, coordination or knowledge sharing between the leadership and
management teams that were spread across about 45 different countries.
Since Regan took over, there have been no more profit downgrades and there are signs investors
are regaining confidence, with QBE’s share price rising well above market benchmarks. One analyst
attributed the turnaround to QBE’s ‘Brilliant Basics’ program which sets and enforces standards related
to underwriting, pricing, claims management and other core operations. Regan says that his senior
management team provided leadership on instilling the importance of improving the small details that
adds up to ongoing improvement throughout all levels of QBE.
Individual business units still have individual management, but they are required to comply with the
core standards, which apply to all QBE’s businesses around the world. The business units have been
given new resources to help them comply and there is now some sense of consistency across operations
around the world. Regan says there was no resistance — and in fact enthusiasm — for this move as it had
made obvious sense to stakeholders when he explained the plan to them. A senior executive was given
responsibility for rolling out the Brilliant Basics plan. Regan has made himself relatable and accessible for
employees through a range of measures, including a video chat that he makes available each week. The
chairman describes him as an inspirational leader.
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Regan’s changes at QBE can be seen then to have involved systems, processes, policies and culture.
He has sought to establish the values of customer centricity, diversity, accountability, teamwork, speed
and technical expertise. These are obvious values a company may talk about, but it is actually putting
them into action that has made a difference at QBE.
This change approach was accompanied by some divestment decisions, with QBE selling its Latin
American and Thailand businesses and exiting some segments of the US market. It also pulled reduced
exposure to high-risk insurance for Australian hotels and clubs. These decisions were driven partly by
profit considerations, but also by the awareness that these businesses were not well aligned to QBE’s
strategic capabilities or risk appetite. Nevertheless, a significant part of the remaining business delivers
underwriting losses and costs in some divisions are seen as excessive.
Questions remain, however, over whether the improvements will be sustained in the long term. Analyst
Brett Le Mesurier suggests it is typical when a new CEO is appointed that the CEO highlights past
problems, sets out a plan to address them and builds enthusiasm and goodwill about the changes. Le
Mesurier notes that then is often when things take a turn for the worse.
In an expected environment of price increases from the insurance sector generally, and with other
companies needing to reposition their portfolios, QBE has an opportunity for growth. Regan said the
company was open to acquisition opportunities if they made clear sense, but analysts suggest investors
will be very wary given QBE’s past disastrous performance on acquisitions.
Source: Adapted from J Thompson, 2019, ‘How Pat Regan set QBE on the road to redemption’, Australian Financial Review,
6 December, www.afr.com/work-and-careers/leaders/how-pat-regan-set-qbe-on-the-road-to-redemption-20191114-p53asg.
QUESTION 6.9
With reference to case facts and applying Kotter’s eight-step process for change model, identify
one key initiative for each step in the model and analyse how Regan used it to achieve change
at QBE.
IMPACT OF CHANGE ON AN ORGANISATION

The purpose of proactively managing a change is to minimise the productivity dip that occurs at the point
of implementation. For the strategy to be successful, an organisation must mitigate this productivity dip
as much as possible. Once a change initiative has been implemented, the effort focuses on monitoring the
change. This is an important phase because it includes benefits-realisation tracking that determines whether
the initiative has been successful. The results then feed into the performance management activities
undertaken by th organisation.
The final aspect to consider during monitoring is the sustainability of the change. There is little point in
an organisation embarking on change if the change cannot be sustained after the initial effort. Implementing
strategy is all about long-term change and, to achieve this, the changes brought about must be sustainable
over time. Some examples of how one can be assured the changes stick are:
• identifying whether the new processes and practices are being used or whether the organisation and its
people have reverted to what was used previously
• determining whether employees are working a similar number of hours to those worked before the
change, or are performing many hours of overtime
• determining whether the demonstrated behaviours in the workplace are consistent with the desired
culture and values.
QUESTION 6.10
Discuss the relationship between the strategy implementation process and the practice of change
management.
follows.
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KEY POINTS
strategy.
• Change management refers to the processes taken to ensure the organisation changes as required
to align with the organisation’s strategy. It is often a function of leadership.
• Kotter’s eight-step process provides a framework for leaders and managers to drive change in
the organisation.
• Change management requires successful communication and stakeholder management.
• A communications strategy is a key part of successful change management.
• The changes associated with strategy implementation can result in a dip in productivity. Effective
implementation involves minimising this dip.
6.4 Appraise how the roles of management and leadership drive the implementation of the strategy.
• Strategy implementation usually requires aspects of the organisation or the organisation as a whole
to change. Often this involves a cultural change and as such leaders are often responsible for driving
this change.
• Change management involves dealing with the change strategy, business impact assessment,
change readiness assessment and stakeholder assessment.
6.4 USING PROJECTS TO MANAGE

STRATEGIC INITIATIVES
Implementation needs to involve consideration and coordination of specific actions, timing and account-
abilities. Forming programs and projects can facilitate implementation. This section focuses on effective
project and program management.
PROJECT AND PROGRAM MANAGEMENT

Turning strategic ideas and goals into tangible and practical projects and outcomes is a difficult but essential
part of the strategic process. This process is now considered in detail.
Best Management Practice (BMP) is an organisation that produces best practice methodologies and
publications in relation to management. It is widely renowned for its PRINCE2 certificate, an accredited
project management training credential that provides the following definitions of projects and programs.
• A project is a temporary organisation structure that is created for the purpose of delivering one or more
business outputs according to a specific business case.
• A program is a temporary flexible organisation structure created to coordinate, direct and oversee the
implementation of a set of related projects and activities in order to deliver outcomes and benefits related
to an organisation’s strategic objectives. A program is likely to have a life that spans several years (BMP
2011, p. 286).
Thus, project management is the management of a temporary endeavour — having a definite beginning
and a definite end — undertaken to create a unique product or service. Program management is the
management of a group of projects sharing common strategic goals, managed in a coordinated way so as
to realise benefits otherwise not available by managing projects as separate entities.
The more complex the strategy, the more likely a large number of projects will be required. These are
easier to manage and monitor if projects with similar objectives are organised within a program structure.
When a strategy involves achieving a number of strategic themes, each program for organising projects
will represent a theme.
Program management tends to be more a feature of large organisation than small ones. This is because
large organisations can justify the use of programs. Rather than having many projects running at once
with no underlying structure, it is normal practice at large organisations to ensure related projects are
placed under the domain of a program designed to achieve a strategic theme. Programs make it easier to
implement the different strategic themes inherent in the strategy. It is easier to understand how the different
projects designed to achieve a theme are related and complement each other if they are organised within a
program structure.
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An initiative’s size and scope will affect the implementation time. Generally, programs consist of several
related and/or interdependent goals that must be met and which take longer than a project. A project is a
discrete piece of work with one specific objective or goal and can be achieved in a shorter time. However,
as indicated, individual projects may be organised into an overarching program.
The Museum of Sports Memorabilia (MOSM) example from module 5 shows how individual projects
can be linked together into a broader program. For example, MOSM identified three strategic options that
can be linked to growing revenues and customer visits:
1. decrease the admission discount given to school groups
2. conduct promotional initiatives to attract adult visitors at full admission prices
3. offer event services to take advantage of the prime location and facilities at MOSM.
Individual projects will be required to implement each of these strategic options. However, they can all
be grouped together into an overarching program that is focused on revenue and customer growth. This
program would be overseen by a single person, the Program Manager, who supervises the activities of
people on the individual projects, including individual project managers, ensuring they are all in alignment
and working together well.
Specific steps in project scheduling and budgeting are described in the Strategic Management Accounting
subject. These include the use of program evaluation and review technique (PERT) diagrams for project
scheduling and using earned value to calculate project performance against budget.
Formal initiatives or projects are more likely to be successful because they have resources and effort
dedicated to them and they create a defined piece of work that can be monitored and reported on. Projects
with lower priorities might be left unattended, not be given enough resources or progress slowly.
Table 6.3 summarises some key differences between a project and a program.
TABLE 6.3 Key distinctions between projects and programs
Project Program
A discrete objective or goal Multiple related objectives or goals
One project manager Multiple project managers and one Program Manager
Multiple work streams Multiple related projects
One overall change strategy, and one plan to One overall change strategy, but multiple plans to
accomplish this change (many project plans within accomplish the change (each plan is a project)
one program)
Shorter duration Longer duration
Delivery is not necessarily directly linked to strategy, Likely to be linked directly to strategic goals
but will be aligned to business plans
As noted in module 5, strategy development identifies a series of projects that need to be scoped and
resourced. Project and program management considers the dependencies of each project, the resources,
related milestones and financial impacts. In addition to performing the technical project management
tasks, there are also cultural benefits attached to having employees working in teams on strategic projects.
Forming project teams can lead to improved employee participation and advocacy for initiatives, which
builds momentum for change.
A useful program and project management tool is a report card that assesses the progress of project and
program initiatives. A report card helps the Program Manager to maintain oversight of current projects.
It visually depicts which projects are on track and which are at risk of failure. Responsibility is clearly
allocated to a particular person or team, and an outlook of the project implementation dates is displayed.
Figure 6.6 shows how the report card has been used by MOSM, from the module 5 case study, to implement
and track its projects. The report card’s goals are featured at the top as a reminder of what a project is trying
to achieve. Report cards can be tailored to the individual requirements of the organisation and the program
of work.
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FIGURE 6.6 MOSM report card
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Goals
Financials Internal process Learning and growth Customer
Goal 2018 2019 2020 2021 Goal 2018 2019 2020 2021 Goal 2018 2019 2020 2021 Goal 2018 2019 2020 2021
Revenue $8m $8.5m $9.0m $9.5m On time 85% 100% 100% 100% Increase 300 320 350 375 Increase 78% 83% 90% 90%
delivery of number of customer
projects volunteers satisfaction
Cost $2.6m $2.3m $2m $1.8m Collection Yearly Quarterly Quarterly Quarterly Increase 2 p/a 4 p/a 4 p/a 4 p/a Increase 150% 180% 200% 200%
care number of visitor
training numbers
days
Museum No Yes Yes Yes Retain 80% 90% 90% 90% Increase % 12% 18% 25% 30%
accreditation high of repeat
performers visitors
Year 1 Year 2 Year 3
Strategic Review
Projects Owner Feb—May Jun—Sept Oct—Dec Jan—Mar Apr—Jun Jul—Sept Oct—Dec Jan—Mar Apr—Jun Jul—Sept Oct—Dec Milestones Comments
theme status
1 Position 1.1 Update MOSM Marketing Plan with clear actions FO

Green
the brand to support MOSM strategy
1.2 Develop an online marketing strategy for MOSM, SF Red
with particular focus on social media
1.3 Develop and implement an engagement FO Green
strategy for members of sponsors' organisations
2 Retain a
2.1 Develop an acquisitions strategy for MOSM PM Orange
relevant
collection
2.2 Catalogue and digitise photo and print library DA Green
across all collections
2.3 Conduct significance assessment across all collections DA Green
3 Optimise
3.1 Review admission prices with a view to increasing prices AT Orange
the
revenue
mix 3.2 Grow museum sponsorship JH Green
3.3 Grow merchandise sales through revised product mix CS Green
3.4 Offer gift vouchers online and through alternative SW

Red
channels to broaden the reach; target adult customers
3.5 Implement events service for sporting teams to JH
Green
hold functions at MOSM after opening hours
4 Support 4.1 Develop and implement training course for all full- LT Green
growth time employees on current collection and sporting history
4.2 Review organisational structure (e.g. option of part- RW Green
time employment) and implement changes as required
4.3 Work with the finance team to better understand GST BS Orange
implications on MOSM and not-for-profit (NFP) status

4.4 Simplify and streamline operational environment RW Green
Review status legend Green Initiative is progressing as specified and approved Orange Initiative is in risk of becoming a Red Red Initiative is outside of acceptable tolerances
and requires immediate attention
Effective project governance processes are required at every stage, including at the front-end of the
project (Zwikael & Meredith 2019) and when an individual project is completed and closed-out (Zwikael
& Smyrk 2019b). It is especially important to allocate responsibilities and accountabilities when a project
is closed-out to ensure the project’s benefits are realised. Even if a project has achieved all of its goals,
to budget and on time, it may not have achieved the desired benefit — what it was required to achieve to
implement the strategy. To avoid this problem, it is now considered best practice to give this responsibility
and accountability to the project owner (Zwikael, Meredith & Smyrk 2019). Senior managers with
technical expertise, such as the Chief Financial Officer, may be required to become project owners.
Project risk also has to be managed at all stages of a project. However, risk management in projects
may differ significantly depending on the size or complexity of the organisation or where it is situated in
the world. Research has shown that mature organisations with a history of managing complexity and high
levels of risk, tend to be more effective at managing their risks than is the case at smaller or less mature
organisations. Risk management is more likely to be managed in an ad hoc manner or poorly in smaller
and less mature organisations. In countries characterised by high levels of risk or uncertainty avoidance,
risk management tended to less effectively undertaken than in countries where risk was associated with
opportunity. Similar principles apply to industries where it is not a technical requirement to manage risk,
such as in a non-engineering organisation (Zwikael & Ahn 2011).
Virtual Teams
Virtual teams are established when it is necessary or desirable for people to work in teams across distances and
even different time zones. They are especially useful when it is necessary to have the input of specialists who
are working cross-functionally on interdependent tasks, for instance, people who are involved in developing
an innovative new product or improving a process. Virtual teams can work across an organisation, even in
the same building. They are more commonly associated with projects which are cross-regional or cross-
country. Effective leadership is required to ensure a virtual team is able to achieve their project’s objectives.
This includes identifying effective methods for: maintaining trust through communication technology,
ensuring diversity is understood and appreciated, managing the work life cycle through productive
meetings, managing team progress through technology, enhancing virtual team member visibility and
ensuring team members benefit from team membership (Malhotra, Majchrzak & Rosen 2007).
Compared to teams who are not remote and see each other in person regularly throughout their project,
it is much more important to think about the nature of the physical, operational and human interaction
aspects of working together. The challenge here is to find ways to make sure people can talk to each other
freely and confidently when they need to. When this is the case, it is usually a good idea to communicate
through conference calls rather than rely heavily on emails or voice calls. The same applies to ensuring
communications are meaningful. Just because there are physical or time constraints does not mean that
communications have to be briefer than they would otherwise be. Important information could be lost if
this is assumed. By the same token, in an effort to establish trust, people are less inclined to pay attention
to their messages if they are bombarded with communications. It is for these reasons that it is essential
to establish norms for responding, for instance, ways to make clear how quickly a message needs to be
answered. Some organisations will use at the end of a message an acronym to indicate when a response is
required, such as ‘4HR’ for four hours. Everyone has to be in agreement what platform for communication
is best, such as Zoom or Google docs for sharing documents. If those leading virtual teams get these things
right then the problems associated with communicating across different time zones, without body language
and when people are different can be overcome (Dhawan & Chamorro-Premuzic 2018).
Critically, in addition to ensuring people can work together in a collegiate manner even in a virtual team,
when technology is used as an enabler, it is essential to match the technology to the task. These range from
email to chat platforms, web and video conferencing, and online collaboration database and cloud-based
tools (Hill & Bartol 2018).
Technology insight 6.3 looks further at technology tools that have application in project management.
Collaboration Tools, Cloud Technologies and Best Practice

Software Enablers
Whether the members of a team work in close proximity to each other or not, a large number of tools and
technologies are now readily available to be used in organisations to make sure people can collaborate in
real-time, sharing communications and information as is necessary.
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Some of the tools and technologies that are being used across organisations to help teams collaborate
are software developer tools, continually accessible databases, cloud storage technologies, specialist
collaboration tools for such things as online product development, online data and big data mining tools,
knowledge management tools, and business intelligence and agile project tools (Anon 2018/2019).
Previously, collaboration across the organisation or geographies was only possible if the organisation
was networked. However, cloud computing has made collaboration much easier and accessible. Cloud
computing technology allows teams to lever the internet to share information systematically and securely.
Cloud computing is enabled through the delivery of hosted services by a range of providers. Two of the
largest cloud service providers are Google and Microsoft. These organisations can deliver services to
networked organisations all the way through to people’s smart phones, making it very accessible. Thus,
the ability to collaborate and work in teams is now something even small and medium-sized organisations
can possess. However, cloud computing is not without its problems and anyone leading a project that uses
cloud computing to link team members should consider how best to mitigate them. While the benefits
include reduced communication and collaboration costs, greater potential to integrate knowledge and
systems, increased flexibility, greater reliability, improved competitiveness and a reduced carbon footprint,
the problems include extra or different investment in resources such as training in cloud-based systems
management, time required to implement, cost of the service, and the potential for more security and data
control problems to occur (Attaran & Woods 2018).
In addition to the development of best practice methods for managing projects through the complete
life cycle of the project, specialist software-based tools have been developed to help project leaders
manage their projects within the required parameters, such as when required to use agile project methods.
This method though originating in software development is now widely used to help organise and execute
projects into discrete and regularly reviewed phases, making it possible to achieve iterative continual
improvement outcomes (Stettina & Hörz 2014).
A relatively new approach to projects is known as ‘agile’ — this refers to a project management and
software development approach in which teams deliver projects or outputs in regular increments. They
achieve this through intensive efforts known as ‘sprints’. Each sprint gives an output that is usable, but is
only part of the bigger picture. This approach allows for regular progress, but more importantly it allows for
fast evaluation of outputs and responsiveness to changes. This contrasts to traditional approaches, known
as ‘waterfall’ where progress is made over time towards a single outcome.
There are a number of key considerations when implementing a strategy through projects.
• Strategies should always be supported by sound processes of governance and decision making. To
avoid important strategic activities getting lost in the myriad of business operations and other projects,
strategic initiatives should be separated from ‘wish list’ initiatives and given a high priority. This ensures
that strategic initiatives are sufficiently resourced and supported by all stakeholders. When there are
several strategic initiatives competing for the same resources and funding, prioritisation models, project
planning and strategic reviews should be used. As discussed in module 5, prioritisation is an important
element in developing strategy.
• Project initiatives are supported by time-phased and adequately resourced tactical actions. Managers
should define the physical tasks and activities that are assigned resources and deadlines. This activity can
ensure that momentum towards the strategic goals is maintained and incremental benefits are realised
as tasks are completed.
• Strategic project initiatives are realistic and achievable. Strategic initiatives should be defined and
scoped to mitigate weaknesses, threats and business risks. They should also be tested to ensure that
the opportunities or targets they identify are realistic, given emerging external and market forces.
• Initiatives are clearly defined. All initiatives should be clearly defined, stand alone and not be
components of other broader initiatives. When strategic initiatives are absorbed into broader or larger
initiatives, there is a high risk that the strategic end goal and vision will be compromised or changed by
being part of a larger initiative. This can result in the strategy not being achieved as planned.
• All initiatives are managed as a central program. Related strategic initiatives should be grouped into
programs of work, use defined project management processes and involve the development of change
management strategies. Managing programs of related initiatives involves defining regular project
reporting requirements, approving KPIs for each initiative, and initiating strong governance processes.
For example, a formal change request process for variations to initiatives should be defined and followed.
For smaller organisations, the central program could include a senior manager, specific individuals or a
specialised team.
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• Input is received from staff. Wherever possible, strategic initiatives should be transparent and incorporate
involvement of and feedback from employees at all levels of the organisation. This helps to align the
initiative with the realities of business operations, and also improves employee engagement with the
overall strategy and strategic direction.
QUESTION 6.11
The senior management team of an industry association determined, in consultation with its staff at
all levels, that the organisation needed to be more innovative. To better help its members use digital
technologies to engage their customers, the association established a program called ‘Always One
Step Ahead of the Competition’. The General Manager of Membership Education was put in charge
and shortly thereafter appointed a Program Manager to manage the program. The two met and
the General Manager confirmed the program had a total budget of $600 000. At this first meeting,
they determined that the program would consist of three projects: (1) Business Intelligence,
(2) New Products for Members, and (3) Coursework of the Future. Each would be managed by
project managers. After discussing resourcing requirements, they decided that each project should
be given a $200 000 budget and a 12-month deadline to complete.
Subsequently, three qualified project managers from outside the organisation were appointed.
They were asked by the Program Manager to spend the next week developing detailed project
plans. Since the projects would utilise the special expertise of key staff and it could be perceived
this project work was in addition to what staff were required to do as part of their day-to-day work
in operations, the General Manager of Membership Education and the Program Manager asked
the three project managers to consider the change management implications of their respective
projects, especially how to make sure seconded staff asked to work in the projects cooperated and
did all they could to support the strategy.
• At the end of 12 months, the Business Intelligence project was over budget by $20 000. This was
attributed to the fact that senior management team approved the purchase of software designed
to report on competitors on a daily basis. This was given to the project manager to implement.
• The New Products for Members project was unable to develop even one project during the
12-month period. This was attributed to the fact that staff did not prioritise the work from the
project work as it made it difficult for them to satisfactorily complete their regular work.
• The New Coursework for the Future project needed a six-month extension. This was attributed
to the fact the project manager kept on missing milestones and this was only noticed at the end
of the project’s 12 months.
Analyse why the three projects undertaken failed, using case facts to support your analysis of
possible reasons why each project failed.
Project Reason Analysis
Business Intelligence project Initiative wasn’t managed as a

central program
New Products for Members project No input from staff
New Coursework for the Future Strategic project initiatives

project weren’t realistic and achievable
Example 6.9 describes steps that can be taken to improve the management of a project.
EXAMPLE 6.9
Improving Project Management Performance

Joe Carter was promoted to Chief Financial Officer at Friendly’s Market, a supermarket company that
operates its supermarkets as a franchise model. Joe was given an internal report on a program developed
to improve areas of declining sales and he determined that there was a decrease instore traffic when
certain unprofitable lines were cut. Joe was asked by the Managing Director to lead a project that
developed a system that would allow them to track what happened when an unprofitable line was removed
from the shelf. The purpose of the system would be to allow management to determine:
• how many customers stopped shopping at stores after lines were cut
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• the amount of add on sales lost due to those customers not buying other products, like milk, bread.
Joe would work in the project for two days a week. The rest of the week he would work in his CFO role.
Six key considerations Joe should incorporate into his project management are described below.
1. Strategies should always be supported by sound processes of governance and decision making —
ensure that Managing Director has allocated sufficient financial and people resources for this to
be successful.
2. Project initiatives are supported by time-phased and adequately resourced tactical actions — develop
a project plan to identify the amount of people, time and budget required for objectives to be achieved.
3. Strategic project initiatives are realistic and achievable — activities in the project plan are scoped
to identify and mitigate any weakness or potential business risks, such as inability for the system to
integrate into existing systems.
4. Initiatives are clearly defined — Joe needs to identify all initiatives to make sure they are aligned with
the overall goal and vision that way he stays on task to achieve the objectives of the project.
5. All initiatives are managed as a central program — the project was aligned to the program to improve
areas of declining sales and so there needed to be reporting from the project into the central program
to ensure initiatives are aligned.
6. Input is received from staff — Joe needs to communicate with staff to ensure alignment with business
operations and to increase employee engagement and implementation success.
QUESTION 6.12
Using the MOSM report card from figure 6.6:

(a) for those projects that have a red status, provide two recommendations to improve their status
(b) for those projects that have an orange status, provide two recommendations to ensure they
don’t turn red.
follows.
KEY POINTS
strategy.
• Projects are a key approach to strategy implementation.
• A set of related projects is often managed as a single program to ensure effective coordination.
• Project management refers to a well-developed set of methodologies and tools that managers (or
project managers) can use to effectively manage projects on budget and schedule to deliver the
required outcomes.
• Strategy implementation often relies on a program or programs of projects to achieve specific
changes and outcomes. Managers (or project managers) can use the project management method-
ology to ensure projects are effective.
• Strategy implementation usually requires aspects of the organisation or the organisation as a whole
to change. Leaders are responsible for driving this change.
6.5 MONITORING IMPLEMENTATION,

PERFORMANCE AND THE EXTERNAL ENVIRONMENT
Implementation requires the ongoing monitoring and adaptation of strategy and initiatives. This monitoring
allows managers to attend to emerging and changing circumstances, promote flexibility and learning, and
avoid the pitfalls of adhering to plans that become outdated. Technology insight 6.4 discusses a model that
can be used by management to examine numerous aspects of the organisation and experiment with various
changes to see how the organisation’s performance will respond.
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Digital Twin
Digital Twin is a technology developed by PwC. Digital Twin refers to a virtual model of the organisation
that can help leaders and managers identify aspects of the organisation that facilitate or work against
the implementation of strategy. This naturally leads to ways to solve the problems or further capitalise
on enablers.
PwC’s Digital Twin technology examines the organisation in terms of:
• how efficiently and effectively the organisation coordinates its resources to implement strategy
• how supportive the culture is of the strategy
• how effectively staff are supported, developed and managed to succeed
• how costs align with priorities and benchmarks.
Because it acts as a digital representation of the business, the Digital Twin can also be used to
experiment; for example, different strategies or different ways to implement a strategy can be fed into
the Digital Twin system and users can then interact with a live simulation. The artificial intelligence built
into the system supports decisions and, perhaps more importantly, stimulates consideration of potential
issues that may not have been discovered.
Involving stakeholders in the simulation enables a well-developed understanding of how different parts
of the organisation are affected and how changes in one aspect will flow through to everyone else. As
a management approach, this can help build cooperation and buy-in for the strategy implementation.
Leaders themselves are able to consider more aspects of the strategy and explore creative and innovative
ways to implement it.
Source: Adapted from M Siegal & C Greenwood, 2019, ‘Organizational effectiveness goes digital’, Strategy+Business,
29 May, www.strategy-business.com/article/Organizational-effectiveness-goes-digital.
This section of the module examines performance measurement, ongoing monitoring of the external
environment and the use of reward systems to support the key strategies.
PERFORMANCE MEASUREMENT
By continually monitoring how well the strategy is being implemented across the organisation, it becomes
possible to identify when intervention is required to adjust the strategy, the implementation plan or the
change management approach.
As discussed in earlier modules, performance management is a critical component of strategy implemen-
tation. Goals, strategic initiatives and measurement systems are needed to execute and control the strategy
process. Key performance measures and indicators must be created, selected, combined into reports and
acted upon so that strategy implementation can have tangible outcomes. First, there needs to be a clear
cause-and-effect relationship between the indicators and strategic outcomes. Second, KPIs need to be
carefully chosen because they will influence the behaviour of people within the organisation (discussed
further in the ‘Reward systems’ section later in this module).
Effective performance management requires the managers in an organisation to:
• know what strategic goals they want to achieve and what strategic options have been selected
• express these goals in practical and measurable terms
• understand their current position in relation to these goals
• appreciate the resource implications of achieving these goals
• ensure that the goals and required action plans are well-communicated and that key employees are
accountable for their achievement.
The foundation of performance management is planning and control, wherein the effective implementation
of strategy requires commitment among subordinates … effective marshalling of resources and capabilities
and quick responses to changes in the competitive environment (Grant 2010, p. 11).
One approach to establishing performance measures against goals is the balanced scorecard, introduced
in module 3.
The Balanced Scorecard

The balanced scorecard (BSC) was discussed in module 3 as an effective tool to assess current performance.
We noted there that to construct a balanced scorecard required setting objectives and KPIs. Setting these is
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undertaken as part of the strategy development and implementation stages of the strategy process.
Example 6.10 lists the key financial and non-financial metrics used by Qantas in its balanced scorecard
figure 6.7 provides a short report that shows its progress.
EXAMPLE 6.10
Qantas BSC Metrics

The QANTAS BSC includes:
• return on invested capital at a group and segment level
• EBIT compound annual growth rate for loyalty
• gross annual benefits from transformation
• employee engagement
• net promoter score
• progress on innovation across product, service and operations.
FIGURE 6.7 Qantas FY19 progress against BSC
Delivering today — performing against strategy
Target
Metrics Timeframe Progress to date
FY19 ROIC > WACC for all

ROIC > WACC FY18–FY20
Segment operating segments
performance Qantas Loyalty targeting On track for $500-600m
FY22
Achieving our targets
EBIT CAGR1 7-10% EBIT target by 2022
Transformation Annual $400m gross benefits FY18–FY20 $452m in gross annual benefits for FY19
Continued improvement in employee Revised engagement survey methodology

People FY18–FY20
engagement to be deployed in FY20.
Continued improvement in
Customer FY18–FY20 Maintaining NPS premium to competitor2
Net Promoter Score
Identify and develop new products, services and Qantas Frequent Flyer Redemption reset,
Innovation FY18–FY20
processes that drive revenue and efficiency Qantas Distribution Platform developed
Group return on invested capital exceeds 10%, sustainable returns to shareholders
1. Compound average growth rate in underlying ebit.

2. Competitor refers to Virgin Australia.
Source: Qantas, 2020, ‘Performance against our strategic pillars’, www.qantas.com/au/en/qantas-group/delivering-today/

performance-against-our-strategic-pillars.html.
The BSC then serves as an effective evaluation and communication tool for ensuring managers and
employees across an organisation understand the strategy and are implementing it well.
The BSC maps the strategy to specific actions that will need to be undertaken to achieve specific
goals and details how achievement of these goals will be measured. This clarifies which managers and
which parts of the organisation are responsible for each actions needed to implement the strategy. The
BSC can also break down information siloes (a lack of knowledge sharing between different parts of the
organisation) and stop new siloes from forming. It can also reduce debates among business units, functional
and geographic regions about resource allocations (Kaplan & Norton 2006).
Figure 6.8 demonstrates a BSC with objectives, measures, targets and initiatives. Measures must be
linked to the organisation’s strategy. Even if the strategy is adjusted over time or changes significantly,
the benefit of the BSC is that it provides a basis for understanding what went wrong and how to remedy
the problem.
Some researchers have suggested the balanced scorecard should be expanded to include measures
that highlight how well the organisation is performing in regard to such things as its environmental
objectives. This is because organisational stakeholders are now demanding strategies reflect their concerns;
for example, their concerns about climate change and the need for organisations to reduce their carbon
emissions. By incorporating the ‘environment’ and ‘social’ into the scorecard, it should be possible for
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managers to better measure how initiatives to deliver on these aspects of a strategy are being implemented
(Hubbard 2009).
FIGURE 6.8 The BSC as a tool for performance measurement against strategic goals
Financial
Objectives Measures Targets Initiatives
‘To succeed
financially,
how
should we
appear to our
shareholders?’
Customer Internal business process

‘To satisfy
Objectives Measures Targets Initiatives our Objectives Measures Targets Initiatives
‘To achieve
shareholders
our vision,
Vision and and customers,
how should
strategy what business
we appear
processes
to our
must
customers?’
we excel at?’
Learning and growth

‘To achieve Objectives Measures Targets Initiatives
our vision,
how will
we sustain
our ability to
change and
improve?’
Performance measurement systems designed to support the strategy implementation process, such as the
BSC are most effective when they are realised as a dashboard of performance. This technology is discussed
in technology insight 6.5.
Dashboards
Dashboards are digital displays that draw data from the organisation’s datasets and display it in a user-
friendly way to provide leaders and managers with relevant information. Modern dashboards can be
customised to display the data of interest and as such have application at all stages of the strategy
process. In relation to the implementation stage, dashboards can display project and program status such
as budgets, milestones, resources allocated and dependencies. In the monitoring stage, a dashboard
can reflect the KPIs and metrics established in the detailed implementation plan, thus providing real-time
insights into the performance of the implementation plan and the strategy itself.
As their name suggest, interactive dashboards allow the user to modify how the data is displayed in
real-time; for example, users can determine which variables to include on a comparative graph and zoom
in or out to particular time periods of interest.
In the context of strategy implementation, digital dashboards can serve multiple purposes.
A program dashboard draw together information about all the projects that form part of an imple-
mentation program, including budgets, schedules and contingencies. This provides an effective way of
assessing overall progress and identifying any emerging problems. An interactive program dashboard
will also allow the user — generally the Program Manager — to zoom into similar details about any
specific project.
A project dashboard enables project managers to see many aspects of the individual project(s) for
which they are responsible, including milestones, budgets, schedules, risks and any issues that have
been alerted.
At a higher level, dashboards can be used more broadly to monitor strategy. This type of dashboard
may combine internal and external data to display the organisation’s performance against external
benchmarks. This is one way the organisation can be aware of and hence responsive to changes in
its external environment that may have implications for the organisation’s overall strategy. Strategic
dashboards also enable top management to identify where the strategic implementation may be varying
from plan and to initiative corrective measures.
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While dashboards take time and effort to set up and depend on the quality of the organisation’s
information systems, an effective dashboard allows managers to drill down and understand what
specifically has led to a given overall result. The dashboard highlights areas of underperformance and
overperformance very clearly, using methods such as a traffic light system (red for a problem, amber for
a potential issue, and green for all on track).
CPAs may be involved in the underlying design of dashboards used across the organisation in terms of
ensuring measures presented draw from reliable data and measure what they are intended to measure.
CPAs may also use dashboards as part of their own work (Bremser & Wagner 2013).
Because dashboards all draw from a single source of data, they are an effective way of sharing
information and ensuring anyone involved at any level of management is seeing the same information.
Because they can be customised to each user’s needs, they reflect an application of ‘multiple versions
of the truth’, as described in module 4. Many performance measurement systems designed to support
the strategy implementation process, such as the balanced scorecard, are most effective when they are
realised as a dashboard.
ONGOING MONITORING OF THE ENVIRONMENT

As part of the implementation process, it is essential to continually monitor the external environment,
including the macro environment and the industry environment. This is because in addition to the strategy
process being a complex process involving many factors, strategies need to continually be evolved. As new
facts about the outside world requiring action are discovered, the strategy and how it is to be implemented
must be changed in a corresponding fashion. The organisation’s must develop its information systems to be
sensitive to these changes. The organisation must have the analytical systems in place that make it easy for
managers to make sense of data and turn their analysis into ways to lever opportunities while addressing
threats (Zubac 2016).
As noted in modules 1, 2 and 3, complexity arises from many causes, including digital disruption,
globalisation and supply chains that cross the world, the rise of internet-based organisations, and economic
turmoil. The strategy process is often not well equipped to deal with these environments because
preparation does not necessarily lead to the accurate prediction of future environmental changes. Brown
and Harris et al. (2010) noted that environmental uncertainty is linked to ‘wicked problems’ — those issues
created by society that are difficult or impossible to solve because they have no simple definition or clear
solutions for managing them.
Implementation must be an ongoing and adaptive process that copes with uncertainty and change.
Business operations need to react to external changes and adapt by finding new ways to achieve the
strategy. Unless there is a major change in the external environment (e.g. a legislative change impeding
the organisation’s ability to continue under the current strategy), the strategy itself does not change, but
the way in which it is achieved changes.
For example, the uncertainty that the US–China trade war has created has made it more difficult for
equity traders around the world because global equity markets fall significantly or become more volatile.
in addition, this could impact trade talks between the governments of countries with China. Likewise, since
the threat of recession is real, it is becoming difficult for managers to know how to invest to better position
their organisations, particularly if part of their revenue comes from trade with China.
Unforeseen changes such as these put pressure on managers to revise and adapt their implementation
plans. As Slater and Hult et al. (2010, p. 551) highlight, ‘dynamic capabilities enable managers to adapt,
integrate, and deploy physical, human, or organizational capital to achieve alignment with the changing
business environment’. During the long timeframe usually required to implement strategy, competitor
actions or changes in resources or key personnel within the organisation can undermine or distract from
the implementation project.
QUESTION 6.13
At a conference in Australia on managing the transition risks that climate change brings, the CEO
of one’s of the world’s leading producers of petrol, hybrid and electric vehicles stood in front of the
audience and said:
We had every intention of introducing a fully electric vehicle to Australia this year but with
the Australian Government’s reluctance to provide support for the roll-out of charging stations
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across the country combined with the customer’s unwillingness to buy electric cars due to
reluctance to change, we have had no choice but to delay the introduction. Instead, we are
focusing on rolling out new models of hybrid cars. Research has shown that customers see
this as a way they can do their bit to reduce carbon emissions without limiting their ability to
drive the distances they want to, when they want to.
As a result, we will be manufacturing and bringing to Australia 10 000 hybrid versions of our
most popular model in the next year. We also plan to reconfigure our manufacturing plants in
South East Asia to phase out fully petrol cars so we can focus on hybrids for the Australian
market. We know there is demand in Europe for electric cars so we will be establishing markets
for our electric cars in Europe in the next year. Our design teams in Japan will stay focused
on the design and manufacturing of innovative electric cars in anticipation of a future that will
eventually see only electric cars on the road in Australia and elsewhere.
Examine three external factors that have impacted this car company’s implementation plans.
External factor Examination
Australian Government’s reluctance to provide

support for the roll-out of charging stations
Customer’s unwillingness to buy electric cars
Demand in Europe for electric cars
REWARD SYSTEMS
It is important to establish links between the strategic initiatives, key performance measures and individual
performance through goal setting, including identifying KPIs and establishing reward systems. KPIs are
an effective way to focus the activities performed and decisions made to ensure they align with the
broader strategy.
Creating a tight fit between an organisation’s strategy and its reward structure entails reaching an
agreement on strategic performance goals, scheduling the responsibility and deadlines for achieving them,
and recognising their achievement through pay and incentives for performance. Employees and managers
must be held accountable for carrying out their assigned parts of the strategy. Research suggests that it is
important that extrinsic motivators, such as pay increases, are ‘clearly and strongly related to performance
behaviour’ (Lawler & Benson et al. 2012, p. 1). This link needs to be visible to encourage managers and
employees to support strategic progress.
The organisation’s managers need to motivate and reward people who perform well in implementing
strategy. Motivational techniques and rewards should be used creatively and linked tightly to the factors
and targets necessary for the execution of the strategy. Managers need to get employees to buy into the
strategy and commit to making it work.
An organisation’s reward and appraisal system should reflect its desired values and beliefs. Changing
the link between employee performance and reward can be effective in encouraging the new values and
behaviours required in strategy implementation. According to Sohail and Al-Ghamdi (2012, p. 1463),
‘there are clear linkages between a reward system and the efficacy of strategy [implementation]’. They
further explain that a reward system should aim to motivate employee performance consistent with current
organisational strategy (Sohail & Al-Ghamdi 2012, p. 1464).
As an example, since the 1990s many banks in the Asia–Pacific region have based their incentives
and pay performance systems on increased sales (i.e. new accounts opened and bank products sold) and
measures of customer satisfaction. These reward systems are designed to implement a strategy of growing
market share by building customer relations and service levels to achieve a competitive advantage over
rivals. In an increasingly competitive and homogenised industry (i.e. one in which organisations offer very
similar products), a strategy of differentiation in customer service and focus is a key to success.
In the past, reward systems were mostly about establishing and maintaining controls so that good
behaviours can be rewarded and bad behaviours punished. The problem with this is that it ignored or stifled
many behaviours that which were productive. As a result, concerted efforts are now being made to develop
and use the organisation’s reward systems to stimulate creativity and innovation (Davila & Ditillo 2017)
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and make working in teams a productive and rewarding process (Thorne & Smith 2000). The challenge
for the accountant is to ensure appropriate measures are identified which are consistent with these goals.
As mentioned in the previous section, the correct choice of KPIs is critical for strategy implementation,
because KPIs encourage certain behaviours when they are linked to reward systems. Poorly chosen
measures may lead to employees choosing questionable or inappropriate methods to achieve the ‘right’
outcome and gain their rewards. KPIs should focus on both the outcomes and the ways those outcomes
are pursued.
Example 6.11 details a proposal by Australia’s finance-sector regulator to impose strong requirements
relating to remuneration to ensure the conduct of the company’s executives and staff is better aligned with
the interests of stakeholders.
EXAMPLE 6.11
APRA Proposes Stronger Requirements on Remuneration to Enhance

Conduct, Risk Management and Accountability
The Australian Prudential Regulation Authority (APRA) has released a draft prudential standard aimed at
clarifying and strengthening remuneration requirements in APRA-regulated entities.
In a discussion paper released today for consultation, APRA has proposed creating a new prudential
standard to better align remuneration frameworks with the long-term interests of entities and their
stakeholders, including customers and shareholders.
Draft prudential standard CPS 511 Remuneration introduces heightened requirements on entities’
remuneration and accountability arrangements in response to evidence that existing arrangements have
been a factor driving poor consumer outcomes.
Among the key reforms, APRA is proposing:
• to elevate the importance of managing non-financial risks, financial performance measures must not
comprise more than 50% of performance criteria for variable remuneration outcomes
• minimum deferral periods for variable remuneration of up to seven years will be introduced for senior
executives in larger, more complex entities. boards will also have scope to recover remuneration for up
to four years after it has vested
• boards must approve and actively oversee remuneration policies for all employees, and regularly confirm
they are being applied in practice to ensure individual and collective accountability.
APRA flagged its intention to strengthen prudential requirements on remuneration in April 2018 following
its Review of Remuneration Practices at Large Financial Institutions. The need for a strengthened approach
was further underlined by the findings of 2018 Prudential Inquiry into the Commonwealth Bank of Australia,
as well as the recent industry self-assessments examining issues on governance, accountability and
culture.
APRA Deputy Chair John Lonsdale said it was clear that existing remuneration arrangements in many
entities were not incentivising the right behaviours.
‘Remuneration and accountability frameworks play an important role in driving employee behaviour.
Where policies are poorly designed, or not followed in practice, companies may incentivise conduct that
is contrary to the long-term interests of the company and its customers.’
‘In the financial sector, APRA has observed an over-emphasis on short-term financial performance and
a lack of accountability when failures occur, especially among senior management. This has contributed
to a series of damaging incidents that have undermined trust in both individual institutions and the
financial industry more broadly. Crucially from APRA’s perspective, these incidents have damaged not
only institutions’ reputations, but also their financial positions,’ Mr Lonsdale said.
Mr Lonsdale said CPS 511 would complement the Banking Executive Accountability Regime to lift
industry standards of accountability and reduce the likelihood of misconduct.
‘Limiting the influence of financial performance metrics in determining variable remuneration will
encourage executives to put greater focus on non-financial risks, such as culture and governance. As our
recent response to the industry self-assessments made clear, this remains a weak spot in many financial
institutions.’
Source: APRA, 2019, 23 July, www.apra.gov.au/news-and-publications/apra-proposes-stronger-requirements-on-
remuneration-to-enhance-conduct-risk.
QUESTION 6.14
Recommend (with justification) three non-financial KPIs that can be used to incentivise and reward
executives.
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follows.
KEY POINTS
strategy.
• Performance measurement is the process that establishes key performance indicators (KPIs) and
measures and then assesses progress against them as a way of ensuring strategy implementation
proceeds according to plan.
• Reward systems are an important tool to align people’s efforts with what is required to successfully
implement the strategy.
• Strategy implementation requires ongoing monitoring and adaptation of strategy and initiatives to
respond to emerging and changing circumstances.
6.3 Evaluate the implementation of strategy and its performance in the context of emerging and
changing circumstances.
• The balanced scorecard is an effective tool for evaluating strategy implementation and outcomes
from financial, customer, business process and learning and growth perspectives.
• The contemporary business environment is one of constant change and thus implementation must
occur in a dynamic and responsive way.
• Management is responsible for establishing KPIs and related measures that clearly link activities to
outcomes and that, along with an appropriate system of incentives and rewards, align the efforts
of people with the actions necessary to implement the strategy.
• Leaders and managers establish reward systems that encourage people to act in ways the support
the implementation of the strategy and that foster innovation and creativity.
6.6 FURTHER IMPLICATIONS FOR LEADERSHIP

AND MANAGEMENT
Implementation takes place in complex and changing organisational, competitive and industry environ-
ments. It requires a supportive environment in which leaders, managers and employees accept and engage
in the implementation process.
Mitch Evans (2013) wrote ‘Winning strategies: 10 reasons for business plan failure’, drawing attention
to some of the challenges faced during implementation. His 10 reasons for failure are outlined in table 6.4.
Most of these reflect shortcomings of management and leadership, but they can be easily avoided.
TABLE 6.4 Reasons implementation can fail
Reason Explanation
Missing purpose Managers and employees throughout the organisation often focus on accomplishment
of their daily tasks, meaning little thought is given to the overall purpose of what they are
doing in the context of the organisation’s strategy.
No road map Implementation of a strategy requires each person in the organisation to understand
their role. Often implementation plans are not shared with all staff or not prepared in a
way that makes them meaningful to all staff so that each staff member and manager can
translate the plan into their specific role.
Lack of prioritisation In any complex undertaking, tasks need to be performed in a certain sequence and to a
certain timeline. A failure to establish these results in a failure to clearly communicate the
priority of different tasks. This leads to a lack of coordination and focus.
No sense of urgency A high-level implementation plan will include deadlines for the completion of various
initiatives. This can only be accomplished, however, if those deadlines are included
in the more detailed plans that managers and staff work from. A failure to clearly
communicate deadlines all the way through the organisation will result in a lack
of urgency.
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No follow-through Implementation plans are intended to guide the actions of everyone throughout an
organisation, but they must be backed up by ongoing follow up to ensure progress is
being made at all levels of the organisation. This simply involves management checking
in with progress and taking corrective action where necessary.
Missing the how-to When people are unclear on how to perform a new task or make a change, they tend to
put off dealing with it. Management and leaders need to ensure those responsible for
any aspect of strategy implementation have the resources and information to proceed.
Weak accountability Implementation plans involve KPIs and metrics. These should be used on an ongoing
basis to monitor performance and ensure accountability.
Lack of celebration Many organisations fail to celebrate or recognise achievements or milestones. This often
occurs because attention immediately moves to the next priority. However, celebrating
achievements helps keep people engaged and motivated.
Missing rewards Related to celebration, recognition with a formal reward (financial or otherwise)
reinforces behaviours that contribute to the successful implementation of strategy.
Poor communication Communication cannot be a one-off effort. Successfully communicating strategy

involves ensuring everyone understands and commits to the strategy, and that this
commitment is reflected in their work. Often this will require ongoing communications
that establish and reinforce the requirements. Leaders and managers should also
encourage two-way communication so they are aware of any problems or suggestions
identified by those actively implementing strategic initiatives.
Source: Adapted from M Evans, 2013, ‘Winning strategies: 10 reasons for business plan failure’, Printing News, 1 January,
www.printingnews.com/article/10830854/winning-strategies-10-reasons-for-business-plan-failure.
COMMON PITFALLS IN STRATEGY IMPLEMENTATION

The themes identified by Evans (2013) are consistently represented in this module. They support and
confirm the rationale for the approaches defined for successful strategy implementation. For managers,
being aware of common errors and reasons for failure provides an opportunity to plan to avoid issues and
proactively mitigate risks, and if implementation does begin to fail, then to recognise it early and take
corrective actions.
Transforming Strategic Thinking into Action

Strategy is best achieved when those in charge of implementation are involved from the outset in the
strategic analysis and formulation process. While these tasks can be separated, and often are, they should
be understood and analysed concurrently. Many strategies are conceived without sufficient regard for the
context and circumstances in which they will be implemented. In this respect, many strategies are divorced
from the reality that must be engaged with for their roll-out, and therefore are less likely to be achieved.
Numerous people will be involved throughout the strategy process, as aspects of that process require quite
different skills and will take place in and across different areas of the organisation. It is crucial therefore
that managers ensure that everyone involved understands the context of their work in the strategy process
and conversely that managers understand the different perspectives and priorities that may influence the
people involved.
A related problem is that, traditionally, the strategy process runs over the course of a year, with
intermittent performance reviews and budget allocations, but implementation is an ongoing process that
needs immediate action and constant adaptation as organisational and market conditions change.
Another challenge for managers is to stay focused on the strategy and not allow day-to-day operational
matters or short-term priorities to interfere.
One reason why strategy implementation fails is that the overwhelming majority of employees are not
aware of or do not fully comprehend their organisation’s strategy. As Cadwallader and Jarvis et al. (2010,
p. 220) argue:
While successful translation from strategy to results depends on a range of organizational, managerial,
environmental, and competitive factors, often it is highly dependent on the actions of frontline employees.
To maximise the prospects of successful implementation, managers should therefore ensure all employ-
ees understand the organisation’s strategy, the benefits for the organisation of successful implementation
and how the employee themselves will contribute to and benefit from the strategy.
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A pervasive — some might say endemic — reason for poor implementation is the lack of coordination
across an organisation’s functional units, processes and systems. An interesting case study conducted by
Trkman (2010) has shown that, in order to supply the infrastructure required to support the implementation
of new strategy, structural changes are needed within an organisation. Without infrastructure, there is a
risk of misalignment between organisational process and the new strategy to be implemented. The 7-S
framework outlined in section 6.2 is a useful tool for managers to understand how the current organisation
relates to the strategy, identify what needs to change and to plan how to make those changes.
Another common lack of coordination or misalignment often occurs in the relationship between an
organisation’s strategy and its information systems. Strategy development is the result of the ‘deliberate,
rational analysis’ (Grant 2010, p. 21) of organisational performance by management, and a means to
adapt the organisation to changing daily circumstances. Many organisations do not focus enough on
information and decision-making processes that are critical to strategy implementation and instead make
structural changes.
Paralysis by Analysis
The failure to implement strategy arises in part from focusing too much on analysis and formulation and
not enough on the ways in which resources are allocated and operational decisions are made. One of the
more general issues and obstacles to strategy implementation that Hrebiniak (2006) identified was that
managers are trained to formulate but not implement strategy. This problem is acerbated by the fact that
the majority of strategy courses, including most MBA programs, focus primarily on techniques for analysis
and formulation rather than implementation.
While some argue that implementation can only be learnt on the job, there is a clear benefit in teaching
managers robust models of strategy execution that help to make sense of, and inform, the activities
of implementation.
The tendency to focus on analysis over implementation may be blamed in part on the ceremony and
process of strategy — the routine and sequential process of developing strategy. Use of the formal
strategy process has come under some criticism, largely from those studying the more informal and
incremental approaches to strategy as is often observed in practice. The formal strategy process can be
problematic because of its emphasis on analysis over implementation. For example, planning is often
treated as a substitute for implementation. As we have noted, there is a danger that in working through
the strategy process, managers think they are implementing strategy. However, strategy is a series of
decisions and actions that determine the long-term direction of an organisation rather than a documented
strategic plan. For example, from a CPA’s perspective, it is particularly important not to combine financial
and budgetary processes with strategic intent and direction, to avoid underlying strategic issues being
overlooked. Budgetary processes should be understood as a measure and outcome of strategy, rather than
the strategy itself. Another issue is the risk that a focus on the process of strategy will stifle creativity and
innovation. Overly formal and rigid strategy processes are unlikely to generate fresh or novel ideas for new
products, services or markets, and may in fact repress an organisation’s innovative capacity.
‘Paralysis by analysis’ is also one of the warnings often sounded when an organisation decides to
implement data analytics, particularly when drawing on big data. The earlier modules have explored how
data analytics can be used to understand the external environment, the organisation’s internal environment
and how it interacts with stakeholders and to help inform the development of strategic options. During
the implementation phase, the organisation’s analytics will continue, providing the organisation with new
information and insights. It is crucial that decision makers can focus on information and changes that have
genuine implications for the strategy implementation or strategy itself. They need to avoid trying to refine
the strategy in response to inconsequential information. They need to avoid delaying implementation or
making ill-considered changes to the implementation plan in response to the ongoing changes that may
arise from the organisation’s analytics program.
Resistance
A range of factors can lead to resistance to strategy implementation efforts, at both the organisational and
individual levels. These are illustrated in figure 6.9.
At the organisational level, resistance typically stems from the following factors.
• Strategic inertia. Organisations develop processes to ensure stability and protect the status quo. These
processes may result in managers not understanding or reacting to changes in the environment. Today’s
strategic capability, based on established processes and ways of operating, may result in a rigid
adherence to norms and routines that lose touch with the changing competitive landscape.
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• Limited implementation focus. For a strategy to be successful, it must be implemented throughout the
organisation. Often, the implementation process falls down when it is inadequately executed in one
subsystem or part of the organisation. For example, if management is attempting to shift the culture
to a more sales- and customer-focused style, failing to change the performance management system to
reward such behaviour will impede the transition.
• Group inertia. Group dynamics, such as norms and roles, are a major influence on the behaviour of
individuals. Groups can resist the shift in behaviour required by the implementation effort, particularly
if they have a subculture at odds with the overall organisational culture.
• Power relationships. Rearrangements of resource allocations and budgets as part of the implementation
process may be met with individual and group resistance, especially from those who have a vested
interest in the status quo. The implementation effort may be perceived as a threat to the expertise and
power base that the existing organisational structure supports.
At an individual level, resistance typically stems from the following factors.
• Habit and security. People are creatures of habit. We establish routines and preferences that reduce
the choices we have to make and the complexity of life. When confronted with the challenges that an
implementation program often presents, we may feel threatened and insecure and tend to cling to our
established ways.
• Economic factors. Individuals may be concerned that the implementation program will undermine their
position at work, potentially making their skills and experience redundant.
• Selective information processing. We interpret and shape our world through our perceptions. Once we
have constructed our individual world, we have a tendency to filter out conflicting information, selec-
tively processing information to reaffirm our world. Therefore, information about an implementation
program that threatens this world has a tendency to be filtered out.
FIGURE 6.9 Factors influencing resistance to change
Strategic
inertia
Selective
Limited
information
focus
processing
Resistance
Economic Group
factors inertia
Habit and Power

security relationships
A number of techniques can reduce resistance to change. In general, resistance will be handled best when
managers and leaders recognise and act upon it constructively and early in the implementation process.
This requires an accurate diagnosis of the organisation’s people, structure and technology that identifies
potential areas of resistance to the implementation effort.
Managing the Politics of Strategy Implementation

The politics of strategy implementation includes people’s behaviours or actions carried out to advance their
own status, position or power within an organisation. This may involve attempts to win promotions, gain
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more money in the budget, or acquire greater decision-making authority. It may also include attempts to
damage the reputation of rivals within the organisation (e.g. through gossip or other means).
When strategies are being implemented, changes may lead to negative outcomes for individuals
(e.g. loss of power or position), who may therefore fight hard to avoid the change.
Organisations are, by definition, arenas of political activity because they are a collection of individuals
and groups with diverse and sometimes conflicting interests and goals who must find ways to create order
and direction among themselves.
Organisational power and politics are key influences on the strategy process and often present challenges
to strategy implementation. Managers must understand and manage these dynamics within their organi-
sation in order to successfully implement strategy. Organisational politics pervades the whole process of
implementation, and managers need to be sensitive to the power structure and political dynamics within
the organisation.
Written implementation plans are only a partial summary of the many aspects of a business and its
future. An ‘invisible’ plan may include a full and frank assessment of forecast results, potential changes,
implementation details, costs and risks, a realistic picture of the business position and a contingency plan
for dealing with potential failure.
There may be gaps between explicit plans and business reality. Most managers accept that the political
nature of the planning process is a reality of managerial life.
Politics and Power Defined
The term ‘politics’ reflects the notion that, where interests diverge, society should provide a way for
individuals to reconcile their differences and conflicts through consultation and negotiation. Power is the
medium through which differences and conflicts are ultimately resolved. In an organisation, the distribution
and dynamics of power determine the behaviour and decisions related to the strategy process. Power can
be understood as a property or characteristic of the organisation at rest, whereas politics is the study of
power in action.
Politics is a fact of life in organisations. Politics and conflict arise whenever interests collide. Conflict
may be interpersonal or between rival groups or coalitions. People and groups collaborate in implementing
strategy, yet they often compete for limited resources, status and career advancement. Power will
influence who gets what, when and how. In recent years, leaders, managers and researchers have become
increasingly aware of the need to recognise the importance of power and politics in the process of
strategy implementation.
As with leadership, power has a number of definitions. Perrow (1986, p. 259) states that:
power is the ability of persons or groups to extract for themselves valued outputs from a system in which
other persons seek the same outputs for themselves or would prefer to expend their effort toward other
outputs.
Examining organisations from a power perspective enables an understanding of the dynamics of

negotiation and decision making among an organisation’s members — dynamics that are inherent in the
strategy implementation process. As Whittle and Mueller (2010, p. 626) note, ‘strategy is influenced
by social, political and institutional forces as opposed to being based on a rational assessment of core
competencies or market opportunities’.
The Role of Managers in Dealing With Politics
Managers need to work hard at building consensus in strategy implementation. During the overall
implementation process, managers should be sensitive to the power structure and political dynamics
inherent in the organisation. As stated earlier, strategy implementation combines the intended strategy and
the series of unplanned actions that form the emergent strategy. However, planning can be more about the
interplay of political forces than the formulation of explicit strategies. In this sense, the planning process
should act as a form of control and conflict resolution, a resource-bidding process and a communication
process.
In order to manage the political influences in the planning and process of strategy implementation,
managers should recognise the political nature of the planning process, and the influence that their personal
values may have on the process. Managers’ commitment to the implementation process provides an
important role model for employees. It is the responsibility of management to clarify and influence the need
for the implementation, to allocate sufficient resources, to facilitate the program and to make key people
accountable. Managers must develop and empower key people such that they can effectively manage
the implementation.
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Organisational politics can be both positive and negative. A certain level of organisational politics
is healthy and productive, if the expression of divergent views is encouraged to gain a more complete
understanding of the strategy implementation process. However, too much political tension can lead to
anxiety and impede the implementation process.
The following tactics for managing interpersonal politics and conflict are drawn from the work
of Eisenhardt and Kahwajy et al. (1997).
• Work with more information and debate matters on the basis of facts. More objective and relevant data
encourages people to focus on issues rather than personalities.
• Develop a range of alternatives to strengthen the debate. Different viewpoints should be encouraged
rather than suppressed, paradoxically as a way of minimising conflict by bringing out and dealing with
the diversity of perspectives in an open atmosphere.
• Maintain a balanced power structure. In doing so, a sense of fairness is created and members of a team
have meaningful input in their areas of expertise.
• Resolve issues without forcing consensus. This is a two-step process in which managers discuss an issue
and try to achieve consensus.
These tactics are consistently used in effective management teams. Successful implementations are more
likely to be achieved by teams that promote active and broad conflict over issues without sacrificing speed.
Managing interpersonal conflict is vital in this process.
Environmental Uncertainty
As discussed in section 6.5, an important part of the implementation process is to monitor the external
environment for changes that could affect the strategy or interfere with its successful implementation.
The business environment is increasingly volatile. This is partly due to the rapid pace of change brought
about by technology and the complex interactions between the components of the highly connected
and interdependent global market. Strategy, by the very nature of the strategy process, is formulated
and implemented over time periods that will almost certainly involve changes in the organisation’s
environment. Some of these can be identified and managed through risk-management processes, but
other changes are unpredictable and can significantly impact on the appropriateness of an organisation’s
strategy. Consider, for example, the bushfire crisis in the Australian summer of 2019–20. Tourism operators
may have contingency plans in place for natural disasters, but the strategy of most would not have
allowed for the scale of fires that meant many tourism destinations were closed for extended periods.
Following the fires, many faced elevated rebuilding costs to meet contemporary building standards and
insurers also increased premiums dramatically if they assessed the future risk substantially higher than in
the past.
Such dramatic changes may require the organisation to change its strategy. Usually, however, changes
in the business environment will not lead to changes in the strategy, but rather to changes in how it is
implemented. The strategy itself may change in the next cycle of the strategy process if the environmental
change is permanent.
Regulatory conditions are another example of environmental uncertainty. In 2019, the United States
significantly changed its trade terms with various major trading partners. The introduction of carbon pricing
— a market-based approach to encourage organisations to reduce greenhouse gas emissions — in various
markets has also been unpredictable.
Management needs to be alert to environmental changes, as discussed in section 6.5, and adjust the
implementation plan accordingly.
Example 6.12 examines how a failure to invest in integrating a new acquisition into the main organisation
led to eventual divestment of the acquisition.
EXAMPLE 6.12
Wealth Management Implementation a Failure for NAB

Kicking off the Melbourne leg of the final round of hearings at the Royal Commission into Misconduct
in the Banking, Superannuation and Financial Services Industry, counsel assisting Michael Hodge asked
NAB’s chief executive Andrew Thorburn whether he considered the shift of the wider banking market into
wealth to be a failure.
After pausing to think, Thorburn said: ‘If you looked at the raw evidence, you’d probably agree that it
has been. It didn’t need to be, but it has been.’
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Thorburn explained how NAB reasoned at the time of its MLC acquisition, saying that customers wanted
the bank to offer a broad range of products. While financial advice traditionally sat ‘just outside of the
banking circle’, people were beginning to see banks offer those services.
In early May 2018, former NAB chief customer officer for consumer banking and wealth, Andrew Hagger,
announced that the bank would sell the lion’s share of its wealth business. At the time, Hagger told
Professional Planner that the divestment of MLC — which had been purchased from Lend Lease in 2000
for AU$4.56 billion — was about the bank becoming ‘far less complex and far more simple’.
Thorburn was much more candid today about the bank’s decision, saying that, ‘We thought it would
be successful, but that didn’t happen.’ While there was more regulation and compliance than the bank
anticipated, he admitted that NAB also failed to wield enough control over the advice side of the
business.
‘We didn’t integrate MLC into the bank, it was like a separate unit,’ he said. ‘We didn’t invest enough in
it, to be honest. It is a completely different business. And MLC didn’t quite recover from the GFC.’
Thorburn said it wasn’t a matter of capability the bank had ‘good expertise’ with ‘wealth experts at the
top level’, but failed to ‘integrate and upgrade’ advice systems, instead investing in ‘other areas that took
away from MLC’.
Source: Adapted from T Sharpe, 2018, ‘Bank execs admit wealth experiment’s failure’, Investment Magazine, 26 November,
www.investmentmagazine.com.au/2018/11/bank-execs-admit-wealth-experiments-failure.
QUESTION 6.15
Examine why NAB’s implementation of wealth management failed, using the following two common
pitfalls of strategy of implementation:
(a) transforming strategic thinking into action
(b) environmental uncertainty.
THE ROLE OF CPAs IN STRATEGY IMPLEMENTATION

There is an increasing expectation that strategy should reside in the daily routines and activities of
employees and processes, in which the role of the finance professional is central. As discussed in previous
modules, the CPA and their role in BIDA is essential to informed decision making. Hence, in recent times
there has been a shift in the role of CPAs to the centre, becoming more active and dynamic in shaping
and enabling both the formulation and the implementation of strategy. Finance professionals are taking up
a more central role in value chain analysis and shaping the future direction of strategy for organisations.
CPAs are more involved in activities traditionally undertaken by other functional roles, such as marketing.
Examples of these activities include financial advice for strategic implementation, for budget control and in
designing strategies of cost leadership. CPAs are also becoming proficient in using data and analytics and
business intelligence to inform corporate- and functional-level strategy development in the monitoring and
measurement of strategy success. This section focuses on this developing role and the relationship between
CPAs and strategy.
CPAs and Strategy

As a finance professional, one of the most important skills that a CPA should develop is the ability to
think analytically and critically. Accounting tasks that form part of the strategy process extend beyond the
well-established functions of decision influencing and decision facilitation (Cuganesan & Dunford et al.
2012).
CPAs play a central role in both shaping and enabling the implementation of strategy. CPAs can play a
key role in collecting business intelligence and using this data analysis to manage and monitor the strategy
process, particularly in terms of resource and budget allocation as well as in setting relevant financial goals
and targets.
Changes to the strategy process have been reported in the context of the global financial crisis (GFC).
According to research into the implementation of risk-management strategies that can withstand the
negative effects of disruptions such as the GFC, an ‘optimal risk management strategy that remains
unchanged regardless of whether it is used before, during or after a significant financial crisis’ should
be adopted (McAleer & Jimenez-Martin et al. 2010, p. 4). The implementation of such a strategy requires
a greater emphasis on BIDA and the role of the finance professional.
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CPAs are also playing a more central role in the approval and monitoring of implementation projects,
and are therefore becoming more involved in strategy implementation. This centrality is evident in resource
and budget allocations, feasibility studies, determining the financial and accounting requirements of
an implementation, forecasting sales and revenue metrics, and setting milestones for the measurement
and control of the implementation project. More active inclusion in project management for the CPA
offers alternative roles within the organisation and broadens the application of the traditional view of
accounting. A recent study found that ‘a whole array of accounting devices can play an active part in
realising a successful strategy’ (Skaerbaek & Tryggestad 2010, p. 108). CPAs are strategic actors not only
in ‘promoting the efficient implementation of a strategy, but also in contributing to its structuring and
(re)formulation’ (Skaerbaek & Tryggestad 2010, p. 108).
CPAs are also increasingly working within project environments where they can actively assist as
subject matter experts, project managers, steering committee members or as project owners, taking ultimate
responsibility for the performance of the project. Likewise, since organisations can benefit from the
support a dedicated cross-functional team, accounting specialists who have the ability to create and
manage performance scorecard systems, identify how to align business units, support functions and
external partners with the organisation’s strategy, monitor progress, help further develop the strategy
and communicate the strategy’s merits could play an invaluable role at the organisation (Kaplan &
Norton 2005).
Organisational units or departments need sufficient resources to carry out their parts of the implemen-
tation plan. CPAs can use their financial skills to ensure that budget allocations are linked to strategy
implementation. Mobilising the necessary resources and funding are among the first requirements of
an implementation project. The CPA’s role is to develop a strategy-enabling budget that drives strategic
initiatives and builds the required capabilities.
Insufficient funding can impede the implementation process, but excessive funding represents a waste of
resources. Strategy implementation may require shifts in resources, downsizing some units while upsizing
others with more people and equipment and increased operating budgets. CPAs must make sure that
strategy drives the allocation of funds, and strategy-critical areas and activities are well-resourced to
facilitate successful execution.
Within an organisation, CPAs might be in a single team within a finance or accounting department, or
dispersed across a range of organisational departments or units. Setting and monitoring financial goals
and measures provide key instruments for checking and controlling the performance of the strategy
implementation program. In this respect, the CPA’s role is critical in ensuring that financial goals are
aligned with the strategic targets set by managers. The cases of Target and Lorna Jane suggest that the
financial goals require embedded functional strategies from all units of the firm and require the finance
professional to be a major player in the execution of this. Target aims to achieve a ‘long-term goal of
generating [USD] 100 billion in sales and [USD] 8 in per-share profit by 2017’ (Cheng 2012). Lorna Jane
aims to double its profit over three years, 2015–18 (Fitzsimmons 2015).
CPAs should set short-term and long-term financial goals. Short-term goals are concerned with the need
for immediate finance to meet day-to-day budgetary requirements. Each of the goals for Lorna Jane and
Target needs day-to-day and cycle-to-cycle objectives to ensure the firm stays on track, and these must be
supported by all strategic units of the firm. Long-term goals have a strategic emphasis in terms of making
financial decisions that will position the organisation for competitive advantage in the future.
CPAs and Leadership

There are a number of practical steps that CPAs in leadership positions should take to ensure a strategy
is implemented successfully. In addition to achieving a balance between the ’hard’ and ’soft’ elements of
implement, balancing the 7-S’s of strategy implementation, it is imperative they are strategically agile. This
means they need to be good at anticipating problems, experimenting, gaining perspective, abstracting and
reframing. They also have to create an environment conducive to leadership unity. This means they need
to be good at starting new dialogues, revealing their motives, integrating organisational agendas, aligning
interests and allow people to make mistakes if this leads to learning. Lastly, they need to be committed to
resource fluidity. This refers to be able to organise to better delivery customer value, allow the organisation
to become more modular, establish exemplary resource allocation and sharing processes, identify and act
on the fact that the business model must change and transform the organisation when necessary (Doz &
Kosonen 2010).
The more critical it is for an organisation to be transformed, the more critical it is to ensure the
organisation is able to achieve its strategic objectives. However, considering how complex problems can be
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and the difficulties leaders can have diagnosing exactly what is wrong at the organisation or what it lacks for
the future. This means leaders need to be clear about why a transformation is necessary, exactly what needs
to be achieved and the leadership capabilities required. For instance, if the organisation is transforming a
global presence, systems, networks, capabilities, knowledge bases, etc. need to be changed. The impact
on the culture must also be considered. Likewise, if the object of the transformation is to become more
customer focused, the workforce needs to understand this. Relationships with vendors and suppliers need
to be redefined. Processes for learning about customers and how to better to deliver value to them need to
be put in place (Anand & Barsoux 2017).
CPAs and Managing the Performance of the Organisation

CPAs also play a key role in the performance of the organisation, working with other senior managers to
link strategy to business operations through financial and non-financial measures and goals. According to
Calvert and Kurji (2012), accounting graduates should develop core competencies in critical thinking and
reasoning so they can contribute to strategy formation and progress. The ability to effectively communicate
through both written and oral mediums, as well as work in a team are also noted as essential skills
of an accountant. Creativity and knowledge, and judging when and how to use that knowledge are
also important.
Taking a more central role in the performance of the organisation is one way that CPAs can assume
a greater managing role and be more involved in strategic decision making. CPAs can provide greater
analysis and interpretation of performance systems and measures, offering a practical and integrated
view of the relationship between operational and strategic goals and measures. According to Kranacher
(2010), CEOs are now looking for soft skills including critical thinking and professional judgement,
competent technical skills, an understanding of technology, in particular BIDA, and management qualities.
These are all core skills for developing and implementing strategy. There are many benefits associ-
ated with becoming a trusted leader, such as being one of the first people consulted about data or
potential performance related issues and improving communications across the organisation as a result
(Elrod, 2012).
Strategic implementation depends on the efficient allocation of resources. Managers need to supervise
the key relationship between strategy and resource allocation to ensure effective implementation. The
success of strategic visions and missions is largely contingent on the extent to which they are aligned with
resource allocation and decision-making processes. CPAs play a key role in resource allocation through
activities such as costing, revenue measurement and forecasting, and in setting budgets. However, the
broader aspects of resource allocation, capital and the organisation’s overall capacity include collecting and
collating business intelligence and analysing it, interacting with people to capture data and information,
and using softer skills which are beyond the traditional focus on financial skills.
The strategy process must be designed and implemented to achieve coordination horizontally and
vertically through the various levels and functional areas of an organisation. In this respect, the strategy
process should involve those managers who have an influence on strategy implementation. The approach
to strategy needs also to be adaptable and flexible, rather than rigid and fixed, particularly in unstable
environments. Organisations need to be more responsive and flexible in relation to change indicators in
their operating environments.
The strategy implementation process is dynamic, and therefore plans must be monitored and revised
as new situations and demands arise. There is something of a paradox in this respect, as strategy must
be both precise and specific in its formulation but also build in flexibility and adaptability, particularly in
its implementation.
Some key questions finance professionals should be able to answer by referring to the concepts,
models and approaches described in module 6 include those listed in table 6.5.
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Key questions for finance professionals to consider and answer regarding strategy
TABLE 6.5 implementation
Concepts/models/approaches that can be used to

Key questions answer the key questions
How is strategy implemented? • Strategic implementation steps — McKinsey’s 7-S

framework
• Program and project management
How does an organisation successfully lead change • Key elements for successful change
management? • Key steps of change
• Kotter’s eight-step process for leading successful
change
Why does strategy implementation fail? • Why change is hard

• The challenges of implementing strategy

Note: Some of the models and concepts provide input into answering more than one question.
A FINAL POINT
London Business School professor of strategy Freek Vermuelen (2017) wrote:
Many strategy execution processes fail because the firm does not have something worth executing. The
strategy consultants come in, do their work, and document the new strategy in a PowerPoint presentation and
a weighty report. Town hall meetings are organized, employees are told to change their behavior, balanced
scorecards are reformulated, and budgets are set aside to support initiatives that fit the new strategy. And
then nothing happens.
One major reason for the lack of action is that ‘new strategies’ are often not strategies at all.
The point Vermuelen is making is that strategies that fail during implementation or that are not
implemented at all commonly arise from a failure to identify and choose clear and consistent actions
to achieve the goals. Instead some organisations fall into the trap of thinking the goals are the strategy.
When that happens, the organisation is left without clear initiatives to implement. By following the rational
approach to strategy detailed in this study guide, leaders and managers — and everyone else involved in
the strategy process — can ensure the strategy:
• is based on high-quality information and analysis
• has considered all realistic options
• is achievable with the resources and capabilities the organisation possesses or can acquire
• has evaluated the relative risks and merits of the various options
• has methodically chosen a cohesive set of options
• has a detailed implementation plan
• is supported by the necessary changes to align the organisation and everything within it to the
strategy.
follows.
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KEY POINTS
• Common factors in failed strategy implementation include:
– missing purpose
– no road map
– everything is a priority
– no sense of urgency
– no follow-through
– missing the how-to
– weak accountability
– lack of celebration
– missing rewards
– poor communication.
• Environmental uncertainty, paralysis by analysis, politics and power, and resistance to change can
all undermine strategy implementation and must be overcome by managers.
strategy.
• Organisational power and politics are key components of organisations and must be managed so
they do not interfere with strategic implementation.
• Managers can respond to conflict and politics in the organisation by ensuring disagreements are
resolved with reference to facts, allowing multiple perspectives, maintaining balance so fairness is
preserved, and resolving issues without forcing consensus.
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REVIEW
Strategy implementation is the final stage in the model of the strategy process introduced in module 1 and
described in modules 2 to 6. It is the stage in which strategic options are translated into specific initiatives
with defined goals, outcomes and metrics.
The module discussed how McKinsey’s 7-S framework can be used to understand the alignment of
the organisation with the strategy. It can then be used to map the changes required to the organisation’s
structure, systems, style, skills, staff and shared values in order fully align them with the strategy and thus
support implementation.
Adopting a new strategy necessarily involves change. The organisation’s leaders and managers need to
undertake a campaign of change management to ensure the organisation changes in order to align with
the strategy. Change management should be based on development of a change strategy, a business impact
assessment, a change readiness assessment and stakeholder management. Clear communication throughout
the entire process is essential in order to achieve commitment throughout the organisation.
The specific actions required to implement the strategy are often planned and actioned using projects.
These are managed using project management methodologies to ensure different parts of the organisation
and different activities are coordinated.
As implementation is a complex process involving change throughout the organisation, it is crucial
managers engage in continuous monitoring of performance and remain alert to changes in the external
environment that may affect implementation. Effective performance measurement requires a clear strategy
linked to clear options and goals, and the translation of options into specific actions with specific
measurable outcomes. The balanced scorecard can also be useful in monitoring implementation against
the goals and specific metrics. Changes in the external environment can affect how the strategy needs to
be implemented. In extreme cases, changes may affect the appropriateness of the strategy itself.
The implementation phase is when the analysis and development is translated to outcomes. Managers
and leaders in the organisation need to be involved throughout the strategy process and need to ensure
every aspect of the organisation is aware of and committed to the strategy. This can be achieved through
communication and by aligning individuals’ own interests with the organisation’s interests. During
implementation, managers often need to confront various challenges, including environmental uncertainty,
paralysis by analysis, resistance, politics and power plays.
Module 6 focused on transforming a strategy into action by highlighting the dynamics of implementation
and change management. It examined how to implement strategy, the challenges of implementing strategy
and using change management to implement strategy.
Module 7 will explore emerging challenges for strategic managers, in particular how the rapidly
changing business environment is giving rise to new business models. These new business models have
significant implications for organisational strategy and in some cases for the strategy process itself. The
understanding of the strategy process built in the first six modules will serve as a foundation to understand
and successfully manage organisations in the contemporary business environment.
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OPTIONAL READING
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MODULE 7
STRATEGY AND
LEADERSHIP FOR
EMERGING BUSINESS
MODELS
LEARNING OBJECTIVES

7.1 select the concepts, processes and frameworks to develop and implement strategy for emerging
business models
7.2 evaluate appropriate strategies applicable to challenges faced by emerging business models
7.3 evaluate how the roles of management and leadership drive the organisational strategy for emerging
business models.
ASSUMED KNOWLEDGE
• describe the strategy process.
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PREVIEW
Module 1 introduced the rational approach to strategy, in which those responsible for the strategic
management of an organisation rely on evidence-based decision making to formulate and implement
a strategy intended to achieve the organisation’s vision and goals. Module 1 described the strategy
process, which begins with strategic analysis of the organisation’s external and internal environments,
proceeds through the identification of options for product, service and market development, and the
development and evaluation of strategic options, and concludes with strategy implementation, including
performance measurement and monitoring to assess the ongoing appropriateness and effectiveness of
the strategy.
Module 1 also described the contemporary context of business. The key characteristic of the modern
business context is the pace and complexity of change, driven by factors such as globalisation, technology
and pressure from stakeholders to improve sustainability. This context is generally recognised as making
it difficult for an organisation to sustain competitive advantage for any appreciable length of time.
This drives organisations to constantly innovate in the ways they create and capture value. The current
business context is characterised by an unprecedented level of innovation in business models, relating
to how organisations create their products and services, the products and services themselves and
how the market experiences the products and services. Some business model changes can be seen as
evolutionary, while others are revolutionary. Technology, in particular, has enabled the creation of business
models that have changed the basis of competition in various long-established industries. As these
industries are transformed by emerging business models, organisations must similarly transform or risk
becoming irrelevant.
This module will:
• examine the drivers of change that are prompting both evolutionary and revolutionary changes in
business models
• describe a range of new and emerging business models
• explore a range of alternative approaches to formulating and implementing strategy
• examine the choice of strategy approach in the context of a fast-changing business environment and
business model innovation
• describe some specific strategic responses to change drivers and new business models
• discuss strategic leadership and management in the context of fast change and emerging business
models.
The strategy process described in modules 2 to 6 (see figure 7.1) is a well-established, useful and
rational approach to an organisation’s strategy. It was noted throughout the earlier modules, and par-
ticularly in module 6, that changes in the external environment or in the organisation’s circumstances
(or unexpected outcomes) during the strategy process may require changes to the implementation plan
or even changes to the strategy itself. The rational strategy process — and the organisation — is thus
able to respond to changes. Strategy is increasingly seen to be a dynamic and living process rather than
‘a plan’.
Nevertheless, working through the rational strategy process often takes an organisation a year and the
strategy itself is intended to be implemented over an even longer period. For example, the MOSM strategy
described in modules 5 and 6 had a three-year implementation phase. Organisations confronted with
rapid change in their business environment and ongoing business model innovation by existing and new
competitors may benefit from strategy frameworks that include methodical approaches to dealing with
high levels of uncertainty and change, often involving iterative stages. These can generally be grouped
together as ‘emergent’ approaches to strategy.
This module explores strategy in the context of creating or responding to emerging business models,
with a particular focus on emergent strategy. A key theme across this module is the increasing need for
organisations to adopt an entrepreneurial orientation, a culture of innovation, dynamic capabilities and an
agile structure. In other words, creating organisations that are stable at their core, but have the flexibility
to respond dynamically and quickly to opportunities and threats.
These key themes, along with emerging business models and the pace of change, create challenges for
management and leadership. The module explores these throughout and concludes with a review of key
implications for leaders and managers.
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FIGURE 7.1 Strategy process — emerging business models

(Module 1)
Strategic analysis:
(Module 2)

Strategic analysis:
(Module 3)

(Module 7)
Strategy development: Ahead of the curve

• Business model change drivers
• Business ecosystems
• Strategy for a dynamic business environment
• Strategy for emerging business models
7.1 THE CHANGING BUSINESS ENVIRONMENT

Modules 2 and 3 described the external analysis and internal analysis stage of the strategy process. This
involves understanding the external environment to identify opportunities and threats and the internal
environment to understand the organisation’s current performance and how its resources and capabilities
can be used to pursue strategic options to accomplish the organisation’s goals.
The increasing pace of change in the business environment has been a recurring theme throughout this
study guide. This section will examine various factors driving this change and establish an understanding
of why the leaders of organisations may need to consider alternative approaches to formulating and imple-
menting strategy and the consequences for organisational structure, culture, resources and capabilities.
CHANGE DRIVERS
The business environment has always been in a state of change. For example, module 1 briefly described
how globalisation had affected the business context. In recent years, a number of key elements have been
driving change, including technology, increasing stakeholder concern for sustainability, and emerging
markets. These and other change drivers collectively create environmental dynamism (Aloulou & Fayolle
2005). This volatile and continuously changing context makes it difficult, if not impossible, to predict the
future of the competitive environment and its impact on the organisation. While environmental dynamism
challenges traditional business models, it also creates new opportunities for organisations to adapt
their strategies to market conditions and to develop actions that allow them to influence environmental
conditions (Lumpkin & Dess 2001; Hakala 2011; Nelson & Winter 1982).
We will now discuss each driver, along with some of their consequences for business models.
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MODULE 7 Strategy and Leadership for Emerging Business Models 419

Technology
Technology has been perhaps the key driver of change and the key facilitator of new business models
over the past 20 years. It has certainly been the factor behind the transformational changes seen in some
industries. It is important to recognise that technology itself does not create these changes, but rather it is
the deliberate use of technology in a business model intended to create or meet a market need (Kavadias
et al. 2016).
Key technological developments that have enabled new business models are the interconnectivity
between organisations and individuals enabled by the development of the internet, the proliferation of
connected smart devices and sensors that automatically capture data, the development of advanced data
analytics to make sense of data, technologies that enable new approaches to the production of products
and services, and technologies that enable the creation of new products and services. Table 7.1 describes
a number of recent technological advancements that have already changed the business environment, but
have potential to facilitate much greater — potentially transformative — change in future.
TABLE 7.1 Technologies with transformative potential
Technology Description
Mobile internet Enables continuous connectivity of computing and smart devices
Internet of Things (IoT) Enables continuous connectivity of smart devices and sensors
Cloud Enables delivery of computer infrastructure and software services over

a network
Robotics Technology able to sense input, apply rules or artificial intelligence, and
react physically
Autonomous vehicles Vehicles that can navigate and drive without a human operator
Automation Technology able to perform work traditionally performed by humans
Artificial intelligence (AI) Technology able to respond to information in a way that mimics human thought
Renewable energy The production of energy from sustainable rather than finite resources
3D printing The printing of 3D objects from a design file
Kark et al. (2019) suggest organisations must merge their technology strategy and their business strategy
if they are to create long-term value in an environment of rapid, technologically driven change.
The changes in business models that have arisen from technology can be broadly categorised as follows.
• Automation is the use of technology to do work conventionally performed by humans or to create new
products and services without the use of human labour. It is often intended to reduce costs and improve
production efficiency. In its simplest form, automation uses machinery and sensors to perform physical
work. This approach has long been used in the car manufacturing industry, where robotic machinery
assembles many of the components of new vehicles. It has also been used for dangerous work, such
as mine detection in the military. A more sophisticated application of automation is business process
automation, which uses algorithms to enable computers to perform repetitive, rules-based work (such
as issuing invoices and payroll). Emerging uses of automation include the application of AI technology,
which responds to information in a way that seeks to mimic human decision making. Chatbots on
websites, collision-avoidance technology in cars, and fraud detection are among the current applications
of AI. An example of technology enabling a change to the business model to enable automation is the
use of automated trucks and trains by Rio Tinto and Fortescue Metal Groups, in addition to traditional
transportation of iron ore and other resources (see modules 1 and 3).
• Extension refers to the use of technology to conduct business in new ways (as opposed to replacing
existing activities). An example of using technology to extend a product or service is the use of live-
streaming of events. For example, in 2019, the pop band The Cure performed a series of concerts at
the Sydney Opera House to celebrate the 30th anniversary of their landmark Disintegration album. The
final concert was live-streamed (for free) and then made available on YouTube, allowing fans all over
the world to experience the concert. Some museums and galleries now provide headphones, a tablet
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computer or a smartphone app that explains each exhibit as guests roam the displays, and even allow
people who do not visit the physical site to access some of their resources. Another example is the online
delivery of educational courses by universities and other providers.
• Transformation is the use of technology to replace established ways of conducting business with
new ones. It involves not just the product or service, but also involves the organisational culture and
business processes. IDC, for example, expected global spending on digital transformation to exceed
US$2.1 trillion in 2021 and research by Gartner found more than half of the surveyed executives
had transformational objectives in their technology strategy (Samuels 2018). Industries are often
transformed by start-ups that begin with highly technological processes and products and services.
Established businesses are then prompted to transform their business to remain competitive. An
example of ongoing digital transformation can be seen in the banking industry, where automatic
teller machines (ATMs) replaced bank tellers for simple transactions. Later on, online and app-based
banking were implemented for even quite sophisticated transactions. Behind the scenes, this transfor-
mation has extended to how banks transact with each other, with real-time transfers now increasingly
possible (Li 2018).
Automation, extension and transformation enable:
• new ways of creating and capturing value
• new means of transacting and exchange
• new organisational forms (Li 2018).
In the video games industry, some publishers have enabled players to build and share their own add-on
components to games, keeping the game fresh and engaging for players long after they have completed
the original version of the game. This works alongside the provision of official add-on content from the
publisher themselves. In some cases, this aspect of the game is far more substantial than the game that was
originally sold.
Li (2018) identified a trend to adopt a ‘portfolio’ of different business models within the one organisation
to serve different market segments, sell different products or services, facilitate interaction between
different types of external parties (e.g. buyers and sellers) or use different models at different points in
time. For example, a digital printing firm worked with freelance writers to produce premium, personalised
children’s books which are ordered online and delivered. This is an added product to their usual printing
business which allows them new revenues from an additional market segment.
Technology insight 7.1 examines how the advent of cloud computing, based on internet technologies,
has enabled organisations to adopt new organisational forms and create and capture value in different ways.
Cloud Computing
The advent of cloud computing has been a major driver in organisational change. It has facilitated structural
change by enabling large-scale outsourcing of technology needs, giving organisations access to expertise
and enabling the organisation to focus on its core strategy (Kark et al. 2019).
Cloud computing is a business model that provides technology infrastructure, platforms and software
as a service. It enables access from a multitude of devices, including smart phones, laptops, desktops and
tablets by members of the organisation and, if desired, external parties. Infrastructure as a Service (IaaS)
is the provision of virtual machines, storage, servers and networking components, sufficient to enable
the user to deploy their own software. Platform as a Service (PaaS) is the provision of infrastructure and
development tools, allowing the user to develop their own applications to run on the cloud platform.
Software as a Service (SaaS) is the provision of software running on the cloud platform. These are shown
in figure 7.2.
Cloud services enable access from a multitude of devices, including smartphones, laptops, desktops
and tablets by members of the organisation and, if desired, external parties. Cloud providers have sufficient
resources to scale quickly to meet rapid changes in demand from clients, meaning clients can also scale
up and down quickly. This is usually based on a ‘pay-as-you-go’ model, so that the client’s costs relate to
the actual amount of the service used. Providers also take care of data security, confidentiality, back-up
and related needs.
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FIGURE 7.2 Cloud computing service levels
Software as a Service
Email software Collaboration Accounting

software software
Platform as a Service
Object storage Runtime Database Development tools
Infrastructure as a Service
Networking
Virtual machines Storage Servers components
Smart devices Internet of Things devices
Laptop Tablet Mobile device Computer LAN
Example 7.1 demonstrates how the US media company, TED Conferences, has evolved with technology
over the past four decades.
EXAMPLE 7.1
TED
TED is best known today as a platform for free online talks on a wide variety of topics presented by the
world’s foremost experts and leading business, social and political identities. Physicist Stephen Hawking,
anthropologist Jane Goodall, former US president Bill Clinton, physician and health rights advocate Leana
Wen, PayPal, Tesla and SpaceX founder Elon Musk, nuclear security expert Emma Belcher, rock star and
political activist Bono, bioengineer Sangeeta Bhatia, and Google founders Sergey Brin and Larry Page,
are among those who have presented TED lectures.
Silicon Valley architect and graphic designer Richard Saul Wurman and designer Harry Marks conceived
the idea of TED (Technology, Entertainment, Design) as a conference in 1984. The first TED conference
demonstrated new technologies, including the Apple Mac, and featured a presentation by mathematician
Benoit Mandelbrot. The poor financial performance of the conference saw the concept placed on hold for
several years. The second TED conference was held in 1990 and it has been held annually since then. Over
time, the focus of the content shifted from technology and design to a broader array of issues including
science, health, social welfare and human rights.
In 2001, Wurman sold TED Conferences to publisher Chris Anderson’s media company, which then
sold it on to Anderson’s not-for-profit Sapling Foundation. After failing to interest television networks in a
show based on TED lectures, in 2006 TED made its lectures available for free online viewing on TED.com,
iTunes and YouTube under a Creative Commons licence. TED.com’s library now exceeds 2500 TED Talks
and collectively they have been viewed billions of times. TED events held around the world are also now
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live-streamed. The first conferences were attended by about 800 people. Now TED videos are watched
by more than a million people every day. This shift of TED’s business model from a conference to a
web-enabled publisher aligned perfectly with the Sapling Foundation’s vision of ‘fostering the spread of
great ideas’.
In 2006, tickets to attend the conference were US$4400. In 2007, a membership model was introduced
where for US$6000 a year, a member received entry to the conference, networking tools, email newsletters
and other information. By 2018, tickets to attend the conference, now held in Vancouver, Canada, were
US$10 000 each. Revenue also arises from corporate sponsorships (including Google, Goldman Sachs
and Coca-Cola), licensing fees, book sales and support from the Sapling Foundation.
In 2019, the Sapling Foundation transferred the TED business to its own TED Foundation.
While the addition of an online delivery model to the existing conference model greatly expanded the
reach of the organisation’s product, TED pursued further ways to increase the reach of the organisations
product.
• It expanded the conference model, both for the value of the conferences themselves and to generate
further online content. TEDGlobal holds conferences at different locations around the world.
• It ensured the content could be accessed by as many people as possible by including subtitling in a
multitude of languages. This was accomplished using crowd-based platforms that, as of 2020, involves
almost 35 000 volunteer translators, creating 160 000 sets of subtitles across more than 100 languages.
• It (freely) licenses its platform and branding via TEDx, which enables people and organisations to
organise TED-style conferences. In return for the licence, organisers must operate in accordance with
principles laid down by TED (including not profiting from the conference) and assign copyright to TED.
• It has established TED-Ed, TEDMED, TEDWomen and TEDYouth for specialist audiences.
• It identifies and sponsors young people to attend conferences and receive mentoring via its TED Fellows
program.
We can use facts from this example to examine how the TED Foundation has used technology to change
its business model and create long-term value by:
• changing the business model via:
– transformation — TED transformed their business model from the established way of organising
conferences in a physical setting to using technology to produce online lectures
– extension — by developing an established online product with highly engaged viewers, TED extended
their model into live conferences, educational resources, licensed product (such as TEDx) and a
mentorship program
• creating long-term value — technology enabled TED to create long-term value by increasing their
number of viewers to a global audience, which then increased brand awareness. This created long-
term value by:
– increasing brand awareness
– generating a revenue stream through sponsorship
– generating an engaged audience that were willing to pay for membership
– extending the product into an offline conference, thus generating more revenue and access to another
audience.
Source: Adapted from TED.com.
QUESTION 7.1
Brosa was launched by Melbourne entrepreneur Ivan Lim in 2014 to sell domestic and imported
furniture and homewares direct to consumers. The business was inspired by Lim’s experience
shopping for furniture in stores across a series of weekends — he had found the process inefficient,
stressful and expensive. Brosa uses a website for sales, eliminating the costs associated with
salespeople and retail space and thus achieving lower prices for customers while allowing them to
browse a variety of styles from home.
By 2018, Brosa’s online shop was supplemented by showrooms in Melbourne and Sydney. Both
online and in-store customers can buy a variety of styles, including designer furniture, period
pieces, tables, chairs, sofas and sofa-beds. The Brosa Studio showroom uses technology to help
customers choose furniture for their homes. Customer service staff help customers convert a
photo of their space to a virtual version of their room that they can then virtually fill with different
products to experiment with different styles and aesthetics. Alternatively customers can use their
smartphones to scan products’ QR codes to obtain pricing, material and dimensions information
about individual items. Customers can even use their smartphone to purchase items if they would
prefer not to deal with service staff.
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Until they are ready to buy, customers can save a link to a wish list so they have quick access
to the items that interest them. Like most furniture stores, they also allow customers to borrow
swatches and samples to test colours and textures at home. Brosa Studio supports customers
with support via phone, social media, online chat and email.
Brosa’s delivery system enables customers flexibility around the delivery date and a tracking
function enables them to see where their driver is so they know when they need to be at home on
delivery day. Optionally, customers can choose to have the delivery team assemble their item and
remove packaging.
Lim said Brosa’s philosophy was to fit around what the customer wants — to be there ‘wherever,
whenever, and however’ a customer wants to shop.
Categorise Brosa’s business model as automation, transformation or extension. Use the case
facts to justify your categorisation. Analyse the ways it has created and captured value for the
organisation.
Source: Adapted from Brosa 2020, ‘Our story’, www.broadsheet.com.au/melbourne/art-and-design/article/brosa-studio-
new-fitzroy-furniture-shop-brings-new-meaning-try-you-buy.
Sustainability
Module 1 introduced the concept that an organisation’s vision, mission, values and goals should align with
stakeholder interests. Module 3 looked specifically at how to identify stakeholders and analyse their needs,
providing the organisation’s leaders and managers with information to communicate with and manage
interactions with stakeholders. One of the concepts identified was the increasing recognition of diverse
stakeholder interests. While shareholders remain a key stakeholder, it is becoming less common for an
organisation’s managers and leaders to see the organisation’s purpose solely as generating income and
wealth for shareholders.
Stakeholder pressure to pursue social and environmental sustainability is growing. Sustainability was
defined by the United Nations’ Brundtland Commission as:
meeting the needs of the present without compromising the ability of future generations to meet their
own needs.
Idil Gaziulusory and Twomey (2014) trace literature back to at least the 1990s that suggests sustainability
would become a driver of innovation. Orsato (cited in Idil Gaziulusory & Twomey 2014) identified
sustainable value innovation as an approach to strategic management. Sustainable value innovation
focuses on creating new markets through business model innovation that enables an organisation to create
value for customers and society as a whole while reducing both economic and environmental costs. A
report by the US Business and Sustainable Development Commission found sustainable business models
have the potential to add US$12 trillion in value to the market (Topping 2019).
Dunphy et al. (2007) proposed the ultimate response to sustainability issues will be a reinterpretation of
the corporation in which organisations view themselves as an integral part of ecological and social systems,
acknowledging resource constraints and focusing on sustainability of all systems. This is a long-term vision
that would require fundamental changes in society.
Example 7.2 describes how H&M’s business has struggled to convince observers of the sincerity of its
sustainability strategy.
EXAMPLE 7.2
H&M Sustainability Strategy Needs Revision

Fashion, homewares and accessories group H&M responded to growing stakeholder interest in sustain-
ability issues with a high-profile sustainability strategy launch in 2018. The strategy nominated a number
of goals: by 2030 it would use only recycled or sustainably sourced materials; by 2040 it would be climate
positive. It is aiming for a circular business model based on sustainably sourcing, reuse and recycling.
Unfortunately for H&M, the strategy was greeted with scepticism. Just a year earlier, Danish TV2 had
aired a documentary alleging H&M sent its unsold clothing inventory to be incinerated at the Västerås heat
and power station — which itself was transitioning to fossil-free operations.
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It is believed an average of 12 tonnes of unsold clothes were being burnt each year. Kolding Design
School sustainable design professor Else Skjold said clothes were being overproduced in response to
companies like Zara that introduce new product lines every week. In response to the allegations, H&M
said:
it is always as last option and only for those garments that cannot be reused — including donations
— or recycled. These may be, for example, products that have failed certain chemical safety tests or
that have been affected by mould during transportation, and are therefore not safe to be reused or
recycled.
A decade earlier, a report in the New York Times forced H&M to abandon its practice of shredding unsold
garments rather than donating them to the needy.
H&M has decided to focus more on online sales. Its biggest challenge may be to reform its image in the
eyes of consumers increasingly concerned about sustainability and the environment. As Swedish student
Måns Flodholm put it: ‘I don’t buy clothes from H&M — ever…Don’t you know they burn their clothes that
they don’t sell?’
Source: Adapted from H Farmbrough, 2018, ‘H&M is pushing sustainability hard, but not everyone is convinced’,
14 April, www.forbes.com/sites/heatherfarmbrough/2018/04/14/hm-is-pushing-sustainability-hard-but-not-everyone-is-con
vinced/#218446c67ebd; E Paton, 2018, ‘H&M, a fashion giant, has a problem: $4.3 billion in unsold clothes’, The New
York Times, 27 March, www.nytimes.com/2018/03/27/business/hm-clothes-stock-sales.html; V Hendriksz, 2017, ‘H&M
accused of burning 12 tonnes of new, unsold clothing per year’, 17 October, Fashion United, https://fashionunited.
uk/news/fashion/h-m-accused-of-burning-12-tonnes-of-new-unsold-clothing-per-year/2017101726341
QUESTION 7.2
Denmark’s largest utility company, Orsted, has replaced almost all of its former coal and oil primary
energy sources with clean sources that it develops, constructs and operates, including offshore
wind farms, waste-to-energy programs and bioenergy plants. Orsted is aiming to achieve a 96%
reduction in greenhouse gas emission intensity from energy production by 2023, compared to its
2006 baseline levels.
Orsted’s transformation has likewise helped the country make progress towards its climate
change commitments under the Paris Agreement. Orsted is majority-owned by the Danish gov-
ernment and its CO2 e reductions account for more than half of Denmark’s reductions since 2006.
Importantly, Orsted’s earnings have grown faster than the power utility sector generally and the oil
and gas sector that was once the key part of its supply chain. Fossil-fuel based activities accounted
for just 1% of Orsted’s total earnings by 2017. Orsted is also tapping into new growth opportunities
that have arisen from its new business model — expanding its wind energy business into Taiwan,
which is looking to replace its ageing nuclear sector with renewables and gas, and the USA, with
the acquisition of Deepwater Wind.
Orsted’s goal is to cease all use of coal at its power stations by 2023. It strategic initiatives to
achieve this included:
• divestment of its upstream oil and gas business
• building offshore wind farms and
• converting power stations to use certified sustainable biomass instead of coal and gas.
Orsted believes it has converted the threat of climate change into a business opportunity —
its ambitious goals have established it as a strong presence in the renewable energy market.
Investors generally are attracted to its strong growth. Investors seeking sustainable investments
are attracted to the organisation’s transition to a low emissions business model and its scientifically
developed goals for the future. Customers are attracted to the business as a way they can access
sustainable energy to make their own contribution towards climate change mitigation.
Analyse how the needs of the different stakeholder groups have been met through the use of new
technologies to transform Orsted’s business model.
Source: Adapted from We Mean Business Coalition, 2018, ‘Orsted: Science-based target case study’, 14 March, www.
wemeanbusinesscoalition.org/blog/orsted-science-based-target-case-study; N Topping, 2019, ‘These companies are embrac-
ing the disruptive innovation of climate action’, GreenBiz, 7 March, www.greenbiz.com/article/these-companies-
are-embracing-disruptive-innovation-climate-action.
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Emerging National Markets
As corporations target emerging economies, particularly the rapidly growing Indian and Chinese
economies, as potentially lucrative future markets, they must deal with the challenge of either cutting
costs substantially in order to make their products and services affordable. They might even then accept
very small profits or reconceptualise their business models to create and capture value in a new way.
Eyring et al. (2011) suggest that adapting existing business models to emerging markets is an inherently
limited approach and that it is better to approach emerging markets in the same way start-up organisations
do — by building a business model from scratch to meet the specific needs of consumers in those markets.
This approach was evident in how Indian consumer durables company Godrej and Boyce expanded
their refrigerator business in India. While management initially focused on how to adapt their large, high-
end refrigerators to reduce costs to make them more affordable for lower-income markets, this approach
overlooked the different need lower-income households had of a refrigerator. Their primary need was
to safely preserve leftovers for one or two days and to cool drinking water. Once this was understood —
based partly on consulting with 600 Indian women who would be among the primary users — the company
developed a small refrigerator (43 litres) that used less than half the energy of a conventional refrigerator
and could run on battery during power outages (Eyring et al. 2011).
BUSINESS ECOSYSTEMS
A business ecosystem can be defined as the co-existence and co-evolution or organisations based on their
ongoing interactions. Traditional markets are being rapidly replaced by networks. This change calls for new
strategies where competitive advantage shifts from what the organisation ‘does better’ than its competition
to how its partnerships and alliances help all involved parties ‘do better’.
Ecosystems may be described in terms of innovation ecosystems, platform ecosystems and service
ecosystems (Aarikka-Stenroos & Ritala, 2017).
• Innovation ecosystems refer to organisations that work together to innovate. A simple example would
be wholesalers and retailers working together to create efficiencies in inventory management. A more
complex example would be independent organisations sharing research to create mutual benefit.
• Platform ecosystems are built around a single product or service that supports many complementary
products. Apple’s hardware, for example, serves as the core of a platform ecosystem that connects
customers with a wide range of organisations that develop productivity and recreational software,
develop television programming, create music, produce headphones and smart phone cases, printers,
battery chargers and other accessories, and service providers who supply training, technical support
and maintenance. The tight integration of the products and services requires cooperation between all
parties involved.
• Service ecosystems refer to the way exchanges between different organisations and/or within an
organisation create value for all parties involved.
Organisations need to understand their external environment in terms of business ecosystems where
different organisations collaborate and cooperate to create value, while simultaneously seeking to capture
value for themselves. Value creation from business ecosystems are discussed in section 7.2.
HYPERCOMPETITION
In certain circumstances, environmental dynamism can give rise to hypercompetition, which refers to the
situation in which competitors evolve, respond and innovate — in terms of products, services, processes
and business models — so quickly that any competitive advantage an organisation establishes cannot be
sustained (D’Aveni, Dagnino & Smith 2010). Organisations operating in hypercompetitive markets target
a series of short-term advantages by pursuing strategies that disrupt the market, then repeat the process with
another disruption, and so on. Zenger (2015) contends that in a hypercompetitive market (or indeed, any
market) an organisation’s strategic objective should be to sustain value creation, not competitive advantage.
Hypercompetition often arises in the early years of new markets and industries, such as those being
created by some of the change drivers described above. In particular, markets for technology-related
products and services often experience hypercompetition. However, mature, seemingly stable industries
can also be thrust into hypercompetition by the arrival of a disruptive new entrant or a disruptive business
model developed by an established organisation seeking renewal.
follows.
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KEY POINTS
7.1 Select the concepts, processes and frameworks to develop and implement strategy for
emerging business models.
• The business environment is characterised by fast-paced change driven by technology, sustain-
ability and emerging markets.
• A business ecosystem perspective of the business’s external environment is a useful way to
understand where value is created and how the organisation may seek to capture value through
cooperation and competition.
• Industry environments characterised by hypercompetition require constant innovation as it is not
possible to sustain a competitive advantage.
7.2 Evaluate appropriate strategies applicable to challenges faced by emerging business models.
• The development of business ecosystems suggest cooperation with external organisations as a
strategy for creating value.
• Hypercompetitive environments require strategy based on a series of disruptive innovations.
7.3 Evaluate how the roles of management and leadership drive the organisational strategy for
• Leaders and managers need to stay abreast of the factors driving fast change in the business
environment and the opportunities and threats they create for the business.
• In any business environment, leaders and managers may seek to formulate strategy to achieve
sustainable value creation rather than seek competitive advantage.
7.2 BUSINESS MODELS AND STRATEGY

The concept of a business model has been defined in numerous ways by different researchers (Li 2018).
Module 1 introduced the broad concept that a business model explains how a business works and the
economic logic behind it. Kavadias et al. (2016) described it as ‘a system whose various features interact,
often in complex ways, to determine the company’s success’. These features include the customer value
proposition, profit formula and key resources and processes (Johnson et al. 2008). As such, every business
has a business model, though not every business chooses to articulate it in a formal way.
It is important not to confuse a business model and strategy: a business model describes how the business
operates; a strategy explains how the business will outperform competitors or sustain value creation.
A strategy may involve a better business model or offer an equivalent business model to a different market
(Ovans 2015).
BUSINESS MODEL INNOVATION

Business model innovation refers to changing one or more elements of the business model to create or
capture value in a new way. More formally, Wirtz (2016 in Wirtz et al. 2016) defined business model
innovation as:
the design process for giving birth to a fairly new business model on the market, which is accompanied by
an adjustment of the value proposition and/or the value constellation and aims at generating or securing a
sustainable competitive advantage.
Business model innovation has been the subject of increasing focus over the past two decades as a way
to succeed in the increasingly dynamic and competitive business environment (Wirtz et al. 2016). Bojoaga
et al. (2012) cited research suggesting the majority of managers consider business model innovation
a more important source of competitive advantage than product or service innovation (as discussed in
module 4). The sustainability of that competitive advantage depends on the extent to which others can also
adopt the innovation. Innovations that can be easily copied will not provide a sustainable advantage unless
they combine with some other unique, difficult-to-imitate component of the business.
Business model innovation can be pursued by:
• start-ups approaching a market with a new model
• existing businesses pursuing competitive advantage
• businesses responding to competitive threats.
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Wirzt et al. (2016) identify that business model innovation is very difficult due a range of barriers,
including high levels of uncertainty. Hoveskog et al. (2015) in Wirtz et al. (2016) suggests using the
business model canvas as a structure within which to experiment with possible business model innovations.
BUSINESS MODEL CANVAS

Most approaches to the design and selection of business models identify the components of business
models and alternative ways to configure them. As described in module 1, a business model canvas is
one tool that can help management analyse aspects of business to understand existing business models or
create new models (Osterwalder 2013). The business model canvas presents nine elements through which
businesses make their product or service, present a customer value proposition to the market and manage
the experience of customers. Figure 7.3 details issues related to each of the nine elements. In essence, then,
a business model canvas is a ‘visual and design-informed tool to enhance strategic thinking about business
model innovation’ (Spith et al. 2014 in Chiaroni, Chiesa, Frattini and Urbinati 2016).
FIGURE 7.3 The business model canvas
CUSTOMER CUSTOMER
KEY PARTNERS KEY ACTIVITIES VALUE PROPOSITIONS
RELATIONSHIP SEGMENTS
Who are our What key activities What value do we deliver How do we get, keep, and For whom are we
partners? do our value to the customer? grow customers? creating value?
Who are our key propositions require? Which one of our Which customer Who are our most
suppliers? Our distribution customers’ problems are relationships have we important
Which key channels? we helping to solve? established? customers?
resources are we Customer What bundles of How are they integrated What are the
acquiring from our relationships? products and services with the rest of our customer
partners? are we offering to each business models? archetypes?
Revenue streams?
segement?
Which key activities How costly are they?
do partners Which is the minimum
perform? viable products? CHANNELS
KEY RESOURCES Through which channels

do our customer segments
What key resources want to be reached?
do our value
How do other companies
reach them now?
Our distribution
Which ones work best?
channels?
Which ones are most
Customer cost-efficient?
relationship?
How are we integrating
Revenue streams? them with customer
routines?
What are the most important costs inherent to our For what value are our customers really willing to pay?
business model? For what do they currently pay?
Which key resources are most expensive? What is the revenue model?
Which key activities are most expensive? What are the pricing tactics?
Source:A Osterwalder, 2013, ‘A better way to think about your business model’, Harvard Business Review, May,
https://hbr.org/2013/05/a-better-way-to-think-about-yo.
Figure 7.4 shows how the main components of the business model canvas interrelate, representing an
integrated set of choices to be made. Mapping an organisation’s business model makes it possible to
experiment with alternatives. It can answer questions such as ‘How can the firm change the components
of its business model to create new configurations?’.
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FIGURE 7.4 Interrelating components of the business model canvas
Infrastructure Product/service Customer
Activities Segments
Value
Partners Relationships
proposition
Resources Channels
Financial viability
Costs Profit Revenues
Source: RM Grant, 2018, Contemporary Strategy Analysis, 10th edn, John Wiley & Sons Inc., Hoboken.
Example 7.3 presents a fictitious business to demonstrate how to analyse a business model using the
business model canvas.
EXAMPLE 7.3
Business Model Canvas for an Online Retailer

Newvines Ltd was established in 1910 in Wales as an upmarket men’s tailor, producing high-quality shirts,
suits and overcoats. Over time the business expanded, and by the 2000s it was using mass production
techniques, targeting an affluent market segment from retail locations around Europe and through selected
distributors in overseas markets. In 2014, Newvines launched an Australian website selling executive-
style business shirts and ties. The clothing was offered in a pack of five shirts with two ties, targeting
businessmen and office workers who wanted to ‘dress well, save time and money, and avoid the shopping
centres’. The launch was accompanied by extensive brochure placement in magazines and newspapers,
along with direct marketing based on purchased mailing lists.
Consider the elements of Newvines’ business model.
• Customer segments — affluent professional men, aged 30–55, with an income of AU$80 000 or more.
This target segment was targeted by brochure placement in media consumed by this same segment,
along with direct mail advertising from purchased mailing lists.
• Key partners — mailing list providers (advertising); magazines and newspapers (advertising); social
media (advertising and customer experience); loyalty scheme providers (generate traffic); Australia
Post and couriers (advertising and delivery); manufacturers in South-East Asia (low-cost production).
Newvines prints and mails two million brochures a year. About 250 000 of these are sent to contacts
from purchased mailing lists. These generate about 80% of sales turnover and hence the partnerships
with mailing houses, mailing list providers, and direct market customer is key to the business’s current
performance.
• Value proposition — make it easy for men to dress well; make high-quality fashion affordable by selling
direct, eliminating intermediaries. The value proposition ‘dress well, save time and money, and avoid
the shopping centres’ is realised by discounted multi-pack shirts and ties, and the use of an online store
and home delivery.
• Key activities — direct marketing; courier delivery of online orders.
• Channels — Newvines uses company-owned physical stores, a company-owned online store and
distribution through retailers. It has three stores in the United Kingdom, 21 stores across the rest of
Europe, six stores in the United States. It has distribution arrangements with retailers in Japan, Dubai,
and Singapore. It has an online store that presents a custom national interface to customers in Australia,
New Zealand, South Korea and South Africa. Half of Newvines’ revenue is generated by its European
stores and a quarter by its US stores. The final quarter is generated by online sales. Newvines European
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warehouse holds extensive stock of all sizes and fashions and has implemented a degree of automation
to improve efficiency of processing, cut costs and reduce errors. Inventory stays in the warehouse for
an average of 60 days.
• Revenue streams — Australian revenue had grown from approximately $65 000 in the launch year to
$380 000 in the last full year of operation.
• Cost structure — stock costs are 40% of revenue. Distribution and selling costs are 30% of revenue.
Administration costs are 20% of revenue.
• Key resources — the online store; mailing lists; tracking of sales generated from direct mailing back to
the individual to inform future promotions.
• Customer relationships — regular direct mail and email of offers, promotions and catalogues to existing
and potential customers; an online store.
The current business model canvas for the Australian operation can be seen in figure 7.5.
With the business model mapped, Newvines could now proceed to explore changes, such as
introducing web-based analytics or shifting its European and US operations online.
FIGURE 7.5 Newvines’ business model canvas
VALUE CUSTOMER CUSTOMER

KEY PARTNERS KEY ACTIVITIES
PROPOSITIONS RELATIONSHIPS SEGMENTS
Mailing houses Brochure and Make it easy for Direct mail and Affluent
Newspapers product delivery, men to dress well, email professional males
Third party referral matching lists save time and money, Aged 30–55
Suppliers with purchases and avoid the
shopping centres
KEY RESOURCES Make Jermyn St CHANNELS

quality and style
Mailing lists affordable for
everyone Online
Match back process
Website for orders
Stock and
warehouse
Stock 40% Multibuy (×4)

Distribution and sales 30% 10% operating profit margin
Admin 20%
(of revenues)
QUESTION 7.3
Amazon is one of the top-three retailers in the world by total revenue and continues to achieve
strong growth. Its online sales are much higher than all other online retailers in the United States.
Amazon’s mission is ‘We seek to be Earth’s most customer-centric company. We are guided
by four principles: customer obsession rather than competitor focus, passion for invention,
commitment to operational excellence, and long-term thinking’.
Amazon has two key aspects to its business: e-commerce, which is its online shopping platform,
and its Amazon Web Services (AWS) cloud computing platform.
Over half of online sales by volume are third-party sales. Amazon supplies the platform on
which other businesses, from major retailers (such as Nike, Best Buy and Calvin Klein) to very
small businesses, can connect with customers to sell their goods. Amazon collects a commission,
receives fees from packing and shipping orders and their fulfilment activities for third-party retailers
indirectly advertises Amazon.
Amazon’s own sales (purchasing from wholesalers, warehousing the items and selling directly to
customers on its platform) account for 42% of the company’s online sales.
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Amazon launched Amazon Prime in the United States in 2005 and later in 16 other countries.
It currently has 150 million members who pay a subscription fee which gives members free one-
to two-day delivery within their country plus other benefits. This is a high-margin revenue stream
for Amazon.
Amazon has built its success on its delivery and fulfilment network. The fulfilment process is
quick, and especially so for Amazon Prime customers, with just-in-time delivery and shipping
systems allowing delivery of orders in one to two days. This is best in-class. This has required
a large investment to build new fulfilment centres when expanding Amazon Prime to international
markets. Amazon conducts significant R&D to streamline and improve efficiency of their fulfilment
centres and other projects. These costs are significant, and Amazon ensures they have well scaled
and efficient fulfilment centres and processes for optimised costs. However, e-commerce revenue
streams are low margin due to costs related to warehousing and the upkeep of fulfilment centres.
Amazon partners with shipping companies (such as UPS, FedEx and DHL), which provide
shipping services for Amazon’s fulfilment process to ensure timely arrival of products. Amazon’s
enjoys global distribution channels through their shipping partners and fully streamlined fulfilment
centres.
Amazon has enormous online marketing and advertising platforms, which is a high-margin
revenue stream for Amazon. Customers are supported through online/phone communication
channels.
AWS provides cloud services, infrastructure, and data storage to business clients in an agile,
flexible, scalable and secure form. They require servers and cloud storage infrastructure, which
they have managed to secure at comparatively lower costs for managing and upkeep of the AWS
servers. Their AWS revenue is a high-margin revenue stream due to low upkeep and variable costs
of adding servers. AWS, along with advertising and subscription services, are the primary profit
driver for Amazon despite being a significantly smaller revenue stream.
Using the case facts, analyse Amazon to create a business model canvas for the organisation.
Most industries eventually evolve so that there is a dominant business model that represents the most
effective way to use resources in order to create value. In module 1, this was described as the ‘productivity
frontier’. While leaders and managers (particularly in mature or declining industries) are greatly interested
in new business models, most companies find business model innovation difficult.
If an existing organisation or a new entrant successfully introduces a new business model, and establishes
a competitive advantage over competitors, then either incumbent organisations are forced out or forced to
adopt the new model. This is how industries are transformed. The Uber ridesharing business is an example
of this. The taxi industry in markets where Uber has succeeded has been fundamentally changed and, if
Uber’s vision is realised, the car manufacturing, sales and service industries will also be transformed.
It is important to recognise that most ‘new’ business models are not genuinely new, but represent an
evolution or sometimes a major revision of an existing business model. Nevertheless, genuinely new
business models and changes in established business models are arising at an unprecedented rate, both
prompted by and contributing to rapid changes in the business environment. The various factors facilitating
and driving these changes were described in section 7.1.
The business model necessarily looks at the organisation’s internal environment. It is important,
however, to also focus on the interfaces with external organisations. These are represented by the ‘partners’
and ‘relationships’ shown in figure 7.4. This has become more important than ever as the business
environment increasingly takes on the nature of a business ecosystem.
VALUE CO-CREATION IN BUSINESS ECOSYSTEMS

Section 7.1 introduced the concept of business ecosystems. The ecosystem concept recognises the
increasing interdependence and co-evolution of contemporary business and innovation activities. Moore
(2013, p. 3) suggested that a business ecosystem perspective allows the investigation of a new form of
organisation that:
shows promise in achieving shared purposes, sharing value among many contributors, and in bringing the
benefits of technology to a range of people, cultures and problems far beyond what earlier systems have
achieved.
Moore (1996) argued that the success or failure of organisations could be explained by how they fit
into the business ecosystem and how well the entire ecosystem is performing. Organisations need to
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understand the way the ecosystem is changing and find ways to contribute to that change. The most
important managerial implications of ecosystems are the need to develop resilience and flexibility to
work and co-evolve with other members of the ecosystem. Organisations seeking to break out of their
current ecosystem to create a new market essentially have to create a new business ecosystem, forming
relationships with suppliers, distributors, service providers and customers.
Using an ecosystem as a perspective in the management of business and innovation networks allows
managers to identify new models for value creation. Value co-creation is a central tenet within the
ecosystems approach — involving customers or other parties in creating a product or services — where
all parties benefit. Therefore managers have to recognise how value can be captured and co-created.
One-way organisations can participate in value co-creation is to contribute to an open-innovation project.
The organisation’s benefits can include:
• intrinsic rewards for staff (e.g. the stimulation of solving problems)
• social rewards for staff and the organisation (e.g. interaction with the community, good citizenship)
• extrinsic rewards including financial rewards and non-financial rewards (e.g. learning, reputation,
diffusion of ideas).
Open innovation will be discussed in more detail later in this module.
Example 7.4 describes the role of co-creation of value in the emerging electric vehicle ecosystem.
EXAMPLE 7.4
Electric Vehicle Ecosystem

Growing concern about greenhouse gas emissions and other pollution and environmental impacts
associated with petrol, diesel and LPG vehicles has prompted research and development into electric
vehicle technologies. These technologies need to be viewed as a system as none of them will work
in isolation. For example, the cars are only viable if there is a network of charging stations. The main
environmental benefit is only realised if the cars’ batteries are charged from renewable energy sources.
Thus the electric vehicle ecosystem includes vehicle manufacturers, consumers, government agencies,
investors, urban planners, renewable energy companies, and others. The emerging industry is not a
competition between individual corporations, but an ecosystem of partners and competitors coming
together to develop technology, define standards and roll out infrastructure.
Vehicle manufacturers have been exploring electric vehicle technology for decades, but growing
concern about climate change has resulted in an acceleration of effort. Tesla is one of the highest valued
automotive manufacturers. It manufactures only electric vehicles and has low-volume production and
sales (it sold about 10 000 electric cars in China in 2017), but its valuation is based on the technology’s
future potential. The Volkswagen group sells 10 million vehicles per year and is the largest car manufacturer
in the world. It is aiming for 25% electric sales by 2025 and has announced plans to move to an all-electric
product range by 2030. Volvo is moving more quickly, targeting 50% electric sales by 2025. Chinese
electric car manufacturer BYD sold more than 100 000 electric vehicles in 2017. Toyota and Nissan both
have plans to target China, which has become the world’s largest market for electric vehicles.
Since the electric vehicle market represents a complex combination of existing and emerging technolo-
gies, numerous start-ups have targeted niche requirements in the sector, including battery technology,
battery recycling and efficient charging. Other start-ups have more ambitiously aimed to produce the
vehicles themselves, including Rimac, Vanda and Nio.
Many electric car customers may seek to recharge their cars at home, but recharging stations will also be
needed in car parks, shopping centres and roadside service facilities. Electric cars are only viable if there
is an extensive network of charging stations, particularly in countries where people travel long distances
by road. For maximum environmental benefit, these charging stations should work from renewable energy
sources, though this will not likely be practicable at first. The United Nations’ National Renewable Energy
Laboratory has supported the development of renewable energy charging stations with a grant to the Solar
Energy Innovation Network Great Plains Institute to develop a plan for solar energy’s role in the future of
the sector. In the United States and Europe, the car industry is seeking charging infrastructure at least
every 150 kilometres. Indian Railways plans to include vehicle charging stations at train station carparks
in Delhi.
Sweden has experimented with creating a stretch of road that recharges electric vehicles as they drive
on it — the eRoadArlanda initiative — though this faces many challenges, including cost and safety.
Most electric vehicles are designed to maximise efficiency and thus achieve the most possible range
from a single charge. Much of this is related to how the car is driven and unsurprisingly self-driving and
driver-assist technologies are being developed alongside electric vehicle technologies. Tesla has focused
on this aspect in particular. In some of DaimlerChrysler’s truck technology, different vehicles are already
communicating with each other to optimise efficiency and safety.
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Regulators are indirectly and directly involved in the development of the electric vehicle ecosystem
through measures intended to encourage manufacturers to be more eco-friendly. Taxes on car registration
and fuel also motivate the development of alternative options. In some countries, changes have been
mandated. For example, European Union members were required to reduce vehicle emissions to
95 grams per kilometre per vehicle by 2020. In Canada, Ontario’s Electric Vehicle Charging Incentive
Program provides incentives for homes to install charging stations.
The role of customers is of course central to the development of the industry. In some markets,
customers are motivated to adopt electric vehicles for environmental reasons and to be an early adopter
of the latest technology. Customer roles are also affected by attitudes to public transport, as well as new
potentially transformative developments such as car-share and ride-share platforms.
Looking more deeply into the electric vehicle ecosystem, emerging technologies like blockchain could
find application in ensuring ethical sourcing is practised throughout the supply chain (e.g. avoiding slave
labour in mining of the minerals used in batteries).
Source: Adapted from https://yourstory.com/2018/05/electric-vehicles-challenges-startups?utm_pageloadtype=scroll;
https://store.frost.com/global-executive-analysis-of-start-ups-in-the-ev-ecosystem-2018.html.
QUESTION 7.4
The electric vehicle ecosystem in example 7.4 consists of large vehicle manufacturers, potential
providers of solar and electricity charging stations, software experts, governments and citizens.
Analyse the value each player can bring to the development of the electric vehicle.
Parties participate in co-creation efforts for the benefits they bring, but it is important to realise that, as
in business ecosystems generally, there is both cooperation for value creation (Kale, Dyer & Singh 2002;
Lavie, Haunschild & Khanna 2012; Yli-Renko, Sapienza & Hay 2001; Zollo, Reuer & Singh 2002) and
competition for value capture (Dyer, Singh & Kale 2008; Lavie 2007).
Customer co-creation, where the customer participates in value co-creation, has increased greatly in
recent years as organisations seek customer-centre innovation as a way to differentiate themselves. Social
media and internet communication technologies generally have made it much easier for organisations and
their customers to engage in dialogue. For example, toy maker LEGO has established an online community
LEGO Ideas that allows customers to suggest, give feedback and vote on ideas for new LEGO kits. Once
an idea receives 10 000 votes, its market appeal is considered to be proven and its production viability is
then assessed. Ideas that are adopted as future products include the creator’s name on the packaging and
the creator receives a 1% royalty on sales. Thus value has been co-created and also shared between the
company and the individual (Persson 2019).
Co-creation also occurs in the business-to-business context. Trust between partners in alliances and
other forms of cooperation, along with strong ties between different organisations’ managers, allow
organisations to gain certain advantages through co-creation, such as sharing risks, specific assets and
knowledge (Gulati, Lavie & Singh 2009). For example, Apple’s App Store is a digital platform that
provides a way for software developers to promote and sell their products to a vast market. Apple provides
numerous resources, such as developer kits, for developers. In return Apple receives a commission from
each sale and the software drives demand for its hardware products such as the iPhone, iPad and iMac.
Thus value is co-created (Hein et al. 2019). Another example is the use of software in logistics enabling
couriers, retailers and customers to all access online information and receive alerts in order to keep up to
date with the progress of a delivery. This helps retailers and couriers coordinate their services efficiently,
adds value for the customer in being able to see the progress of their order and thus reduces inquiries from
customer to both the retailer and courier, reducing wastage of resources.
TRANSFORMATION AND DISRUPTION

Industries, products and services and business models tend to gradually evolve through continuous
improvement and industries and organisations progress through a life cycle, as described in module 1.
Sometimes, however, innovations are introduced that change the basis of competition in a market and
result in an industry transformation or disruption.
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Transformation occurs when an innovation is introduced that effectively competes for the same
customers and shifts the basis of competition in the industry. In common usage, ‘disruption’ or ‘disruptive
innovation’ refers to any innovation that brings about substantial change in a market or industry.
Christensen et al.’s (2004) original concept of disruption was based on the idea that disruptive
organisations introduce an innovation to market segments that are unattractive to (and hence ignored by)
the industry’s established major players. They are often based on a product or service that is simpler,
cheaper and more convenient than the established offerings. Once they establish a foothold, they then
improve their product or service to meet the needs of customers currently served by industry incumbents.
This succeeds when the industry incumbents have ‘overshot’ customers’ needs (see figure 7.6). Disruption
therefore should be seen as a process rather than defined in relation to a product or service innovation.
Christensen et al. (2015) described two key types of disruption.
1. Low-end disruption. This describes disruption that is a low-performance and low-price innovation
serving in existing low-end markets (Hang et al. 2006). Low-end disruption is attractive to customers
who are over-served by the functionality of their current provider. Netflix began with a low-end
disruption. Its initial service was a video rental service that involved customers ordering online and
then waiting some days to receive the video by mail — and then they customer had to return the
video by mail. This service did not directly compete with the mainstream customers of video rental
stores, because it did not provide the convenience or access to new releases that stores did, and so
rental stores ignored Netflix as it focused on that subgroup of customers who did not want to pay
a premium for the advantages of renting via a store. As internet technology and adoption improved,
Netflix moved to an online streaming model offering low-price subscriptions and the convenience of
on-demand consumption, matching or exceeding the service offered by video rental stores. This was
a significant threat to stores. If Netflix had begun with this business model, it is almost certain video
rental stores would have responded aggressively. As it was, Netflix because sufficiently established that
its streaming service revolutionised the video industry, with stores almost all closed and the industry
now based around competing streaming services (Christensen et al. 2015).
2. New-market disruption. This type of disruptive innovation is also often a low-performance and low-
price innovation but serves new markets. New-market disruption typically occurs when characteristics
of existing products limit the number of potential consumers or force consumption to take place in
inconvenient, centralised settings (Christensen et al. 2004). It also can attract customers who are non-
served (i.e. unable to use the product). The advent of online stockbroking is an example of new-market
disruption. By greatly reducing the commission charged on trades, providing general advice rather than
personalised advice and using a self-serve style interface, online stockbroking created a new market
of traders.
FIGURE 7.6 The mechanism of disruption
4 Disruptive
innovation
Industry incumbents competes with
improve product or incumbents
service performance
1 Customer
Performance
needs
2 3 Disruptive
Performance innovation
exceeds
customers’
needs
Time
Source: AA King & B Baatartogtok, 2015, ‘How useful is the theory of disruptive innovation?’, MIT Sloan Management Review,
Fall, vol. 57, no. 1, pp. 99–90, www.researchgate.net/publication/283877064_How_Useful_Is_the_Theory_of_Disruptive_
Innovation.
In Christensen et al.’s (2004) original model, disruption only occurs through the two paths described
above. He does not consider other competitive innovations to be disruptions. However, in subsequent years
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the term has come to be broadly used for any innovation that changes the nature of competition in an
industry and over time transforms the industry. It is important to appreciate when ‘disruption’ is being
used to refer specifically to Christensen et al.’s original definition (2004; 2015) and when it is being used
more generally, because the strategic approach will differ, as may the strategic response. This is discussed
in section 7.4.
QUESTION 7.5
The idea of ecosystems is not entirely new — although arguably a lot more prevalent now and likely
to be more so into the future. The traditional, internal combustion engine motor vehicle industry
has evolved a close ecosystem over decades. Large automotive manufacturers such as GM, Ford,
Toyota and Volkswagen assemble vehicles, working very closely with their suppliers often on a just-
in-time basis. They have sometimes worked together, sharing designs or specific development
processes. The major manufacturers sell their new cars through franchised dealer networks.
Customer demand and preferences have been closely monitored through analysis of data and other
market research. Governments also have had a significant interest in motor vehicle manufacturers,
as they have been aware that the complex engineering skills associated with internal combustion
engine vehicles have increased the skills of the general workforce.
Using the above information and the information from example 7.4, analyse how the current
automotive ecosystem may be disrupted in the near future.
Some innovations substantially change an industry or even multiple industries. We discuss some of these
‘hyperdisruptive’ business models next.
HYPERDISRUPTIVE BUSINESS MODELS

The business ecosystem perspective seeks to understand how the organisations in an industry co-evolve in
a mixed state of cooperation and competition for value creation and capture. An alternative to this state of
co-evolution occurs is the creation of a hyperdisruptive business model by an established player or a new
entrant. Marden (2015) and Caudron and Van Peteghem (2014) suggest the biggest business success stories
in modern times involve breaking away from traditional business models — doing business differently and
thinking outside conventions. Various new and emerging hyperdisruptive business models are discussed
below. It is important to realise that these business models are often using in combination or merged to
form hybrid approaches.
The Subscription Model

The subscription model is a long-established business model in which the customer pays at regular
intervals for ongoing access to a product or service. Mail-order companies and programmed home
maintenance services are among the businesses that have used this model for many decades. The reason
it is considered hyperdisruptive is that businesses are now applying the model to products and services
that in the past have been purchased on an ad hoc basis. The disruption is the ‘lock-in’ of customers via
a subscription fee for continued access to the product or service. This is enhanced by the use of customer
data to personalise the product or service over time so that leaving the subscription involves a cost in terms
of convenience. Many of these businesses leverage technology to deliver or support the product or service.
Examples include video streaming services such as Netflix, razor and shaving accessories businesses such
as Dollar Shave Club and music streaming services such as Apple Music.
The subscription model has also been used to combat the problem of piracy in the music, movie and
software industries. By providing subscription-based access to content or software and supplementing this
with convenience, free updates and add-on features, these industries have shifted the value equation away
from piracy.
The Free Model

The free model involves collecting and selling personal data or ‘advertising views’ harvested by offering
consumers a ‘free’ product or service that captures their data and/or attention. Examples include Google,
social media platforms such as Facebook and free online news and entertainment sites. This model disrupts
industries where organisations have traditionally charged for purchase or access to the product or service.
Table 7.2 lists variations on the free model.
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TABLE 7.2 The free model
Free model variation Description Example
Advertising The organisation seeks to attract users Most online news and entertainment sites
so that they may be presented with YouTube
advertising messages
Users do not pay for the product or, more
commonly, service they received
Rather, the advertiser pays the organisation
for access to its audience
Barter A product or service is given to customers Google’s free search engine

in exchange for something of value other Most social media platforms
than money (often their personal data)
Cross-subsidisation An organisation gives a product or service Printers are sold cheaply to build demand
to customers for free (or very cheaply) for high-margin printer cartridges
in order to drive high-margin sales of a Apple sells music and apps cheaply to
complementary product drive demand for its high-margin devices
Gift A product or service is provided for free Open-source software

because the producer or owner derives Wikis
satisfaction or some other benefit from
doing so User forums can often relieve the amount
of traffic on an organisation’s help lines
Promotion A low-cost product or service is given Supermarkets and takeaway chains

away in conjunction with the purchase providing children’s toys or collectables
of a different product or service as a free gift when customers spend a
threshold amount on a product or service
The Freemium Model

The freemium model extends the free model by adding an optional non-free premium service. Users can
sample most features of the service for free, but need to pay to upgrade to get all the features. This model
works where marginal cost for extra units and distribution are lower than advertising revenue or the sale
of personal data. Examples include streaming music service Spotify, professional networking platform
LinkedIn and online storage and document sharing service Dropbox. This model disrupts businesses that
could formerly charge for even the basic service.
The Digital Platform Model
The digital platform model provides a digital marketplace that brings together buyers and sellers directly,
in return for a transaction, membership or placement fee or commission. Examples include retail and
second-hand platform eBay, music publishing and download service iTunes, software publishing and
download service App Store, ride-share platform Uber and accommodation share platform Airbnb. This
model disrupts by directly connecting providers, including those who were not formerly competing with
established providers, and consumers. For example, Apple’s iTunes allows people to upload and sell
music they have produced without needing to go via a record company. Airbnb enables people with spare
rooms or vacant homes to rent them on a short-term basis to people looking for holiday or other short-
stay accommodation, thus competing with hotels and bed-and-breakfasts. Uber competes with taxi and
limousine services. eBay has disrupted the second-hand and auction sectors as well as aspects of online
and bricks and mortar retail.
The Access-Over-Ownership Model
The access-over-ownership model provides temporary access to goods and services traditionally only
available through purchase. This includes ‘sharing-economy’ disruptors, which take a commission from
people monetising their assets (home, car, capital) by lending them to ‘borrowers’. Examples include car-
share club Zipcar and accommodation share platform Airbnb. The access-over-ownership model often
works in conjunction with the marketplace model.
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The Hypermarket Model
The hypermarket model disrupts by using market power and scale to crush competition, often by selling
below cost price. Some of the most disruptive business models in recent years have relied on investors’
funds to build a presence, establish market share and knock out competitors. Amazon started as an online
book seller and operated for many years recording huge financial losses, but over time it successfully
destroyed much of the competition in the book retailing industry by offering prices and an inventory
range that established businesses could not match. Electric car company Tesla has similarly burnt through
investors’ funds while establishing a position intended to provide future profitability.
It is difficult, if not impossible, for many established businesses to compete because their shareholders
will not generally tolerate the destruction of value and wealth necessary to respond directly to new
businesses pursuing the hypermarket model. Conversely, wealthy organisations that command market
power and enormous resources can often engage in prolonged price wars to destroy established competitors
and prevent newcomers from getting a foothold.
The Experience Model

The experience model disrupts by adding an experience component to a product or service that elevates its
value to the customer beyond that provided by the product or service itself. An example is when high-end
performance car manufacturer Ferrari flies purchasers of its most exclusive models to Maranello, Italy, to
have a personal fitting that ensures the seats, steering wheel and pedals are all positioned to perfectly match
the purchaser’s body. Luxury airline lounges are another example that add a level of experience beyond
the flight itself.
The Service Ecosystem Model

The service ecosystem model (described in section 7.1) disrupts by selling an interlocking and interde-
pendent suite of products and services that increase in value as more are purchased. This creates consumer
dependency. Examples include:
• Apple’s interoperating system of computers, smartphones, music players, television and music stream-
ing and downloads
• automated synchronisation across devices (Marsden 2015).
QUESTION 7.6
The subscription business model is growing exponentially and, as a result, almost every industry
is preparing for a different way of dealing with customers. Enormous advantages await those that
get it right.
Residents of Dallas-Fort Worth in the US state of Texas became guinea pigs for a new offering
from Audi in late September 2018. The luxury car maker, like many of its peers, launched a
subscription-based service but restricted it to a specific geographic area to iron out any kinks
before rolling it out more broadly.
How does car subscription — also offered in various forms and territories by the likes of Porsche,
Mercedes-Benz, BMW, Jaguar Land Rover, Volvo and more — work? The Audi version, known
as Audi Select, costs US$1395 per month. In return, Audi subscribers can choose from several
vehicles — from the luxurious A4 sedan to the capacious Q7 SUV or the sporty S5 coupe — and
are allowed two vehicle swaps each month. They can make the swap at the local dealership, or
have the new car delivered to their home or office. Included in the subscription price is insurance,
maintenance, unlimited mileage and roadside assistance.
A subscriber might take a sedan during work weeks but, for the family beach holiday, select a
larger and more spacious four-wheel drive. Or, for weekends with friends on the winding roads
of wine country, they may go for something a little sportier. It’s all about choice that was never
available under the old ownership model, and it’s something we’ve experienced already with music
and television, thanks to brands such as Spotify and Netflix. Now, it’s increasingly an everyday part
of our lives.
Analyse how Audi is using the subscription model to pursue benefits to consumers and to Audi
itself, supporting your response with case facts.
Source: C Sheedy, 2019, ‘What you need to know about subscription business models’, INTHEBLACK,
www.intheblack.com/articles/2019/02/01/subscription-business-models-explained.
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LINKING NEW BUSINESS MODELS TO RAPID GROWTH
Chiaroni et al. (2016) studied how business model design affected the pattern by which consumers adopt
product and service innovations over time. An understanding of how the business model influences speed
and spread of the adoption of innovative products and services can help strategic decision makers in
organisations pursue rapid growth.
Chiaroni et al.’s (2016) study focused on ‘unicorn’ companies — those that were technology-based,
small, backed by venture capital, narrowly focused and had experienced fast growth (achieving valuations
of more than US$1 billion by venture capitalists). Companies such as Uber and Airbnb exemplify
this definition.
One of the key characteristics of the fastest growing unicorn companies was the ‘dual-sided’ nature
of their business models (Chiaroni et al. 2016). Their models targeted two groups of users, generally a
provider and a consumer. Accommodation sharing business Airbnb, for example, targeted people wanting
to earn money from their temporarily vacant premises on the provider side and people wanting short-
term, homestay-style accommodation on the consumer side. This characteristic was associated with faster
growth, as the user base can expand on both the supply side and consumer side at the same time, and both
types of expansion improve the value offered, a phenomenon known as network effects.
The number and variety of partnerships the dual-sided companies formed related to the range and quality
of service or product they could offer. For example, Uber, in addition to its principle relationships with
drivers on the supply side and people seeking car transport on the consumer side, also formed partnerships
with hotel chains to offer discount accommodation and with car manufacturers to ensure drivers can buy
cars specifically suited to the service (Chiaroni et al. 2016).
The next factor was the key resources commanded by the dual-sided companies. These companies are
virtually defined by the platform that connects suppliers and consumers. The more diverse the offerings
on the platform the more opportunity for fast growth (Chiaroni et al. 2016). For example, the Uber Eats
food delivery platform connects providers of all styles and prices of food with customers seeking anything
from cheap takeaways through to gourmet meals. Thus, while the service is based on one concept, it is
highly customised in practice.
Single-sided unicorns focused their partnerships mainly on acquiring inputs for their products or
services, which are usually quite narrow in focus. Data analytics company Plantir is an example. It targeted
only partnerships with companies that could provide data that helped Plantir better meet its customer’s
needs. On the consumer side, the most important factor in growth was word of mouth among customers.
Often unicorns with a single-sided strategy offer a standardised product (Chiaroni et al. 2016).
A key feature of the business model allowing rapid diffusion of innovation is its technology base. When
designed correctly, this allows the offering to scale up to meet demand very quickly (in contrast to, for
example, services that rely on skilled labour). The technology basis often means there are substantial
upfront costs developing and implementing the system, but that costs settle down rapidly after start-up.
Scaling up does not usually require adding large numbers of staff. Indeed many unicorn companies have
very low numbers of staff compared to the number of customers. Social media platform, Pinterest, for
example, had only 100 employees when its user base reached 40 million (Chiaroni et al. 2016).
The key points covered in section 7.2, and the learning objective they align to, are as follows.
KEY POINTS
• A business model is the managed interaction of numerous aspects of a business to create and
capture value.
• A business model canvas provides a way to understand an organisation’s business model and
explore options for changes that could create and capture more value.
• An ecosystem approach to value creation sees strategy as a means to capture a greater share of
the value created in the value chain.
• Disruptive innovation arises when an innovation is offered to a market and results in a transformative
change in the industry.
• Business model innovation refers to changing one or more elements of a business model to create
or capture value in a new way.
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• Even a successful business model innovation will only lead to a sustained competitive advantage
if it is difficult for competitors to copy.
• Hyperdisruptive business models include: the subscription model, the free model, the freemium
model, the digital platform, the access-over-ownership model, the hypermarket model, the expe-
rience model and the ecosystem model.
• Disruptive business models are linked to rapid growth when they are ‘dual-sided’ — they involve a
variety of external parties on both the supply and demand side.
• Leaders and managers can use the business model canvas as a key tool for understanding the
organisation’s business model and exploring options for change in the interrelated components of
the organisation. This can form the basis for innovating the organisation’s business model.
• Most leaders and managers are interested in business model innovation, and consider it more
important than product or service innovation.
7.3 IMPLICATIONS FOR STRATEGY

Module 1 introduced a strategy process based on the rational approach. It follows a systematic sequence of
activities and decisions, explained in modules 2–6. This is a proven evidence-based approach. However,
there are numerous possible approaches to strategy. One of the challenges for leaders and managers
of organisations is to identify a strategy process appropriate for the organisation’s circumstances. In
the context of hypercompetition or industry disruption, the strategy process described in the earlier
modules may need to be adapted or even replaced by an alternative approach. This discussion provides an
overview of alternative approaches to strategy and then examines some specific strategic responses to new
business models.
ALTERNATIVE APPROACHES TO STRATEGY

Whittington (1993) defines four strategy processes — classical, evolutionary, processual and systemic —
based on their relationship to two dimensions.
1. The extent to which the perspective assumes a single profit-maximising motive (a shareholder perspec-
tive) versus a broader (pluralist) one (a stakeholder perspective).
2. The extent to which the theories assume that strategic management is a deliberate, rational planning
process versus an emergent process.
The processes and the dimensions are illustrated in figure 7.7.
FIGURE 7.7 Generic perspectives on strategy
Outcomes
Profit-maximising
Classical Evolutionary
Processes
Rational Emergent
Systemic Processual
Pluralist
Source: RM Grant et al., 2013, Contemporary Strategic Management: An Australasian Perspective, 2nd edition, John Wiley and
Sons Australia Ltd: Milton.
A classical formulation adopts profit as the principal objective and pursues this in a rational and
calculating manner. It has strong connections with classical economics theory where the strategy is driven
by a single decision maker with a single objective: the economist pursues clear, financial goals through
rational and analytic means.
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An evolutionary formulation reflects more of the environment, rather than internal planning, in the
decisions. Here, the influence of decision makers is deemed weaker and it is assumed that the environment
determines the types of organisations that are successful: organisations either adapt to environmental
pressures or cease to exist. This approach can provide a powerful ‘reality check’ for strategic decisions.
A processual formulation reflects the realities of organisational life, which are influenced by politics,
divergent interests of multiple stakeholders and organisational culture. This formulation approach produces
strategy incrementally and necessarily represents a compromise between a theoretically optimal strategy
and one that can be successfully implemented. As markets rarely work according to the rules of perfect
competition, a theoretical decision-making approach will not prove to be optimal in practice.
A systemic formulation reflects the internal and external context in which strategy takes place. It allows
for the behaviour of people, institutions and organisations, and is influenced by the social and economic
systems in which they operate. For example, capital markets, government policy, industry standards, and
legal and accounting systems may all limit, constrain or even drive strategic actions.
Of course, none of these strategy formulation approaches is right or wrong — they are alternatives that
may be more or less suited to specific circumstances. The strategy process proposed in module 1 and
detailed in modules 2–6 of this study guide most closely resembles the classical formulation, but you
should be able to recognise that it also features some aspects of each of the other formulations.
It is not possible to specify a particular formulation process for specific conditions because the
formulation of strategy is not a predictable process — it is creative.
In order to compete effectively in a dynamic environment, an organisation may need to adopt a
strategy process that is more emergent in nature — drawing on elements of the evolutionary or processual
formulations described above.
EXPLORING EMERGENT APPROACHES TO STRATEGY

This section will examine a number of techniques that can be used in an emergent approach to strategy,
including discovery-driven planning and design thinking. Technology insight 7.3 demonstrates aspects of
an emergent approach.
Discovery-Driven Planning
Discovery-driven planning is a planning technique introduced by McGrath and MacMillan (1995).
Intended originally for start-up ventures, the strength of discovery-driven planning is it provides an
approach to strategy that accommodates uncertainty and gaps in knowledge. As such it is suitable not
just for start-ups, but also for established businesses exploring new business models.
The goal of discovery-driven planning is to learn as much as possible at the lowest cost. The value of
this approach is that it ensures that all business model assumptions are both articulated and tested. Its
main thesis is that when one is operating in arenas with significant amounts of uncertainty, that a different
approach applies than is normally used in conventional planning. In conventional planning, the correctness
of a plan is generally judged by how close outcomes come to projections. In discovery-driven planning, it is
assumed that plan parameters may change as new information is revealed. With conventional or platform-
based planning, it is considered appropriate to fund the entire project, as the expectation is that one can
predict a positive outcome. In discovery-driven planning, funds are released based on the accomplishment
of key milestones or checkpoints, at which point additional funding can be made available predicated on
reasonable expectations for future success. Conventional project management tools, such as stage-gate
models or the use of financial tools to assess innovation, have been found to be flawed in that they are not
well suited for the uncertainty of innovation-oriented projects.
Despite its unconventional nature, discovery-driven planning is a systematic, disciplined process which
relies on four key and related documents (McGrath and MacMillan 1995):
1. a reverse income statement that models the economics of the business starting from the profit required
and working backwards through revenues and costs
2. pro forma operations specification that outlines the activities needed to run the business, thus establish-
ing the resources and capabilities required to be competitive
3. a key assumptions checklist, that is used to ensure all assumptions are checked and revised as necessary
— with any changes being taken back into the reverse income statement
4. a milestone planning chart, which specifies which assumptions need to be checked at each project
milestone — and further investment decisions are made only once milestones have been achieved.
Each of these documents is updated as new data is uncovered throughout the project. This process raises
the viability of make or break decisions.
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Figure 7.8 contrasts conventional planning with discovery-driven planning.
The discovery-driven approach helps overcome four problems that commonly arise when applying the
conventional approach when there are many unknowns (McGrath & MacMillan 1995). The discovery-
driven approach:
• ensures assumptions are not treated as facts — and hence that decisions are not made based on
unvalidated assumptions
• builds in a process to examine the implications of data and hence scrutinise the assumptions that have
been made
• assesses the organisation’s ability to implement its strategy alongside the assessment of the opportunity
itself
• is responsive to changes in the environmen
FIGURE 7.8 Conventional planning versus discovery-driven planning
Manage to
Platform-based projections
planning
Knowns >
Assumptions Projections Decision Result
Unknowns
Discovery-driven
planning
Unknowns >
Projections Assumptions Result Decision
Knowns
Articulate and
test assumptions STEP 5a
Execute
Yes
STEP 1 STEP 2 STEP 3 STEP 4
Create financial Document Test assumptions Discuss validity
projections critical against of plan/forecast True
assumptions plan/forecast
No
STEP 5b
Revise financial
projections
QUESTION 7.7
Compare and contrast discovery-driven planning with the rational approach to strategy that is
outlined in modules 2–6.
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Design Thinking
Design thinking was introduced in module 4 as a product development tool. This approach can be extended
to systems, procedures, protocols and strategy as it is at its core a fluid research and data-driven approach
to identifying problems and solutions.
Liedtka, Salzman and Azer (2018, p. 49) state:
design thinking provides a common language and problem-solving methodology that everyone can use
to help their organisation accomplish key strategic objectives, whether they involve traditional business
outcomes like profitability and competitive advantage or social outcomes like reducing poverty or creating
jobs. It all starts with who does the innovating.
Cindy Tripp, part of the leadership team at Procter & Gamble, says design thinking is an umbrella term
for the methodologies that designers use to tackle problems, and almost anyone can learn it given the right
environment and encouragement. Tripp (2013) states:
design thinking is a flexible approach that delivers not because of its inherent brilliance, but because of the
inherent brilliance of the people in your organisation — brilliance that, perhaps, you don’t see most the
time, because they believe they are not supposed to offer it up.
The chief design officer at SAP, Sam Yen, encountered just that issue when trying to embed design
thinking throughout the SAP organisation. He found employees regularly expressed interest in using design
thinking as part of their work, but rarely demonstrated doing so.
Tim Brown, CEO of the firm that popularised design thinking, defines it as:
a discipline that uses the designer’s sensibility and methods to match people’s needs with what is
technologically feasible and what a viable business strategy can convert into customer value and market
opportunity (Brown 2008).
Design thinking differs from traditional planning approaches in that it is iterative and non-linear (see
figure 7.9).
FIGURE 7.9 A design thinking approach
Evolution
Experiment Experiment
Discover Interpret Ideate Implement
(prototype) (test)
Develop Collect, Question Refine Refine Implement

a deep analyse and assumptions solutions solutions strategies
understanding interpret data Explore
of customers different
and their perspectives
needs
Reframe
problems into
opportunities
Generate,
critique and
choose
creative
ideas

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Design thinking is evident in the agile approach to new product or service development being used by
some organisations in fast-changing and hypercompetitive industries. An agile approach to product and
service development involves rapid experimentation and iteration, based on involving customers closely
in product and service development and having prototypes and concepts tested early in the process (Salo
2017). Advanced manufacturing technologies, such as 3D printing, have greatly increased the ability of
organisations to prototype and test product ideas and thus support design thinking approaches. Technology
insight 7.2 explores advanced manufacturing technologies.
Advanced Manufacturing
Various advanced manufacturing techniques can support design thinking by enabling fast and efficient
prototyping of products. Some advanced manufacturing technologies that support this are:
• computer-aided design (CAD)
• computer-aided engineering (CAE)
• automated drafting technologies
• flexible manufacturing systems (FMS)
• computer numerically controlled machine tools (CNC)
• 3D printing
• virtual reality.
A CSIRO (2019) study concluded that advanced manufacturing provides an immense opportunity
to Australian businesses. Table 7.3 describes various advanced manufacturing technologies and their
applications for prototyping, testing and beyond.
TABLE 7.3 Potential applications of advanced manufacturing technologies
Now In the future
Advanced Reactive use to address specific Proactive integration at early design

materials product limitations e.g. enhanced phase to offer multiple novel attributes
durability, weight, look and feel. e.g. biocompatibility, biodegradability,
energy efficiency and self-repairing.
Additive Prototyping and one-off production Reduced capital costs will allow greater
manufacturing runs of customised high-value complex adoption of the technology for production
(3D printing) metal componentry and low-value of complete complex products and
consumer products, with high capital associated advanced business models such
costs stalling wider spread adoption. as customer-led design processes and
just-in-time production.
Augmented and Predominantly restricted to gaming Used to overlay product designs with
virtual reality and consumer electronic markets, with end-use environments, optimise machine
limited use in the manufacturing sector. settings in the virtual world, facilitate remote
collaboration and train or guide workers
through complex/dangerous tasks.
Source: CSIRO, Advanced Manufacturing Roadmap, www.csiro.au/en/Do-business/Futures/Reports/Advanced-

manufacturing-roadmap.
By integrating design thinking into strategy development, practitioners can produce both incremental
improvement in the performance of today’s business model and open opportunities to completely
transform it (Liedtka and Kaplan 2019).
QUESTION 7.8
How are the concepts from design thinking applied to strategy development? What are the key
advantages of this approach?
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Lean Start-Up
Discovery-driven planning and design thinking can be used to advantage by start-ups and established
businesses. Start-ups may have little choice. They cannot draw on the resources of an established business
and lack the experience that established organisations can use to inform their analyses, assumptions and
the development of strategic options.
A lean start-up is an organisation that specifically aims to be fast, agile, quick-thinking and quick-
acting, with the aims of optimising efficiency in all its value-added activities and eliminating non value-
adding activities. The very nature of start-ups is that they don’t always know the value that they’re creating,
as they don’t really know their customers. In essence, lean start-ups are searching for a business model
(Blank 2013). Therefore, the basis of lean start-ups is the need to learn. They are continuously validating
and organising around learning. They need to learn what their core value is to their customers, determine
the best solution to providing that value and then ensuring that marketing, sales and delivery lead to a
realisation of that value to the customers. This requires a balance between the opportunity (or start-up
idea), their resources and the team required.
While there are a number of ways to conceptualise and implement a lean start-up, it should be clear
from our discussion above that many of the principles incorporated in discovery driven planning and
design thinking can be used. The essence of these approaches is to answer the reflective question: ‘Is
there something that could have been tested that might have provided an early indication of failure?’ The
first stage is to separate the known from the unknown. If it is known (from previous experience), it needs
to be optimised for a lean business. If it is unknown, evidence needs to be gathered to provide insight.
Blank (2013) suggests the following broad approach.
1. Use a business model canvas to summarise educated guesses about how the business will work.
2. Engage with potential customers and partners to obtain feedback on all elements of the business model
canvas. Revise the canvas and again seek feedback.
3. Practise agile development — develop the product or service and, as necessary, the rest of the business
model, in an iterative and incremental way.
One of the consequences of such an approach is that the start-up’s ideas are exposed to competitors
before launch. On balance, however, this approach values the learning aspect above the benefits of secrecy.
Technology insight 7.3 describes 3D printing start-up 3DSimo’s use of crowdsourcing of ideas and
crowdfunding of capital. Crowdsourcing and crowdfunding are digital platform enabled technologies that
have greatly enhanced the ability for lean start-ups to gauge interest in their ideas and get to know their
customers’ needs. Technology insight 7.3 also demonstrates how 3DSimo incorporated aspects of design
thinking and discovery-driven planning in to their strategy.
3DSimo Crowdsourcing and Crowdfunding

Crowdfunding involves describing a business idea to a mass audience of potential investors with the aim
of raising small amounts of money from each that in total enable an organisation to proceed with their
strategy. It usually takes place on a digital platform such as Kickstarter, GoFundMe or Indiegogo.
One of the advantages of crowdfunding is that investment is often by people interested in the product
or service being promoted. An organisation thus establishes the market appeal of the idea as part of the
process of raising funds for it.
Czech based 3D printing start-up 3DSimo developed an idea for a handheld pen-like 3D printing device
in 2014. It began efforts to build a community of potential users through its website and its Facebook
page. To generate interest, it paid for promotions on Facebook. Both platforms were used to harvest
email addresses of potential customers. This effort resulted in about 1000 contacts and took place about
a month before 3DSimo launched its fundraising campaign. In hindsight, the company concedes it did not
make good use of its community of potential users — it focused on gauging interest levels and establishing
possible investment interest, but failed to consult with the community to help shape the product. As a
result, the company’s first crowdfunding campaign on the Kickstarter platform failed to reach the target
of US$70 000, reaching only US$41 000. This barely covered the money the company had spent on
public relations.
3DSimo realised the shortcomings of their approach and revisited their strategy, to focus on building a
community. To do this, the company:
• promoted the product on social media and invited people to register interest via email
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• created a pre-launch campaign informed by market research that helped define and segment their
target market
• used multiple web pages targeted at different market segments and multiple messages targeted at the
same market segment in order to learn which segments were viable and which messages each segment
responded to
• collected and evaluated feedback generated by the first two steps, and adjusted the product and
promotional approach
• used Facebook advertising analytics to further profile and understand interested users.
When 3DSimo launched the second Kickstarter campaign, it had doubled its number of contacts to
2000, but had no further money to spend on professional promotion. The company took a risk and reduced
the crowdfunding target to US$35 000 even though it ideally wanted US$150 000 to move into production.
The company has since acknowledged that this was a huge risk that could have left it unable to follow
through on the commitments it made as part of the campaign.
As it turned out, the second Kickstarter campaign raised more than US$225 000, helped in part by
Kickstarter’s decision to feature and promote the project.
The device progressed through various prototypes before the company hired a designer and settled
upon a design to present to the market — the 3DSimo. This was then developed further into the 3DSimo
mini-pen, which features more controls, Bluetooth connectivity and swappable tips that allow the pen to
perform multiple functions such as soldering. The fundraising campaign identified that multifunctionality
was important to users. They also wanted a stand and case for transport, so the company responded to
these suggestions which also enabled the company to charge more.
Having developed and launched the 3DSimo mini-pen, the company sought further funds to further
develop the product and scale up production. This time it moved to the Indiegogo crowdfunding platform,
quickly raising more than US$100 000 in each of two campaigns to launch its 3DSimo Multipro tool
which supports numerous functions, has a wide range of accessories, is based around an open-source
development kit so third-parties can build their own accessories, and is made from cornstarch-based
recyclable materials.
The company says one of the lessons it learned from its experience with the initial product (which sold
more than 40 000 units worldwide) and listening to its online user community (in which more than 1000
people actively participate every day) was that users did not want to have to buy a new device every
year to access more features. This informed the multifunctional approach and open-source design of the
Multipro version. To ensure an ongoing revenue stream, the company intends to release new attachments
and software upgrades.
The company summarised its start-up experience as follows:
We have found many dead ends and made some mistakes, but we have always learned from that
experience as much as we could and this knowledge helped us optimize and evolve our products
and production.
Source: Adapted from J Habich, 2015, ‘How we failed in our first Kickstarter campaign, only to nail it with the second’,
Medium.com, 26 November, https://medium.com/the-crowdfunding-bible/how-we-failed-in-our-first-kickstarter-campaign-
only-to-nail-it-with-the-second-f72d163dd881; 3Dsimo Multipro Indigogo page, www.indiegogo.com/projects/3dsimo-
multipro-one-tool-to-rule-them-all#; D Miller, 2019, ‘What businesses can learn from these Kickstarter success stories’,
The Balance, 21 March, www.thebalancesmb.com/crowdfunding-lessons-from-startup-success-stories-4167448.
QUESTION 7.9
Imagine that 3DSimo are looking to develop a new product targeting home use. Using the learnings
from previous launches, described in Technology insight 7.3, to recommend how 3DSimo should
launch the new product.
THE STRATEGY COMPASS

Entrepreneurial endeavours often involve creativity, fast development and risk taking. The idea of a
formal strategy can seem incompatible with the start-up phase of new organisations, but to maximise
the chances of success, entrepreneurs need to understand the business environment, the options they have
for developing their business and the options available to competitors. A strategy also helps manage and
persuade stakeholders, including potential investors (Gans et al. 2018).
Gans et al. (2018) developed a strategy compass for entrepreneurs (see figure 7.10). This draws attention
to the organisation’s choices about which customers to target, what technologies to use, what organisational
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image to use and what to position the organisation against competitors. These are the types of decisions
established organisations make based on formal analysis, often drawing on data analytics, as part of their
strategy process as described in modules 2 and 3. Start-ups lack the historical data and experience of
established organisations. However, the compass is designed for entrepreneurial behaviour and therefore
has application for established businesses exploring new innovations alongside the methods discussed in
earlier modules.
FIGURE 7.10 The entrepreneurial strategy compass
Strategic opportunities for new ventures can be categorised along two dimensions: attitude
towards incumbents (collaborate or compete?) and attitude towards the innovation (build a moat
or storm a hill?). This produces four distinct strategies that will guide a venture’s decisions
regarding customers, technologies, identity and competitive space.
Maintain control of the innovation and find a way Create and control a new value chain, often using
to create value within the existing marketplace. a platform business. Protect intellectual property.
Focus on being an idea factory. For example, OpenTable developed a proprietary
For example, Dolby is the global standard setter platform that allowed diners to make reservations
for sound technology; it licenses proprietary efficiently and in doing so established influence
technology to Sony, Bose, Apple and others. over customer flow to restaurants.
BUILD A
MOAT
INTELLECTUAL ARCHITECTURAL
PROPERTY
STORM A
VALUE CHAIN DISRUPTION

HILL
COLLABORATE COMPETE
Focus on creating value for partners in Compete directly with incumbents. Take
the existing value chain. Execute quickly. them by surprise with fast execution.
For example, Peapod become the leading For example, Rent the Runway challenged high-end
US internet grocer by fitting into — and retailers by offering aspiring fashion-oriented women
improving — the grocery industry. the ability to rent rather than buy designer clothes.
Source: J Gans, EL Scott & S Stern, 2018, ‘Strategy for start-ups’, Harvard Business Review, https://hbr.org/2018/05/do-entrepre
neurs-need-a-strategy.
As figure 7.10 shows, start-ups need to make choices:

• between collaboration and competition
• between protecting their intellectual property to prevent imitation and collaborating with others to enable
speed to market and disruption.
Module 4 discussed the identification of options against the Ansoff framework. The entrepreneurial
strategy canvas in figure 7.10 represents a corresponding framework for start-up strategy which focuses
less on the existing business environment and more on the business environment the organisation hopes
to create. Organisations should identify as many strategic options as possible in each quadrant of the
framework.
An assessment of the options will likely reveal the organisation lacks the resources or capabilities to
pursue some of them and these can be eliminated so the start-up can focus on the feasible options. The
vision or purpose the entrepreneur has for the start-up should guide which option to ultimately choose. As
with any strategy process, alignment between purpose, vision, goals and strategy is crucial if the strategy
is to succeed. As start-ups learn and rapidly gain experience, the initial strategy may need revision or
refinement. Start-ups often exhibit the level of flexibility that allows this, but like any organisation, it is
not simple or effective to regularly switch strategy (Gans et al. 2018).
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Example 7.5 describes the early stages of digital workforce platform Event Workforce Group and how
the strategy compass could be used to explore entrepreneurial options for the group’s future strategy.
EXAMPLE 7.5
Event Workforce Group

Geelong entrepreneurs Bennett Merriman and Shannan Gove identified a major gap in Australia’s
AU$19 billion temporary employment industry. Their market research revealed that Australia’s major
sporting and entertainment event holders were struggling to source dedicated workers, while students
were struggling to find work experience opportunities. So Merriman and Gove developed a system to
connect the two, and Event Workforce Group (EWG) was born to provide temporary staff to large events.
They later added staff training as part of their service offering.
As the business evolved, EWG developed a digital workforce management platform that provided a
fully integrated rostering, training and accreditation system to help manage their 20 000 strong database
and growing portfolio of over 1000 events per year.
Bennett took advantage of EWG’s success by traveling to the United States to set up business in San
Francisco’s RocketSpace — the same creative communal space where Uber and Spotify were born. And
in three months, Bennett secured multi-year contracts with major event organisers, growing the business
revenue forecast by 300% on previous years.
EWG’s growth continued by securing major lucrative deals including delivering the largest ever volunteer
workforce for Super Bowl ‘hailed as the best coordinated workforce program in Super Bowl history’,
the Alpine Skiing Cup in Aspen, the Rugby World Cup in Australia, and locking in their first US-based
employee, Tyler MacFarland — the Director of Business Development for US Today.
In 2020, EWG merged with Miles Per Hour (an event operator providing event strategy, budgets, project
planning, stakeholder management, procurement and venue management) to form Spark.
Miles Per Hour and EWG were already working together on a number of Australia’s biggest events and
venues including the Australian Formula One Grand Prix, Melbourne and Olympic Parks Trust, Australian
Open, White Night Melbourne and Regional, Australian Motorcycle Grand Prix and Red Bull Wings for Life
World Run.
The entrepreneurial strategy compass can be applied to EWG to determine their strategic options.
• Intellectual property. EWG could provide their platform to large organisations who need temporary staff
on short notice, such as McDonald’s or the Commonwealth Bank, to assist with their staffing needs.
• Architectural. EWG could develop their training service to new industries, such as food preparation and
cleaning, providing access to another segment of skilled staff.
• Disruption. EWG could develop a superannuation product for their workforce, creating another revenue
source for the organisation.
• Value chain. EWG could develop an extension to their product that measures the productivity of the
workforce based on the hours, number of event participants and revenue, providing data on the most
efficient staff numbers for event managers.
Source: Adapted from Austrade, n.d., ‘Event and sportstech startup scores touchdown in US’, www.austrade.gov.au/lan
dingpads/news/case-studies/event-sports-tech-startup-scores-touchdown-in-us.
The most successful established businesses are usually those with the best understanding of their
environment. Start-ups with their relative lack of experience and resources often struggle to compete with
established organisations unless they bring some sort of innovation to the market. Where start-ups do bring
an innovation to the market, they have a significant opportunity to succeed against established businesses
by redefining the business environment and the basis of competition in the industry (Gans et al. 2018).
QUESTION 7.10
BuzzFeed was launched in 2006 by founders John Johnson and Jonah Peretti (the co-founder of the
Huffington Post). An algorithm was used to identify popular stories from other websites. Links to
these were sent by instant messaging to BuzzFeed subscribers. Later, BuzzFeed hired curators to
add summaries to the links. In 2011, Peretti hired political blogger Ben Smith to assemble a news
operation. By 2016, BuzzFeed formally split its news and entertainment business into BuzzFeed
News. While BuzzFeed has a large readership and had won some prestigious awards for journalism,
there are questions over its reliability and objectivity as a news source.
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Now CEO, Peretti said:
you always have to look at what do new media technologies enable that was not possible before
… We’re building a global news and entertainment company for the way the world works today,
instead of the way the world worked 20, 80 or 120 years ago.
He identified, for example, that internet-based platforms generate data that shows you exactly
what are people are viewing and sharing — something that remains largely unknown in print
and broadcast. Peretti said useful data include what people are clicking, how they are engaging,
whether they watch a video all the way through or abandon it, when they stop scrolling through a
feed and the sort of comments people are writing.
Peretti suggests this data is the key for new entrants seeking to compete against the giant
established companies like NBC and News Corp. The data provides the new entrant with an
opportunity to identify and tap into something new.
Disney, recognising the value BuzzFeed had created, sought to acquire the company, but the
owners declined. Peretti said there was an emotional element to the decision, but that it was based
on the knowledge that the company could do a lot more, particularly in journalism and video, based
on its insights from the data it was collecting. It wanted to retain its independence to explore these
opportunities.
Video now accounts for more than half of BuzzFeed’s revenue. Peretti said many people viewed
BuzzFeed as just a website, but that the company was convinced the industry was changing and
it could grow its efforts in video and news into a much larger business. Peretti believes some of
the new media technology companies will be sustainable for decades. He compares the shift in
media technology over the past 10 or 20 years to the early development of the newspaper industry.
Transport infrastructure enabled newspapers to be sold beyond their local market, reliable postal
services enabled magazine subscriptions, cable television enabled new television companies.
While many of the early businesses faded away, some became established and sustainable. Peretti
views online media in the same way, expecting many businesses to fail over time, but a few to grow
and endure. Peretti’s vision for BuzzFeed is to be part of redefining how news and entertainment
work in the internet, mobile and social context. He sees a future where BuzzFeed has a close
relationship with its readers, reliably serving up diverse but relevant content. Peretti sees advances
in machine learning and artificial intelligence as providing new opportunities to further consolidate
the relationship with individual consumers.
Examine which of the quadrants of the strategy compass BuzzFeed has chosen to compete in,
using case facts to support your response.
Source: Adapted from A Shontell, 2017, ‘How BuzzFeed CEO Jonah Peretti took an instant message bot and turned it
into a $1.5 billion media empire’, Business Insider, 2 June, www.businessinsider.com.au/buzzfeed-jonah-peretti-startup-
success-how-i-did-it-interview-podcast-2017-5?r=US&IR=T.
KEY POINTS
• There are four broad strategy processes: classical, evolutionary, processual and systemic. They
are differentiated by (a) focus on profit versus broader goals and (b) rational approaches versus
emergent approaches to strategy.
• Strategy to create or respond to emerging business models often involves greater uncertainty than
strategy for known business models.
• Discovery-driven planning is an iterative, but methodical, approach to strategy that accommodates
uncertainty and gaps in knowledge.
• Design thinking is an iterative approach to understanding, exploring and materialising products,
processes, procedures and strategy where the knowledge gained at each step is used to refine
earlier steps.
• Start-ups lack the resources and experience of established organisations and must often take a
lean approach based on being fast and agile, optimising value-adding activities and eliminating
non-value-adding activities.
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• The entrepreneurial strategy compass provides a way for new ventures to explore strategic options
in terms of competition or collaboration and how to manage the intellectual property attached to
the innovation.
• Leaders and managers must resist the temptation to adhere to proven, but outdated, business
models due to risk aversion.
• Leaders and managers bringing an innovation to the market need to make decisions about whether
to compete or collaborate with other parties and whether to protect and defend their IP or use it in
collaboration with others to promote disruption.
• Emergent strategies involve experimentation and iteration, but leaders and managers must ensure
efforts are still focused and informed, not merely speculative.
7.4 STRATEGIC RESPONSES TO NEW

BUSINESS MODELS
The creation and use of new business models is not unique to new businesses. While some of the highest
profile new business models of recent decades have emerged from start-up companies, many others are
the result of innovation within established businesses.
Much of this module describes innovative approaches to business, with a focus on strategy to create or
respond to new business models suited to the complex business environment. It is important to recognise
that while start-ups often base their business on an innovative product, service or process or way to
offer value to an untapped market, established businesses must achieve this alongside and integrated with
managing their existing business activities. Established businesses cannot survive if they merely try to
preserve their current position, but nor can they satisfactorily meet stakeholder expectations by sacrificing
their overall performance. For established businesses, it is a balancing act:
Utilizing and optimizing existing products [and services and markets] while embracing innovation is a key
element of lasting growth and profitability (Daykin 2019).
In other words, for established businesses, pursuing the options described in this section needs to be done
in a way that does not derail the organisation’s existing products, services, markets, processes, resources
and capabilities.
This section outlines various approaches an organisation can take to enable the organisation to success-
fully achieve business model innovation, including successful implementation, whether the organisation
is a start-up or an established business. There are of course specific considerations for these quite different
organisational life cycle stages, and these are described where appropriate.
VALUE-BASED STRATEGY IN A BUSINESS ECOSYSTEM

Recognition that a firm’s business environment extends beyond conventional industry boundaries has
given rise to the term business ecosystem to describe the community of organisations, institutions, and
individuals that impact the organisation. This notion of an ecosystem also emphasises the co-dependencies
among its members and the continual evolution of the system.
Just as each step in an industry value chain (see module 3) contributes value to the ultimate customer
offering, value is created by the constituent parts of a business ecosystem. In a value-based strategy in a
business ecosystem, an organisation’s task is to identify and capture where value is generated within this
ecosystem. In other words, the organisation’s strategy is to dominate those aspects of the ecosystem that
create significant customer value. This is known as a ‘value-based strategy’ or a ’value-capture model’.
Brandenburger and Stuart (1996) have developed a framework for value-based strategy that combines
both breadth and analytic rigour. The framework envisages the organisation within a broad network of
transacting parties. The approach then establishes boundaries for the amount of value that the organisation
can capture. The upper limit is determined by the amount of value that the organisation creates within
its current network — which is the amount by which the total value created within the network would
diminish if the organisation left the network. The lower limit is determined by the amount of value that the
organisation could add to an alternative business network.
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Within this framework, an organisation’s strategic decisions are mainly about investments in resources
and capabilities that influence the value it can capture. These decisions relate to two types of action:
1. those that increase the value that is available to the organisation by increasing the maximum value the
organisation adds either to its existing network or to an alternative network — these are investments
with competitive intent
2. actions that determine how much value the members of the network are willing to give up to the
organisation — these are actions with persuasive intent.
The following guidelines are proposed for organisations pursuing a value-based strategy (Jacobides
2011; Jacobides & MacDuffie 2013).
• Become the ‘guardian of quality’. Who controls a product’s reputation? In wine, there is competition
for control between growers grouped by location (champagne, chianti), wine makers (Krug, Chateau
Margaux), importers/distributors (Harveys of Bristol, Berry Bros. & Rudd), and critics (Wine Spectator,
Decanter). Control typically lies with players that are closest to the consumer — but not always: Intel’s
‘Intel Inside’ campaign showed the potential for component suppliers to forge links with consumers.
• Become irreplaceable. The battle to capture value is won by those who can make themselves irreplace-
able. In many industries, these are the system integrators. Conversely, those who contribute a tiny portion
of the value chain are easily substituted. Apple is a master of ‘supply chain atomisation’ — ensuring
that each of its suppliers occupy limited roles that can be substituted by other companies.
• Take advantage of changing customer needs. Shifts in customer preferences can shift value within an
ecosystem. As consumers expand the range of online payment options they are willing to use, there are
growing opportunities for payment service providers such as Adyen, Worldpay, and Square.
• Redefine the value chain. In addition to fragmenting and integrating value chains, firms may redefine
roles along it. IKEA’s building of a global value chain for furniture has involved the transfer of furniture
assembly from manufacturers to consumers. Recently, IKEA has acquired TaskRabbit to now create
value by offering an assembly service.
A conventional approach to strategy often takes a view that is too narrow for the contemporary business
environment. Commonly, business strategy is formulated in terms of cost or differentiation advantage
(see module 4), and corporate strategy in terms of selecting sectors then managing linkages between
them. Business models allow us to consider more complex business situations and envisage business
opportunities more widely. They are useful in formulating strategies to exploit the opportunities within
an organisation’s business ecosystem.
Section 7.1 described technology as a key driver of change and identified the emergence of business
ecosystems as one of the outcomes. Complex business ecosystems offer opportunities for more diverse
business models. As established industries are disrupted by digital technologies, the challenge for
traditional firms is to find business models to replace those rendered obsolete by new competition. For
example, travel agents have transitioned from being commission-based retailers to providing customised,
fee-based services to travellers. Google is an example of an elaborate business model that exploits the
opportunities available in complex digital ecosystems (see example 7.6). Many mature industries also
have complex business ecosystems that offer opportunities for business models that exploit relationships
among diverse partner organisations. Example 7.7 explores this in relation to budget airline Ryanair.
EXAMPLE 7.6
Google — A Business Model for a Complex Digital Ecosystem

At the heart of Google’s strategy is a business model whereby free search supports paid advertising — over
two-thirds of the revenues of Google’s parent company, Alphabet, are generated by advertising placed
on Google’s own websites and applications. However, Google’s full business model is more extensive. It
includes:
• using its advertising management capabilities and relationships with advertisers to manage advertising
placements on other content providers’ websites (AdSense)
• gathering huge quantities of user data that allow more precise targeting of advertising
• protecting the availability and data-gathering capabilities of Google’s search products by providing its
own web browser (Chrome) and operating systems (Android, Chrome OS)
• sustaining dominance of online advertising through launching competing products against rivals such
as Apple, Facebook and Microsoft.
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EXAMPLE 7.7
Ryanair — A Business Model for a Complex Mature Ecosystem

At the core of Ryanair’s strategy is the low-cost carrier business model, originally developed by Southwest
Airlines. The various activities Ryanair undertakes to supports its position of being Europe’s lowest cost
airline providing no-frills flights to budget conscious travellers are shown in figure 7.11.
However, this model has been extended by Ryanair to exploit multiple sources of revenue generated
by a range of partners. Elements of the Ryanair business model include:
• extreme unbundling — in addition to paying for flight tickets, passengers are encouraged to pay for
services such as seat assignments, checked baggage, priority boarding, credit card fees, and inflight
refreshments
• payments from airports and local government authorities provide incentives to Ryanair to initiate and
maintain specific routes
• commission on sales of partners’ complementary products and services such as car hire, train and bus
services, insurance, hotels, theater, sports tickets and ticket sales for other airlines (e.g. Air Europa)
• advertising on Ryanair website, travel magazine and seat backs (Afuah 2014; Ryanair Holding 2017).
FIGURE 7.11 Activities that support Ryanair’s strategic positioning
Low operating costs
Job
flexibility
High aircraft No-frills product High labour
utilisation offering productivity
Boeing
Direct
737s only Single class; no
25-min sales
reserved seating only
turnaround Low prices;
separate charging
for additional
Point-to-point routes No baggage Internet-only
services
transfer check-in
Secondary
airports
Source:RM Grant et al., 2013, Contemporary Strategic Management: An Australasian Perspective, 2nd edition, John Wiley
and Sons Australia Ltd: Milton.
STRATEGIC PARTNERSHIPS AND ALLIANCES

There has been a trend over recent years for companies to dramatically increase their use of intercompany
cooperation, including partnerships where organisations cooperate to achieve specific mutually beneficial
goals and alliances where organisations cooperate to generate a broad range of long-term benefits. The
dynamic market environment requires organisations to focus on their core competencies while forming
cooperative relationships with other companies to access and build resources. Contemporary developments
in the field of strategy acknowledge that the resources residing outside the company’s boundary are
also potentially available to the company. To benefit from resources external to the organisation, it is
crucial to establish, develop and maintain lasting business relationships with customers, suppliers and other
important parties. Companies can no longer be isolated and independent; rather they must be flexible and
cooperative. This has resulted in a new interconnected and interdependent environment with intercompany
partnerships that help companies to access required resources and develop new capabilities to respond to
the rapidly changing business environment.
This increasing interest in cooperative models reflects an important shift in strategy formulation and
implementation. This understanding of the importance of collaboration of companies with various groups
of stakeholders not only challenges former views on the company owning and controlling all aspects of its
own activities, but it also means that the responsibilities of companies are extended outside of its bound-
aries. An organisation’s resources are partially controlled by the demands and requirements of counterparts,
while ‘external resources’, owned by counterparts, are partially controlled by the organisation.
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The growing understanding of the importance of cooperative models has also resulted in another
development: within local and regional economies, clusterings of companies (and the social environment
within which they are embedded) have become engaged in a wider set of interactions to advance the
local context. This clustering of companies reflects that intercompany collaborations are able to produce,
improvise and innovate more effectively than companies would otherwise do independently. These local
production systems are viewed as important to local economies as they create a basis for regional growth
and development. The collaboration at the local and regional levels illustrates the changing landscape
of company management based upon partnerships, cooperation and interdependence and highlights a
significant difference from the previous competitive landscape. While the competitive approach was
concerned with how a company could gain advantage over its competitors through favourable industry
conditions or by protecting its core resources and capabilities, the cooperative approach expects that
competitors explore how they can work together to learn new capabilities and create new products
and processes that expand their capabilities beyond their independent capabilities. There is a growing
understanding that a company’s performance may be strongly influenced by its intercompany ties or its
‘strategic networks’. Strategic networks and interfirm collaboration have been under focus in both the
academic and business worlds for a considerable time. It is widely acknowledged that networks are forming
a major area in the field of strategic management. Strategically guided networks provide companies with
excellent support to grow their business and develop innovation. Indeed, strategic networks provide a
company with valuable information and knowledge which would not be possible for the company to create
in isolation. Intercompany cooperation is particularly important for small companies and niche players that
cannot compete on scale; they need to participate in more efficient and effective mechanisms of production
and marketing in order to achieve and sustain a competitive advantage in the global economy.
Supply Chain Partnerships

The digital age has empowered customer buying decisions primarily through greater access to information.
Based on customer needs and wants, three broad approaches to supply chain innovation have evolved:
1. fast supply chains that emphasise speed and time
2. agile supply chains that focus on an organisation’s ability to respond to changes in demand (volume
and variety)
3. lean supply chains that focus on eliminating waste (including time).
The strategic focus of supply chain management differs by industry and sector. For example, in the
basic commodities (food) sector, the focus is on lower cost (lean focus). In the fashion sector, the focus
is on quick deliveries and inventory (fast focus and agile focus). In the telecommunications sector, the
focus is on reliability (agile focus). The lean focus is also increasingly important for organisations trying
to improve their performance against sustainability measures. For example, the Ford Motor Company
established the ‘Partnership for a Cleaner Environment’ initiative that uses an interactive online tool to
support sharing and reporting of environmental practice among its suppliers. The initiative covers more
than 1000 manufacturing sites across 40 countries. Ford estimated its suppliers would reduce CO2 -e
emissions by 500 000 metric tons through energy-saving and energy efficiency measures and save almost
2 billion litres of water over the period 2017–22 (Lacefield 2017; Martyn 2017).
These approaches also rely on information technology to improve processes along the entire supply
chain. Examples include:
• electronic data interchange (EDI) between organisations that provides faster access to information,
reduced paperwork, improved customer service, and better order tracking
• bar coding and scanning
• radio frequency identification tags (RFIDs)
• point-of-sale (POS) terminals
• electronic funds transfer (EFT).
A CHAINalytics report (ASCI 2017) found that almost 70% of organisations have supply chain
innovation as part of their strategy, but less than 20% believe their supply chains are innovative. Those
that did demonstrate innovative supply chains tended to engage in collaboration with partners throughout
the entire supply chain.
DISRUPTION AND STRATEGIC INNOVATION

It is important to recognise that disruption of an industry or a change that brings about a discontinuity
requires a change in strategic approach. If managers of established organisations continue to pursue a
strategy based on continuous improvement in the face of an industry disruption, they are at risk of failing
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to remain competitive, ultimately resulting in organisational failure. It is not uncommon for even leading
organisations to fail when disruptive changes emerge. Disruptive innovations bring to market a com-
pletely different value proposition compared to the value proposition that had been available previously.
Table 7.4 outlines a number of issues managers need to address to successfully lead their organisation
through a disruption.
The competing pressures represented by the issues in table 7.4 constitute the ‘innovator’s dilemma’ —
disruptive technologies should be taken seriously but responding to them cannot risk the needs of current
customers who provide organisations with profit and growth. New markets should be developed around
new definitions of value while meeting the needs of present customers. Example 7.8 examines management
of disruption by Alibaba founder, Jack Ma.
TABLE 7.4 Principles for managing through disruption
Issue Managerial implications
Organisations depend on Companies must satisfy their customers and investors and thus find it difficult to
customers and investors invest in disruptive technologies or other innovations if customers don’t want them.
for resources Creating an independent organisation, with a cost structure honed to achieve
profitability at the low margins that are characteristic of most disruptive
technologies, may be the only viable way for established firms to deal with this
issue.
Small markets do not meet Many large companies adopt a strategy of waiting until new markets are ‘large
the growth needs of large enough to be interesting’. This is not often a successful strategy, because other
companies organisations have a chance to become established in the new market.
Resource allocation processes can make it difficult for large organisations to focus
on small markets, but managers must recognise whether the market is important
to the organisation’s future and/or whether the innovation and the companies
behind it will in time disrupt the organisation’s own markets.
Markets that do not exist The first-mover advantage is strong in markets created by disruptive innovations,
cannot be analysed but by definition little is known about the market until the innovation is introduced
and creates it.
In the absence of data, planning should be ‘discovery-based’, identifying what
needs to be known.
An organisation’s Managers often assume their organisation is capable of successful innovation, but
capabilities define its the very resources, capabilities and organisational culture that enable performance
disabilities in the current context may define its limitations in another context.
Managers need to understand and acquire or develop the resources and
capabilities, and develop the culture, to successfully innovate.
Technology supply may not In their efforts to remain competitive in their current markets, organisations often
equal market demand underestimate competition at lower price-point markets that can provide disruptive
competitors with a foothold in the market.
EXAMPLE 7.8
Alibaba
In China, 11 November is Singles’ Day. Originally called Bachelors’ Day, it began in the late 1990s when
students invented a special day for singles. The date, written as 11–11, is very popular among young
Chinese. It has become an opportunity for them to meet and party with friends.
In 2009, Chinese e-commerce giant Alibaba turned this party day into a mammoth annual ‘Global
Shopping Festival’. Calling it an ‘anti-Valentine’s Day,’ the company renamed it Double 11, a term (Russell,
Jon and Liao, Rita, 2018) it invented and trademarked. The festival has since become the world’s
largest 24-hour shopping event, supported by Alibaba’s unique global cloud, logistics, and payment
infrastructure. In 2018, 180 000 brands participated in Double 11, including thousands of foreign ones.
Hundreds of millions of consumers made purchases through Alibaba’s platform. The online retailer sold
US$30.8 billion worth of merchandise, making the event bigger than Black Friday and Cyber Monday
combined. At one point, more than 350 000 orders per second (Katz, 2018) were being registered. An
Alibaba spokesman commented, ‘It’s like the Olympics or the Super Bowl of e-commerce’ (Future of
Payment, 2018).
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This event bears testimony to the extraordinary rise of Alibaba and its founder and chief executive, Jack
Ma. His success story fascinates media outlets across the world. There is certainly a lot to be learned
from this former English teacher, who claims to know nothing about technology. In spite of, or perhaps
thanks to, this background, Ma has built a huge technology empire. Nothing seems impossible to ‘Crazy
Jack’, (Time Staff, 2000) as he is affectionately known in the internet world. Alibaba and its subsidiaries
account for approximately 80% of all of China’s e-commerce business. Fortune magazine described it
as ‘the equivalent of Amazon, eBay, and PayPal combined’ (Kopytoff, 2014). Its global revenue has seen
exponential year-over-year growth and totalled $39.9 billion in 2017.
A Contrarian Model
Jack Ma has shown great resilience. He is at the head of a company that, like appliance and electronics
company Haier, has reinvented itself on several occasions. He often quotes the founder of Intel, Andy
Grove, who said ‘only the paranoid survive’ (Grove, 1996). Jack Ma is well positioned to know. Maintaining
a healthy level of paranoia is essential in the tech world, where a new idea, business model, or app
can provoke an industry shift that renders current business models instantly obsolete, from one day to
the next.
Alibaba started out as a business-to-business service provider, created to help Chinese companies
find export channels online. It then progressively began to connect entrepreneurs with global markets,
wherever they were. The concept allowed, say, a mid-sized Norwegian company to sell more effectively in
Brazil. But faced with the threat of the arrival of eBay in the Chinese market, Jack Ma launched Taobao. This
entry into the consumer world was initially a defensive move. With 666 million monthly active users, this
online shopping website now dominates e-commerce in China. Other initiatives soon followed, beginning
with the launch of Alipay, the online payment app. Processing more than 175 million daily transactions
(Smith, 2018) and 54% of all electronic payments in China, it is by far the biggest online payment service
provider in the world.
Alibaba owes its unique success to the power of its business model. And also to the discovery of a real
consumer insight. In China, most consumers were initially mistrustful of the digital world because it was
unfamiliar. Chinese suppliers hesitated to sell things online because they worried that customers would
not pay. This was the insight that led Jack Ma to create Alipay. Alipay’s main feature consists of freezing
the money. It’s an escrow payment system. Vendors are reassured they will be paid for the products they
ship. At the same time, consumers know that if they pay with Alipay, their account will only be debited
once they are satisfied with the goods they have received.
Alibaba is intent on gaining control over the virtual wallet, in particular against Tencent, China’s leader in
messaging and gaming, thanks to its more than one billion monthly active users. Alipay is an incomparable
asset for Alibaba in this context. It now handles close to a trillion a year in online transactions, three times
that of PayPal. Jack Ma always thought that finance must be disrupted, which is exactly what he did
with Alipay.
Alibaba’s websites are designed to reflect Chinese culture. They are packed with all sorts of information
and graphics that clash with the clean styles of Amazon or Google. For Westerners, it all looks a bit messy.
You need to scroll down several times to see the whole page. The impression of chaos is reinforced through
discovering the most improbable products on Alibaba’s sites, stuff usually found in local street markets.
Thousands of small, even tiny companies, as well as millions of individuals from the back of beyond, in
the remotest of Chinese villages, were given the opportunity to make money online. Most of them owe the
very existence of their businesses to Alibaba. All this contributes to making its sites look like a gigantic
online hardware store. From the outset, Alibaba’s websites were intentionally built differently. They are
made in China, for the Chinese.
This is reminiscent of Big Bazaar’s amazing success in India. Its founder Kishore Biyani came to the
conclusion that the basic principles behind successful retail in developed economies just didn’t work
in India. All those look-alike stores filled with long, pristine aisles, tidy shelves, air-conditioning, clean
graphics, and skilled staff made Indians feel that they couldn’t afford the products on display. So Kishore
Biyani transformed his stores into huge local markets: bazaars. Garish colours prevail. People bump into
each other. They bargain just like in a street stall. Today Big Bazaar is India’s most popular supermarket
chain. Its president loves saying ‘we can only survive in chaotic environments’ (Interview of Kishore Biyani
with IndiaKnowledge@Wharton, 2007). He knows what he is talking about. He had previously encountered
spectacular failure by following management consultants’ advice to model his stores on Walmart and
Carrefour.
Not adapting to local market characteristics proved fatal to eBay’s success in some countries. Its
website design faithfully followed the American model, and the Chinese were uncomfortable with it. It
was one of the main reasons for eBay’s amazing failure in China.
Jack Ma’s unorthodox way of doing things manifests itself from the top to the bottom of his company, in
whatever the area. Consider two examples. First, when Alibaba’s sales suffered during the global financial
crisis in 2008, Ma decided to lower subscriber fees by 60% for those who signed up for a broader range of
services. As Duncan Clark points out in Alibaba: The House That Jack Ma Built (Clark, 2016), the financial
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world reacted very badly. With sales down, they hardly expected the company to drastically reduce the
cost of membership. An increase seemed more appropriate for the situation. From one day to the next,
a large proportion of Alibaba’s revenue was put in jeopardy. This was evidently a risky strategy and quite
the opposite of what many envisioned. But Jack Ma had anticipated that a rise in sales would offset the
subscription price cut. This is exactly what happened. And it heralded a totally new period for Alibaba,
resulting in more sales of value-added services, which have since become its major motor for growth.
A second example of Jack Ma’s unconventional way of doing things is illustrated by the fact that he
once told his staff to sell some of the shares they owned in the company. It is unlikely any other chief
executive has ever done this. Jack Ma believed that the people who worked so hard for the company, and
whose jobs often kept thems away from their loved ones, deserved to be rewarded — along with their
families. In September 2014, Alibaba made the largest stock market flotation in history. The surge of the
share price valued the company at $230 billion. Jack Ma told his employees, ‘Selling the stock doesn’t
mean you don’t like the business. I encourage you to sell some, to build your life, to give a reward to your
family’ (Ibid., 2016).
Many observers talk of Jack Ma’s contrarian mind. It’s true that a lot of his initiatives go against the grain
of conventional Western habits. They echo what was referred to in the 1990s as ‘contrarian marketing’.
I remember being critical of this kind of approach back then. In my book Disruption, published in 1996, I
noted that ‘you can oppose something without proposing its opposite’ (Dru, 1996). At the time, contrarian
marketing seemed too simplistic to me, but I must admit that seeing Jack Ma’s success with it has led
me to reconsider. Whatever the subject, it’s worth asking whether, at a given point in time, an approach
that is diametrically opposed to conventional practices could prove fruitful.
QUESTION 7.11
1. Examine how Jack Ma has applied the principles in table 7.4 to his management of Alibaba,
supporting your response with examples from the case facts.
2. Contrast Alibaba’s value proposition with the value propositions of eBay and other conventional
businesses.
Discussions of new and emerging business models often focus on disruptive change and how industries
are transformed over just a few years. It is important to remember, though, that these are the exception
rather than the rule. Many new business models represent an evolution of existing approaches and many
diffuse slowly throughout an industry. Often a new business model provides a new way for an organisation
to compete and perhaps establish a competitive advantage, but the industry itself continues to operate
successfully using existing business models alongside the new approach.
STRATEGIC OPTIONS RELATED TO THE CHANGE DRIVERS

Section 7.1 described various factors in the business environment contributing to rapid and substantial
change. In section 7.2, we saw how changes were facilitating and driving new business models and in
section 7.3 we looked at alternative approaches to strategy in the context of environmental dynamism.
In addition to the overall measures an organisation can take to enable it to create or adopt new business
models, there are a number of strategic responses organisations can consider in the context of technology,
sustainability, emerging markets and hypercompetition. These are outlined next.
Technology and Business Models

Kavadias et al. (2016) found the business models most likely to successfully use technology to transform
an industry featured one or more of the following:
• technology-enabled customisation of the product or service
• closed-loop processes, where products are reused or recycled
• asset sharing, in which asset owners can generate income from their assets and consumers can access
many of the benefits of ownership without having to actually own the asset
• usage-based pricing, where customers pay in accordance with the value they consume
• collaborative systems between supply chain participants
• agile and adaptive organisational structures and approaches to decision making.
In order to realise the full potential of emergent technologies, organisations need both innovative
leadership and investment.
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Strategies to Respond to Digital Disruption
The increased focus on digital disruption is a consequence of the opportunities and threats that have
resulted from the adoption of digital technologies like the internet, cloud digital storage, smartphones
enabling real-time access and emergent business models offering products and services in new ways never
thought possible. Strategy, in this age of digital disruption, provides the tools, concepts and direction for
flexible response and improved implementation in volatile markets. Embracing the digital economy will
help transform the industry value chain, manage patterns of demand and competitive pressures, and support
key activities across an organisation. This implies new value propositions and new approaches to funding
and other resource allocation.
Conversely, organisations my choose to combat disruption or implement any of various alternative
responses. Some of these are as follows.
• The block strategy. This involves using all means available to inhibit the disruptor. These means
can include claiming patent or copyright infringement, erecting regulatory hurdles, and using other
legal barriers. Taxi companies employed a block strategy to attempt to block the ease with which Uber
could enter the market and use the same market practices (e.g. using defined taxi ranks). This strategy
met with mixed success, largely depending on the laws of each country and the willingness or otherwise
of regulators to accommodate the Uber business model.
• The milk strategy. This strategy involves extracting the most value possible from vulnerable businesses
while preparing for the inevitable disruption. The milk strategy often ends with wind-up because the
organisation can no longer create value. Video rental store owners tended to adopt this strategy as
downloading and streaming business models won favour with consumers. There was no buyer for the
redundant concept of video rentals.
• The invest in disruption model. This response involves actively investing in a disruptive threat. This can
mean investing in disruptive technologies, developing the organisation’s human capabilities, creating
new digitised processes, or perhaps acquiring companies that already possess these resources and
capabilities. For example, several home-service agencies are investing in sharing-economy firms to
assist in staff management at low demand times.
• The disrupt the current business strategy. This is an aggressively competitive strategy that involves
launching a new product or service that competes directly with the disruptor, and leveraging inherent
strengths such as size, market knowledge, brand, access to capital, and relationships to build the new
business. Start-ups often cannot call on these resources and thus may be at a disadvantage compared to
established organisations that pursue this strategy.
• The retreat into a strategic niche strategy. This strategy involves focusing on a profitable niche segment
of the core market where disruption is less likely. For example, while Airbnb has disrupted the personal
hotel booking market and digital platforms like Webjet have disrupted travel agency services targeted
at individual and family travellers, many travel agents have shifted their focus to corporate travel and
those with complex itineraries.
• The redefine the core strategy. This strategy involves building an entirely new business model, often in
an adjacent industry where it is possible to leverage existing knowledge and capabilities. For example,
IBM moved away from computer hardware and into information technology consulting.
• The exit strategy. The exit strategy involves selling or winding up the business entirely and returning
capital to investors, ideally through a sale of the business while value still exists. For example, MySpace
sold itself to Newscorp.
Source: Adapted from P Marsden, 2015, ‘The 10 business models of digital disruptions (and how to respond to them)’,
Digital Intelligence Today, 26 August, http://digitalintelligencetoday.com/the-10-business-models-of-digital-disruption-and-how-to-
respond-to-them. Reproduced with permission.
Example 7.9 examines various strategies pursued by retailers in regional Australia to survive the
disruption created by online retailers.
EXAMPLE 7.9
Regional Retailers Innovate to Stay Afloat

Unlike online shopping there are plenty of benefits to shopping in person like being able to walk into town,
try garments on, see what they look like on, and feel the texture of the fabric.
But shop fronts may soon be a thing of the past as small businesses, unable to compete, are
strategising, negotiating or closing.
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For 25 years Rowena Boreland has been operating Take A Hike, a shoe shop in Wollongong specialising
in ‘rugged hiking shoes and boots’.
Recently, however, she has had to implement new strategies to stay afloat.
Ms Boreland said the secret of her success was to buy in bulk, get in and get out of premises, and
negotiate better rent prices.
This means she does not have the security and stability of a long-term lease and has to move stock,
storing it off site. ‘I’d much rather not have an online business. I’m more a people person but you have to
sell at online prices to survive,’ Ms Boreland said.
Pop-up or Pop-off
For the time being Ms Boreland is operating her business in a pop-up shop — a local council initiative
encouraging businesses to operate in what were previously closed shop fronts.
‘This is my first time in 25 years I’ve had a shopfront with a very short lease,’ Ms Boreland said.
‘I’m here for a few months [but] am looking at other retail shops [where] I can negotiate cheaper rents
because if I don’t sell at online prices and be very competitive, I don’t have a business anymore.
‘I’ve learned to do deals with the landlords. Paying full rent — well, it’s not feasible to survive.’
Ms Boreland, who understands that buying online is cheaper and that a $50 difference is a lot in our
economy, has changed her business model to accommodate that.
‘Some customers come in, they try the shoes on, you spend half an hour with them,’ she said. ‘Then
they take photos and think that we are ignorant, then they run out the door and buy them online.’
‘Other customers don’t mind paying extra money to get the product now and not [have to] wait for
delivery, but there’s always the concern about whether the shoes will turn up if ordered online.’
Online Shopper Is a Different Shopper
The growing trend of online shopping has seen the rise of employees whose specific job is to deal
with returns.
This is especially true in the shoe industry.
‘The trend is that people buy three or four pairs to get the one that they like and send the others back,’
shoe merchant Ben Porcheddu said.
Mr Porcheddu, a third-generation shoemaker, recently shut his shop doors and after 45 years of face-
to-face customer service, is joining his online competitors.
He said these days customers want the product without spending the full price and were prepared to wait.
‘They sacrifice seeing and trying on for getting a better price,’ Mr Porcheddu said.
Sending shoes out and getting them back to restock is an expensive and time-consuming business but
it keeps delivery personnel in jobs.
Mr Porcheddu said when he saw the analytics of his online shoe sales, he was shocked.
‘It comes down to people’s time and shopping patterns,’ he said. ‘People shop more at night time —
the busiest times for us online is between 2am and 6am.’
Mr Porcheddu has a warning for shoppers.
‘Once you don’t have the option to go to a shop and buy something from their limited range then you
are forced to shop online, and the prices will go up,’ he concluded.
Where Are All the People?
When it comes to shopping, Wollongong is not an exceptional city in as much as it, like many other small
cities, is constantly re-inventing itself to draw shoppers.
The Mall has long been a point of contention with retailers and shoppers alike.
Judy Short, who started working fresh out of school, 45 years ago, at Greens Newsagency in
Wollongong Mall, is astounded at the lack of customers today.
She said the shortage had led to the forthcoming closure of her current workplace, which sold
leftover books.
‘There are just not the people in the Mall that we used to have,’ she said.
Nearing retirement herself, Ms Short is acutely aware that the bookshop is not doing well.
‘We should have been gone 12 months ago but our boss loves it like we do and he’s tried to keep it
going,’ Ms Short said.
The main problem seems to be a lack of customers.
‘There are no people out there,’ Ms Short said.
‘Online shopping is a problem for everyone but people who love books — and they’ve been in and told
us — they love their books.
‘They got Kindles originally but because they use technology at work, when they go home, settle down,
they want to turn the pages, smell a book, and lots of people have gone back to their books.’
Consider that by choosing to shop online, shoppers are slowly sealing the fate of the shopping precinct,
and many of the basic service shops we love will soon disappear for good.
Source: S Moss, 2020, ‘Regional retailers innovate to stay afloat’, ABC News, 2 March, www.abc.net.au/news/
2020-03-02/as-shopfronts-close-retailers-innovate-or-implement-strategies/12011508.
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The suggested strategies above are presented in response to disruptive forces in an industry, but such
strategies do not necessarily apply only as responses; they can also be pre-emptive. Successful strategy
in the context of emerging business models must look forward to anticipating (and indeed creating)
changes. Adopting a merely responsive approach will leave an organisation always trying to catch up
to its competitors. Example 7.10 looks at an emerging technology and some possible future consequences
for various business models, emphasising the need to look ahead, prepare for and create the future of
the business.
EXAMPLE 7.10
Autonomous Vehicles — a Foreseeable Disruption

Autonomous vehicle technology enables cars and trucks to sense their environment and use this
information to navigate and drive without human intervention. The concept was proposed many decades
ago and active development of the technology has also been ongoing for many years. In recent years,
there has been some real-world application of the technology. Moreover, there has been widespread
discussion of the future implications of the technology. Organisations in a wide variety of industries need
to consider this emerging technology as part of their strategy.
• Long-distance road freight has seen the earliest applications of autonomous vehicles. Various compa-
nies in Germany are using self-driving trucks in convoys to move freight on suitable routes. Rio Tinto
uses self-driving trucks to transport ore between its mine and processing locations in Western Australia.
These largely use private roads. The technology clearly has implications for the future of the road freight
transport sector.
• Taxi-style transport may likewise be based on autonomous vehicles in the future. The ride-share platform
Uber has invested heavily in research and development for self-driving technology, perhaps with a view
towards shifting its business model away from contract drivers in the future.
• Car manufacturers have long implemented some of the underlying technologies of autonomous vehicles
as part of the safety and driver convenience features of their cars. An interesting perspective on the
future of the car manufacturing industry is whether the mass market will still choose car ownership if
ride-share business models and autonomous vehicle technologies combine.
Sustainability and Business Models

Strategic advisers SustainAbility researched 100 companies with disruptive sustainability innovations and
found that three-quarters of them were implementing entirely new business models, not adapting existing
ones (Clinton & Whisnant 2014). While there is no simple definition of what constitutes a sustainable
business, Idil Gaziulusory and Twomey (2014) identified nine emerging approaches relevant to business
models that target sustainability and/or a transition to low greenhouse gas emissions. These approaches
are described in figure 7.12.
FIGURE 7.12 Emerging business models relevant to sustainability
Product-Service Systems that Deliver Functional Results to a Customer

Product-service systems are a combination of products and services that work together to satisfy a
consumer need. For example, the Flexicar car-share business provides access to a car for private usage
thus meeting the need for car transport without requiring car ownership; the sustainability benefit is that
the resources required to build and maintain a single car meet the car needs of multiple households.
Open Innovation
Open innovation is an approach that promotes more efficient and effective innovation by collaborating on
ideas between organisations, representing a shift from closed innovation in which organisations fiercely
protect their IP through legal means and secrecy, discussed in module 4. For example, Tesla relinquished
electric vehicle patents in order to help the industry develop more quickly, and various crowdsourcing sites
exist that invite people and organisations to participate in collaborative problem solving. Open innovation
will be discussed in more detail in section 7.5.
Peer-to-Peer Innovation
Peer-to-peer innovation is distinguished from open innovation by the absence of formal organisational
participation; instead individuals collaborate in a self-organising way to share knowledge and contribute
to a product or service. For example, open-source software in which individual developers learn and
contribute code towards the operating systems and applications; Linux is probably the best known
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of these. Examples are also found outside software, including digital platforms for peer-to-peer food
production and consumption, and community cooperatives established to install community-owned
renewable energy systems, such as solar and wind farms.
Closed-Loop Production
Closed-loop production refers to the design of production and consumption to maximise resource
efficiency and eliminate waste. When this occurs through a network of organisations, in which one uses the
waste or by-products of another, this is known as an ‘industrial ecology’ (e.g. reuse or recycling of metals,
plastics and textiles help organisations move towards closed-loop production; the use of sugarcane leaves
to produce mulch instead of burning them and the use of the bagasse left over after the sugar has been
extracted as a biofuel represent progress towards closed-loop production).
Crowdfunding
Crowdfunding is the use of (usually online) platforms to raise finance to fund a specific project,
crowdfunding enables innovators to access funds for ideas that investors want to support for reasons
other than necessarily financial returns. For example, the LifX smart and energy-efficient light company
built itself on crowdfunding. The public sector has also experimented with crowdfunding of public projects
(e.g. SpaceHive in the UK has been used to raise funds to revitalise public spaces and community hubs).
Sharing Economy
The sharing economy refers to platforms (now almost always online digital platforms) that connect suppli-
ers and consumers. For example, Uber connects people requiring car transport with car owners prepared
to drive fare-paying passengers thus potentially reducing the demand for individual car ownership and
thus reducing resource consumption.
Social Enterprises and Benefit Corporations
Social enterprises and benefit corporations are organisations that operate for the purpose of creating
shared value for all stakeholders in contrast to primarily serving shareholders with consideration of other
stakeholders mainly driven by reputational benefits.
Gift Economy
The gift economy represents a rejection of monetary transactions for labour and resources in favour of
gifting . For example, rather than set menu prices, Australian restaurant group Lentil As Anything asks
customers to pay what they think is fair based on the meal, their experience and with consideration of the
business’s costs.
Emerging Manufacturing Paradigm
The emerging manufacturing paradigm refers to technologies and approaches such as advanced manu-
facturing. For example, the development of 3D printing technology enables reduced waste, flexibility in
manufacture, elimination of transport costs through distributed manufacturing, and more opportunities
to repair rather than replace products; as discussed in module 4, it also enables simple, cheap and fast
prototyping of designs and product components.
Source: Adapted from I Gaziulusoy & P Twomey, 2014, Emerging Approaches in Business Model Innovation Relevant to
Sustainability and Low-carbon Transitions. Melbourne: University of Melbourne.
None of the approaches shown in figure 7.13 are necessarily specific to sustainability, but all can be
used to help an organisation become more sustainable in its operations. To move the entire economic
system towards sustainability requires a further consideration, which is that any new business model
should be informed by a vision for the future economy, not just the organisation itself (Gaziulusoy et al.
2013). A further challenge is that at present ‘business success’ is still often measured against performance
benchmarks established in the absence of sustainability considerations, and based on assumptions such
as competition and the primacy of shareholder wealth. In response, organisations with business models
that pursue sustainability must, to some extent, simultaneously change the conventions of the prevailing
economic system while operating within them.
Emerging National Markets and Business Models
Eyring et al. (2011) suggest that it is better to build a business model from scratch to meet the specific needs
of consumers in emerging national markets. Oyedele (2016) suggests various characteristics of emerging
markets require the business model to feature particular responses, including the following.
• Sociopolitical institutions (e.g. government, NGOs, religious groups) exert more influence over
exchanges in emerging markets than do competitive forces. It is necessary therefore that the business
model include the development of relationships with these institutions.
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• Infrastructure (including communications, electricity, transport and payments systems) is poorly devel-
oped compared with established markets. Business models must therefore ensure products and services
do not rely on high tech, cheap and constant electricity, safe and reliable transport or sophisticated
transactions. Value should be linked with easy accessibility.
• Raw materials are often plentiful, but other resources are constrained. A business model may therefore
involve sourcing raw materials in an emerging market, but processing them elsewhere.
• Low-income conditions suggest business models that focus on high volumes of low-margin transactions.
• Distribution channels feature long chains of intermediaries that each take a commission, greatly
increasing the price to the consumer and reducing the money received by the supplier. A business model
that can eliminate intermediaries and deal directly with consumers may be beneficial.
Example 7.11 examines issues Microsoft encountered in trying to enter the Chinese market before
identifying the appropriate strategy.
EXAMPLE 7.11
How Microsoft Entered China

In 1992, Microsoft made its first attempt to enter the Chinese market. It sent two Taiwan-based sales
managers into China to promote sales of the Windows operating system. Use of Windows was widespread
in China, but many users had bought counterfeit versions of just a few dollars. Unsurprisingly, no-one was
interested in suddenly paying hundreds of dollars for the legitimate product.
Microsoft decided to pursue legal remedies, suing companies that were using pirated versions, but
usually lost in court. China-based Microsoft management did not support the legal strategy and this
translated to high turnover.
The piracy problem was then compounded by the widespread adoption of open-source software such
as Linux and concerns among Chinese officials that China’s military and government systems were hosted
on US software, representing a potential security risk.
Microsoft sent a senior executive to China to try to diagnose its ongoing lack of success in the Chinese
market. The executive identified three key issues:
1. the company had tried to enter the market with people lacking in experience
2. the company was putting too much emphasis on sales approaches
3. the company had failed to realise the importance of collaborating with the government.
The company began taking executives to China to learn more about the market first-hand, but more
importantly Microsoft approached the Chinese government with a proposal to help the country develop
its own software industry and commissioned a study to help the government understand how it could
do so.
Microsoft established a research centre in Beijing and developed it into an attractive workplace for the
country’s computer scientists. It also reassured Chinese security officials that Windows was not being
used by the US Government to spy on China and eventually granted permission for China (and various
other countries) to inspect and customise the code for security-critical applications.
Rather than continue to seek legal remedies to piracy of Windows, Microsoft accepted the situation.
Founder Bill Gates has publicly recognised that tolerating piracy was a good long-term strategy because
it meant Windows was the system of choice for most of China’s users. Microsoft now sells its software in
China for a fraction of the cost in Western markets.
Source: Adapted from D Kirkpatrick, 2007, ‘How Microsoft conquered China’, Forbes, https://archive.fortune.com/
magazines/fortune/fortune_archive/2007/07/23/100134488.
QUESTION 7.12
Indian wine culture developed significantly during the 20th century and wine is now a desirable
drink for young urban people, conveying a sense of status. India has almost half a billion people
of legal drinking age, with almost 20 million new people reaching drinking age each year. The
market represents an emerging opportunity for international companies. Current growth is around
16% per year.
The situation in India mirrors that in various other Asian markets where wine, particularly white
wine, is growing as a preference among the middle and upper classes. At present, women are the
major buyers, and often purchase wine as a gift for other women.
India’s domestic wine industry currently accounts for 90% of sales. A 150% customs duty on
imported wine ensures domestic wines comprise the bulk of sales. Importers are usually seeking
prices of no more than AU$3.50 a bottle, even though the wine market exhibits strong demand up
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to about AU$36 a bottle. However, the Indian Government allows hotels to import alcohol duty-free
and thus five-star hotels account for a lot of the imported alcohol sales in India’s major centres.
Indeed, the market share of the hospitality sector (including pubs, bars, restaurants, clubs and
catering services) exceeds that of the retail sector.
Alcohol advertising is banned across India, but there regulation of most other aspects of wine
sales is inconsistent. Many states restrict alcohol sales, while Gujarat, Bihar and some others ban
alcohol sales entirely. Where alcohol sales are permitted, the taxation, distribution and sale laws
vary. Generally though, state-by-state brand registration is required, and separate licences must
be obtained to produce, bottle, store and sell liquor.
Using case facts and the characteristics of emerging markets, provide four recommendations
on how to successfully enter India as a wine manufacturer. Use the case facts to support your
recommendations.
Source: Adapted from M Morley, 2019, ‘Insight – Uncorking growing wine market in India’, Mirage News, www.
miragenews.com/insight-uncorking-growing-wine-market-in-india.
HYPERCOMPETITION: A STRATEGIC APPROACH

Operating in a hypercompetitive environment requires a strategic approach matched to the fast-changing
context (Sammut-Bonnici 2014). D’Aveni (cited in Sammut-Bonnici 2014) suggests a strategy develop-
ment approach that targets disruption as outlined in figure 7.13.
FIGURE 7.13 A strategic approach to hypercompetitive environments
Analysis
Identify patterns and predict future actions in terms of competition based on:
• cost and quality of competitors and whether they take a leadership or follower position
• timing and know-how capabilities that affect efficiencies in the value chain
• strongholds — an organisation’s core capabilities that are difficult to imitate
• deep pockets — the financial resources available.
Testing
Examine how a single competitive action affects the factors above.
Vision
• Stakeholder satisfaction — adding value for customers, partners and investors
• Strategic soothsaying — predicting windows of opportunity
Capabilities
Target
disruption via: • Speed — preparing the organisation to react to market changes
• Surprise — planning strategies that will disrupt competitors
Tactics
• Shifting rules — innovating products, processes and revenue models
• Signalling intent of selective strategies to the industry
• Simultaneous and strategic thrusts to maintain a proactive lead and to keep competitors
in a defensive position
Source: Adapted from T Sammut-Bonnici, 2015, ‘Hypercompetition’ in Sir Cary L Cooper (ed), Wiley Encyclopedia of
Management, John Wiley & Sons, www.researchgate.net/publication/272353055_Hypercompetition.
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This model differs from the strategy process outlined in earlier modules in that:
• it does not support the idea that consistency of strategy can create long-term benefits
• it does not support the idea that constructing barriers to competition can create competitive advantage.
Rather, it contends that traditional strategy processes hinder flexibility, that even the smallest competitors
can erode the profits of established businesses and that barriers to competition cannot withstand aggressive
organisations.
In addition, it does not support the idea discussed elsewhere in this module that cooperation leads to
higher profits.
Example 7.12 examines how Google has thrived in a hypercompetitive market.
EXAMPLE 7.12
Google in a Hypercompetitive Market

Google was officially launched in 1998, four years after Yahoo. It was launched amid a cluttered market of
Yahoo, Ask Jeeves, Alta Vista Lycos and Excite. Google continued to innovate to include geographically
specific search engines, catalogued searches such as weather, news and images. Google’s unique and
improving algorithm has made it the most used search engines as it made the search result more relevant.
In January 2020, Google’s parent company, Alphabet, became the third technology company reaching
market capitalisation of US$1 trillion. Even as a massive conglomerate, Google still manages to innovate
with the kind of dexterity and creativity that most young start-ups would love to have. From driverless
cars and solar-powered contact lenses to pills that search your body for disease, the company has taken
on projects that are both ambitious and game-changing — and that, if successful, could impact humanity
for the better. So how does Google manage this?
1. Invest in research. Google spends billions of dollars each year on research and development, funding
more than 250 research projects annually. The company invites scholars to spend sabbaticals at its
headquarters, luring them with the opportunity to delve into its huge swaths of data. Google also invests
in young companies with its GV (formerly Google Ventures) arm and its 30 Weeks program helps new
designers develop their product ideas and bring them to fruition. Noticing a trend here? Google puts a
huge emphasis on learning from outsiders.
2. Push everyone to innovate, from top to bottom. Google’s famous ‘20% rule’ encourages employees to
dedicate 20% of their time to projects that interest them. Though it’s been debated recently whether
it’s still in practice — Yahoo CEO and former Google VP Marissa Mayer has said it’s more like a ‘120%
rule’ — the policy did directly lead to the creation of Google News, Gmail, and AdSense.
3. Break your team into self-sufficient ‘start-ups’. Having a lean team that operates away from the day-
to-day bustle of the main offices helps keep operations smooth and efficient. Small teams can work
on moonshot projects at Google X, the secretive R&D facility down the road from the company’s main
campus. The incubator was founded in 2010 with a self-driving car project; since then, projects have
included Wing — a drone delivery service similar to the one planned by Amazon.
4. Encourage collaboration. Wherever Google’s projects take place, the company aims to maintain a tight
feedback loop that promotes quick decision making. Instead of using an assembly line approach,
Google has its researchers, engineers, and product managers work together throughout projects —
and decide what might be worth looking into further for future ones. Feedback and new ideas are
meant to flow freely between teams, so scientists talk directly to those who gather customer input and
vice versa. All this helps create a culture where innovation flourishes because it’s baked into day-to-day
processes.
QUESTION 7.13
Using case facts examine how Google has achieved and maintained its success in a hypercompet-
itive market.
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KEY POINTS
• A value-based strategy seeks to identify how the business ecosystem can create more value and
how the organisation can capture more of that value.
• Strategic partnerships are often used as part of a collaborative approach to co-creating value.
• Specific strategies to respond to digital disruption include:
– the block strategy
– the milk strategy
– the invest in disruption model
– the disrupt the current business strategy
– the retreat into a strategic niche strategy
– the redefine the core strategy
– the exit strategy.
• Business models relevant to sustainability include product-service systems, open innovation, peer-
to-peer innovation, closed-loop production, crowdfunding, sharing economy, social enterprises,
the gift economy and the emerging manufacturing paradigm.
• Strategies for emerging national markets should ideally build a business model from scratch to suit
the market rather than adapt an existing unsuitable model. Strategies for emerging markets need
to consider sociopolitical institutions, infrastructure, raw materials, low-income conditions and the
characteristics of distribution channels in place.
• A strategic approach to hypercompetition involves:
– analysing current and future competitive behaviours
– testing how a single competitive action affects competitive behaviours
– targeting disruption by aligning vision, capabilities and tactics.
• A business model approach, potentially using the business model canvas, to preparing a value-
based strategy enables management to explore more complex strategic options compared with
the conventional strategy process.
• Numerous strategic approaches and strategic options are available for emerging business models.
Management is ultimately responsible for evaluating these options to set the strategic direction of
the organisation.
7.5 SHAPING THE ORGANISATION FOR NEW

BUSINESS MODELS
Module 3 examined the internal environment of the organisation, including its resources and capabilities.
Module 5 included a discussion of evaluating strategic options, including assessing whether they were
feasible given the organisation’s resources and capabilities. Module 6 then described how the organisation
would need to change to implement the strategy.
This module has focused on new business models and noted that alternative strategic approaches may
be required as well as suggesting some specific strategies to respond to the changing business environment
and disruptive competitors. In contrast to the approach in module 6 where an organisation goes through a
change process to implement a strategy, this section explores how to shape an organisation that can quickly
and effectively respond to changes in a dynamic business environment.
DYNAMIC CAPABILITIES VS ROUTINE CAPABILITIES

Module 3 examined the role of resources and capabilities in creating value and competitive advantage.
Those capabilities that are valuable, rare, costly or difficult to imitate and non-substitutable have the
potential to create a competitive advantage and are considered strategic capabilities. Module 3 described
the need for an organisation’s strategy to align with the resources and capabilities that an organisation
possessed or could quickly develop or acquire. This is based on the notion that the resources and capabilities
of an organisation can create competitive advantage by being different (superior in creating value) to those
of competitors. A traditional resource-based view of strategy emphasises protecting and defending the
organisation’s resources and capabilities from imitation by competitors.
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The rapid pace of change characteristic of the contemporary business environment requires emphasis
on the need for resources and competencies to develop continuously over time. Rapid and unpredictable
environmental changes and market complexity require companies to accumulate competitive advantage
through learning and knowledge creation processes in order to respond to such dynamics. Considerations
such as how resources are developed, how they are integrated within the firm and how they are released
have been addressed by the knowledge-based view of strategy, which examines dynamic capabilities and
dynamic resources. Dynamic capabilities attempt to act as a buffer between the organisation’s resources
and the fast-changing business environment. Dynamic resources help an organisation to adjust its resource-
mix. Dynamic capabilities emphasise resource development and renewal, and sustain a firm’s competitive
advantage. Both routine and dynamic capabilities may be strategic capabilities.
Capability as Routine
Organisational capability requires the expertise of various individuals to be integrated with capital
equipment, technology and other resources. Virtually all productive activities involve teams of people
undertaking closely coordinated actions — typically without detailed direction. These regular and
predictable patterns of activity made up of a sequence of coordinated actions by individuals may be
described as organisational routines. Such routines form the basis of most organisational capabilities. At
the manufacturing level, a series of routines governs the passage of raw materials and components through
the production process to the factory gate. Sales, ordering, distribution and customer service activities are
similarly organised through a number of standardised, complementary routines. Even top management
functions comprise routines for monitoring business unit performance, capital budgeting and strategy.
Routinisation is an essential step in translating directions and operating practices into capabilities. In
every Boost Juice bar or Gloria Jeans coffee shop, operating manuals provide precise directions for the
conduct of every activity undertaken, from combining ingredients for smoothies to the maintenance of the
milkshake and coffee machines. In practice, the operating manuals are seldom referred to in the course of
day-to-day operations — through continuous repetition, tasks become routinised.
Like the individual skills described above, organisational routines also develop through learning-by-
doing and, just as individual skills diminish when not practised, so it is difficult for organisations to
retain coordinated responses to contingencies that arise only rarely. Hence, there is a trade-off between
efficiency and flexibility. A limited repertoire of routines can be performed highly efficiently with near-
perfect coordination. The same organisation may find it extremely difficult to respond to novel situations.
Dynamic Capabilities
Teece et al. (1997) defined dynamic capabilities as ‘the firm’s ability to integrate, build, and reconfig-
ure internal and external competencies to address rapidly changing environments’. By developing dynamic
capabilities, firms are able to respond to fast-moving, competitive and turbulent business environments
(Easterby-Smith et al. 2009 and Eisenhardt & Martin 2000, in Mansour et al. 2019) and exhibit faster
research and development and innovation (Babelyte-Labanuske & Nedzinkas 2017 and Tchuta & Xie
2017 in Mansour et al. 2019). Dynamic capabilities have been found to be crucial in responding the
context of environmental dynamism (Girod & Whittington 2017 in Mansour et al. 2019) and equally that
when the environment requires organisations’ capabilities to survive and grow those organisations develop
their capabilities rapidly (Ruiz-Ortega & Patta-Requena 2013 in Mansour et al 2019). For example, when
countries began imposing shutdowns affecting businesses and geographical regions to try to contain the
spread of the COVID-19 virus, those organisations with dynamic capabilities were better positioned to
find ways to continue operating (such as being able to continue operations with employees working from
home), whereas those with an over-reliance on routines had little way to respond.
This concept of dynamic capabilities opens the opportunity to incorporate managerial action into
discussions of the sources of competitive advantage. Attention to managerial action was further emphasised
by Eisenhardt and Martin (see Mansour 2019), who defined dynamic capabilities in terms of process.
Ongoing collaboration with customers allows companies to reconfigure existing resources and thus
develop dynamic capabilities in response to customer needs and suggestions.
AGILE ORGANISATIONS
Closely related to the development of dynamic capabilities is the concept of the agile organisation. Module
6 described how part of implementing strategy involves aligning core aspects of the organisation around
shared values. This was described as the ‘7-S framework’. The changes required to align those aspects
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and the specific tasks to achieve the strategy were described in terms of change management and project
management approaches. Detailed implementation plans are put in place as part of the strategy process.
A new model of organisation seeks to achieve a culture that is always responsive and ready to change
and that can adapt its operations and processes quickly to changing circumstances, opportunities and
threats. This model is known as being ‘agile’. ‘Agile’ is one of the business buzzwords of the past
decade. Originally applied to an iterative approach to software development, ‘agile’ is now used to refer to
organisations that can change quickly to respond to changes in the external environment, market changes,
technology changes or changes by competitors. It contrasts with the traditional view of an organisation as
a ‘machine’ that operates on the basis of structural hierarchies, linear planning and established processes
(Aghina et al. 2018). While traditional organisations have many benefits (as described in the discussion
of capability as routine, above), their strengths of stability, control and process optimisation are arguably
less suited to the increasingly dynamic nature of the context in which they operate.
Agile organisations feature:
• a people-centred culture with networks of self-managing teams
• fast decision cycles
• a purpose to co-create value for all stakeholders (Aghina et al. 2018).
The agile business model gives an organisation the ability to efficiently and rapidly reconfigure its
strategy, structure, people, technology and processes to respond to opportunities to create or protect value.
In a business environment characterised by fast and constant change, instability and increasing levels of
uncertainty, the ability to adapt quickly to changing circumstances is a source of competitive advantage
over traditional organisations.
While the adaptability of agile organisations is a clear strength, an agile organisation can only succeed if
that adaptability is balanced by a degree of stability. Successful agile organisations ensure enough elements
of the organisation evolve slowly so they provide a stable central structure around which other aspects can
change quickly.
McKinsey (Aghina et al. 2018) represent the change of organisational form from ‘machine’ to
‘organism’ as shown in figure 7.14.
FIGURE 7.14 The organisation as machine and as organism
Rather than organisation as machine, the agile organisation is a living organism
From organisations ... to organisations

as ‘machines’ ... as ‘organisms’
Quick
‘Boxes and lines’
changes,
less important,
flexible
Top-down focus on action
resources
hierarchy
Bureaucracy
Silos Leadership shows Teams built

direction and around end-to-end
Detailed
enables action accountability
instruction
Source: Exhibit from ’The five trademarks of agile organizations’, March 2018, McKinsey Quarterly, www.mckinsey.com.
Copyright © 2020 McKinsey & Company. All rights reserved. Reprinted by permission.
Research suggests agile organisations outperform conventional organisations in terms of organisational

health (linked to long-term performance), customer centricity, revenue growth, workforce engagement,
speed to market and cost efficiency (Aghina et al. 2018). A McKinsey survey found three-quarters of
respondents rated transforming to an agile organisation as a top-three priority. Efforts to transform were,
predictably, most advanced in industries with rapidly changing environments such as communications,
financial services and media (Salo 2017). Of the respondents to the survey who had begun transforming to
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an agile organisation, 81% reported increased overall performance on financial and non-financial measures
(Salo 2017).
Aghina et al. (2018) identify five key characteristics of an agile organisation. These are summarised in
figure 7.15.
FIGURE 7.15 Key characteristics of the agile organisation
There are five trademarks of agile organisations.
Trademark Organisational-agility practices1
Strategy North Star embodied • Shared purpose and vision

across the organisation • Sensing and seizing opportunities
• Flexible resource allocation
• Actionable strategic guidance
Structure Network of • Clear, flat structure

empowered teams • Clear accountable roles
• Hands-on governance
• Robust communities of practice
• Active partnerships and ecosystem
• Open physical and virtual environment
• Fit-for-purpose accountable cells
Process Rapid decision and • Rapid iteration and experimentation

learning cycles • Standardised ways of working
• Performance orientation
• Information transparency
• Continuous learning
• Action-oriented decision making
People Dynamic people • Cohesive community

model that • Shared and servant leadership
ignites passion • Entrepreneurial drive
• Role mobility
Technology Next-generation • Evolving technology architecture,

enabling technology Systems, and tools
• Next-generation technology
development and delivery practices
1The 5 trademarks include 23 practices for organisational agility; 18 are based on survey
research. Five additional practices are included that have emerged from recent experiences
with large global companies transforming into agile organisations.
Source: Exhibit from ’The five trademarks of agile organizations’, March 2018, McKinsey Quarterly, www.mckinsey.com.
Copyright © 2020 McKinsey & Company. All rights reserved. Reprinted by permission.
Interestingly, McKinsey research (Salo 2017) found agile organisations or agile units within organi-
sations strongly outperform traditional organisations in terms of alignment to strategy, shared purpose
and entrepreneurialism.
QUESTION 7.14
Huanxi Media Group intended to release its movie Lost in Russia into cinemas for Lunar New Year
2020, but as New Year approached it became clear that measures taken to contain the spread of
the COVID-19 virus meant cinemas in China would be closed. Huanxi faced the prospect of losing
millions of dollars invested in production and having to pay investors who it had guaranteed a
certain level of box office revenue.
Huanxi quickly developed a plan try a novel distribution alternative. It approached ByteDance,
the Chinese company responsible for a family of apps, including TikTok and a video platform.
While hundreds of millions of people used ByteDance products every day, its video streaming sites
are built around on short form, user-generated content. For example, TikTok limits videos to just
15 seconds. ByteDance, therefore may not seem an obvious choice for Huanxi’s two-hour+ running
time for Lost in Russia. ByteDance, however, was open to negotiation. A deal was reached within a
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day whereby ByteDance would pay RMD630 million and a share of advertising revenue for streaming
rights to the movie and other Huanxi programming.
Two days after the deal was sealed, ByteDance released Lost in Russia free on its platforms,
attracting 600 million views and generating significant positive sentiment towards the company. The
ongoing free streaming of Huanxi content on ByteDance platforms has led to substantial growth in
user numbers (commonly one of the most important measures used by digital companies).
Huanxi could have also considered Alibaba or Tencent to distribute the film online, but both own
studios that compete with Huanxi. The broader film industry have accused the Huanxi–ByteDance
free model of destroying the cinema industry, but the companies appear determined to take their
collaboration further with rumours of co-productions to feed a new online cinema channel.
Describe how Huanxi and ByteDance exhibited the characteristics of an agile organisation.
Examine the risks and benefits to Huanxi and ByteDance in taking the actions they did to change
their business models.
Source: Adapted from M Greevan & M Wade, 2020, ‘Chinese movie studio upturned its business model due to
coronavirus — Western companies take note’, The Conversation, 10 February, https://theconversation.com/chinese-
movie-studio-upturned-its-business-model-due-to-coronavirus-western-companies-take-note-131167.
ENTREPRENEURIAL ORIENTATION
The change drivers described in section 7.1 collectively create environmental dynamism (Aloulou and
Fayolle, 2005). This volatile and continuously changing context makes it difficult, if not impossible, to
predict the future of the competitive environment and its impact on the organisation. While environmental
dynamism challenges traditional business models, it also creates new opportunities for organisations
(Lumpkin & Dess 2001; Hakala 2011; Nelson & Winter 1982).
Environmental dynamism requires organisations to adapt traditional models of strategy development
and implementation to create a strategic process in which they demonstrate innovative behaviour to create
new opportunities, accept higher levels of risk and implement entrepreneurial actions (Dess & Lumpkin
2005). This is known as an entrepreneurial orientation to strategy (Miller 1983; Wiklund & Shepherd
2003; Hughes & Morgan 2007; George 2011).
An entrepreneurial orientation involves behaviours aligned to the continual identification and generation
of new business, which will create and sustain a competitive advantage (Wiklund & Shepherd 2003). In
particular, entrepreneurial organisations aim to be first to market with product and service innovations.
The three key dimensions of an entrepreneurial orientation are as follows (Hughes & Morgan 2007;
Hakala 2011).
• Innovativeness — the tendency or willingness to participate in support of new ideas, creativity and
experimentation as well as to develop creative processes of technological and R&D leadership which
result in new products, services or technological processes (Lumpkin & Dess 1996; Zho 2006).
• Proactiveness — a forward-looking view, where organisations try to develop new products or improve-
ments on them, anticipating changes and opportunities that arise in the environment, promote changes
in current tactics and detect future market trends (Hughes & Morgan 2007). Proactiveness enables firms
to minimise the threat of obsolescence, which is usual in dynamic environments (Lumpkin & Dess
2001). Dynamic environments encourage a firm’s to achieve new target market segments before they
are discovered by the firm’s rivals (Zahra 1996).
• Risk taking — the willingness to commit resources to projects where the results are uncertain and/or
the cost of failure can be high (Wiklund & Shepherd 2003; Zahra 1991). For example, the early stages
of technology product development is usually uncertain, because competing firms try to establish the
industry standard (Meijer et al. 2010), which renders the others obsolete.
Studies have found a robust correlation between entrepreneurial orientation and performance (Rauch
et al. 2009). Of course, the ability of an organisation to adopt an entrepreneurial orientation is dependent on
the organisation’s resources and capabilities. In particular, the availability of technological and marketing
capabilities has a positive influence on entrepreneurial orientation. The more resources an organisation
commands, the more likely it will develop the innovative, proactive and risk-taking behaviours that define
the entrepreneurial orientation (Ruiz-Ortega & Parra-Requena 2013).
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STRATEGIC INNOVATION
Organisations adopting an entrepreneurial orientation often seek strategic renewal through a process of
strategic innovation. De Wit (2017) identified four key elements of strategic innovation: strategising,
entrepreneuring, changing and investment processes. These are represented in figure 7.16.
FIGURE 7.16 Strategic innovation
Strategising Enterpreneuring
Strategic reasoning Strategic visioning
Strategic renewal
Strategic alignment Strategic venturing
Changing Investing
Strategic innovation as a strategising process requires managers to identify new bases of competitive
advantage, often against the dominant logic of the organisation. This requires managers to identify
opportunities and threats through their continuous assessment of changes in the organisational environment
and constant evaluation and re-evaluation of organisational strengths and weaknesses. The capabilities
managers need in order to lead their organisations to strategic renewal will be discussed later in the module.
The strategising process allows organisations to overcome strategic myopia and move away from outdated
cognitive maps.
Strategic innovation as an entrepreneurial process requires managers to identify new markets for existing
products and services, apply new technologies in current markets and establish new businesses in addition
to the existing business portfolio. This requires managers to possess or develop entrepreneurial capabilities.
Strategic innovation as a change process requires adjustments of the organisational structure (e.g.
when new products require the combination of resources that are located in separate business units).
Organisational structure refers to how the individuals in the firm have been configured and relate to
one another. Conventional organisational structures divide the tasks and responsibilities among the
organisational members, forming different functions and units, and then coordinate their separate tasks
into an integrated whole (De Wit 2017). Organisational culture will almost certainly need to change if a
conventional organisation is to successfully pursue strategic innovation.
Strategic innovation requires investment in a variety of resources and capabilities and thus competes with
investment into other areas (e.g. entering new markets, mergers and acquisitions). Investment in strategic
innovation can be seen as risky due to the uncertainty over the prospects it will lead to future value creation.
Managers often seek to mitigate risk by sharing it (see module 5) using processes such as open innovation
and value co-creation with partners in the business ecosystem.
INTRAPRENEURSHIP
Gifford Pinchot coined the term ‘intrapreneur’ in 1978 to describe ‘employees who do for corporate
innovation what an entrepreneur does for his or her start-up’ (Daykin 2019). In other words, intrapreneurs
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are employees who create new products, services and processes, identify new opportunities for business
development, and create value for the organisation.
We discussed earlier the tension between the flexibility required for an organisation to be innovative and
the routinised nature of processes that have achieved efficiency and are responsible for an organisation’s
past successes. It is unfortunately common that managers and leaders suppress the innovative tendencies of
talented employees, fail to provide the necessary resources of autonomy, or reject innovative ideas created
by those not formally appointed to a research and development role. As the pace of change and level of
complexity in the business environment continue to accelerate and the components of business models
become increasingly complex, the top-down model of leadership, management and decision making
becomes increasingly problematic. Organisations seeking staff often advertise for creative, passionate and
innovative people — they must then encourage and support the staff to exercise these qualities if the
organisation is to benefit (Daykin 2019).
Google exemplifies an organisation that has excelled in creating a culture of innovation and intrapreneur-
ship. Some of its flagship products, including Gmail, have been initiated by the work of employees during
the 20% of work time that Google requires employees to pursue interests and ideas outside the core of
their work duties. 3M has a long-established similar program. Such an approach encourages collaboration
across organisational units and motivates employees to explore their creativity.
An important aspect of encouraging intrapreneurship within the organisation is to provide motivation
and rewards for those staff engaging in it. This may involve the organisation providing resources and a
high degree of autonomy, and tolerating a degree of risk and failure. It may also involve recognition,
financial and other rewards for those who successfully generate innovations that enhance achievement
of the organisation’s goals. Equally, employees engaging in intrapreneurship using the organisation’s
resources must accept responsibility for the outcomes. This mirrors the ways entrepreneurs seek returns
on the risks they take.
Capozzi et al (2010) found that organisations with formal processes to enable intrapreneurship have
higher intrapreneurship success rates than those that do not formally adopt supportive processes. Earlier
in the module we discussed the idea of re-inventing an organisation to be innovative, but Altringer (2013)
suggests much can be achieved by mentoring, workshopping and other methods that identify, encourage
and support intrapreneurs without a wholesale change in the organisation’s structure and culture. Corbett
(2018) argues intrapreneurs cannot take an innovation from idea to realisation in the absence of a culture,
structures and systems that nurture innovative ideas and support their development. Further, he suggests
that to successfully achieve intrapreneurialism, a key requirement is the creation of an organisation-wide
innovation management system featuring:
• leadership committed to creating an innovative organisation
• a culture of innovation
• a structure that highly interconnects different parts of the organisation
• a willingness to commit resources throughout the organisation
• decision-making processes that can respond quickly to innovations
• processes and tools to support the pursuit of innovation
• metrics and rewards
• specialised skills and talent aligned with innovation.
Corbett (2018) suggests organisations should hire innovation specialists, but that they should be
integrated across all functions of the organisation, not placed in a separate ‘innovation department’.
OPEN INNOVATION AND VALUE CREATION

Module 4 examined how organisations protect their intellectual property using measures such as legal
protections (e.g. trademarks, copyright, patents) and confidentiality (preventing competitors from imitating
the offering). They take these steps to ensure any competitive advantage they achieve cannot be easily
overcome by competitors. This is a long-established practice, common throughout the business world.
Efforts at innovation, including research and development, are fiercely protected within the organisation
to ensure the organisation can capture the value that its efforts create. This approach is known as closed
innovation — it relies on the organisation’s own resources and capabilities and attempts to retain the value
created by the innovation for itself.
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More recently, particularly over the past 10–15 years, as the business environment has become more
complex (involving rapid change and high levels of uncertainty) increasing numbers of organisations have
found there is benefit in adopting an open innovation approach. Open innovation is defined as:
a distributed innovation process based on purposively managed knowledge flows across organisational
boundaries, using pecuniary and non-pecuniary mechanisms in line with the organisation’s business model
(Chesbrough & Bogers 2014).
Open innovation thus represents an alternative to the vertically integrated closed innovation model in
which all innovation activities are internal to organisations. Generally, open innovation involves knowledge
flows between organisations in the value chain (e.g. between the organisation and its suppliers or between
the organisation and its customers) (Hagedoorn & Duysters 2002). It can, however, also involve knowledge
flows between competitors. For example, the electric car company Tesla allowed other car companies to
use its patented technology in an effort to accelerate development of the electric car market.
To craft a successful collaboration between a large organisation and a start-up requires each party
to understand the other’s perspective (Usman & Vanhaverbeke 2017). Open innovation activities must
create value to sustain their purpose. Thus, open innovation must be assessed through the lens of value
(Chesbrough, Lettl & Ritter 2018; Spender et al. 2017).
Leaders and managers have to develop an open-innovation capability within the organisation, which
comprises the following four value processes:
1. value provision — the organisation’s participation in open innovation must be able to provide value to
the other party
2. value negotiation — the organisation must be able to leverage its contribution in order to ensure it
receives a benefit from its participation
3. value realisation — the organisation must be able to translate the outcomes of the collaboration into
value
4. value partake — the organisation must be able to share the value with its collaborators.
Consider, for example, the appliances company Philips, discussed in example 7.13.
EXAMPLE 7.13
Open Innovation at Philips

Philips centralised research and development in 1998 before deciding to take an open innovation
approach. It renamed its R&D space ‘High Tech Campus Eindhoven’ and invited companies, institutes,
researchers and entrepreneurs to engage in open innovation. Companies associated with the Campus
now generate almost 40% of all Dutch patent applications. Philips also established a lab called MiPlaza,
which invites companies to access Philips knowledge and resources to develop their own applications.
The four value processes are:
1. value provision — Philips provides other organisations with value through access to facilities, knowl-
edge and Philips’ own research
2. value negotiation — Philips retains the right to use inventions made by participants in the MiPlaza lab
to improve their own products
3. value realisation — Philips exercises judgement about who participates in its Campus and MiPlaza
programs and thus ensures alignment with its interests; in addition to business-related innovation, it
takes a broad view of value, including the generation of social benefits such as healthcare and the
development of technology for developing countries and
4. value partake — both collaborators and Philips share in the right to use and benefit from the innovations
created (Isomaki 2018; Philips 2020).
Both large, established organisations and start-ups can utilise open innovation to share (and thus reduce)
the risks attached to innovation efforts (e.g. market uncertainty). Start-ups look for collaboration with
established organisations to access specialised resources, share risks and identify potential customers.
Collaborating with various business partners is critically important to start-ups’ survival (Wouters et al.
2018). For example, financial technology (fin-tech) start-ups operating in the co-working centre, Stone &
Chalk, rely on feedback from well-established banks, finance and insurance companies to finetune their
innovative products, make them industry ready, find investors for scaling up projects and, ultimately, sign a
deal with corporate clients. Collaboration with well-established companies allow start-ups to develop their
business networks, become recognised and legitimised (Di Pietro et al. 2018), and overcome their liabilities
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of newness and smallness (Usman & Vanhaverbeke 2017). Large organisations often seek collaboration
with start-ups in order to acquire external knowledge to improve their innovativeness (Spender et al. 2017).
The collaborative interactions between start-ups and large organisations in their open innovation commonly
grow from simple activities to complex relationships and not all result in creation value (Weiblen &
Chesbrough 2015).
Participation in open innovation requires effective governance mechanisms. Key challenges include
information-sharing and communication costs and the alignment or reconciliation of different objectives
among partnering organisations. Chesbrough and Crowther (2006) stress the importance of establish-
ing clarity around who will own intellectual property generated, using contracts to formally allocate
responsibilities, and using control mechanisms to balance openness and confidentiality (Chesbrough &
Crowther 2006).
Collaboration activities often involve more than just two parties and may be ongoing rather than project-
oriented. They can involve diverse networks of organisations that form collaborative ecosystems and co-
create value (Reypens, Lievens & Blazevic 2016; Vargo et. al. 2015).
Innovation Hubs and Incubators

Many organisations engage ‘innovation intermediaries’ to identify and access external sources of inno-
vation. These intermediaries provide support roles in the collaboration between two or more other actors
across various stages of the innovation process (Howells 2006). Intermediaries add value by developing
dense communities (Spigel 2017); establishing and mediating collaborative relationships (De Silva,
Howells & Meyer 2018); and fostering shared values, trust and risk taking which support exchange (Bergek
& Norman 2008; Scillitoe & Chakrabarti 2010).
The way in which innovation intermediaries contribute is evolving in response to the demands of diverse
contexts and the expectations of value creation by participating firms (Brunswicker & Chesbrough 2018;
De Silva et al. 2018; Howells 2006; Oh et. al. 2016). The innovation hub is becoming an increasingly
popular model in facilitation value creation.
An innovation hub is a shared space intended to foster collaboration within an industry by bring-
ing together various parts of the business ecosystem, including established operators and suppliers,
entrepreneurs, start-ups and researchers. A business incubator is a company that provides services,
resources, networking, advice and mentorship to start-ups to help them become viable businesses. For
example, the CORE Innovation Hub in Perth is intended to foster collaborative innovation in the oil, gas
and minerals sector. The hub also incorporates Unearthed Solutions, an industry incubator that organises
hackathons and supports innovative start-ups until they become industry ready.
Incubators generate multiple benefits through their co-working design (Spinuzzi 2012) and affordable
and flexible office arrangements, and provide economies of scale through the sharing of resources and
facilities (Goswami et. al. 2017). By strategically selecting certain types of start-ups based on development
stage and innovation focus, incubators also benefit from projecting a collective image (Bergek & Norman
2008). This encourages interorganisational interactions that enable start-ups to better recognise market
opportunities and how their innovations can be embedded within current product systems (Bøllingtoft
2012; Zott & Amit 2010).
KEY POINTS
• Routine capabilities are part of what provides established organisations with their competitive
advantage.
• Dynamic capabilities are what enable an organisation to respond and change quickly to new
circumstances.
• An agile organisation has a stable core, but the rest of the organisation is flexible. Agile organisa-
tions feature networks of self-managing teams, fast decision cycles and a purpose to co-create
value for all stakeholders.
• Agile organisations outperform traditional organisations on measures of alignment to strategy,
shared purpose and entrepreneurialism.
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• Organisations in dynamic environments can seek to establish a strategic innovation approach to
generate ongoing innovation and thus regularly create new advantage.
• Organisations can support strategic innovation by encouraging an entrepreneurial orientation in
their organisation and encouraging intrapreneurialism by individual employees.
• Open innovation involves collaboration with external parties with a goal of mutual value creation
and capture.
• Management must balance routine and dynamic capabilities to maintain existing business and
enable the pursuit of new business. This balancing task is a major challenge for the managers
of established businesses that must maintain and grow their existing business while laying the
foundations for future business.
• Leaders and managers seeking to establish an agile organisation must balance the dynamic nature
of the organisation with a strong central core with shared values and purpose to provide stability.
• In an increasingly complex and changing environment, leaders and managers are less able to
understand and make decisions about all aspects of an organisation’s strategy and operations.
Decision making needs to be devolved to lower levels of the organisation in order to motivate and
enable innovation. Leaders and managers need to create a culture and environment in which this
approach can be effective.
7.6 LEADERSHIP AND MANAGEMENT ROLES IN

STRATEGY FOR EMERGING BUSINESS MODELS
In this section we examine leadership and management roles in the context of a dynamic business
environment, with a particular focus on successfully meeting the challenges of driving strategy for
emerging business models. We will conclude with a discussion of how current and future leaders and
managers can continue to develop their portfolio of skills.
LEADING BUSINESS MODEL INNOVATION

Most researchers view business model innovation and strategy as different things (Wirtz et al. 2016).
Business model innovation needs to align with overall organisational strategy, but equally business model
innovation can be an important driver of strategic innovation.
Business model innovation is seen as source of substantial value creation and a way to effectively react
to uncertainty and rapid change in the business environment. It also generally has more potential to create
a sustainable competitive advantage than does product or service innovation (Wirtz et al. 2016). Dynamic
capabilities (see section 7.5) are crucial to achieving successful business model innovation (Schneider &
Spieth 2014). Because the outcomes of the process are somewhat unpredictable, business model innovation
is by its very nature experimental. This poses a problem for the leaders of established organisations in
particular who must be wary of compromising their existing strengths. As Carayannis et al. (2014) note,
business model innovation requires profound governance and organisational competencies.
Wirtz et al. (2016) identified that business model innovation design often takes place as a mix of
structured and creative steps. Gunzel and Holm (2013, cited in Wirtz et al. 2016) suggested using an
experimental approach to those aspects of the business model that are externally oriented and a structured
process for those that are internally oriented.
Most research into business model innovation suggests it is seen as crucial but very difficult to implement
(Wirtz et al. 2016). One problem that successful organisations experience is that past successes will
tend to drive future thinking. It often becomes extremely difficult to move away from longstanding
routines and behaviours that were established to support past successes, but which may no longer be
appropriate. Innovation is stifled as managers become hesitant to take risks and performance suffers.
Business model innovation often involves substantial changes in the organisation’s value chain,
structure, resources and capabilities. Successful implementation requires leaders in organisations to:
• break down barriers to knowledge sharing
• overcome behavioural and social barriers to change
• create a culture and processes for organisational learning
• create an environment that supports creativity and experimentation
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• allocate sufficient resources
• provide a sense of legitimacy to the process
• ensure decision makers cooperate and work in alignment with the organisation’s strategy.
There are also some contexts in which business model innovation may not be the optimal response.
Aspara et al. (2010, cited in Wirtz et al. 2016) suggested large established organisations may often be better
replicating the innovations of others than trying to generate business model innovation themselves. Wirtz
et al. (2016) note that business model innovation in an established organisation often involves a period in
which management must simultaneously deal with multiple business models, with attendant risks.
LEADERSHIP AND MANAGEMENT IMPLICATIONS OF

TECHNOLOGY-ENABLED BUSINESS MODELS
The shift towards business models based on technology requires corresponding shifts in how the organi-
sation’s resources and capabilities are developed and utilised (Kark et al. 2019).
• Automation and AI technologies reshape the nature of work itself. This requires new skills and
capabilities in the workforce and may push towards using more contract or gig work rather than
traditional full-time, long-term employment models. Communications technologies and in particular
sharing and collaboration via internet technologies enables interaction between geographically distant
workers that would once have required physical proximity.
• The technology resources, particularly the human resources, are increasingly likely to work within
business functional areas rather than in a centralised technology department.
• Investment in technology should be based on a strategic approach and the investments should be subject
to metrics in order to establish accountability. Nevertheless, organisations must be able to balance
identifiable returns on investment with the risk of failing to invest in their technology-enabled future.
• Heavy reliance on technology, including cloud-based technologies that exist outside the organisation’s
direct control, introduce risks related to confidentiality, legal compliance and in some cases product
usage (e.g. internet-connected smart devices that can be hacked or hijacked).
To successfully manage these changes, Kark et al (2019) suggest leaders must promote a culture and
establish an organisational structure that can change quickly and willingly. Organisational structure must
integrate functional areas must become more integrated to ensure that resources and capabilities are
working together towards the organisation’s strategy. A workforce must be developed that can work with
and alongside technologies, including AI, and that values innovation and collaboration.
Cultural change to support technology-enabled business models is a major challenge for leaders. Briggs
et al. (2018) found that leaders regularly blamed resistance to change throughout the organisation as a
key reason business model change initiatives fail. For example, managers and employees accustomed to
project management approaches, with defined schedules, budgets and deliverables often struggle to move
to an agile approach in which development occurs in a fast-paced iterative manner. Leaders and managers
therefore need to establish the necessity of cultural change, act as role models and reward behaviours that
support change.
As described in section 7.1, digital transformation requires the creation and implementation of a new
business model. Start-ups are well positioned to use new business models because they do not need to
maintain their existing businesses. Established businesses, however, must achieve transformation without
sacrificing their current performance.
The entire senior executive team is likely to be involved in decision making for digital transformation. It
is important to recognise that while transformation implies a start and end point, transformation is in fact
an ongoing process. As described earlier in the module, the dynamic nature of the business environment
and the continuing development of technology and other forces of change means that ‘almost-constant
strategic iteration is the new norm’ (Samuels 2018).
Tabrizi et al. (2019) note that 70% of digital transformation initiatives fail to achieve their goals, with
organisational culture and adherence to old practices responsible for much of the failure rate. Figure
7.17 suggests how to improve the prospects of success of a digital transformation strategy, drawing on
suggestions from Tabrizi et al. (2019). These recommendations reinforce the important message that
‘digital transformation is about people’ (ZoBell 2018).
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FIGURE 7.17 Roadmap for successful digital transformation
1. Establish the Goals and Business Strategy Before Deciding on and Investing in Technology
Technology should be chosen based on its ability to help the business achieve its specific goals. Too
often, businesses invest in technology tools based on the way those technologies are promoted rather
than establishing goals and then assessing which technologies are best suited to achieving them.
2. Integrate External Expertise and Internal Organisational Knowledge
Organisations often bring in external consultants for their expertise about technology and transformation
and their fresh perspective. This is a legitimate approach, but consultants can never understand the
business in the same way as internal stakeholders. Digital transformation strategy must be informed by
both external expertise and organisational knowledge.
3. Involve Customers
Customer experience is an increasingly important part of many organisations’ value propositions. Obtain-
ing extensive input from customers helps the organisation ensure each aspect of its digital transformation
improves customer experience.
4. Manage the Impact on Employees
Organisational transformation involves not just the product or service, but all the processes that create
the value proposition. For employees, such initiatives often seem associated with job cuts. The fear that
naturally arises can lead to resistance and a lack of cooperation. Leaders can manage this process by
framing the transformation as an opportunity for employees to develop into higher value-adding roles
and where possible involving employees in the implementation plan. Of course, management should not
mislead employees.
5. Adopt a Start-Up Culture
Digital transformation involves uncertainty and requires agile practices and agile decision making.
Traditional organisational hierarchies often hinder efforts to transform a business. The organisation or
at least those parts most directly involved in the transformation should adopt a less hierarchical structure
that enables decision making based on experimentation and iterative strategy.
Source: Adapted from B Tabrizi, E Lam, K Girard & V Irvin, 2019, ‘Digital transformation is not about technology’,
Harvard Business Review, 13 March, https://hbr.org/2019/03/digital-transformation-is-not-about-technology.
Example 7.14 provides a comprehensive case study of the efforts of the leadership and management of
the New York Times news organisation to manage digital disruption, design and implement new business
models and shape the organisation to succeed in the contemporary business environment. This example
will be used to explore leadership, management and strategy issues later in the module.
EXAMPLE 7.14
Saving The New York Times

The New York Times (NYT) was quick to recognise the potential — and the threat — of the internet. The
NYTimes.com website launched in 1996 and focused upon adapting content from the print edition for
web display. It was free to access and aimed to attract paid advertising.
In 1999, New York Times Digital was established to manage the websites of the Times, Globe,
and International Herald Tribune and to launch other online initiatives. It was an independent business
unit within NYT in the belief that, if NYT was to be a serious player in cyberspace, it needed to have the
people, systems, and culture of a dot.com start-up rather than of a century-old newspaper.
Despite success in attracting online visitors, digital advertising revenues were disappointing, and
executives increasingly recognised the need to charge users. The first online subscription, launched in
2005, was Times Select, which charged an annual US$49.95 fee for premium content and access to
online archives. It generated a mere US$10 million a year and was discontinued in 2007. Then, in March
2011, NYT introduced its ‘metered access’ model, which allowed web visitors free access to a limited
number of articles each month, after which a paid subscription was required. By the end of 2011, there
were 390 000 paid digital subscribers to subscription packages and, by the end of 2014, there were
910 000 digital-only subscribers.
Although digital advertising revenues grew — by 2014, digital accounted for 27% of NYT’s advertising
revenues — this growth failed to offset declining revenues from print advertising. Moreover, despite huge
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improvements in the content and accessibility of NYTimes.com, it was the digital-only upstarts that were
leaders in innovation and user features.
Some industry observers saw the hybrid model — print and digital editions — as doomed to failure.
Rick Wartzman, Director of the Drucker Institute, argued: ‘Dead-tree editions must immediately yield
to all-internet operations. The presses need to stop forever, with the delivery trucks shunted off to the
scrapyard.’ He pointed to the Huffington Post (owned by AOL) as the model for an online newspaper. Eric
Schmidt, chairman of Google, suggested that users would only be willing to pay for unique content,
as most news was available from multiple online sources. For online newspapers to generate adequate
advertising revenues, they needed to offer targeted advertising linked to customised content — for this,
Google was an essential partner for the newspaper companies.
One of the main initiatives of the incoming CEO, Mark Thompson, was to initiate a fundamental rethink
of NYT’s digital strategy. In May 2014, a committee headed by AG Sulzberger delivered a report entitled
‘Innovation’ that provided a wrenching diagnosis of NYT’s weaknesses in ‘the art and science of getting
our journalism to readers’.
Among the many challenges the report identified were the following.
• Creating a fully digital newsroom: with Jeff Bezos funding advanced technological development at
the Washington Post, BuzzFeed and Yahoo increasing their investments in news gathering and delivery,
and new entrants such as Flipboard and First Look Media entering the business — NYT was being
left behind. The report noted: ‘The newsroom has historically reacted defensively by watering down
or blocking changes, prompting a phrase that echoes almost daily around the business side: “The
newsroom would never allow that”.’
• Fewer and fewer readers were accessing the Times through the NYTimes.com home page: the NYT
needed to take its journalism to the reader: at NYT ‘the story is done when you hit publish. At
the Huffington Post, the article begins its life when you hit publish’. Taking NYT journalism to readers’
‘digital doorsteps’ would require eliminating the NYT’s traditional division between the news side and
the business side of the newspaper.
• Exploiting the archive. ‘We have an archive of 14 723 933 articles extending back to 1851 that can be
resurfaced in useful or timely ways. Yet we rarely think to mine our archive, largely because we are so
focused on news and new features.’
• Experimentation: especially in finding new ways of packaging existing content that would be conducive
to sharing on social networks.
• Personalisation: ‘using technology to ensure that the right stories are reaching the right readers in the
right places and the right times. For example, letting you know when you are walking past a restaurant
we have just reviewed’.
• User-generated content: The Times’ audience is its ‘most underutilized resource. We can count the
world’s best-informed and most influential people among our readers. And we have a platform to which
many of them would be willing and honored to contribute’.
The report was intended for a handful of senior managers; however, the leak of the report to
BuzzFeed triggered an explosion of anguish and debate within the company. Harvard’s Nieman Lab
reported: ‘One [NYT employee] admitted crying while reading it because it surfaced so many issues
about Times culture that digital types have been struggling to overcome for years.’ For AG Sulzberger
the leak was ‘… a moment of panic … suddenly it felt like our dirty laundry was being aired’. Yet, within
days, the report had become a rallying cry: ‘You couldn’t read that report and think that the status quo
was an option.’
The Innovation Report was a prelude to a flurry of top management and organisational changes. A
week after the distribution of the report, the executive editor of the Times, Jill Abramson, was fired. She
was replaced by the Times’ managing editor Dean Baquet. One factor in her dismissal was her perceived
opposition to the greater integration of the news and business sides of the NYT — a key objective of
CEO Thompson, but contrary to the long tradition of the independence of the Times’ journalism. As AG
Sulzberger later explained: ‘… the most important thing is to have real strong protections around the
editorial independence of our newsroom’, but the separation of the news and the business sides of the
newspaper had created a barrier to change. ‘We regarded the members of our technology team and
product team as being on the business side … the folks who were building our website weren’t able to
talk to the people who were filling the website with great journalism each day.’
Jill Abramson’s dismissal was followed by the elimination of about 100 positions in the company’s
newsroom: ‘the most extraordinary collection of talent, of human knowledge, that has ever left the New
York Times in a single day,’ according to reporter David Dunlap. Under Dean Baquet, the newsroom
leadership was reorganised around four deputy editors. The major emphasis was on promoting and
bringing in talent that could propel the Times’ digital efforts — especially within mobile communication.
Essential to this effort was the integration of journalism and technology. According to Clifford Levy, who
won two Pulitzers at the Times before being promoted to the assistant managing editor overseeing digital
platforms: ‘Working hour by hour, day by day, with software developers and designers and product
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managers — to me that was a real revolution, a kind of epiphany … This is standard operating procedure
in Silicon Valley, but it was radical here.’
Having established a consensus around the imperative of a digital future for the Times, it was easier to
articulate a longer-term strategy for the company. In October 2015, the top management team released
Our Path Forward, a public document intended ‘to share our challenges, our progress and our plans
for moving forward’. At the foundation of the NYT’s strategy was the principle of ‘offering content and
products worth paying for’, which put quality journalism at the heart of NYT’s strategy and established
that NYT’s basic revenue model was user fees. If producing quality content was the dominant priority, it
needed to be financed. To do this, the company set the goal of doubling its digital revenues over the next
five years to more than US$800 million — which in turn meant more than doubling the number of digital
readers, most of whom would be accessing news content on their phones and mobile devices.
Expanding the number of users and building a revenue-generating relationship with users required
the following.
• ‘We will continue to lead the industry in creating the best original journalism and storytelling.’ This
involved not only maintaining NYT’s corps of journalists but also infusing them with the technical and
design skills needed to deploy new storytelling tools. Initiatives included increased emphasis on visuals,
including videos, and increased customisation to allow fully personalised content delivery.
• ‘We will continue to develop new audiences and grow the Times as an international institution.’ The
international expansion offered a huge potential for subscriber growth: this strategy required both
greater global integration and greater customisation to meet the needs of specific audiences in different
countries.
• ‘We will improve the customer experience for our readers, making it easier to form and deepen a
relationship with the Times’. The goal was to make the Times an essential part of its readers’ lives.
This required that: ‘Every moment in the reader’s journey, from visiting for the first time to registering as
a user to becoming a lifelong subscriber, must be frictionless, intuitive, and responsive. To support this
goal, we will improve each stage of the experience.’
• ‘We will continue to grow digital advertising by creating compelling, integrated ad experiences that
match the quality and innovation of the Times’.
• ‘We will continue providing the best newspaper experience for our print readers and advertisers, while
carefully shifting time and energy to our digital platforms.’
These aspirations were reflected in a host of digitally based new initiatives launched between 2014 and
2017. Behind these initiatives was the Beta Group — an in-house digital development group housed on
the 9th floor of the NYT’s building. Most of the new products were apps for mobile platforms. These
included NYT Now, a mobile app aimed at younger readers, and NYT Cooking, a hugely successful
mobile app allowing access to the Times’ library of over 17 000 recipes, which became the model for
additional apps covering real estate, crosswords, health and fitness, and TV and movie reviews. In 2015,
NYT launched a virtual reality app. Emailed newsletters were another means by which NYT communicated
with users. By mid-2017, it had 50 different newsletters with 13 million subscribers. Wirecutter, acquired
in 2016, was another website and mobile app providing reviews of consumer products.
T Brand Studio, was established in 2014 to create ‘native advertising’ — stories appearing on NYT
websites and apps that were sponsored by advertisers. One of the first of these paid posts was an article
on women prison inmates, accompanied by video interviews with several of them, designed to generate
interest in Netflix’s Orange is the New Black series. T Brand Studio developed into a fully-fledged marketing
and creative services agency — partly through acquiring Hello Society, a leader in influencer marketing,
and Fake Love, an experiential design studio with a focus on virtual reality and augmented reality.
By 2018, the NYT had made substantial progress in implementing a clearly articulated strategy based
upon an intelligible vision for the future and a realistic understanding of the challenges it faced. The decline
in its revenues had been halted and its presence in digital media transformed.
Yet still doubts remained. The dominance in digital media of Google and Facebook and the power
exerted by the other digital giants — Apple, Amazon, Microsoft, and Netflix — placed all digital media
companies in a subservient position, while the pace of technological change gave born-digital upstarts
an advantage over the former giants of print media. This was especially apparent in digital advertising
revenues whose growth since 2014 had been modest.
A report by a NYT newsroom working party in early 2017, Journalism that Stands Apart, made it clear
that NYT still had far to go: ‘For all the progress we have made, we still have not built a digital business
large enough on its own to support a newsroom that can fulfill our ambitions’, the report’s authors wrote,
and ‘too often, digital progress has been accomplished through workarounds … our work too often reflects
conventions built up over many decades, when we spoke to readers once a day’.
Among the report’s criticisms were the following.
• Too many stories that ‘lack significant impact or audience’ or were ‘little different from what can be
found in the freely available competition’.
• Stories ‘dominated by long strings of text’ because reporters ‘lack the proper training to embed visuals
contextually’.
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• The need for greater engagement by readers through ‘email newsletters, alerts, FAQs, scoreboards,
audio, video, and forms yet to be invented’.
• The success of NYT’s Cooking and Watching (TV and movie reviews) apps needs to be extended with
‘more big digital bets’ in features — especially features that are designed to provide useful guidance to
readers (as The Wirecutter and Smarter Living).
• The need for better organisation around themes of reader interest: ‘High-priority coverage areas are
spread across multiple desks … Our health care coverage, for example, spans five departments and
multiple print sections’.
• The needs to improve hiring and training processes to ensure ‘the right mix of skills in the newsroom to
carry about the ambitious plan for change’.
• ‘Lack of clarity over who are we writing for’. The success of sections like Cooking and Well is because
they were designed with specific audiences and story forms in mind. Other parts of the Times are unclear
who their target audience is. Every section should specify what the team will cover, the target audience,
how that audience will experience the section’s reporting, and what kinds of skills the group will need.
Even if the NYT could achieve the same level of comfort and flexibility with the world of digital media
as its ‘digitally native’ competitors such as BuzzFeed, Vox, Mashable and Vice Media, the financial
performance of these companies gave cause for concern. During 2017, all the on-line news providers
struggled to grow revenues. Although the NYT’s user subscription-based business model provided
insulation from the slim returns to content providers from digital advertising, this placed even greater
weight on the imperative of generating new subscriptions.
If NYT were to be unable to generate the revenues needed to finance the high costs of high-quality,
global journalism, would it need to explore alternative business models? One possibility was that NYT
could become a social enterprise: either explicitly, through enlisting charitable support or establishing
an endowment that could support news gathering and analysis, or implicitly, through seeking a wealthy
backer (as in the case of the Washington Post with Jeff Bezos). Alternatively, should NYT view itself
less in the news business and more in the intelligence business, using its news gathering and analytical
capabilities to supply customised intelligence to corporations and government agencies?
Source: Adapted from RM Grant, 2018, Contemporary Strategy Analysis, 10th edn, John Wiley & Sons Inc., Hoboken.
QUESTION 7.15
Using the information from example 7.14 explain how the leadership and management of the NYT
has shifted resources and tried to build capabilities in their response to the challenge of the internet
to their historically successful print media business. Use case facts to explain the difficulties they
have faced in doing this.
DECISION MAKING
As described above, the formal decision-making role of senior management is less suited to modern
organisational forms. Nevertheless, leaders and managers remain responsible for the organisation’s
strategy and performance. Where decision-making responsibilities are devolved through the organisation,
leaders and managers must ensure staff have sufficient information to support decisions, fully understand
how their decisions relate to the organisation’s strategy and have a sound and ethical decision-making
framework to work through.
Girotra and Netessine (2014) suggest that a business model is a set of key decisions and that the business
model can be improved by changing when decisions are made, who makes them and why. In terms of
timing, they suggest:
• where possible, postpone decisions to gather more useful information (e.g. the pricing of each seat on
an aeroplane should be determined in real time with reference to demand to maximise revenue)
• change the sequence of decisions so investment is made after demand is known (e.g. crowdfunding
campaigns on platforms such as Kickstarter raise funds from interested customers at the idea or
prototype stage, ensuring production only proceeds if a sufficient market is in place) and
• divide decisions into multiple parts so that each progressive decision is better informed (e.g. use
discovery-driven planning).
In terms of who should make decisions, they suggest:
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• assign decision making to the best-informed people (e.g. a supplier may be able to better make inventory
decisions than the organisation itself; customer-facing staff will be best informed about customer
experience; senior management may be unable to be sufficiently informed to be the best decision maker)
• assign decision making to the party that can best manage the consequences (e.g. the drop-shipping model
moves inventory decisions from the individual retailer to the manufacturer or wholesaler)
• place decisions with the party that stands to gain most.
In terms of adjusting the motivations of decision makers, they suggest:
• ensuring the implications for decision makers’ revenue align with the organisation’s interests
• creating long-term relationships with suppliers
• integrating different parties involved in the business model into the business itself.
Technology insight 7.4 examines a range of data analytics issues related to decision making.
Analytics
As the business environment becomes increasingly volatile, the ability to access and analyse data for
decision making in real time becomes crucial. Cloud computing services have enabled even the smallest
start-ups to access big data and sophisticated analytics. This gives them the power to uncover insights
on new trends, needs, markets and segments that provide potential opportunities for growth. Data can
be used not just to help optimise an existing business model, but also to transform it into something
altogether new and innovative.
Business model transformation involves streamlining business activities to remove unnecessary activi-
ties and optimise performance. Data and analytics can also be optimised by removing unnecessary silos
and barriers and enabling bi-directional communication between all stakeholders in a market or even
industry. The technology already exists to communicate, gather and analyse vast amounts of data. The
next stage is for organisations to unify data from myriad sources across their business model in order to
provide more informed analysis and uncover previously unknown correlations.
By eliminating silos of information and creating data ‘lakes’, you are able to analyse data in real time
while it is streaming. In this situation organisations their customers, suppliers, partners, etc all become
sources of information for each other. This data sharing creates a bi-directional communication mesh of
stakeholders, enabling rapid, real-time responses to issues and requests.
In addition to providing information for decision making, analytics platforms that incorporate AI have
begun to be built into products and services. One of the most familiar is the safety features, such as lane
assist and active accident avoidance technology in motor vehicles. These rely on numerous sensors that
detect the car’s behaviour, the driver’s behaviour and static and moving objects near the car. Industrial
machinery company Siemens has established a cloud-based platform to capture data from sensors in
machinery located around the world and create a central reporting system that can be used to schedule
preventive maintenance.
Many industries have long used real-time data analysis for dynamic pricing to reflect variations in
supply and demand. For example, the airline industry changes fares to try to sell seats for the highest
possible price while ensuring it does not fly with empty seats. Getting close to departure, airlines can
drop prices dramatically as its flight costs are largely fixed and any revenue is preferable to an empty
seat. As technology has improved over time, this process has been increasingly driven by complex
algorithms. Ride-share platform Uber’s pricing algorithm, for example, responds immediately to changes
in demand (people looking for a ride) and supply (drivers logged in and available). Uber’s dynamic pricing
approach affects not only the amount the customer pays, but also of course affects Uber’s income. Since
Uber’s revenue consists of a 20 to 30% commission on all fares, dynamic pricing also directly relates to
the driver’s income. During periods of surge pricing, the fares increase, rewarding drivers who provide
the service during peak demand and encourage inactive drivers to log in and increase supply to meet
that demand.
Source: Adapted from J-P Ruth, 2019, ‘6 examples of AI in business intelligence examples’, Emerg, https://
emerj.com/ai-sector-overviews/ai-in-business-intelligence-applications; H Rindani, 2018, ‘5 ways data analytics is trans-
forming business models’, Medium.com, 23 April, https://medium.com/datadriveninvestor/5-ways-data-analytics-is-transfo
rming-business-models-6944dc0affac; K Marko, 2018, ‘Can data analytics inform new business model development?’, Dig-
inomica, 26 June, https://diginomica.com/can-data-analytics-inform-new-business-model-development; D Paredes, 2018,
‘Analytics helps companies launch new business models: research’, CIO Australia, 24 October, www.cio.com/article/350
9444/analytics-helps-companies-launch-new-business-models-research.html.
A recurring theme in this module has been the increasing volatility and pace of change in the business
environment. There is an associated high level of uncertainty, particularly for organisations seeking to make
disruptive changes to their industry or enter an industry with a disruptive business model. Nevertheless,
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fundamental principles of gathering information, conducting analysis, assessing and managing risks and
making evidence-based decisions remain relevant. While it can be tempting to adopt defensive actions
in times of uncertainty, leaders and managers seeking strategic advantage need to be able to put the
fundamental principles into practice and not be distracted or misled by ‘noise’ that arises from change
and information overload.
Snabe and Trolle (2018) suggest discarding business plans and strategic plans. They argue plans work
to stifle creativity and that the measures taken to implement plans (see module 6) focus on ‘correcting’
deviations from the plan, thus shutting down creativity and responsiveness (Business School 2019). Snabe
and Trolle suggest that a move away from formal plans needs to be accompanied by empowerment of
teams and the creation of a shared purpose (what they term a ‘dream’).
LEADERSHIP FOR START-UPS

Entrepreneurial success has always required the combination of a good business idea with the ability
to implement it — for leaders of start-ups that includes people skills, persuasion, communication,
flexibility, tolerance of risk, problem solving and, increasingly, a focus on a range of stakeholder
needs other than generating wealth for the founders and investors. Tesla founder, Elon Musk, perhaps
embodies this combination better than most. Most of his businesses are informed by and closely related
to solving problems facing humanity, including principally tackling climate change by developing and
commercialising alternative energy technologies.
Entrepreneurialism is often based on the idea of identifying and solving problems that others have
been unable to see or solve. In developing a business that can solve these problems, numerous challenges
arise that are also uniquely different from the challenges facing established businesses. Leaders in start-
ups therefore need strong problem-solving abilities and the ability make decisions in an environment of
uncertainty. Start-ups usually lack the resources that leaders and managers in established businesses can
draw on to analyse and understand issues. This must be replaced by insight and the flexibility to quickly
respond as new information emerges (Knowledge@Wharton 2019).
Global Education and Leadership Foundation chair Shiv Khemka (cited in Knowledge@Wharton 2019)
identified three key reasons behind the failure of start-ups.
1. The entrepreneur’s idea does not deliver a value proposition or its timing is wrong.
2. The start-up exhausts its current and potential resources before reaching viability.
3. The entrepreneur fails to build trust and confidence in the vision of the start-up that will enable the
flexibility and persistence to navigate early setbacks.
Social venture start-ups face a set of different challenges and while some of the characteristics needed
from social venture and conventional entrepreneurs are the same, leaders of new social ventures require
deep values of empathy, altruism and ethics. Perhaps the main common ground between leaders of start-up
businesses and start-up social ventures is the focus on problem solving. Social venture leaders need to find
solutions to entrenched social problems and to be motivated by the social outcomes that will be achieved —
a substantially different motivation from that of ambitious business entrepreneurs seeking rapid growth and
financial reward (Knowledge@Wharton 2019).
LEADERSHIP FOR ESTABLISHED BUSINESSES

The strategic management of an established business requires a mix of developing new capabilities while
maintaining the core established business. IBM proposed the ‘emerging business organisation’ concept (see
figure 7.18) in which leaders are responsible for managing the business with a view to optimising profit
in the mature part of the business, expanding the growth part of the business, and achieving milestones in
the future part of the business.
As discussed earlier in the module, business innovation is one of the most difficult tasks for leaders and
managers, but as figure 7.18 shows, it is the basis of the future of the business and must therefore be a key
focus. The knowledge and tools in this module are intended to help current and future decision makers in
business take a strategic approach to the future development of their organisation without compromising
the existing business.
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FIGURE 7.18 Leadership and management tasks — an emerging business organisation model
IBM’s emerging business organisation (EBO) model
Horizon 3
Future businesses
Profit
Horizon 2
Growth businesses
Horizon 1
Mature businesses
Time/Uncertainty
Focus Defend and increase the Resources to expand Discover options and
profitability of existing and build new place selected bets on
businesses businesses emerging opportunities
Outputs Annual budgets and Investments, business Market insight data,
operating plans plans for growth initial project plans
Key success Cost, efficiency, Customer acquisition, Learning, adaptation,
factors customer intimacy, speed, execution, risk taking, business
incremental innovation flexiblity model innovation
Metrics Profit, margins, costs Market share, growth Milestones
Source: C O’Reilly, J Harreld & M Tushman, 2009, Organizational Ambidexterity: IBM and Emerging Business Opportunities.
Stanford University, Graduate School of Business, Research Papers, 51.
QUESTION 7.16
Use IBM’s EBO model and the information from example 7.14 to analyse how NYT’s leadership has
responded to the challenge of the internet to their historically successful print media business.
Managing Disruption
Christensen (1997) highlighted the tension between management of an established business‚ based
on responsiveness to customers, development of strategic capabilities and considered investment, and
responsiveness to potential threats from disruptive innovators (see section 7.2). Christensen argued that
established businesses often failed to recognise disruption, because it did not initially target the organ-
isation’s mainstream customers, and responded too late, leading to declining performance or ultimately
failure. Christensen and Raynor (2003, p. 35) state:
With resource allocation processes designed and perfected to support sustaining innovations, they are
constitutionally unable to respond … Disruption has a paralyzing effect on industry leaders.
This view has been challenged by others who suggest most businesses do identify and successfully
counter disruption (King & Baatartogtok 2015). The analysis has been complicated by the way the term
‘disruption’ has evolved to refer to innovations that prompt industry upheaval, regardless of whether they
arose in the way Christensen originally described (see section 7.2).
According to Christensen’s model, disruptive threats do not at first target an established business’s key
market segments. Leaders and managers may not perceive the new entrant as a legitimate threat. Thus the
emerging threat is not recognised until it is become a significant threat. Once recognised, the need for
leaders and managers to maintain and grow the returns from the existing business constrains their ability
to shift focus and dedicate resources and capabilities towards addressing the growing disruptive threat.
Further, depending on the nature of the disruptive innovation the organisation may lack the resources and
capabilities to adopt it. Finally, established businesses may face regulatory and other hurdles that constrain
their response. For example, the taxi industry is Australia has been highly regulated and could not legally
respond to many features of Uber’s service. By the time regulation was loosened, Uber had established a
strong market presence.
King and Baatartogtok (2015), however, cited research that suggested management will nearly always
respond in a way that matches their capabilities: those with the capabilities to adopt or compete with
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disruptive innovations do so, while those without will focus on maximising returns as they prepare to exit
the disrupted market. Moreover, they suggested that any new competitive threat should be approached in
a systematic way, as follows.
• Analyse the value to the organisation of defeating the competitive threat — and thus determine whether
to compete or plan to exit the market.
• Determine how existing capabilities can be used — this may involve addressing the threat, but could
also involve shifting focus to a new market/expanding into other areas.
• Where practical, collaborate with other companies — there may be an opportunity to work with a
potential new competitor for mutual benefit (King & Baatartogtok 2015).
START-UPS VERSUS INCUMBENTS

Established organisations often view the markets targeted by start-ups as too small to justify their attention.
This can be a serious error as industry disruption often begins when a start-up gains a foothold by targeting
an untapped part of the market. The threat is usually more serious in the other direction — start-ups that
do have some success often face very substantial responses by established organisations that command
considerably greater resources. Consider, for example, the workplace instant messaging platform Slack
(which is based on a freemium business model). After strongly growing its user based for four years,
Slack was confronted with Microsoft’s addition of the similar, but more highly featured, product Teams
to its software suite. Microsoft had earlier attempted to acquire Slack, but Slack declined the offer. So
Microsoft decided to develop its own platform instead. Such a competitive move can prove fatal for start-
ups, but in Slack’s case it responded by integrating more deeply with Google’s service platform and took
over the users of Atlassian’s Stride and HipChat platforms, with Atlassian integrating Slack into its agile
project software products. More than one-quarter of Slack’s users pay for the premium product. The rest
use the freemium version.
While established organisations’ resources often provide a significant weapon against start-ups, start-
ups can try to identify and leverage aspects that large organisations will struggle to copy. This includes,
for example, customisation, exclusivity and other points of differentiation. For example, online clothing
retailer Zulily focused on building strong relationships with suppliers based on high-quality communica-
tion, prompt payment and fair dealings, in return for exclusive supply arrangements. This contrasted with
Amazon’s approach to suppliers, which is based simply on the exercise of Amazon’s purchasing power.
Zulily’s exclusive supply contracts enabled them to offer a range not available on any other platform and
thus Zulily was immune to price discounting by Amazon and other online retailers.
Texeira (2019) suggests start-ups can fend off copycat behaviour if the following factors are all present:
• the established player has a major strength that it relies on for its success
• there is a product offering of value to a market segment that the dominant player’s major strength works
against
• imitating the offering would negatively impact on the established player’s main business
• if the offering succeeds the established player could only copy it or compete directly with it by giving
up their main strength.
STAKEHOLDER MANAGEMENT
Stakeholder management is the process of managing the expectations of people, groups and organisations
that have an interest in a company and will be affected by its activities. Module 3 described a process to
identify key stakeholders and develop effective communication and management approaches to them. The
importance of managing any particular stakeholder group was dependent on the level of interest of that
stakeholder and the power they could exert over the organisation. Thus, for example, senior managers
were identified as key internal stakeholders and regulators were identified as potentially key external
stakeholders.
Emerging business models raise numerous important considerations for stakeholder management,
including:
• the increasing recognition that a wider variety of stakeholders have a legitimate interest in the
organisation and that the organisation has a duty towards all these stakeholders
• that emerging business models are unfamiliar and are therefore seen as involving higher risk and thus
stakeholder perceptions of risk must be managed
• how to attract investors to unproven business models
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• how to prepare internal stakeholders for change
• how to manage a non-permanent workforce.
We will discuss managing risk, attracting investment and managing a non-permanent workforce in a
little more detail in this section.
New business models naturally involve unfamiliarity and this affects how stakeholders perceive the
level of risk they involve. An important task for management in organisations with emerging business
models is to manager stakeholder perceptions of the balance between risks and returns. For example,
the public company Virgin Galactic has a business model based on space tourism. While there are clear
links to the aviation, tourism and space industries, the business model is unique and thus stakeholders,
including investors, have relatively little experience or evidence to base their decisions on. To sure up
investor confidence, Virgin Galactic announced in early 2020 that it would commence space flights later
in the year and would begin taking US$1000 deposits from interested customers. Virgin had accepted
deposits of up to US$250 000 as early as 2004 from enthusiasts, but ceased accepting them in 2018. Re-
opening deposits will demonstrate the level of interest in the service, while customers have the assurance of
their deposit being refundable up to the point a seat booking is confirmed. Virgin Galactic said it has almost
8000 expressions of interest, collected via its website. Its next step is to use these numbers to determine
the frequency of flights to manage its advance bookings (Bachman 2020).
The Virgin Galactic discussion leads us to the next issue for stakeholder management — attracting
investors. There are numerous examples of organisations that have become household names over the
past few years by disrupting long-established industries with innovative business models. These include
Amazon, Uber and Airbnb. In addition, companies at the forefront of technology-based products and
services, including Google, Facebook and Apple, have generated enormous wealth for their shareholders.
As described above, however, new business models are unproven and may be perceived as risky.
Organisations therefore need to manage investor perceptions in order to raise the capital required to launch
the business and achieve viability.
Consider that online retail giant Amazon recorded annual losses for its first four years, totalling
US$2.8 billion, before recording a small quarterly profit in 2001. It was only in 2003 that the company
began to consistently achieve profitability. During its formative years, Amazon burned through sharehold-
ers’ funds focusing on its strategy of disrupting the book retail industry and eventually retail in general.
Organisations seeking to pursue goals that reflect a wide range of stakeholder interests need to manage
the potential perception among investors that the other stakeholder interests may compromise the amount of
value that can be generated for shareholders. In practice, many of the world’s largest investment funds have
driven organisations towards a more sustainable and socially focused agenda. This reflects the priority the
funds’ members place on sustainability and ethics, as well as recognising that good corporate citizenship
is increasingly important as part of a long-term strategy to create wealth for shareholders.
Example 7.15 examines how e-scooter business, Lime, revised its business approach to focus on
profitability rather than continue with the expansion approach commonly used by disruptive start-ups.
EXAMPLE 7.15
Lime’s Shift from a Growth Focus to a Profitability Focus

E-scooter company Lime was founded in 2017. It operates ride-share electric scooter and bicycle
businesses in well over half of the world’s countries in competition with other start-ups including Lyft,
Bird, Scoot and Skip.
In early 2020, co-founder Brad Bao announced the company would shift its focus from growth to
profitability. As part of this shift, the company would withdraw from some markets, including various
cities in the United States, Europe and Latin America — Atlanta, Phoenix, Linz, Buenos Aires, Lima, Rio
de Janeiro and others.
The e-scooter ride-share industry has also encountered issues with regulations. Some jurisdictions
do not allow legal operation of e-scooters. While the operators have often campaigned for regulatory
changes, this has been met with mixed success, with safety in particular a concern for many regulators.
Most e-scooter ride-share companies have not yet proven they can generate a profit and sustain their
business model. Bao said financial independence was crucial to the future of Lime.
Source: Adapted from N Kurczewski, 2020, ‘Lime puts the squeeze on its e-scooter and electric bike fleet’, Ride,
1 February, https://ride.tech/mobility-lifestyle/pitch-lime-puts-the-squeeze-on-its-e-scooter-fleet.
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The fast-changing business environment and ongoing business model innovation elevate the importance
of change management to a new level compared with changes associated with implementing strategy. The
contemporary business environment often requires ongoing change. In such circumstances, organisations
need to create an organisation that is inherently adaptable to change rather than seeing change as a one-off
or periodic activity (Schepis et al. 2010). The ultimate realisation of this may be the creation of an agile
organisation, as discussed in section 7.5.
Readiness for change is also determined by factors such as organisational life cycle, attitude towards
risks, job knowledge and skills, management-leadership relations, social relations in the workplace and
organisational culture. Readiness for change can be increased by empowering employees (e.g. capacity
building, internal and external trainings and other skills development) and decreasing their workload to
allow time for exploration of new ways of work (Schepis et al. 2010).
As described in section 7.5, ongoing business model innovation and responsiveness to environmental
changes create a need for an agile organisation. Agile organisations are defined by a stable core surrounded
by flexibility. One way this flexibility is evident is in the nature of the workforce. As business models
and strategy change, the capabilities and resources the organisation needs also change. Given the pace of
change and the need to respond quickly, organisations increasingly seek to bring resources and capabilities
into the organisation as required and equally to move them back out of the organisation when no longer
required. This, along with various other influences, has led to a change in the nature of the workforce.
Increasingly organisations use contract workers who are with the organisation for a fixed period of time.
This has important consequences for organisational knowledge management, organisational culture and
shared purpose. Successful agile organisations do not accept compromises in these factors, but rather
ensure a people-centred culture by empowering teams, encouraging collaboration and ensuring co-creation
of value (Aghina et al. 2018).
QUESTION 7.17
1. Using the information from example 7.14 and with reference to section 7.3, use the case facts to
explain the approach to strategy NYT management has used. Evaluate whether it was the best
approach they could have used.
(a) Analyse how BuzzFeed’s strategic approach to developing their news service has differed
from NYT’s strategic approach (as discussed in question 7.10 and example 7.14).
(b) Analyse BuzzFeed’s relative competitive strengths and weaknesses against NYT as it has
developed from a start-up.
(c) Evaluate whether BuzzFeed could fend off copycat behaviour by NYT, using the Texeira (2019)
checklist.
(d) Evaluate how each of these organisations appear to be positioned to take advantage of future
opportunities that arise due to technological developments.
LEADERSHIP AND MANAGEMENT DEVELOPMENT

Current and future leaders and managers will need to work within an environment of unprecedented
change and the ongoing emergence of new business models that both create and respond to those changes.
Changing external conditions, new strategic priorities, and different types of organisation call for new
approaches to management and leadership. The traditional role of the CEO as peak decision-maker may
no longer be feasible, let alone desirable. As organisations and their environments become increasingly
complex, the CEO is no longer able to access or synthesise the information necessary to be effective
as a peak decision-maker. Contemporary perspectives on leadership place less emphasis on the role of
executives as decision-makers and more on their role in guiding organisational evolution.
Gary Hamel (2009) suggests:
Leaders must be recast as social-systems architects who enable innovation…leaders will no longer be seen
as grand visionaries, all-wise decision-makers, and ironfisted disciplinarians. Instead, they will need to
become social architects, constitution writers, and entrepreneurs of meaning. In this new model, the leader’s
job is to create an environment where every employee has the chance to collaborate, innovate, and excel.
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McKinsey & Company (Feser et al. 2015) identified leaders with the willingness to see different
perspectives and the ability support others as key attributes that differentiate strong and weak organisations
in terms of leadership effectiveness.
Senior managers require different knowledge and skills. Research into the psychological and demo-
graphic characteristics of successful leaders has identified few consistent or robust relationships —
successful leaders come in all shapes, sizes, and personality types. However, research using competency
modelling methodology points to the key role of emotional intelligence. This comprises:
• self-awareness — the ability to understand oneself and one’s emotions
• self-management — control, integrity, conscientiousness, and initiative
• social awareness — particularly the capacity to sense others’ emotions (empathy)
• social skills — communication, collaboration, and relationship building.
A similar transformation is likely to be required throughout the hierarchy. The informal structures and
self-organisation associated with new business models have also transformed the role of middle managers
from being administrators and controllers into entrepreneurs, coaches and team leaders.
It is crucial therefore that everyone in an organisation — top leadership, middle management, staff —
develop a portfolio of skills and attributes that encompasses both technical skills and ‘soft skills’ such
as communication and collaboration. Indeed, leadership development itself should take place at all levels
of the organisation to embed the innovative thinking, individual initiative-taking, problem solving and
collaboration that is necessary to build dynamic capabilities that will allow the organisation to thrive in the
context of environmental dynamism.
Formal Leadership Development

Interestingly, a variety of research has found that most senior leaders believe their organisations’ investment
in traditional talent development programs fail to develop the organisational skills and capabilities their
organisation requires (see, for example, Moldoveanu & Narayandas 2019). In essence, while financial
analysis and strategy development are critical skills for managers, it is the ability to combine these skills
with interpersonal skills (such as communication, persuasion and collaboration skills) that distinguishes
the successful leaders of present and future organisations. Individuals and organisations need to focus on
development that:
• teaches people effective interpersonal skills
• integrates interpersonal skills with technical skills
• teaches and enables individual to apply this ‘classroom’ development to the real world — to the work
they do (Moldoveanu and Narayandas 2019).
Moldoveanu and Narayandas suggest the ability and willingness to apply newly learned skills is largely
determined by how closely the environment in which those skills are learned resembles the environment
in which they will be applied. This insight has key consequences:
• development efforts should be personalised
• development of interpersonal skills should occur in an interactive social environment
• development efforts should take place in the work environment.
Moldoveanu and Narayandas suggest therefore that customisable learning that can be accessed from
within the organisation (including online access) supported by interactivity and online social platforms/dis-
cussion groups may help effectively address the gap between the acquisition of skills and the application
of those skills. Rather than substantial one-off or periodic efforts, development should be ongoing.
Designing learning materials in a granular, modular and easily consumable format, and combining them
with robust assessment of learning outcomes, supports this approach. An array of ‘microcredentials’, based
on carefully curated modular content, may then replace traditional qualifications such as the multi-year
MBA as the most desirable development approach for individuals and organisations.
Complementing the approach described above with personal coaching and tuition for the development
of the most affective aspects of leadership, communication and motivation provides for a comprehensive
approach. This coaching and tuition can take place face-to-face or online taking advantage of sophisticated
technologies such as eye-tracking and facial expression analysis in order to overcome the limitations that
have until now constrained tele-coaching.
Informal Leadership Development

Leadership and management are long-established disciplines with an enormous body of knowledge.
Formal leadership development is thus highly valuable to aspiring and practising leaders and managers.
Informal approaches to development are also important and, in particular, offer ways to network and to
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stay abreast of developments in a more immediate way than formal development programs allow. One
especially valuable approach is to capitalise on network intelligence.
Hoffman, Yeh and Casnocha (2019) emphasise the importance for leaders to learn from interactions
and one-on-one discussions with members of their professional networks. They refer to the collective
knowledge of these networks of people as network intelligence. It is not only the most conventionally
successful people in a person’s network that can help a person develop; everyone has experiences and
perspectives that help build understanding.
Indeed, an organisational leader or a person with ambitions to take on informal or formal leadership roles
should as much as possible ensure they interact with, ask questions or and listen to people throughout their
organisation and organisations in their business ecosystem. This will build a true understanding of how the
organisation works and how the people in it relate to each other and the organisation’s vision, values and
strategy. It will also encourage two-way communication, thus promoting the role of network intelligence
and knowledge sharing at all levels of the organisation.
Learning from network intelligence is not a substitute for learning from formal education, but nor does
formal education provide the everyday development and building of knowledge and skills that is available
from interactions with other people.
KEY POINTS
• Leaders of organisations pursuing business model innovation must find ways to innovate alongside
their existing business model and may need to maintain multiple business models during a
transition period.
• Leaders of organisations implementing business model innovation need to encourage knowledge
sharing, overcome social and behaviour barriers to change, encourage organisational learning,
support creativity and experimentation, allocate sufficient resources, provide legitimacy to the
process and ensure decision makers throughout the organisation are aligned to the organisation’s
strategy.
• Leaders seeking a digital transformation should establish goals before choosing technology,
integrate internal and external expertise, involve customers in decisions, manage the impact on
employees and adopt aspects of a start-up culture.
• Business model innovation is often best achieved by replacing top-down management approaches
with teams empowered to make decisions at lower levels of the organisation. The leader’s role
focuses more on culture and shared vision.
• Leaders must decide whether developing a new business model or copying another’s innovation
is the best approach.
• Leaders of start-up ventures often face higher uncertainty and risk, fewer resources and less
experience than those of established businesses and thus need particularly strong problem-solving
abilities, the ability to think and act quickly and high tolerance for risk.
• The pace of change and innovation requires practising and aspiring leaders to undertake ongoing
development through formal and informal channels in order to develop the skills and knowledge to
make strategic decisions.
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REVIEW
The modern business environment is characterised by the pace and complexity of change, Key change
drivers include technology, the quest for sustainability and the development of emerging national markets.
It has become increasingly difficult for an organisation to sustain a competitive advantage, which therefore
requires organisations to constantly innovate.
The current business environment exhibits an unprecedented level of innovation the creation and capture
of value. This is often accomplished through business model innovation. Business model innovation is
both a structured and creative process. The business model canvas provides a useful tool for leaders and
managers to understand and explore their existing and potential business models.
One way businesses can approach the dynamic business environment is to adopt an emergent approach to
strategy. Emergent strategy is more iterative and incremental in nature than the rational approach that was
described in modules 2–6. It enables information and experience to be gathered and used in decisions as
the strategy is developed. Implementation becomes more experimental and incremental in nature, ensuring
the strategy is responsive to learning and change.
This module explored a number of strategic responses to the drivers of change and emerging business
models. It also examined how to shape the organisation to succeed in the context of emerging business
models, including by developing dynamic capabilities, becoming agile, adopting an entrepreneurial
orientation, encourage innovation and collaborating with other parties in the business ecosystem.
Finally, the module explored specific issues arising for leaders and managers. These include creating
self-managing teams throughout the organisation, empowering decision making at all levels, creating
a culture of innovation and openness to change, managing stakeholders and developing the skills and
knowledge required to lead in the increasingly dynamic business context.
Throughout the study guide, there has been an emphasis on decision making based on information and
analysis. Strategy must also be seen as a creative process that involves uncertainty and ongoing learning and
adjustment. Fortunately there are numerous approaches to strategy that feature elements of a rational and
emergent approach and thus provide a sound framework for the strategic management of the organisation.
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APPENDIX A
THE SECRET OF ZARA’S SUCCESS: A CULTURE OF
CUSTOMER CO-CREATION
Zara is one of the world’s most successful fashion retail brands — if not the most successful one. With its
dramatic introduction of the concept of ‘fast-fashion’ retail since it was founded in 1975 in Spain, Zara
aspires to create responsible passion for fashion among a broad spectrum of consumers, spread across
different cultures and age groups. There are many factors that have contributed to the success of Zara but
one of its key strengths, which has played a strong role in it becoming a global fashion powerhouse as it
is today, is its ability to put customers first. Zara is obsessed with its customers, and they have defined the
company and the brand’s culture right from the very beginning.
THE ZARA BRAND STORY

Zara was founded by Amancio Ortega and Rosalía Mera in 1975 as a family business in downtown Galicia
in the northern part of Spain. Its first store featured low-priced lookalike products of popular, higher-end
clothing and fashion. Amancio Ortega named Zara as such because his preferred name ‘Zorba’ was already
taken. In the next eight years, Zara’s approach towards fashion and its business model gradually generated
traction with the Spanish consumer. This led to the opening of nine new stores in the biggest cities of
Spain.
In 1985, Inditex was incorporated as a holding company, which laid the foundations for a distribution
system capable of reacting to shifting market trends extremely quickly. Ortega created a new design,
manufacturing, and distribution process that could reduce lead times and react to new trends in a quicker
way, which he called ‘instant fashion’. This was driven by heavy investments in information technology
and utilising groups instead of individual designers for the critical ‘design’ element.
In the next decade, Zara began aggressively expanding into global markets, which included Portugal,
New York (United States), Paris (France), Mexico, Greece, Belgium, Sweden, Malta, Cyprus, Norway
and Israel. Today, there is hardly a developed country without a Zara store. Zara now has 2266 stores
strategically located in leading cities across 96 countries. It is no surprise that Zara, which started off as
a small store in Spain, is now the world’s largest fast-fashion retailer and is the flagship brand of Inditex.
Amancio Ortega, is the sixth richest man in the world according to Forbes magazine.
Today Inditex is the world’s largest fashion group with more than 170 000 employees operating more
than 7400 stores in 202 markets worldwide, including 49 online markets. The revenues of Inditex was
US$29.4 billion in 2018.
THE ZARA BRAND STRATEGY

In 2018, Zara was ranked 25th on global brand consultancy Interbrand’s list of best global brands. Its core
values are found in four simple terms: beauty, clarity, functionality and sustainability.
The secret to Zara’s success has largely been driven by its ability to keep up with rapidly changing
fashion trends and showcase it in its collections with very little delay. From the very beginning, Zara
found a significant gap in the market that few clothing brands had effectively addressed. This was to keep
pace with the latest fashion trends, but offer clothing collections that are a combination of high quality
and yet, are affordable. The brand keeps a close watch on how fashion is changing and evolving every day
across the world. Based on latest styles and trends, it creates new designs and puts them into stores in a
week or two. In stark comparison, most other fashion brands would take close to six months to get new
designs and collections into the market.
It is through this strategic ability of introducing new collections based on latest trends in a rapid manner
that enabled Zara to beat other competitors. It quickly became the people’s favourite brand, especially
with those who want to keep up with fashion trends. Amancio Ortega is famously known for his views on
clothes as a perishable commodity. According to him, people should love to use and wear clothes for a
short while and then they should throw them away, just like yogurt, bread or fish, rather than store them in
cupboards.
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The media often quotes that the brand produces ‘freshly baked clothes’, which survive fashion trends
for less than a month or two. Zara concentrates on three areas to effectively ‘bake’ its fresh fashions.
• Shorter lead times (and more fashionable clothes). Shorter lead times allow Zara to ensure that its stores
stock clothes that customers want at that time (e.g. specific spring/summer or autumn/winter collections,
recent trend that is catching up, sudden popularity of an item worn by a celebrity/socialite/actor/actress,
latest collection of a top designer etc.). While many retailers try to forecast what customers might buy
months in the future, Zara moves in step with its customers and offers them what they want to buy at a
given point in time.
• Lower quantities (through scarce supply). By reducing the quantity manufactured for a particular style,
Zara not only reduces its exposure to any single product but also creates artificial scarcity. Similar to
the principle that applies to all fashion items (and more specifically luxury), the lesser the availability,
the more desirable an object becomes. Another benefit of producing lower quantities is that if a style
does not generate traction and suffers from poor sales, there is not a high volume to be disposed of. Zara
only has two time-bound sales a year rather than constant markdowns, and it discounts a very small
proportion of its products, approximately half compared to its competitors, which is a very impressive
feat.
• More styles. Rather than producing more quantities per style, Zara produces more styles, roughly
12 000 a year. Even if a style sells out very quickly, there are new styles waiting to take up the space.
This means more choices and higher chance of getting it right with the consumer.
Zara only allows its designs to remain on the shop floor for three to four weeks. This practice pushes
consumers to keep visiting the brand’s stores because if they were just a week late, all the clothes of a
particular style or trend would be gone and replaced with a new trend. At the same time, this constant
refreshing of the lines and styles carried by its stores also entices customers to visit its shops more
frequently.
In the following sections, the key components of Zara’s winning formula in the fashion retailing industry
are illustrated.
CUSTOMER CO-CREATION: ZARA’S PRINCIPAL DESIGNER IS

THE CUSTOMER
Zara’s unrelenting focus on the customer is at the core of the brand’s success and the heights it has achieved
today. There was a fascinating story around how Zara co-creates its products leveraging its customers’
input. In 2015, a lady named Miko walked into a Zara store in Tokyo and asked the store assistant for
a pink scarf, but the store did not have any pink scarves. The same happened almost simultaneously for
Michelle in Toronto, Elaine in San Francisco, and Giselle in Frankfurt, who all walked into Zara stores
and asked for pink scarves. They all left the stores without any scarves — an experience many other Zara
fans encountered globally in different Zara stores over the next few days.
Seven days later, more than 2000 Zara stores globally started selling pink scarves. 500 000 pink scarves
were dispatched. They sold out in three days. How did such lightning fast stocking of pink scarves happen?
Customer insights are the holy grail of modern business, and the more companies know about their
customers, the better they can innovate and compete. But it can prove challenging to have the right insights,
at the right time, and have access to them consistently over time. One of the secrets to Zara’s success
includes using Radio Frequency Identification Technology (RFID) in its stores. The brand uses cutting-
edge systems to track the location of garments instantly and makes those most in demand rapidly available
to customers. Additionally, it helps to reduce inventory costs, provides greater flexibility to launch new
designs, and allows fulfilment of online orders with stock from stores nearest to the delivery location
thereby reducing delivery costs.
Another secret of Zara’s success is that the brand trains and empowers its store employees and managers
to be particularly sensitive to customer needs and wants, and how customers enact them on the shop floors.
Zara empowers its sales associates and store managers to be at the forefront of customer research — they
intently listen and note down customer comments, ideas for cuts, fabrics or a new line, and keenly observe
new styles that its customers are wearing that have the potential to be converted into unique Zara styles.
In comparison, traditional daily sales reports can hardly provide such a dynamic updated picture of the
market. The Zara empire is built on two basic rules: ‘to give customers what they want’, and ‘get it to them
faster than anyone else’.
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Due to Zara’s competitive customer research capabilities, its product offerings across its stores globally
reflect unique customer needs and wants in terms of physical, climate or cultural differences. It offers
smaller sizes in Japan, special women’s clothes in Arab countries, and clothes of different seasonality
in South America. These differences in product offerings across countries are greatly facilitated by the
frequent interactions between Zara’s local store managers and its creative team.
In the fashion world, a trend starts small, but develops fast. Zara employees are trained to listen, watch
and be attentive to even the smallest seismographic signals from their customers, which can be an initial
sign that a new trend is taking shape. Zara knows that the quicker it can respond, the more likely it is to
succeed in supplying the right fashion merchandise at the right time across its global retail chain. Zara has
set up sophisticated technology driven systems, which enable information to travel quickly from the stores
back to its headquarters in Arteixo in Spain, enabling decision makers to act fast and respond effectively
to a developing trend. Its design teams regularly visit university campuses; nightclubs and other venues
to observe what young fashion leaders are wearing. In its headquarters, the design team uses flat-screen
monitors linked by webcam to offices in Shanghai, Tokyo and New York (the leading cities for fashion
trends), which act as trend spotters. The ‘Trends’ team never goes to fashion shows but tracks bloggers
and listens closely to the brand’s customers.
The fact that Zara’s designers and customers are inextricably linked is a crucial part of the brand strategy.
Specialist teams receive constant feedback on the decisions its customers are making at every Zara store,
which continuously inspires the Zara creative team.
ZARA’S SUPER-EFFICIENT SUPPLY CHAIN

Zara’s highly responsive, vertically integrated supply chain enables the export of garments 24 hours, 365
days of the year, resulting in the shipping of new products to stores twice a week. After products are
designed, they take around 10 to 15 days to reach the stores. All clothing items are processed through the
distribution centre in Spain, where new items are inspected, sorted, tagged, and loaded into trucks. In most
cases, clothing items are delivered to stores within 48 hours. This vertical integration allows Zara to retain
control over areas like dyeing and processing and have fabric-processing capacity available on-demand to
provide the correct fabrics for new styles according to customer preferences. It also eliminates the need
for warehouses and helps reduce the impact of demand fluctuations. Zara produces over 450 million items
and launches around 12 000 new designs annually, so the efficiency of the supply chain is critical to ensure
that this constant refreshment of store level collections goes off smoothly and efficiently.
Here are some of the characteristics of Zara’s supply chain that highlight the reasons behind its success.
• Frequency of customer insights collection. Trend information flows daily into a database at head office,
which is used by designers to create new lines and modify existing ones.
• Standardisation of product information. Zara warehouses have standardised product information with
common definitions, allowing quick and accurate preparation of designs with clear manufacturing
instructions.
• Product information and inventory management. By effectively managing thousands of fabric, trim and
design specifications and their physical inventory, Zara is capable of designing a garment with available
stock of required raw materials.
• Procurement strategy. Around two-thirds of fabrics are undyed and are purchased before designs are
finalised so as to obtain savings through demand aggregation.
• Manufacturing approach. Zara uses a ‘make and buy’ approach — it produces the more fashionable and
riskier items (which need testing and piloting) in Spain, and outsources production of more standard
designs with more predictable demand to Morocco, Turkey and Asia to reduce production cost. The
more fashionable and riskier items (which are around half of its merchandise) are manufactured at a
dozen company-owned factories in Spain (Galicia), northern Portugal and Turkey. Clothes with longer
shelf life (i.e. the one with more predictable demand patterns), such as basic T-shirts, are outsourced
to low-cost suppliers, mainly in Asia. Even when manufacturing in Europe, Zara manages to keep its
costs down by outsourcing the assembly workshops and leveraging the informal economy of mothers
and grandmothers.
• Distribution management. Zara’s state-of-the-art distribution facility functions with minimal human
intervention. Optical reading devices sort out and distribute more than 60 000 items of clothing an hour.
In addition to these supply chain efficiencies, Zara can also modify existing items in as little as two
weeks. Shortening the product life cycle means greater success in meeting consumer preferences. If a
design does not sell well within a week, it is withdrawn from shops, further orders are cancelled and a
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APPENDIX A 493
new design is pursued. Zara closely monitors changes in customer preferences towards fashion. It has a
range of basic designs that are carried over from year to year, but some in-vogue, high fashion, inspired by
latest trends items can stay on the shelves for less than four weeks, which encourages Zara fans to make
repeat visits. An average high-street store in Spain expects customers to visit thrice a year, but for Zara,
the expectation is that customers should visit around 17 times in a year.
This expectation for such a high frequency of repeat visits is evidence of Zara’s confidence that it is
keeping on top of changing consumer needs and preferences and is helping them shape their ideas, opinions
and taste for fashion. In reality, Zara is also helping in giving birth to new trends through its stores or even
helping in extending the longevity of some seasonal styles by offering affordable lines.
SUSTAINABILITY AT THE CORE OF ZARA’S OPERATIONS

Sustainability has been a hot topic in business for the last decade and is now quickly becoming a must-have
hygiene factor for companies that want to resonate with and win the loyalty of its global customers. For
Inditex, this means having a commitment to people and the environment.
• Commitment to people. Inditex ensures that its employees have a shared vision of value built on
sustainability through professional development, equality and diversity and volunteering. It also ensures
that its suppliers have fundamental rights at work and by initiating continuous improvement programs
for them. Inditex also spends almost US$52 million annually on social and community programmes and
initiatives. For example, its ‘for&from’ programme is aimed to enable the social integration of people
with physical and mental disabilities, by providing over 167 stable employment opportunities.
• Commitment to environment. Being in a business where it taps on natural resources to create its products,
Inditex makes efforts to ensure that the environmental impact of its business complies with UNSDGs
(United Nations Sustainable Developmental Goals). Inditex has pledged to only sell sustainable clothes
by 2025 and that all cotton, linen and polyester sold will be organic, sustainable or recycled. While Zara
stores do not use plastic bags, Inditex plans to eliminate the use of plastic bags across all its brands by
2020. The company also runs Join Life, a scheme which helps consumers identify clothes made with
more environmentally friendly materials like organic cotton and recycled polyester.
Additionally, Inditex takes wide-ranging measures to protect biodiversity, reduce its consumption of
water, energy and other resources, avoid waste, and combat climate change. For example, it has outlined a
Global Water Management Strategy, specifically committing to zero discharge of hazardous chemicals. It
has also been expanding its waste reduction programme through which customers can drop off their used
clothing, footwear and accessories at collection points in 1382 stores in 24 markets today.
ZARA’S CULTURE: THE WORD ‘IMPOSSIBLE’ DOES

NOT EXIST
Zara has a very entrepreneurial culture, and employs lots of young talent who quickly climb through the
ranks of the company. Zara promotes approximately 90% of its store managers from within and generally
experiences low turnover. The brand has no fear in giving responsibility to young people and the culture
encourages risk-taking (as long as learning happens) and fast implementation (the mantra of fashion).
Top management gives its store managers full liberty and control over their store’s operations and
performance with clearly set cost, profit and growth targets with a fixed and variable compensation scheme.
The variable component amounts to up to half of the total compensation — making store level employees
heavily incentive-driven.
In addition, once an employee is selected for promotion, his or her store develops a comprehensive
training program for that individual with the human resources department, which is followed up by periodic
supplemental training reflecting Zara’s commitment to talent development. The organisational structure is
also flat with only a few managerial layers.
Customers are the most important source of information for Zara, but like any other fashion brand, Zara
also employs trend analysts, customer insights experts, and retains some of the best talents in the fashion
world. The creative team of Zara comprises of over 200 professionals. They all embody and enact the
corporate philosophy that the word ‘impossible’ does not exist in Zara.
For example, while many companies struggle with long lead times in discussions and decision making,
Zara gets around this challenge by getting various business functions to sit together at the headquarters
and also by encouraging a culture (through structures and processes) where people continuously talk to
each other. The sales and marketing teams who receive trend feedback talk regularly with designers and
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494 APPENDIX A
merchandisers. It is important that there is constant two-way communication so that sales and marketing
teams can talk about new lines to customers and designers/merchandisers have a strong visibility of
customers’ needs and preferences enacted at a store level. The production scheduling is also closely
coordinated so that there is no time wasted on approvals. The design team structure is very flat and focuses
on careful interpretation of catwalk trends that are suitable for the mass market — the Zara customer. The
design and product development teams, who are based in Spain, work closely to produce 1000 new styles
every month.
Besides being customer-centric, another important reason why Zara’s employee strategy is so successful
is the fact that it empowers its staff to make decisions based on data. Zara has no chief designer. All its
designers are given unparalleled independence in approving products and campaigns, based on daily data
feeds indicating which styles are popular.
Due to the unwavering focus on the customer, the entire business model is designed in such a way that
the pattern of needs for the finished goods dictate the terms of the production process to follow, instead of
having the raw materials determine the nature of the production process — something that is very rare in
multinational companies of similar scale.
In sum, the entire brand culture is extremely customer-centric, which has been and continues to be a
significant contributor to Zara’s success.
THE ZARA BRAND COMMUNICATION STRATEGY

Zara has used almost a zero advertising and endorsement policy throughout its entire existence, preferring
to invest a percentage of its revenues in opening new stores instead. It spends a meagre 0.3% of sales
on advertising compared to an average of 3.5% by competitors. The brand’s founder Amancio has never
spoken to the media nor has in any way advertised Zara. This is indeed the mark of a truly successful
brand where customers appreciate and desire the brand, which is over and above product level benefits but
strongly driven by the brand experience.
Instead of advertising, Zara uses its store location and store displays as key elements of its marketing
strategy. By choosing to be in the most prominent locations in a city, Zara ensures very high customer
traffic for its stores. Its window displays, which showcase the most outstanding pieces in the collection,
are also a powerful communication tool designed by a specialised team. A lot of time and effort is spent
designing the window displays to be artistic and attention grabbing. According to Zara’s philosophy of
fast fashion, the window displays are constantly changed. This strategy goes down to how the employees
dress as well — all Zara employees are required to wear Zara clothes while working in the stores, but these
‘uniforms’ vary across different Zara stores to reflect socio-economic differences in the regions they were
located. This effectively communicates Zara’s focus on the mass market, yet another detail that reflects its
close attention on the customer.
To tap into the emerging e-commerce trend, Zara launched its online boutique in September 2010. The
website was initially available in Spain, the United Kingdom, Portugal, Italy, Germany and France, and
was extended to Austria, Ireland, the Netherlands, Belgium and Luxembourg. Over the next three years, the
online store became available in the United States, Russia, Canada, Mexico, Romania, and South Korea.
In 2017, Zara’s online store launched in Singapore, Malaysia, Thailand, Vietnam and India. More recently
in March 2018, the brand launched online in Australia and New Zealand. As of 2018, online sales grew to
constitute 27% of Zara’s total global sales.
As a fast-fashion retailer, Zara is definitely aware of the power of e-commerce and has built up a
successful online presence and high-quality customer experience.
CONCLUSION: TAKE ZARA’S CUE AND LISTEN TO

YOUR CUSTOMERS
The Zara brand was born with a keen eye on its customer — its ability to understand, predict and deliver on
its customers’ preferences for trendy fashion at affordable prices. In addition to its effective supply chain,
the brand’s ability to have its customers co-create designs is unique and provides it with a competitive
advantage. Most fashion trends often start unexpectedly, originate from uncommon places and grow out
of nowhere. With reference to the pink scarf trend mentioned above, it could have been that Hollywood
actress Scarlett Johansson had worn a pink scarf to a charity gala the evening before in Los Angeles, or
golf star Michelle Wie had showcased a pink scarf at a celebrity tournament in Asia. The fact that Zara
was able to quickly jump on to this trend and provide hundreds of customers with the pink scarves they
desperately wanted to buy.
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APPENDIX A 495
In a world swamped with big data, and yet more collected at an even more rapid pace than before, brands
still need to be careful and observant. Big data does not provide answers to all business challenges, and it
may be too hyped to be considered as the holy grail.
One of the secrets behind Zara’s global success is the culture and the respect for the fact that no one
is a better, authentic trendsetter than the customer himself or herself — and this philosophy needs to be
continually reflected in all its business strategies going forward.
So, why not consult your customers for a start? Zara always does.
Source: Adapted from Martin Roll, 2019, Business and Brand Leadership, December, https://martinroll.com/resources/articles/stra
tegy/the-secret-of-zaras-success-a-culture-of-customer-co-creation.
Martin Roll
Martin Roll is an experienced global business strategist, senior advisor and facilitator to Fortune 500
companies, Asian firms and family-owned businesses with more than 25 years of board & C-suite
counselling experience. Former senior advisor to McKinsey & Company. He is a Distinguished Fellow
at INSEAD. www.martinroll.com
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APPENDIX B
GOING OFF SCRIPT: HOW THE $1.7B BUNNINGS UK
DISASTER UNFOLDED
Before consigning its costly unsuccessful foray into Britain’s home improvement sector to a footnote in
Wesfarmers’ largely illustrious history, it is worth trying to understand how it got it so wrong.
It’s certainly something chief executive Rob Scott and his board will be working through given that
Wesfarmers hasn’t ruled out another venture in offshore markets in future, despite the obvious near-term
limitation to its licence to expand via large-scale acquisitions in new markets imposed by the Homebase
disaster.
While there are some broad parallels with Woolworths’ disastrous attempt to challenge Wesfarmers’
Bunnings dominance of the local home improvement sector, the core reasons for the costly — $1.7 billion
— failure of Bunnings in the United Kingdom is quite different to those that destroyed the Masters
experiment.
Masters was a joint venture with Lowe’s, a big North American retailer supposed to bring home
improvement expertise and supply arrangements to Woolworths but which failed to recognise that the
seasons in Australia are different to those in its home markets.
Masters was a greenfields venture and Woolworths’ ambition meant it scrambled to acquire whatever
sites it could as quickly as it could, overpaying for generally less-than-ideal properties.
The inflated property costs relative to Bunnings and a less-dense format that tried to skew towards
female customers to differentiate the offer from that of Bunnings meant its stores were higher cost but
lower-volume than their competitors and that the more stores there were in the rapidly expanding network
the more the joint venture lost.
Bunnings thought it had learned from Woolworths’ failures. Its entry to the United Kingdom wasn’t to
be a greenfields strategy, but the acquisition of an established business to lower the risk.
The original target was the industry leader, Kingfisher, which operates the B&Q chain in the United
Kingdom. With operations throughout Europe and Russia, however, Wesfarmers concluded it was too
complicated and risky an acquisition and it turned its sights to the number two player, Homebase.
Homebase was a renovation opportunity. Effectively, Bunnings was acquiring 265 well-located stores
and a business that turned over about $3 billion but made only $40 million a year. The plan was to eventually
re-format and re-badge the Homebase network as Bunnings.
While Wesfarmers’ chairman Michael Chaney has been ridiculed for saying the due diligence for the
acquisition was the best he had ever seen, Bunnings’ management had spent years studying the UK market
and planning for its entry.
The gameplan was simple. Bunnings would acquire the business but leave it largely untouched while
opening some pilot Bunnings-branded stores to test various iterations of its Australian format. Only after
it had proven a format would it roll it out across the larger chain.
One of the key perceived opportunities within Homebase was the nature of its offering. Under its former
owner, Home Retail Group, the response to years of declining sales was to fill its stores with concessions
like Laura Ashley and brands it controlled like Habitat and Argos. That produced an odd offer of home
improvement and homewares.
To reiterate, however, the original plan was to leave Homebase and the concessions alone and collect
the modest profits the business was generating until the pilots had produced something that worked for the
United Kingdom.
Instead the Bunnings UK management, seconded from Australia, couldn’t help themselves.
Confronted by what they saw as — and which was — an under-performing business, they moved to fix
it. They tore up the original ‘hasten slowly’ script.
There was a wholesale clear-out of local management and of the concessions at a speed that alienated
the Homebase customer base, which because of the concessions had more of a female skew to it than
Bunnings was used to. Adverse weather, Brexit and a deteriorating UK retail environment didn’t help.
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Despite encouraging signs within the pilots — some converted Homebase stores were seeing sales uplifts
of more than 50% — the unintended damage done to the larger network inevitably meant an abrupt descent
into losses. Bunnings UK lost $165 million in the December half, with the outlook deteriorating.
Wesfarmers responded by dumping the expat management it had installed, appointing B&Q’s retail
director, Damian McGloughlin, to head up the business. Newly appointed CEO Rob Scott then initiated
a strategic review which ended with the announcement of a sale of the business to private equity group,
Hilco Capital.
The Homebase disaster is the second time in two years that Wesfarmers’ ‘loose/tight’ operating model
— it devolves enormous operating autonomy to business unit management while maintaining stringent
financial controls — has malfunctioned.
The last time was in 2016 when it discovered Target was inflating its earnings with artificial deals —
rebates from suppliers brought forward with promises of repayments via higher prices in future financial
years.
This time it wasn’t financial or accounting trickery, but a failure of a business’ management to stick to
the agreed gameplan — and head office’s failure to intervene to ensure that they did.
The fact that there was a contest occurring to be the next CEO last year may have been an element of the
explanation for how that could have occurred — the key executives and the board may have been distracted
— but perhaps the UK venture shouldn’t have been left within the larger Bunnings division, where the size
and success of the parent business would inevitably attract most of the senior management’s attention.
Whatever the explanation, Scott and his board will no doubt devote some time and effort to analysing
how something that had been so carefully planned could go off the rails so quickly and badly without the
alarm bells ringing in Perth when key components of the original strategy were being jettisoned.
Scott has said he wants his team to not to be discouraged from being ‘bold and diligent’ in pursuing
opportunities to enhance shareholder value. In time, Wesfarmers might be able to regain its licence to
make acquisitions, even offshore acquisitions. A second failure offshore, however, would probably see it
removed for a generation or more.
Source: Stephen Bartholomeusz, 2018, ‘Going off script: how the $1.7b Bunnings UK disaster unfolded’, The Age, 18 May, www.
smh.com.au/business/companies/going-off-script-how-the-1-7b-bunnings-uk-disaster-unfolded-20180528-p4zhvw.html.
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GLOSSARY
7-S framework A framework useful for analysis and to plan strategy implementation, based on the
premise that successful performance requires alignment of organisational structure, strategy, systems,
skills, style, staff and shared values.
access-over-ownership model A business model that provides temporary access to goods and services
traditionally only available through purchase.
agile organisation An organisation with a stable core, but with the ability to change quickly to respond
to changes in the external environment, market changes, technology changes or changes by
competitors.
Ansoff product/market matrix A framework for classifying and organising strategic options into the
categories of market penetration, product development, market development, and diversification.
balanced scorecard (BSC) A method of performance measurement and management based on the
stakeholder approach. The BSC is organised around the financial perspective, the customer
perspective, the internal process perspective and the learning and growth perspective, and is intended
to balance short- and long-term performance, external and internal performance, financial and
non-financial performance, and different stakeholder perspectives.
basis of competition A description of what drives demand, choice, price and cost, the current and
potential risks that may affect future developments in the industry, and what underpins sustainable
BCG matrix The Boston Consulting Group product matrix is a tool to assess an organisation’s products
and services in terms of market growth and market share, using the categories of stars, cash cows,
question marks and dogs.
behavioural approach A leadership theory that suggests that leaders can be trained to exhibit
leadership behaviours and actions.
big data An all-encompassing term for the volume, velocity and variety of data that is now available.
blood, sweat and tears A strategic option that is high-value and high-effort, requiring substantial time
and resources but with great potential to create high value for the organisation. These options should
be seriously considered.
Blue Ocean strategy The creation of new, undiscovered markets through activities to innovate an
organisation’s product and service offering.
business ecosystem The co-existence and co-evolution or organisations based on their ongoing
interactions.
business model A way of representing and communicating how an organisation creates and delivers
value, and makes explicit the assumptions it is making and testing about the economic logic of the
model.
business model canvas A tool that can help management analyse aspects of business to understand
existing business models or create new models by presenting nine elements through which businesses
make their product or service, present a customer value proposition to the market and manage the
experience of customers.
business model innovation The design process for giving birth to a fairly new business model on the
market, which is accompanied by an adjustment of the value proposition and/or the value constellation
and aims at generating or securing a sustainable competitive advantage.
capabilities What the organisation is able to do by coordinating activities.
change management The process of effectively leading and managing individuals, teams and the
organisation to successfully adopt the changes needed to achieve required or desired business results.
channels The methods by which an organisation distributes its product or provides its service to
customers.
closed innovation Reliance on the organisation’s own resources and capabilities to innovate, and the
attempt to retain the value created by the innovation for the organisation itself.
competitive advantage The ability of an organisation to outperform its competitors and make more
profit than its competitors do from an equivalent set of activities. It can do this by being more efficient
than competitors or undertaking different activities that allow it to, for example, charge higher prices
or gain more market share and brand loyalty.
competitive position How an organisation differentiates itself from competitors in its market.
Pdf_Folio:499
GLOSSARY 499
contingency approach A leadership theory that suggests choosing a leader to match the situation, based
on the leader’s leadership style.
dead ducks Low-value and high-effort strategic options that are not worth extensive effort, given the
expected limited value.
delegate or dump Low-value and low-effort strategic options that can often be delegated as tasks to the
lower levels of the organisation or dumped if they do not provide sufficient value.
design thinking A development tool for products and services, systems, procedures, protocols and
strategy; a fluid research and data-driven approach to identifying problems and solutions.
differentiation advantage Doing something different from competitors in a way that appeals more
strongly to customers.
digital platform model A business model that provides a digital marketplace that brings together buyers
and sellers directly, in return for a transaction, membership or placement fee or commission.
discovery-driven planning An approach to strategy that accommodates uncertainty and gaps in
knowledge and is intended to learn as much as possible at the lowest cost by articulating and testing
business assumptions.
diversification Moving into new products or services and markets, usually requiring new or different
capabilities, resources or experience that the organisation does not have.
dynamic capabilities The firm’s ability to integrate, build, and reconfigure internal and external
competencies to address rapidly changing environments.
effort The resources, time, cost and risk involved in pursuing a strategic option.
emotional intelligence A combination of self‐awareness, self‐management, social awareness and
social skills.
entrepreneurial orientation An approach to strategy in which organisations demonstrate innovative
behaviour to create new opportunities, accept higher levels of risk and implement entrepreneurial
actions.
environmental dynamism The ongoing and rapid change characteristic of the contemporary business
environment.
experience model A business model that disrupts by adding an experience component to a product or
service that elevates its value to the customer beyond that provided by the product or service itself.
exporting Selling products into an international market from the home market.
extended SWOT analysis The use of a SWOT analysis to identify strategic options that respond to the
organisation’s strengths, weaknesses, opportunities and threats.
focus A strategy that aims to find a small product or market segment with a particular set of significantly
different needs and to focus on this area only, rather than compete in the whole industry.
franchising A system in which one party (the franchisor) licences another party (the franchisee) to use
its business system.
free model A business model that involves collecting and selling personal data or ‘advertising views’
harvested by offering consumers a ‘free’ product or service that captures their data and/or attention.
freemium model A business model that extends the free model by adding an optional non-free
premium service.
functional analysis A systematic survey of an organisation’s capabilities by functional area.
gap analysis A comparison of actual performance against desired performance to help identify the
reasons for any shortfall.
goals Specific outcomes the organisation seeks so it can achieve its mission.
horizontal integration The merger with, or the purchase of, a competitor.
hypercompetition The situation in which competitors evolve, respond and innovate — in terms of
products, services, processes and business models — so quickly that any competitive advantage an
organisation establishes cannot be sustained.
hypermarket model A business model that disrupts by using market power and scale to crush
competition, often by selling below cost price.
industry A group of organisations or business units participating in similar economic or commercial
activities, producing similar products or services.
industry analysis A process that considers factors that affect both the growth and profitability of an
industry, which in turn will affect an industry’s level of competition.
industry life cycle The passage of an industry over time through a start-up phase, a growth phase, a
maturity phase (usually by far the largest phase), a shake-out and a decline phase.
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500 GLOSSARY
innovation The process of creating a new product, service or process to create value for the customer
and organisation.
intellectual property (IP) The unique, value-adding creations of the human intellect that result from
human ingenuity, creativity and inventiveness.
intrapreneur An employee who acts like an entrepreneur within an organisation.
joint venture A type of strategic alliance involving two or more separate organisations jointly setting up
a new entity that has equity and assets. Partners in a joint venture share control and decision making.
key success factors The determinants of success of a new product, service or market entry.
key performance indicators (KPIs) A way to measure how well an organisation, team or individual is
performing in relation to strategic goals or in relation to specific initiatives intended to help achieve
those goals.
key performance measures (KPMs) Agreed measures of the success of the strategy after it has been
implemented.
knowledge management The processes by which organisations capture, share and use knowledge.
lean product development A development approach that uses rapid prototyping and experimentation
and aims to minimise waste and maximise value for the customer and organisation by overcoming
long development cycles and high production costs.
lean start-up An organisation that specifically aims to be fast, agile, quick-thinking and quick-acting,
with the aims of optimising efficiency in all its value-added activities and eliminating
non–value-adding activities.
licensing An agreement in which an organisation (the licensor) grants rights to another organisation (the
licensee) in a country or region for a set period in return for a royalty.
low-cost advantage Producing a product or service at a cheaper cost than competitors.
low-hanging fruit A strategic option that is high-value and low-effort and should always be pursued.
market penetration Improving the performance of existing products in existing markets.
markets The organisations in the industry and the buyers of the products and services they offer.
mechanistic systems Organisational designs that emphasise hierarchical control.
mission A statement of the organisation’s fundamental purpose or reason for operating, explaining how
the organisation will achieve its vision.
new market development Either developing new customer markets with a product or service (which
may entail making product or service modifications) or entering new geographic markets.
new product A product (either a good or service) new to the organisation marketing it.
new product development The overall process of strategy, organisation, concept generation, product
and marketing plan creation and evaluation, and commercialisation of a new product.
new service development The outcome of design that choreographs processes, technologies and
interactions with complex systems in order to co-create value for relevant stakeholders.
open innovation A distributed innovation process based on purposively managed knowledge flows
across organisational boundaries, using pecuniary and non-pecuniary mechanisms in line with the
organisation’s business model.
organic systems Organisational designs that focus on adaptive self-regulation.
Porter’s generic strategies Differentiation or low cost, with a broad or narrow focus. Porter argued an
organisation must choose one of the generic strategies.
productivity frontier An economic concept that represents the current level of best practice — the
maximum value an organisation can deliver at a given cost, given the best available technology, skills
and management techniques.
program management The coordinated management of a group of related projects.
project A temporary organisation structure that is created for the purpose of delivering one or more
business outputs according to a specific business case.
project management The planning, leading, organising and controlling of a temporary endeavour (a
project) to achieve specified goals using specific resources.
purpose A statement of an organisation’s overarching objective, which can be used to guide strategy and
enable organisations to redefine the competitive landscape and their value proposition.
rational approach to strategy An approach to strategy based on a linear and mechanistic model, in
which the conception and execution of strategy are treated as discrete, sequential activities.
related diversification Diversification involving the creation of new products that are linked to existing
products.
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GLOSSARY 501
remote environment Those general influences that affect an industry and are out of the organisation’s
control.
resources The productive assets owned or controlled by the organisation, including tangible, intangible
and human resources.
risk The threat that an event, choice or associated action will affect the organisation’s ability to achieve
the option’s goals or outcomes.
risk assessment A constant and iterative process intended to support identification, assessment and
management of the risks associated with strategic options and strategic development.
segmentation Breaking things into groups based on their characteristics.
service ecosystem model A business model that disrupts by selling an interlocking and interdependent
suite of products and services that increase in value as more are purchased. This creates consumer
dependency.
shareholder view The concept that the organisation exists primarily to generate income and wealth for
shareholders.
stakeholder management The process of managing the expectations of people, groups and
organisations that have an interest in a company and will be affected by its activities.
stakeholder view The concept that the organisation exists to serve the needs of multiple types of
stakeholders with a variety of interests.
stakeholders Organisations, groups, and individuals that can affect or are affected by a firm’s actions.
STEEPLE analysis An industry analysis examining social, technological, economic, environmental,
political, legal and ethical factors.
strategic alliance A formal, mutually agreed upon commercial collaboration between organisations.
strategic competition The studied deployment of resources, based on a high degree of insight of a
business system.
strategic drivers An organisation’s industry and markets, customers, products and services, channels
and competitive advantage.
strategic fit Matching the organisation’s goals, values, assets and capabilities, structures and systems to
the external environment and market needs.
strategic groups Groups of competitors within an industry following a similar strategy in a similar
product market classification.
strategic initiatives The activities that must be performed to implement the desired strategies.
strategic innovation The pursuit of strategic renewal through strategising, entrepreneuring, changing
and investment processes.
strategic leaders Leaders with the ability to match the strategic choices, vision and mission of the
organisation with the external environment.
strategic leadership Leadership that encompasses the vision, mission, strategy and structure of an
organisation.
strategic options The strategy components an organisation may consider.
strategic risks Risks associated with the way that the organisation develops and sustains competitive
advantage through building resources and capabilities.
strategic stretch Leveraging organisational resources and capabilities to create new opportunities.
strategic themes Cohesive groupings of strategic options.
strategic thinking Linking concepts to operational practices and being able to understand and articulate
the ‘big picture’ in terms of an organisation’s potential strategic directions and developments.
strategy Those decisions that have high medium- to long-term impact on the activities of the
organisation, including analysis leading to the resourcing and implementation of those decisions, to
create value for key stakeholders and to outperform competitors.
subscription model A business model in which the customer pays at regular intervals for ongoing
access to a product or service.
sustainability Meeting the needs of the present without compromising the ability of future generations
to meet their own needs.
sustainable value innovation Innovation focused on creating new markets through business model
innovation that enables an organisation to create value for customers and society as a whole while
reducing both economic and environmental costs.
SWOT analysis A framework that combines internal and external analysis to identify an organisation’s
internal strengths and weaknesses, and the external opportunities and threats it faces.
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502 GLOSSARY
traits approach A leadership theory based on the premise that leaders are born with particular qualities
that will produce patterns of behaviour to make them successful leaders over time.
transactional leaders Leaders concerned with maintenance of current activities, best suited to the
maturity and decline stages of the organisational life cycle.
transformational leaders Leaders with the ability to inspire, motivate and lead major change, resulting
in organisational transformation, often using characteristics such charisma and presence
unrelated diversification Diversification involving products and markets distinct from its existing ones
(potentially involving moving into a different industry).
value The revenue, profit or return generated by pursuing a strategic option.
value-based management Management focused on financial measures and on activities that maximise
financial return, such as shareholder return, as the measure of performance.
value chain analysis A sequential view of the main activities and organisation undertakes.
values Guiding principles for behaviour, ethical conduct and the organisation’s management and
leadership philosophy.
value proposition A description of the target customer, the problem that is solved for the customer, and
why what is being offered is distinctly better than available alternatives. How the organisation will
uniquely position itself against its competitors.
value/effort assessment tool A tool that evaluates the potential impacts of the strategic options
according to value contribution and level of effort required. It categorises options into low-hanging
fruit; blood, sweat and tears; delegate or dump; and dead ducks.
vertical integration Moving up the value chain by acquiring control of suppliers or developing new
supply operations or moving down the value chain by gaining control over customers or developing
new customer outlets and distribution operations.
vision A guiding statement of the organisation’s aspirations; offering a set of priorities and ideals, but
not including the specifics of how the organisation will achieve this state.
weighted criteria evaluation tool A tool that enables decision makers to objectively compare and focus
on the strategic options that show the most promise in terms of opportunity, size and capability to
implement.
what-if analysis A calculation of the estimated benefit of the successful implementation of a strategic
option. Value to the organisation = annual revenue × percentage return of organisational revenue.
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GLOSSARY 503
SUGGESTED ANSWERS
MODULE 1
QUESTION 1.1
The strategy process can be described as an organising framework for analysing and planning the direction
of an organisation with associated techniques and tools for leading, managing, coordinating and decision
making within an organisation.
The key strength of the rational approach to strategy is that it is systematic and logical. Using this
approach, an organisation is more likely to be able to achieve its objectives and move from its current state
to a more desired future state. A logical framework also supports clear communication about progress.
The key weakness of the rational approach to the strategy process is that it is fairly linear and
mechanistic, which does not reflect the reality of business today. That is, change is happening so rapidly in
a global and digital business world that organisations have to make decisions with imperfect information
and not necessarily in a pre-determined or logical order. The basis of competition is also changing in many
industries. A rigid, linear and mechanistic approach to strategy may prevent strategy from being flexible,
developing continuously and emerging from ‘intuition and creativity’ (as suggested by Chandler).
QUESTION 1.2
The customer profile and value map for Mountain Bikes Direct is as follows.
Value Customer
proposition segment
Gain creators Wider target audience reach Customer jobs Get the bike parts they need to
Specialist staff around the world support how they want to ride
their bikes
Early awareness and introduction of
new products and services coming
onto the market
Pain relievers Removing the overheads of physical Gains Longer operating hours
stores to offer a wider range of Direct access to expert staff
products and services
Fast response
Using the cloud to have a flexible
Early access to new products
staffing model
Products and Diverse product range Pains Ability to get more obscure
services Specialist bike parts parts
Expert advice
QUESTION 1.3
Prospa is in the growth stage of the organisational life cycle. This is supported by the following.
• It is generating revenue and revenue growth has been strong (revenue has grown from $1.8 million to
$22.3 million between 2013–14 to 2015–16).
• Prospa is still developing products and services (it is expanding into the credit information space) and
solidifying its current products and services (in the small business lending space).
• It is expanding its customer base, targeting small businesses that want to have access to credit
information.
Key challenges for Prospa over its next 12 months of operations based on the growth phase of the
organisational life cycle are as follows.
• Functional delegation to support further growth — Prospa is likely to need to organise itself differently
internally to support and manage further growth in a controlled and efficient way.
• Getting more control into the business through consolidating systems and processes and capturing
margins through efficiency.
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504 SUGGESTED ANSWERS

• Maintaining growth at the same levels (potentially due to new competitors entering the market and/or
less market development opportunity in their chosen customer segment, which could explain their
expansion plans in targeting small businesses that want to have access to credit information.
QUESTION 1.4
A business that is declining in market share typically comes under pressure from declining volumes, to the
extent that it can be unprofitable to manufacture below a threshold quantity of product/capacity utilisation.
At the same time, sales staff that manage customer relationships are under pressure to maintain/make sales
in a declining market. They may promise their customers supply of customised goods and services to
achieve sales without understanding the cost implications of customisation for a business that needs to
produce standardised products at a minimum volume to be able to offer products at specific price points.
Alternatively, they may promise supply of goods that may not yet be possible to manufacture in scale
because key raw material inputs may not be approved for use in the manufacturing location (a problem
that is sometimes encountered by manufacturers who use chemicals in the manufacturing process).
These potential business conflicts are highlighted in the table below, which is adapted from table 1.4.
Potential conflicts
Core business Business (selected from
type drivers table 1.4) Potential conflicts at DIC
Customer Scope • Asking the product • The most likely conflict here would be
relationship innovation business unwillingness of sales staff to stop providing
to adapt products products and services that have become
for specific unprofitable to provide because insufficient
customer qualities are being made to achieve
economies of scale (and therefore margins)
in manufacturing
Product Speed • Creating products • In the desire to make sales, it is possible that
innovation and services that products and services could be designed
are uneconomic to that are specific to one customer, and as
produce such, cannot be leveraged across other
customers to generate sufficient volume to
make manufacturing volumes viable/profitable
• Another conflict could be making sales that
involve using inputs/materials that may
not be approved for use in the country
(e.g. chemicals) in haste to make sales
Infrastructure Scale • Unwillingness to • A typical response to declining sales is for

business change or adapt sales staff to ask the infrastructure business
processes — to customise to win or keep customers —
one-size-fits-all not understanding the costs associated with
• No customisation customisation and small run
and special
treatment
QUESTION 1.5
Kotter’s question Discussion
1. Does it convey a picture of what the future will look Yes — it is clear what RMIT does and where it is wants
like? to head, particularly from its mission statement: ‘RMIT
exists to create transformative experiences for our
students, getting them ready for life and work, and to
help shape the world with research, innovation, teaching
and engagement.’
(continued)
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SUGGESTED ANSWERS 505

(continued)
Kotter’s question Discussion
2. Does it appeal to the long-term interests of It is very clear that students are central to RMIT’s vision,
members, employees, customers, partners and mission, values and goals. Other key stakeholders are
other stakeholders? less explicitly mentioned but are implied. For example,
staff are mentioned relating to working teams, society
is mentioned in terms of solving challenges through
research, industry is mentioned through strategic
partnerships. Financial performance and responsible
use of resources would satisfy governance requirements
of government key stakeholders and RMIT’s Council.
3. Does it comprise realistic, attainable goals? No metrics have been provided against the goals.
However, measures could easily be assigned to each
of the priority areas under each goal.
4. Is it clear enough to provide guidance in decision Yes. Any options for growth and development could
making? easily be tested against the goal and priority areas for
how it would contribute to the achievement of RMIT’s
vision, mission, values and goals.
5. Is it general enough to allow individual initiatives Yes, and it is also backed up by the value ‘Agility’ and
and alternative responses in light of changing con- being able to adapt quickly and effectively to new
ditions? pressures and opportunities.
6. Is it easy to communicate; can it be clearly Yes — particularly if the priority areas are not included
explained in five minutes? in the explanation (RMIT does in fact present this
information in an attractive document with graphic
design to help communication).
7. Is it ambitious enough to force people out of Overall, there is an energy to the values and goals
comfortable routines? that suggest innovation, creativity, imagination and
courage to do something that sets RMIT apart. Two key
goals/priorities in particular underpin this:
• a transformative student experience (goal 1)
• a global contribution to research and innovation (goal
7, priority 2).
QUESTION 1.6
Johnson’s three business model components Flexicar and its economic logic
1. Customer value proposition: that helps customers • Short-term access to the use of a fleet of reliable,
perform a specific ‘job’ that alternative offerings fully insured vehicles without having the ongoing
don’t address. costs of vehicle ownership or the hassle of vehicle
maintenance.
2. Profit formula: how value is generated through • Annual membership fees (three different customer
factors such as revenue model, cost structure, segments).
margins and inventory turnover. • Choice of plans with pricing reflecting excess in case
of accidents.
• Hourly fee for use (includes cost of petrol, roadside
assist etc.).
• Benefits for members, for example, when members
refer and get others to join and use Flexicar
themselves to drive member growth.
3. Key resources and processes: what costs with • Fleet of vehicles (many types to appeal to different
regard to people, technology, products, facilities, customer use requirements).
equipment and brand are required to deliver the • Technology to locate, book and access vehicles (app
value proposition to the target customers. and website that integrates with GPS tracking and
maps).
• Accessible parking spots for car pick up.
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QUESTION 1.7
The information available to answer this question is limited; however, it is possible to speculate about the
likely causes without having more detail about the project.
Using this approach, relevant factors that could explain why the Boing 787 was so overdue and over
budget are highlighted and explained in the table below. Based on this analysis, the most likely explanation
of time delays and cost overruns would be that the management and coordination of logistics for what is
effectively a globally dispersed team were vastly under-estimated. This would have then been compounded
by the cultural, language and time differences for the various locations around the world, and would
have made decision making challenging where groups needed to make decisions and proceed. In the
absence of being able to speak directly and immediately with other groups, or having language challenges,
assumptions are likely to have been made. Where those assumptions were proven to be untrue, then this
would have caused rework. Rework costs both time and money.
Factors and considerations for leaders

Risk and managers Possible reasons to explain
Competition • There are likely to be more competitors and • No relevant factors

different types of competitors
• Existing competitors in the market will have
experience in that market and better market
knowledge and understanding
• Competitors in the market already will have
established relationships with suppliers
and distributors, and it may be difficult for
a new entrant to find suitable suppliers and
distributors
Distribution • Specific and different distribution arrangements • It is likely that management and
are often in place in different markets, (i.e. coordination of logistics was
it may not be possible to directly apply not sufficiently factored into
approaches successful in one market into planning, and that elements of
another) work that involved dependent and
• There will be an increased need for interdependent decisions based
management and coordination of logistics on what other groups were doing
• It will be necessary to invest in building and were not sufficiently resourced.
developing local relationships Proceeding without knowing what
other parties are doing in these
instances is a leading cause of
rework, which causes delays and
additional expenses.
Macro- • Different markets will have different economic • No relevant factors

economic drivers so it will be important to understand the
macro-economic trends of multiple regions and
markets
• Similarly, it will be important to understand
what is driving growth and consumption
patterns in different markets, and whether
relevant consumer segments can afford the
goods/services being offered and will choose to
buy them
Socio- • In each country, social, economic and • It is possible that both these
economic business practices differ for a range of cultural factors may have contributed
and historical reasons (e.g. relationship to Boeing’s time and cost
development and reward structures) and these overruns. For example, different
need to be understood holiday periods that did not align
• Leadership and management styles vary across across countries, and different
regions and countries approaches to incentivising
• To what extent products and services need to production to meet deadlines.
be adapted for the local market
(continued)
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(continued)
Factors and considerations for leaders
Risk and managers Possible reasons to explain
Financial • Different countries may have different financial • No relevant factors

systems and variances in interest rates, inflation
rates and taxation systems
• How businesses are structured in different
countries can vary, as can tax rates and
regimes and interest rates
• Exchange rate variations need to be managed
• Any costs associated with customising
products and services to the local market need
to be factored in
Legal • Businesses need to understand and comply • No relevant factors

with different laws and regulations in different
countries
• Debt collection arrangements may be different
and more difficult in unfamiliar jurisdictions
Physical • Different time zones may challenge • Differences in time zones

communications and logistics almost certainly challenged
• Operations in remote locations may be effective, efficient and timely
inaccessible at times, especially in less communications when decisions
developed countries needed to be made.
• Similarly, there may be inadequate local
infrastructure such as roads for transport and
poor energy and water supply continuity
• Different power sources and standards
(e.g. electrical) may mean equipment has to be
modified for specific countries
Political • Businesses need to understand and work with • No relevant factors

different political systems, governments and
international agencies
Sociocultural • Different regions and countries have their own • Differences in languages
cultures, values, beliefs and ways of doing almost certainly challenged
business that need to be understood and effective, efficient and timely
respected communications when decisions
• Language differences may cause difficulties needed to be made.
• Differences in culture and
understanding of communication
styles, types, hierarchies and so on
across cultures are likely to have
contributed to the delay and cost
overrun.
Labour • Employment and industrial relations institutions • These may have impacted the
and practices are likely to be different ability of some groups to meet
deadlines that other groups were
dependent on, and so could have
contributed to delays and cost
overruns.
Technological • The potential for leakage of intellectual property • The decision to distribute
and know-how needs to be managed manufacturing so broadly may
• Cyber security threats from online business have been a strategy to not have
activities need to be managed the whole solution made in one
place where it could be copied if
proprietary knowledge was a key
competitive factor for the
Boeing 787.
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Localisation • Understanding what degree of standardisation • No relevant factors
versus versus customisation is optimal for growth and
standardisation profitability
QUESTION 1.8
What has supported Mountain Bikes

Benefit type Description Direct’s growth
Cost Cost benefits arise when standardisation of The key cost benefit has been reduced
products and processes enable economies overheads from operating physical stores that
of scale that increase purchasing power has enabled the company to hold a greater
over suppliers, increase efficiency of range of stock, and have the funds available
production and lower overall production from this saving to stock more obscure and
costs. specialist parts than competitors with physical
stores.
Timing Product or service development and launch The key timing benefit is the ability to track
can be coordinated on a global basis, trends globally and be able to offer new
providing net efficiencies compared with products in Australia that are being introduced
launching at different times in different elsewhere before competitors.
markets. The costs incurred for logistics
and planning are offset by greater efficiency
and the prevention of piracy, imitation or
espionage (global launches are a barrier to
copying).
Learning Coordination of information sharing across Learning appears to have been a significant
countries and subsidiaries eliminates benefit to Mountain Bikes Direct. Being able to
national ‘silos’ of knowledge and leads employ experts around the world and sharing
to higher overall learning and knowledge their knowledge has enabled the company to
sharing (meaning different subsidiaries quickly respond to trends in new products and
do not waste resources independently to resolve customer questions in a prompt and
confronting problems already solved efficient way.
elsewhere).
Arbitrage Use of resources in subsidiaries in different While the online approach to sales and use of
countries can be coordinated to achieve cloud services means that human resources
lowest possible cost. As currencies fluctuate in different locations can be used, the main
and the price of raw materials, components purpose for this is for knowledge sharing
and finished goods varies in different (earning benefits) rather than trying to achieve
markets, it can be worthwhile locating the lowest possible cost.
specific functions to achieve greater returns
on investment and improved competitive
positioning.
QUESTION 1.9
The core tasks in strategic leadership are: making things happen; setting goals that direct and shape;
championing the organisation’s strategy and direction; making complex decisions and identifying the right
business model.
Once a rehabilitation plan was agreed (it is not clear from the case that Mr Inamori led this, but it
is reasonable to assume that he did), he implemented the plan (which involved significant cuts to the
company) and put in place the structures and processes to enable staff to drive the turnaround of the
company, using a style and approach that was quite different to traditional management approaches in
Japan. The facts from the case that demonstrate the role of strategic leadership have been summarised in
the table as follows.
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Core task in strategic
leadership Mr Inamori’s action/s
Making things happen • A rehabilitation plan was approved for JAL late in 2010, requiring the company to
terminate almost one-third of its workforce and reduce salaries by up to 30%.
• Mr Inamori introduced his managerial accounting system known as ‘amoeba
management’ to enable change.
• The amoeba management system uses profit centres (such as manufacturing or
sales units) as its basic unit of operation — these consist of 5 to 50 people.
Setting goals that direct • To avert an economic disaster for Japan by ensuring JAL did not become
and shape bankrupt.
• To protect the jobs of the remaining JAL staff.
• To maintain fair competition in the airline market and thus benefit the public.
Championing the • Mr Inamori’s goal was to create a company that every employee is proud to work
organisation’s strategy for and put people before profit.
and direction • One of his approaches involved having a few drinks with employees working late
so they could talk informally.
Making complex decisions • Mr Inamori brought an analytical mind to understanding the company’s figures
and exhibited confidence and commitment.
Identifying the right • Each amoeba is tasked with improving revenues and lowering costs.
business model • Shifting the way staff view their jobs from ‘serving bosses’ to ‘contributing to the
company’s performance.
QUESTION 1.10
Transformational leaders have the ability to transform and lead major change. Mr Inamori:
• implemented a change plan that involved terminating almost one-third of its workforce and reduce
salaries by up to 30%
• broke away from the semi-government style of management that had long been in place to establish
motivation and commitment among JAL’s staff
• changed the management structure and roles and responsibilities of staff in distinct business manage-
ment (amoeba) groups to establish common values among employees and make their welfare the number
one priority
• placed responsibility on staff and gave them a sense of ownership of outcomes, and at the same
established transparency and accountability — a very different approach to traditional Japanese
management.
QUESTION 1.11
Corporate transformation was required at JAL to deal with the crisis situation the company was in. This
involved major changes to the whole organisation.
To support a corporate transformation, initially a coercive style was used — that is, the implementation
of the agreed rehabilitation plan in exchange for a loan and write off of some debts, but involving significant
staff and cost reductions. The coercive style is appropriate when an organisation is in crisis and has
limited time and resources. Top-down leadership has to make decisions in the short-term to get through
the immediate crisis, and often involves retrenchments and downsizing.
Later, the leadership style changed to a more collaborative style, where there was significant participa-
tion from employees in important decisions related to the future and organisational change. Mr Inamori
also delegated responsibility and accountability to staff with specific knowledge of the functional (amoeba)
group they belonged to, as they had knowledge relevant to the change within their group.
QUESTION 1.12
During his time leading JAL, Mr Inamori had to use different styles of leadership. At the beginning he
had to be directive to implement difficult decisions that were the condition of JAL being able to continue
operations. He then moved through the different leadership styles so that, ultimately, he could step back
and delegate leadership to others.
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Leadership
style Description Application by Mr Inamori
Directing An authoritarian style characterised by Implemented a rehabilitation plan that was

specific instructions and close supervision approved for JAL late in 2010, requiring the
company to terminate almost one-third of
its workforce and reduce salaries by up to
30%. In return it was given a ¥900 billion
loan and some of its debts were written off.
Coaching While specific instructions and supervision Inamori adapted the management
are still provided, there are also clear philosophy he had developed at Kyocera
explanations of what is occurring, and (previous company) and introduced his
suggestions offered by employees may managerial accounting system known as
be accepted; coaching is still regarded as ‘amoeba management’ to break down the
being authoritarian but takes tentative steps rigid, bureaucratic corporate culture at JAL,
towards collaboration establish common values among employees
and make their welfare the number one
priority. The system also helps identify and
develop leaders.
Supporting Employee efforts are facilitated, and Placed responsibility on staff and gave
employees share decision-making them a sense of ownership of outcomes,
responsibility establishing transparency and
accountability. Shifted the way staff
viewed their jobs from ‘serving bosses’
to ‘contributing to the company’s
performance’.
Delegating Responsibility for both decision making and He stood down from the CEO role to an
problem solving is transferred to employees advisory position once the transformation
was completed, leaving the structures that
he put in place intact.
QUESTION 1.13
According to the Rothschild model, to ensure future success or to fight against current problems, surgeons
have an ability to prune or sever parts of the organisation that, although they may once have been valuable,
have become a hindrance. The main evidence that supports Mr Inamori as demonstrating the leadership
style of a ‘surgeon’ is the implementation of the rehabilitation plan which required the company to
terminate almost one-third of its workforce and reduce salaries by up to 30% as a condition of being
able to continue operating.
QUESTION 1.14
The culture of any social unit includes group norms, shared perceptions, espoused values, and consensus
around goals and objectives. It includes the way people interact with each other, how they solve problems,
and how they justify themselves.
A significant cultural challenge for Mr Inamori was to move the company and its employees away
from the semi-government style of management that had long been in place, establish motivation and
commitment, and instil a sense of personal accountability and responsibility for company performance
across all staff.
Another challenge was that the amoeba approach he introduced was very different to traditional Japanese
business practice whereby decisions are made by the senior management and handed down to staff to be
implemented. This is a reflection of the distribution of power in Japanese society (power distance) and the
typically collective decision-making preferences Japanese people have and the importance of relationships
in their culture.
Through the amoeba approach, Mr Inamori was able to identify leaders and trust staff to deliver, although
there would be little way to conceal underperformance, which could have been challenging.
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QUESTION 1.15
The key initiative that Mr Inamori took to empower others to act was to put in place amoeba groups.
The amoeba management system uses profit centres (such as manufacturing or sales units) as its basic
unit of operation — these consist of 5 to 50 people — and has responsibility for planning, decision making
and administration. Each amoeba is tasked with improving revenues and lowering costs. This ‘management
by all’ approach places responsibility on staff and gives them a sense of ownership of outcomes, and at
the same time establishes transparency and accountability. Staff become more aware of the connection
between their work performance and the company’s profitability, shifting the way they view their jobs
from ‘serving bosses’ to ‘contributing to the company’s performance’.
QUESTION 1.16
There is limited information as to how Mr Inamori’s strategy was communicated. The key action discussed
in the case is that one of his approaches involved having a few drinks with employees working late so they
could talk informally. This would have provided staff with the opportunity to:
• express their feelings in an open and protected manner
• raise concerns.
Communication is also non-verbal. Mr Inamori’s decision to not take a salary would have been a very
powerful message to all staff that he was committed to turning the company around and was not in it for
the money but to:
• avert an economic disaster for Japan by ensuring JAL did not become bankrupt
• protect the jobs of the remaining JAL staff
• maintain fair competition in the airline market and thus benefit the public.
QUESTION 1.17
There were two main types of decision-making styles needed for the turnaround at JAL.
Initially, a command style was needed. This was because difficult decisions about downsizing the
company and reducing costs had to be made. It is unlikely that the decisions would have been made
(especially in a timely manner) through any other means.
Command decisions are decisions that are made by leaders without consultation with their team. This
occurs in organisations where things are moving quickly, and there is no time for consultation. When
a crisis arises, it is often unexpected and requires immediate attention to avert damage. It is here when
command decisions are most utilised and the most effective.
Once initial decisions had been implemented, Mr Inamori was able to move to a collaborative style of
decision making. This leadership style allows the team to provide opinions, insight and knowledge. The leader
can consider each perspective and is then well-informed to make the final decision. This was achieved through
the amoeba group structure whereby each amoeba group had responsibility for finding ways to improving
revenues and lowering costs. This ‘management by all’ approach placed responsibility on staff and gave them
a sense of ownership of outcomes, and at the same established transparency and accountability.
QUESTION 1.18
Mr Inamori came to JAL with a reputation for putting people ahead of profit. The values that guided his
process of change was to make staff happy (not shareholders) and create a company that every employee
is proud to work for. He demonstrated his commitment and values by not taking a salary.
QUESTION 1.19
7-Eleven and Cotton On have very different approaches to organisational value and ethics.
7-Eleven takes a much more classical approach in that it exists to make money for its key shareholders.
While Milton Friedman states this should be achieved without fraud or deception, it is clear that 7-Eleven
has transgressed in this regard.
Leadership decisions at 7-Eleven have supported behaviours that have been shown to exploit members
of society in order to pursue the goal of making a profit. Employees are seen as a cost to the business.
In terms of the welfare of employees (including franchise owners) and the impact on society, this has
had extremely detrimental and exploitative impacts. No information has been provided on environmental
impacts.
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On the other hand, Cotton On takes a socio-economic view of ethics, using its role as a large company to
try and make a positive impact on the society within which it operates. It has chosen education as a focus,
noting that education is a key mechanism to ending extreme global poverty.
Leadership decisions at Cotton On have established mechanisms to drive a culture of support for people
in society that are less fortunate through a global education focus. This has had a very positive impact on
employees and society more broadly with significant funds invested in the purpose and goals of the Cotton
On Foundation, and partner organisations involved in supporting the organisation’s activities. There is no
information provided about Cotton On’s approach to the environment.
QUESTION 1.20
The key source of information to answer this question is the material that compares and contrasts the roles
of management and leadership (refer table 1.8) and the role of finance professionals in strategy (refer
table 1.13).
There are many possible actions to choose from to answer this question. Options are summarised in the
following table.
Leading and Characteristics (refer Actions that drive strategy for managers and leaders
managing table 1.8) (refer table 1.13)
Managing • Plan, allocate resources • Gather finance, enterprise and big data
(stability) and assign tasks • Provide support in business modelling
• Performance reporting and • Support implementation, analysis of interim performance, and
control strategic project re-scoping efforts if these are necessary
• Communicate • Analyse results and performance metrics (e.g. SWOT, ROI)
• Coordinate from an organisational context and trend perspective
• Make decisions • Ensure the sound management of large volumes, varieties,
• Evaluate and velocities of data with a focus on veracity (ensure data
• Accept the status quo validity and reliability)
• Do not ask difficult • Manage and mitigate risk effectively
questions • Ensure the decisions are made across the organisation are
• Rely on control based on sound judgement
• A short-range view • Act as an intermediary between the finance, technology and
information functions of the organisation
Leading • Inspire and influence • Champion change and plan for contingencies
(change) • Build confidence and • Offer insights, collaborate to develop ideas, produce
enthusiasm forecasts, have an active role in business modelling, and
• Develop future leaders complete business case generation and analysis
• Promote culture • Challenge assumptions in business models, conceptualise
• Role model ideas, anticipate future trends, develop strategic options and
• Communicate help develop budgets
• Establish networks and • Help identify if and when the strategic plan and business
relationships model(s) of the organisation need to be changed
• Catalyst for change • Be a role model for change, drive and lead the change
• Challenge the status quo and any project re-scoping efforts if and when required
• Ask what and why • Identify strategic and business model issues, and consult
questions with the organisation’s leaders to identify through consensus
• Inspire trust the next logical steps to ensure the organisation is to remain
• A long-range strategic relevant
view
MODULE 2
The questions in module 2 have been designed to illustrate multiple questions that can be asked in relation
to various case facts and to show you approaches to preparing for case-based analysis. In an examination
context it is the summary of the analysis that is important — that is: what does the analysis mean?
To be able to answer examination questions succinctly, extensive prior analysis of case facts needs to
be undertaken. This prior analysis is then the basis from which solutions to exam questions are derived.
What is being tested is not only your ability to analyse data but, more importantly, your ability to draw
meaning from that analysis.
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The questions in this module include building up to a full external environment analysis. For the
STEEPLE model, the individual components are shown here in great detail. However, it is important
to note that this is an approach to systematically work through all the external environment factors that
could affect the growth of the industry and consider new models and practices that may be emerging from
digital disruption. It is perfectly acceptable to have a component of this model where there is nothing
of significance affecting either historical or future growth. What is important is the way that all the
components of the model are pulled together to summarise the key factors that have driven the historical
growth of the industry and that are projected to have an impact on the future growth of the industry. And,
finally, your summary needs to clearly articulate whether those impacts will be positive or negative.
QUESTION 2.1
The following explains the value of analytics in improving performance and sustainability outcomes for
stakeholders in the fisheries industry: fishing companies, government agencies and food companies.
Fishing Companies
The type of issues that fishing companies need to address include fishing efficiency, capture volatility and
fleet monitoring. The first step is to assess their data stores to see what information is readily available
to them. The type of information they are likely to have includes vessel-specific data on daily catch (both
volume and species), GPS position, and fuel consumption. Simple, yet powerful use cases could be built
around this type of data. Rather than using this information for purely descriptive purposes — for instance,
noting the average catch for each vessel during past months — fishing companies could adopt a forward-
looking analytical approach.
• One analysis might involve using geospatial modelling to map fishing activity and catch rate over the
course of the entire season. This would allow fisheries to track the fleet more closely and gain a better
understanding of performance drivers. Increased fishing efficiency would also reduce fuel consumption
and running costs.
• Geospatial modelling could also be used for more complex analysis such as predicting the location of
targeted fish according to various environmental conditions. Such tools could inform not only fishing
operations but also downstream commercial activities, including seafood pricing and labelling.
• They could generate even greater fuel savings by examining data from IoT sensors that provide
information on vessel behaviour, including fuel consumption and navigation conditions. This analysis
could help them generate real-time recommendations about the most energy-efficient routes and
manoeuvres.
• Fishing companies could also examine data from onboard sensors to determine if any equipment is
experiencing the sorts of problems that typically occur before a breakdown. With this information, they
could detect potential.
To make the most of these tools, fishing companies must undertake an end-to-end digital transformation
throughout all their functions. Such transformations require employees to have the right skill sets, as well as
appropriate tools, processes and interfaces (for instance, dashboards where they can readily access data).
In addition, organisations should provide training and support to help employees see the value of AA,
especially if they appear reluctant to change their ways. Without this support, employees may view AA as
an imposition — a mindset that is likely to impede progress.
Government and Fishery-Management Agencies

With fish stocks dwindling and environmental challenges mounting, governments and fishery-management
agencies could consider investing in data collection technologies and research programs that can provide
a comprehensive, near real-time vision of both ocean resources and fishing activities. By leveraging the
data, they can:
• adopt new measures and regulations more quickly
• respond to external pressures such as climate change
• have dynamic fishing quotas; that is, rather than setting a quota annually, at the beginning of the fishing
season, throughout the year based on real-time information about the amount and type of catch that
vessels are collecting.
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The current exchange of information between fishermen and authorities is not optimal. A collaborative
problem-solving approach — potentially happening at the global or regional level — is needed to develop
a clear road map defining data standards and mutual goals, such as those for by catch reduction. These
efforts would build trust among stakeholders and benefit all.
Food Companies
Technologies including distributed-ledger technologies and radio-frequency-identification tags, can help
companies share their insights about catch origin more efficiently and might merit additional investment.
Food companies can share the associated information about catches with consumers, who have a growing
interest in the quality, traceability and sustainability of food products.
QUESTION 2.2
The following table describes a number of organisations and identifies the industries they could be
associated with. These answers are not exclusive as defining the industry for each business will depend on
the specific situation that the business is in. Some are quite simple, like the car parts manufacturer; however,
something like the vegetarian clothing manufacturer could be in a number of industries depending on what
type of clothing they make and for whom.
As many of these examples are serving relatively new markets, choosing a specific industry is even
more difficult. For example, ridesharing began as disrupters in the taxi and limousine transport industry.
The rapid growth of businesses in this area have led to a new rideshare services industry being born.
Organisation description Industry
Rideshare operator Taxi and limousine transport, ridesharing services
Subscription air travel service Domestic airlines, international airlines
Provider of ‘smart’ technology for household devices Emerging industries, software developers, software
suppliers, data storage services
Vegan restaurant Fast food and takeaway food services, cafes and
coffee shops, chain restaurants, catering services
Vegetarian clothing manufacturer Clothing retailing, online clothing, fitness and athletic
clothing, online sporting apparel
Car parts manufacturer Motor vehicle parts and accessories manufacturing
R&D facility Scientific research services
IT service Computer system design services, IT security

consulting
QUESTION 2.3
The following diagram shows the value chain for the coffee industry.
Coffee trees are planted. The coffee seeds, usually called beans, are inside the fruit of the tree, which
is often called a cherry. The fruit is picked or harvested. The harvested product is then exported around
the world. The next step is to process the harvest. Roasting the beans may also include blending beans to
create a particular strength or flavour. The roasted coffee is then distributed to wholesalers. Wholesalers and
coffee roasters may sell directly to food service organisations (e.g. restaurants, coffee shops), supermarkets
and direct to individual consumers. Interestingly, in the coffee industry these final consumers may be both
the individual coffee consumers and also the large emergent barista and coffee shop marketplace that sell
both the roasted coffee and brewed coffee to consumers. This suggests that in the coffee value chain both
industrial and consumer value chains exist.
Wholesaler
Grow and
Processed Exported Roasting Distribution Food service Consumer
harvest
Supermarkets
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QUESTION 2.4
Following is the pharmaceutical value chain (from figure 2.11) and a discussion of its components.
Illustrative Manufacturing
Distribution Dispensing
of drug
• R&D manufacturing • Medicine acquisition • Medicine

costs • Handling & delivery acquisition
• Import duties and • Obsolescence costs • Labour, facilities,
Cost incurred taxes • Capital costs equipment
• Promotion and • Promotion and • Medicine wastage
education education • Capital costs
• Education
• Innovation • Ensuring continuous • Medicine

• Regulatory medicine supply availability
documentation • Waste management • Pharmacist advice
Value added • Quality assured • Order processing • Patient
manufacturing • Education convenience
• Education • Additional health
services
Source: M Aitken, 2016, ‘Understanding the pharmaceutical value chain’, Pharmaceuticals Policy and Law, 18, pp. 55–56.
If you consider the pharmaceutical value chain above, there are a number of components that can be
taken offshore or outsourced, including the following.
• R&D. Large pharmaceutical companies often have the majority of their research and development done
in the country where they have their head office, such as Switzerland or the USA. Smaller companies
who don’t have these capabilities may outsource this, buying newly developed drugs from university or
other research facilities
• Manufacturing. Manufacturing is often done in countries with lower manufacturing costs, such as labour,
and so on. Again, smaller companies also outsource manufacturing to specialised facilities.
• Promotion and education. As the legal requirements for pharmaceutical promotion differ from country
to country, this is usually managed within each country or region, or outsourced in each location. Drugs
are also becoming more specialised and personalised, requiring more communication with end-users.
This too is often outsourced in each location the drug is sold.
• Handling and delivery. As pharmaceuticals are truly global products, distribution is often outsourced to
logistics specialists.
Another significant opportunity for outsourcing not apparent on the given value chain is clinical trials.
Trials often rely on subpopulations and advanced analytics, capabilities not necessarily available in-house.
QUESTION 2.5
Following is a discussion on the impact of Airly, a subscription airline service.
Airly offers subscription-based private flights where a monthly fee allows unlimited flights between
several domestic airports. As their target customers are mainly time-poor corporate travellers, they are
most likely to impact on the business traveller transport segment.
As business travel has grown over the past five years and existing airlines have reduced capacity for this
segment, there is great potential for Airly to be the catalyst for a completely new segment with opportunity
for new business and growth.
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QUESTION 2.6
Following is a suggested segmentation of the Australian accounting services industry, its markets and the
industry’s life cycle stage.
The Australian accounting services industry can be segmented according to the types of services
provided:
• tax
• auditing
• financial statements
• bookkeeping.
The Australian accounting services industry is in the mature phase of its economic life cycle. This has
been determined by considering profit trends in the industry, with the average net profit for SME accounting
firms in Australia decreasing by 41% from 2013–2018. In addition, the five-year average annual growth
rate of the accounting industry has slowed to just 0.97%, compared to the Australian average of 2.18%.
Of course, the clearest evidence is the following quote:
Our research proves what many already know: the accounting industry is – and has been – in the mature
stage life-cycle for more than a decade (benchmarking.com.au CEO Markus Hugenschmidt).
QUESTION 2.7
1. The following table relates to the social factors that may impact on the Australian accounting services
industry from the remote environment analysis worksheet (see table 2.3).
Overall effect on
Issues, insights and patterns likely to affect the Australian industry growth
Factor accounting industry (+, =, –)
Social There has been an increase in SMEs using accounting services. +

They are using traditional services and also creating demand for new
value-added services.
There are a number of technologies available that offer low-level −

accounting services.
Firms are outsourcing low-level accounting work as they build +

capacity in higher-value advisory services.
2. Summary of social issues. Overall, social factors have a positive impact on the Australian accounting
industry. The growing demand, largely driven by SMEs, for value-added services encourages firms
within the industry to build capability in these new skills. This counters the impact of the increased
outsourcing of low-level accounting work, by increasing the demand for highly skilled workers.
QUESTION 2.8
1. The following table relates to the technology factors that may impact on the Australian accounting
services industry from the remote environment analysis worksheet (see table 2.3).
Overall effect on
Issues, insights and patterns likely to affect the Australian industry growth
Factor accounting industry (+, =, –)
Technology Growth in automated accounting systems such as MYOB, single

touch payroll, real-time reporting and superstream reduces the need
for some low-level accounting services -
ATO working with FinTech companies to streamline and standardise

reporting =
The use of data analytics and cloud-based accounting to offer value-
added services with larger profit margins than traditional services +
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2. Summary of technology issues. Overall, technology factors have had a minimal impact on the Australian
accounting industry as much of the technology has been developed to help ‘accountants do accounting’.
Therefore, although the growth of automated accounting systems has the potential to negatively impact
the industry, this is countered by the opportunities available to accounting firms to use technology to
improve the value-added services they offer. Of course, this will be dependent on the firms building
capability in these new technologies and related services.
QUESTION 2.9
1. The following table relates to the economic factors that may impact on the Australian accounting
Issues, insights and patterns likely to affect the Australian Effect on industry
Factor accounting industry growth (+, =, –)
Economic The industry has remained stable due to the necessity for =
accounting services and compliance
The value of traditional services is reducing -
The addition of value-added services is increasing profitability +
The market is largely saturated, leading to an increase in =

competition, acquisitions and making entry into the market
unattractive
2. Summary of economic issues. Overall, economic factors have a neutral impact on the Australian
accounting industry. Although demand remains relatively stable, customer expectations are changing
the types of services offered. This means that while the value of traditional services have decreased,
value-added services offer higher potential revenue. As a result, accounting firms are outsourcing low-
level services and investing in building their capabilities for the higher skilled services.
QUESTION 2.10
1. The following table relates to the environment factors that may impact on the Australian accounting
Environment As relationships and brand reputation become more important, firms +

will need to consider their environmental impact
2. Summary of environment issues. Although there are very few environmental issues that impact on the
Australian accounting industry, it may provide an opportunity for growth. As competition in the industry
increases, making building customer relationships and brand reputation more important, companies can
develop their corporate social responsibility profile to differentiate themselves from the competition.
Some of the areas they can consider improvements to could be recycling and disposal of their highly
paper-oriented processes.
QUESTION 2.11
1. The following table relates to the political factors that may impact on the Australian accounting services
Political Industry driven by ATO policy and compliance +
ATO and Treasury working with FinTechs to streamline and -

standardise reporting
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2. Summary of political issues. The overall impact is neutral as while businesses will always need
accounting services to ensure compliance with ATO and other policies, the introduction of new
technology enables businesses and individuals to manage some of their own accounting services. Again,
this highlights the importance of increasing the value-added accounting services in order to remain
relevant.
QUESTION 2.12
1. The following table relates to the legal factors that may impact on the Australian accounting services
Legal Industry driven by a number of legislations and standards +
Everyone legally required to lodge tax returns annually +
Changing legislative environment +
Expanded audit laws +
Larger firms subject to both domestic and international laws and +

regulations
2. Summary of legal issues. The overall impact of legal issues is positive as the Australian accounting
services industry is largely driven by legislation and compliance due to the importance of accurate
financial reporting and auditing procedures. The industry is subject to legislation and standards from
a number of bodies including the federal government, ATO, ASIC, Tax Practitioners Board (TPB),
Australian Accounting Standards Board (AASB) and CPA Australia. Firms operating overseas, or with
overseas supply chain operations, also need to comply with international laws. This has a positive impact
on the industry, ensuring that their professional capabilities remain in demand and relevant.
QUESTION 2.13
1. The following table relates to the ethical factors that may impact on the Australian accounting services
Ethical Changes in customer expectations =
Changes in legislation +
2. Summary of ethical issues. The overall impact is positive. Ethical issues permeate much of the operations
of the Australian accounting services industry with overall expectations of ethical practices and
procedures. Recent social expectations also include responsible and sustainable business practices and
greater transparency in reporting and communication. Legislation is being developed to reflect these
changed expectations, with new laws regarding both transparency and supply chain responsibilities.
Modern accounting firms will need ensure not only compliance but that they are meeting all stakeholder
expectations.
QUESTION 2.14
1. The following table summarises the overall effect for all factors that may impact on the Australian
accounting services industry from the remote environment analysis worksheet (see questions 2.7
to 2.13).
Pdf_Folio:519

Factors Overall effect on industry growth (+, =, –)
Social = / potentially +
Technological = / potentially +
Economic = / potentially +
Environmental +
Political =
Legal +
Ethical +
2. Major issues influencing the future growth of the industry. Overall, the key issues affecting the future
growth of the Australian accounting services industry are the reliance on meeting the requirements of
various policies, legislations and standards, coupled with changing stakeholder expectations.
Although there have been many technological developments in the industry, they have largely
been developed to help improve accounting services. On one side, technology has meant that many
low-level accounting services can now be done by individuals and businesses themselves, leading to
many accounting firms outsourcing these services. However, this is countered by the opportunity that
technology offers in enabling accounting firms to meet the growing demand for new, higher level, value
added services. Therefore, while technology has decreased the value of traditional services, overall
demand remains stable with value-added services offering higher potential revenue.
Just as stakeholders demand new services, they also expect greater sustainability, responsibility and
transparency. Again, these factors provide opportunities for accounting firms to differentiate themselves
in an increasingly competitive market.
3. Future growth. Based on this analysis, the future growth of the Australian accounting services industry
is dependent on accounting services firms:
– ensuring that they stay on top of changing legislation and standards both domestically and interna-
tionally as their customers rely on them for compliance
– building capability in the skills and technology needed to offer the new services demanded
– differentiating themselves from their competition through the services offered and their sustainable
practices.
4. Implications for an organisation within this industry. In order for companies in the Australian
accounting services industry to remain competitive, firms will need continue undertaking traditional
accounting while diversifying their offerings to meet the expectations of their customers.
To do this successfully, they will need to understand the needs of their customers. This will require them
to build better customer relationships so that they can adapt their services to meet the changing business
needs and expectations. This will not only enable better customer service but promote loyalty.
SMEs have been the catalyst for the changing demand for accounting services, with increasing expec-
tations for business and growth strategies and detailed analytics. These services will require accounting
firms to invest in new capabilities and technologies to meet these expectations.
The maturity of the industry, and the changing nature of the services offered, will mean increased
competition. To manage this, accounting firms will need to develop their brand and reputation. This will
encourage loyalty and reduce the number of customers switching service providers.
QUESTION 2.15
1. The threat of new entrants is summarised in the following table, based on the checklist of relevant
questions.
Checklist question Response
Is the industry large enough to be attractive to new Yes, and there is sufficient diversity for smaller
entrants? companies to succeed alongside large players
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Are economies of scale needed to be competitive in Not necessarily, although it is an advantage in mid-tier
this industry? and larger firms
How much capital investment is required to set up? Start-up costs are low as it tends to be a labour
intensive, rather than a capital intensive, industry
How easy or hard will it be for new entrants to get the This is the biggest barrier for the industry, with
appropriate qualifications? qualifications including a university degree and a
number of certifications
What government policy restrictions are there? The industry is driven by policy and regulations, making
knowledge and understanding of these a significant
barrier to entry
How onerous is compliance in the industry? Compliance is another critical driver of the industry
providing a higher entry barrier
Are there proprietary product differences for existing This is increasing as traditional services are being
products and services in the industry? automated and/or outsourced, while higher value-
added services are increasing
How strong are the brands in the industry? Little differentiation
How hard or easy is it for customers to switch their Easy

business between competitors in the industry?
2. Conclusion: barriers to entry are low. Once the qualifications are achieved, all other barriers to entry
remain relatively low. It is a large, stable industry with a diverse range of businesses from large to sole
proprietors with little or no differentiation. Capital investment is very small and switching costs for
customers are low.
QUESTION 2.16
1. Using the checklist of relevant questions, the power of suppliers can be summarised as follows.
What is the number and concentration of suppliers? Small but growing
How important are specific suppliers’ inputs? The supply of new technology to perform both
traditional accounting services and provide new
services is increasingly significant
How likely are suppliers to forward integrate? Technology developers may provide basic accounting
services
How easily can organisations in the industry switch Moderate — new technology suppliers would mean
suppliers? new software, training, etc
What is the proportion of the cost of the suppliers’ Growing as services increase
products relative to the total cost of the industry
product or service?
Is information about suppliers’ products Yes

easily available?
How profitable are the suppliers? Profitable, as they have capabilities that are in demand
2. Conclusion: supplier power is low but increasing. There are few significant suppliers to the Australian
accounting services industry. However, with the increasing demand for new higher value-added
services, accounting firms will need to invest in new technologies to provide the capabilities needed
to meet this demand. The capital and time investment to purchase and train employees will discourage
switching. There is also the risk that the technology suppliers will offer the service directly to the
customers.
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QUESTION 2.17
1. Using the checklist of relevant questions, the buyer power can be summarised as follows.
How concentrated are the buyers in the industry? Is Not at all. Customers vary from individual to large
distribution controlled by a few important outlets? entities are widely dispersed.
Are there alternative channels of distribution? Yes, many accounting services can be offered online.
What impact does the product or service being High. Customers have traditionally been reliant on
purchased by the buyer have on their business? their accounting services to satisfy policy, legislation
and standards compliance. This is now increasing to
include business strategy and analytics.
How likely are buyers to backwards integrate? Technology has enabled some simple accounting
services to be done by customers.
How easy or difficult is it for buyers to switch to Very easy — they can get the same accounting
alternative suppliers? services from any number of accounting firms.
How important are industry volumes to buyers? Not at all.
What is the proportion of the cost of the industry High but decreasing as competition increases within
product being purchased relative to other products the industry.
and services the buyer buys?
How profitable is the buyer? Varied
How easily can the buyer access information about the Quite easily as the industry is highly concentrated with
industry’s products and services? major global suppliers. Boutique suppliers are more
localised to the area in which they operate.
2. Conclusion: buyer power is high and increasing. The lack of differentiation amongst accounting firms
has always meant that customer power was strong, enabling them to switch among competing firms.
With the introduction of new technology that has simplified low-level accounting services, customers
can now do some of their own accounting, increasing their power further. The expected increase in
competition will likely reduce prices and further increase buyer power. All this highlights the need for
more differentiation and better customer relationships in the industry.
QUESTION 2.18
1. Using the checklist of relevant questions, the power of substitutes can be summarised as follows.
Are there equivalent prices and performance products Yes — but for only some of the services offered by
available? accounting firms as well as some of the higher value-
added services demanded
How easy or difficult is it for customers to switch from Relatively easy — if they have the capabilities
the industry products to a substitute?
2. Conclusion: substitute power is moderate and increasing. There are a number of technologies that
have been developed to streamline and standardise low-level accounting. Customers with the required
capabilities can use these to reduce the types of accounting services needed. This has driven the demand
for higher level accounting services such as strategy and analytics. However, there are also many
alternative suppliers of these types of services, both to do in-house or outsource. These increase the
scope of competitors in the accounting services industry to include strategy and analytics suppliers.
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QUESTION 2.19
1. Using the checklist of relevant questions, the power of complements can be summarised as follows.
Are there products or services that increase the value Yes. Companies and/or technologies that provide
of the industry? the higher value-added services now demanded by
customers
Is there differentiation in the complementary product or Unsure

services’ market, or is it commoditised?
Can the complementary product or service be used to Yes

strengthen your position in the industry?
Is your position protected long term? No
Does technology exist that will enable complements to Yes. Some services may be accessed through new
impact on the industry? technology
2. Conclusion: complement power is moderate and increasing. As the demand for new services continues
to increase, accounting firms will need to consider the complementary products that are needed to
support these. This may include building their own capabilities or outsourcing to external operators.
QUESTION 2.20
1. Using the checklist of relevant questions, the intensity of industry rivalry can be summarised as follows.
What is the life cycle stage of the industry? Mature
What is the proportion of fixed costs in the industry’s Low. The majority of costs are for labour
total cost structure?
Does the industry have too much or too little capacity? N/A
How are the competitors organised? Other accounting firms, bookkeeping firms, tax
specialists, banking services. Evolving to include
strategy and analytics companies
How different are the products and services being Low product/service differentiation
offered by competitors in the industry?
How well established are brands in the industry? Low brand differentiation
Are buyers loyal to specific competitors and on what No

basis?
How complex or easy is it to compare the pros and Simple

cons of industry products and services?
How does government policy affect the industry? The industry is driven by policy and regulations
Have mergers and acquisitions been supported or Supported and increasing

blocked?
How difficult is it to exit the industry? Easy
2. Conclusion: industry rivalry is medium and increasing. The primary source of competition is the
number of players in the industry and the low barriers of entry. Competition is increasing as firms
move away from their traditional accounting services.
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QUESTION 2.21
Barriers to entry are low. Once the qualifications are achieved, all other barriers to entry remain relatively
low. It is a large, stable industry with a diverse range of businesses from large to sole proprietors with little
or no differentiation. Capital investment is very small and switching costs for customers are low.
Bargaining power of suppliers are low but increasing. There are few significant suppliers to the
Australian accounting services industry. However, with the increasing demand for new higher value-added
services, accounting firms will need to invest in new technologies to provide the capabilities needed to meet
this demand. The capital and time investment to purchase and train employees will discourage switching.
There is also the risk that the technology suppliers will offer the service directly to the customers.
Bargaining power of buyers are high and increasing. The lack of differentiation amongst accounting
firms has always meant that customer power was strong, enabling them to switch among competing firms.
With the introduction of new technology that has simplified low-level accounting services, customers
can now do some of their own accounting, increasing their power further. The expected increase in
competition will likely reduce prices and further increase buyer power. All this highlights the need for
more differentiation and better customer relationships in the industry.
Threat of substitutes is moderate and increasing. There are a number of technologies that have been
developed to streamline and standardise low-level accounting. Customers with the required capabilities
can use these to reduce the types of accounting services needed. This has driven the demand for higher
level accounting services such as strategy and analytics. However, there are also many alternative suppliers
of these types of services, both to do in-house or outsource. These increase the scope of competitors in the
accounting services industry to include strategy and analytics suppliers.
Impact of complements is moderate and increasing. As the demand for new services continues to
increase, accounting firms will need to consider the complementary products that are needed to support
these. This may include building their own capabilities or outsourcing to external operators.
Industry rivalry is medium and increasing. The primary source of competition is the number of players
in the industry and the low barriers of entry. Competition is increasing as firms move away from their
traditional accounting services.
1. (a) Future profitability of the industry
• Based on this analysis (low barriers to entry, low but increasing supplier power, high and increasing
buyer power, increasing power of substitutes and complements and increasing industry rivalry),
industry profitability may decrease in the short term, with the potential to increase to even higher
levels as companies commit to new value-added services and the capabilities to supply them.
(b) Key driving forces of future profitability
The key driving forces of future profitability will be:
• building customer relationships to better understand their changing needs and encourage loyalty
• investing in value-added services and capabilities
• differentiating your product and building a strong brand.
(c) External evidence
• Declining revenue from traditional services.
• Increasing demand for new services.
• The development of new technology to streamline and standardise low-level accounting services.
• Improved access to data and analytics.
(d) Gaps in understanding
• The importance of customer relationships to anticipate demand.
• How to differentiate and build a brand.
• The capabilities needed to future proof the organisation.
(e) Implications for the future of organisations in this industry
• The need to build capabilities in business strategy, analytics and related technologies.
• The need to build customer relationships to better understand customer needs.
• The need to differentiate to improve the competitive position of the firm.
• The need to build loyalty through branding and customer satisfaction.
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QUESTION 2.22
We already know from question 2.5 that Airly is most likely to impact on the business traveller segment
of the industry, or potentially even be the catalyst for a completely new segment of subscription airline
services.
Airly offers subscription-based private flights where a monthly fee allows unlimited flights between
several domestic airports. As their target customers are mainly time-poor corporate travellers, they are
most likely to impact on the business traveller transport segment.
As business travel has grown over the past five years and existing airlines have reduced capacity for this
segment, there is great potential for Airly to be the catalyst for a completely new segment with opportunity
for new business and growth.
Their target market are the business traveller market. This is an attractive segment to target, as they
represent nearly 70% of the revenue for existing airlines. The most important thing to business travellers is
flexibility and time efficiency. The Airly subscription model is well placed to satisfy their needs. Business
travellers are also less price sensitive, and therefore may be open to a subscription service. The risk of
targeting only one market segment is that during times of low profitability when organisations reduce or
cease air travel, this would have an enormous impact on Airly’s profitability. Technology may also impact
on this segment, replacing air travel with teleconferencing. However, one of the biggest risks to Airly is
the competition. Qantas and Virgin are likely to take aggressive defensive action if faced with losing share
in this lucrative segment.
QUESTION 2.23
1. Question 2.6 defined industry segmentation in the Australian accounting services industry as:
• tax
• auditing
• financial statements
• bookkeeping.
2. These accounting services are offered to households and businesses across all sectors of the economy.
Some of the key markets include the following.
• Large firms. This market includes businesses across the professional services, retail and wholesale
of consumer goods, real estate, medical, utilities and telecommunications, manufacturing and
construction sectors. Firms in this market require numerous industry services, ranging from general
accounting functions to complex audits.
• SMEs. There has been a growing demand for accounting services in this market, with SMEs requiring
all the traditional accounting services such as tax returns and BAS statements, but also more value-
added activities such as business strategy and analytics
• Households. This market primarily requires tax agent services from the large number of sole
proprietors and small firms in the industry.
• Public sector. These markets use accounting services for general audits and advisory services.
QUESTION 2.24
Using the list of relevant questions (see table 2.5), the basis of competition can be summarised as follows.
Basis of competition: Australian accounting

services industry Response
What drives demand for the products and services of Demand is largely driven by policy and legislation
the industry? requirements. SMEs are also driving demand for other
complementary services such as business strategy and
analytics.
What drives price, product performance and Price is currently largely driven by competition.
supply availability? Product performance is driven by service range, work
quality, relationship management and technology.
Supply availability is driven by access to capabilities in
the accounting industry’s workforce.
(continued)
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(continued)
Basis of competition: Australian accounting
services industry Response
How is price determined in the industry? Price is largely determined by competition, with few
firms differentiating. Those that can are able to charge
premium prices.
What are the main drivers of cost in the industry? The main costs in the industry are wages. Therefore,
the main drivers of cost are the skills and expertise of
the labour force hired.
What are the current and potential risks? Current risks include losing access to low-level
accounting services through technology and
outsourcing.
Potential risks are not adapting to emerging demands
by building appropriate capabilities.
Under this basis of competition, an organisation can gain a sustainable competitive advantage through:
• building relationships to increase customer satisfaction, encourage loyalty and allow for premium
pricing
• investing in value-added services to better satisfy changing customer needs and increase the perceived
value of their services, differentiating the organisation from the competition
• improving brand reputation to differentiate and encourage loyalty.
QUESTION 2.25
Using the competitor analysis worksheet (see table 2.6), the competitor analysis can be summarised as
follows.
East Shore University Bridgeland University University of Excellence
Value proposition To be the leading A full suite of courses To provide the highest
(The benefit or value university in the offered, as well as online quality teaching and learning
that the institution country, with growing facilities, so students can services in the business and
offers to its students.) international prospects. get what they need. finance disciplines.
Strengths Now engages a large The Teaching and Exceptional reputation

proportion of overseas Learning Hub — of quality and superiority.
students and generates integrated online system, Exclusive access to world-
extra revenue from fees. ensuring all student class business and finance
High level of government markets are catered for. academics, ensuring high
funding and research Extensive range of quality of teaching.
grants. courses offered, Extensive funding from
Sturdy and lasting with particular focus high wealth individuals in
reputation. on areas of skills the field. Higher fees than
shortages and demand. standard institutions.
High-quality teaching
staff, fostered by Sophisticated online
high wages and good teaching facilities that attract
reputation. a large portion of distance
learning students.
Weaknesses Substandard online Low standard of It is a niche university, thus

platform, possibly limiting academic teaching staff. offering a limited number
its accessibility. Reputation was yet to and range of courses, and
develop before being does not vary offerings
damaged by publicity to meet areas where skills
surrounding quality shortages are rife.
issues. Although intentional,
no export channels have
been developed.
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QUESTION 2.26
1. There are four large players in the industry: KPMG, Ernst and Young, PwC and Deloitte. Mid-tier
competitors include BDO Australia and Findex Group Ltd. There are also a significant number of small
organisations offering accounting services.
Strategic groups include:
• Big 4: tax and audit services to large companies, advisory services to large companies, advisory work
to private clients and wealthy individuals
• mid-tier: tax and audit services to small and medium size businesses, advisory services to small and
medium size businesses
• small organisations: accounting services to small businesses and individuals.
2. The Big 4 and mid-tier companies compete on the basis of offering complementary services to diversify
their offerings, building customer relationships, and acquiring and developing the capabilities required
to manage this.
The large number of small players compete mainly on quality of service and price.
QUESTION 2.27
1. The biggest impact on the accounting services industry has come from the use of cloud computing
services. These services provide businesses with real-time financial positions, easy access to finances,
and greater transparency and collaboration with their accountant
These products are also benefiting accounting firms by reducing the time spent on basic accounting
functions and allowing them to develop new higher value-added services, such as advisory services.
2. Competition is coming from digital providers of real-time accounting services, data analytics and cloud-
based services. These services allow small businesses and individuals to use this software themselves
for its efficiency and convenience, bypassing their traditional accounting services firms.
3. The accounting services offered online are subject to the same tax, audit, disclosure and reporting laws
as accounting firms. There are currently no laws specific to digital services.
4. Firms can offset heightened competition by adopting cloud-based accounting software themselves to
help them streamline their offerings. Alternately, they can outsource this type of low-level accounting
work. By increasing the efficiency of their low-level accounting offering, they can then add new services
to customers that complement these online services.
5. Leaders and managers need to recognise the potential impact of technology developments and update
and replace the firm’s software as required. Alternately, they may choose to lease these systems to reduce
depreciation costs. They also need to invest in training or acquisition of staff with the skills to use these
new systems. Most importantly, they need to be innovative in their approach to the complementary,
higher value-add services that they can introduce to counter the impact of these online services.
MODULE 3
QUESTION 3.1
Melbourne Victory’s key stakeholder groups and their needs are as follows.
Key stakeholder Stakeholders’ objectives
Shareholders • Increasing revenues and profit growth

• Increased value of investment
• Good reputation
CEO and the Board • Prestige

• Increasing good reputation and club image
• Revenue and profit growth
• Increasing financial value of the club
Major suppliers • Stable, but growing in value, purchases

• Reasonable, stable margins
• High integrity in procedures including on-time payment
(continued)
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(continued)
Key stakeholder Stakeholders’ objectives
Sponsors and advertisers • High performance compared to competitors in A-League

• Growing fan base
• Good reputation
TV, newspaper, radio and • High level performances in matches

other media outlets • Accessibility to officials and players
Football Federation • Club makes prudent financial decisions for stability

Australia/new governing • Club pays fees and operates under their guidelines
body • Players’ behaviour conforms to rules
Other clubs • Good on- and off-field behaviour
Members/committed fans • High performance compared to competitors in A-League

• Accessibility to players and club functions
Fans — casual • Good performances at matches
Community and • Clean and fair competition

government • Behave respectably as role models
Other stakeholder groups and needs are also possible.
QUESTION 3.2
Some of the key stakeholders of Facebook are Mark Zuckerberg, Facebook shareholders, customers
(Facebook users), advertisers and governments. Each stakeholder has individual motivations for their
involvement in Facebook. As a result of these various motivations, each stakeholder is aligned slightly
differently to the organisation due to their separate objectives.
Key stakeholder Stakeholder objectives Alignment to objectives — met/not met
Mark Zuckerberg • High revenue and market share • Increase in daily users and high
• Increased share price advertising revenue — met in the
• Products — innovation of new and development of longer term but short-term fluctuations
existing occur
• Increased ability for open sharing and communication • Purchase of Instagram and WhatsApp
— prior to Cambridge Analytica scandal as new products — met, no other
• Increased power to people to build community and information in case on this
bring the world together — after Cambridge Analytica • Political and social movements enabled
scandal by Facebook communication — met
• No information in case regarding
increased power to people to build
community and bring world together
Shareholders • Increased share price • Initial reduction in share price after IPO,
• Increased value of investment so for original investors — not met
• Increased Facebook profit • Share price has always recovered after
scandals, so for these investors — met
• Share price has fluctuated when
scandals have occurred (e.g. 40%
reduction in late 2018), so for
shareholders caught by scandals —
not met
• Relatively high profit margin — no
information
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Customers • Reliable accessibility of Facebook • No information on accessibility and
(Facebook users) • An understanding of how to use Facebook and change process in case
training to enable adaption to any changes • Over 1.6 billion active daily users —
• Maintained Facebook popularity met
• Safe and secure use for the full range of user • Attitudes challenged and action
purposes communicated on social and political
causes such as the Arab Spring
uprising and the #MeToo campaign
— met
• Cambridge Analytica scandal has
shown that users have taken their data
availability for granted and it has been
used to try to unknowingly influence
their behaviour — not met
Advertisers • High levels of user traffic on Facebook • Over 1.6 active daily users worldwide
• Effective advertisement positioning on the — met
Facebook website • High advertising revenue, suggesting
• Return for advertising investment that Facebook is a popular advertising
medium and, hence, effective — met
• As above, given the level of the
advertising spend it is assumed
advertisers are getting value — met
Governments • As Facebook is a non-political entity, assumption • Met for some countries; not met
of neutrality and non-interference in the stability of in others. For example, Facebook
government has been instrumental in organising
• Good corporate citizen activists and communicating action in
the Arab Spring uprising
• Cambridge Analytica data scandal
revealed Facebook did not take enough
responsibility in preventing its use
for harm such as fake news, foreign
interference in elections and hate
speech — not met
QUESTION 3.3
1. The evidence in the case shows that Zuckerberg did alter Facebook’s strategy during the Cambridge
Analytica scandal. The mission before the scandal was to ‘give people the power to share and make
the world more open and connected’ (Facebook 2012) and during the scandal it was changed to ‘give
people the power to build community and bring the world closer together’ (Facebook 2018). This is a
shift towards putting more value on unity and building community than on valuing the dissemination
of information.
This shows that key stakeholder groups who may not have much interest in the organisation may
have their interest awakened if an issue calls for it. These key stakeholders can then wield their power
and force a change of strategy on the organisation.
2. The power-interest grid for Facebook is as follows.
Subjects Players
• Employees • Mark Zuckerberg and the Board
• Minor shareholders • Major shareholders
Crowd Context setters

• Suppliers (not mentioned in case) • Governments
• General public — not Facebook users • Advertisers
• Customers (Facebook users)
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3. The major shareholders have high interest and high power. Zuckerberg should partner with these
stakeholders. He should keep them involved, ensure he listens to them, answers their questions, warn
them of any problems that may occur as they come up, and have strategies ready to combat them.
The US Government has high power over Facebook but in the usual course of events, low interest.
Facebook should inform the government as required and involve them early in issues that may be cause
concern in the future.
QUESTION 3.4
The following suggested answers use reasonable inferences based on information given in the example.
Additional answers may be also be appropriate.
The types of data that Dickey’s would likely have access to, for each of their more than 500 locations,
include the following.
1. Data generated by point-of-sale systems — menu items, prices, totals for each order, how it was paid
(e.g. cash, credit card, etc.), at what time.
2. Data generated by loyalty program records — when loyalty program members sign up they usually
give a range of data about themselves, depending on what is asked for. This data is then able to be
matched to a sale when the member uses their loyalty program card. Examples of the types of data
include demographic information such as age, gender, home address, their job, the location of where
they work, mobile phone number and/or email address. This can be related to when they are most likely
to purchase, what they are most likely to purchase, their average spend per purchase, frequency of
purchase, and so on.
3. Data generated by marketing promotions — the kinds of prices and promotions that increase sales of
different types of goods, at what times.
4. Data generated by inventory systems — stock levels and orders pending for key items.
5. Data generated by customer surveys — these are answers to the questions Dickey’s may want to ask.
For example, this could purely be feedback on the service they experienced or the quality/taste/serving
sizes of the items purchased. It could also include suggestions for other menu items/combinations of
items/flavours. Alternatively, customers could be given samples (such as new menu items) and asked
for feedback.
6. Data generated by ‘other’ sources — could be anything that Dickey’s considersrelevant. The observa-
tions of staff could come into this category. External sources of data relevant to the purchase decision
might be used,such as the weather, jobs data in the local area, changes in the levels of income for people
in the relevant area, how the demographic of the relevant area is changing, as well as whatever data is
can found about competitors.
The types of analyses Dickey’s use includes the following.
• Short-ish term longitudinal trend analyses (monitoring sales performance to address under-performing
stores) and very short-term analyses of cross-sectional data are mentioned in the example. In fact, data
can be virtually real time (e.g. lower than expected sales at a store can be addressed in real time with
promotional text messages to customers). Daily operational briefings summarise the data for corporate
headquarters.
• As a general statement, quantitative analysis of the hard data being captured by the systems, such as
frequency of purchase, revenue per transaction, and so on, can also be done.
• Qualitative analysis from customer surveys. Analysis can be focused on historical trends to give an idea
of what the future might be like. It can also be focused on the short term, such as how all the stores
are performing today — down to the hour — and compared to each other. It can also be compared to a
certain standard, such as expected or target sales. Correlations could also be looked at — what is also
bought with what; and what is rarely bought together. Variability can also be considered.
How Dickey’s commercialise the insights they find from their data analysis includes the following.
• They use the data to respond quickly to opportunities and problems — instead of knowing about the
issues days, weeks or months later, they can find where problems or opportunities lie in real time, and
remediate or take advantage of them. This includes headquarters initiating a training program for the
store managers and staff to improve the performance of under-performing staff. If a store has lower
than expected sales and this leads to an inventory build-up, they can initiate a spontaneous marketing
campaign, such as sending text messages to local customers to increase sales and solve the inventory
problem.
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• Dickey’s can use the data to get a better insight into their customers, their sales and other key aspects of
the organisation. They can better match expected demand in terms of the volume and nature of goods
ordered.
• They also use the data as a basis for strategy development in the future, and also to monitor the
implementation of the current strategy.
QUESTION 3.5
Large retail customers are the most important customer segment for CCC. They contribute the largest
amount of revenue to total revenues, but there has been no sales growth during the four-year period, which
is a concern. Reasons for the lack of growth should be investigated, with strategies put in place to address
this.
Small retailers were as important to CCC as large retailers three years ago. However, revenues from small
retailers have declined significantly over the following three years to nearly half their previous levels. This
decline in sales is troubling. An investigation into the reasons behind the decrease should be conducted,
and a strategy developed to refocus on this segment. It has been shown previously that there is potential
for high sales values, and as the opportunity is there, it should be further assessed and potentially pursued.
The hospitality segment is a third customer segment that contributes to total revenues. Sales increased
marginally over the four-year period. The ’other’ group comprises a miscellaneous range of small customer
types, and sales have halved from a small base over the period. Given their relatively small contributions
to revenue, management may decide to ignore these customer segments to focus on sales elsewhere, or
create a new strategy to successfully grow these areas. However, it is clear that the current strategy is not
working effectively.
Sales to these customer groups have meant that overall revenue has declined from approximately $59 000
to around $49 000. This is a nearly 17% decline and is mostly attributable to the decline in revenue from
small retail customers. Strategies tailored to the needs of the specific customer groups discussed here need
to be considered and implemented to increase total revenue.
QUESTION 3.6
The industries, markets, customers, and products and services that the Alibaba Group are engaged with
can be classified as follows.
Industry and
Organisation geographic markets Customers Products and services
Alibaba Group Industry: • Individual shoppers • Hosting e-commerce sites for

• Wholesale • Small and medium sellers
• Retail businesses • Enabling buyers to find purchases
• Financial services • Large businesses • Payment services to enable
• Marketing and online transactions
advertising services • Marketing and advertising
• Information services to enhance online sales
technology services • Information technology
Market: infrastructure hosting services
• China
• Global
QUESTION 3.7
• Question mark: low market share but high growth potential.
– Nuts2Go: relatively low market share currently, but high growth potential due to increase in health-
conscious consumers and the possibility to make it more gourmet.
• Dog: low market share and low growth potential.
– Burgers2Go and Cheese2Go: relatively low market share and low growth potential due to healthcon-
scious consumers avoiding fried food and added flavours.
• Star: high market share and high growth potential.
– GourmetChips2Go and Health2Go: relatively high market share and high growth potential due to
consumer demand for more premium and healthy goods, and willingness to pay higher prices.
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• Cash Cow: high market share but low growth potential.
– Potatoes2Go: relatively high market share of a large market, but low growth potential due to health-
conscious consumers moving away from fried foods.
QUESTION 3.8
The retail/grocery distribution channel of CCC is the most successful and thriving channel in the
organisation in terms of sales. There has been a steady incline in sales revenue, indicating a strong strategy
and business model for this distribution method. Although this channel is already obtaining the highest
sales revenue, CCC may choose to further focus its strategy on this channel, due to the large opportunity
it provides.
Any increase in sales revenue from export, food service or clearance would be minimal due to the large
gains required to make a significant monetary difference, and would require time before substantial gains
were felt. Based on this data, the strategic direction may focus on the retail/grocery channel in the short
to long term, gaining market share and increasing sales revenue, while developing a strategy to break into
and increase market share in less successful channels with growth opportunities. This short analysis of the
data exemplifies how data analysed by channel can assist an organisation in assessing its performance and
subsequently directing its future strategy.
QUESTION 3.9
R.M. Williams uses a product quality strategy to differentiate their boots in particular. The high quality is
expressed in the way they make the boots: with 70 hand processes using a single piece of leather, which
is stitched up the back. Superior quality materials and workmanship are used for the boots, with great
attention to detail. This differentiates R.M. Williams boots from their competitors’ own high-quality riding
boots and shoes.
They also use their brand name to differentiate themselves. Their long-time tradition and focus on quality
has led to R.M. Williams being a revered brand name for quality. Their brand of footwear and apparel
suitable for the outback, with a track record for practicality and functionality, differentiates their products as
quality products, made to high standards, which will be durable, practical and reliable. Their subscriptions
to their magazine are also evidence of their successful brand identification.
QUESTION 3.10
Budget airlines use a range of strategies to reduce their costs, and pass on those savings to customers in
the form of lower ticket prices than full-service carriers. The low-cost strategies mentioned in example 3.6
include the following.
Technology advantage Superior technology can be a source of cost advantage.

• Budget airlines use modern and reliable aircraft, and collaborate with the world’s
most renowned providers of technical maintenance. This is a process technology
aives a cost advantage for maintenance.
No-frills product Cost can be reduced by minimising non-essential features of the product.
• Online booking reduces the help that customers can get and minimises fees to
agencies and the cost of booking staff.
• The ‘no-frills’ approach. This is not explained in example 3.6 but means that
some services that full-service carriers include in their ticket prices are not
automatically included in the ticket prices for budget airlines’ customers. Budget
airlines’ customers may be able to pay more for these additional services such as
checked baggage, meals, entertainment, choice of specific seats etc.
Simple product design Product parts can be eliminated through re-engineering, leading to lower material
cost and manufacturing cycle time.
• Budget airlines use simple routes.
• One-to-one point operations maximise the plane occupancy versus service
downtime in stopovers.
Pdf_Folio:532

Cost control Costs can be reduced by improving control of raw materials (sourcing materials
from low-cost countries such as China), direct labour, factory overheads or
administrative overheads. Some of the strategies labelled elsewhere in this answer
could also be labelled here, as the overall aim of them is to control costs.
• Budget airlines use one type of aircraft/only a few types of modern aircraft to
streamline maintenance (i.e. reduce the costs of maintenance by not having to
train staff on new methods for different aircraft, have a smaller inventory of spare
parts, etc.).
• High efficiency in every part of the business which means they are constantly
monitoring all aspects of the business to reduce costs.
• High frequency of flights: this reduces their fixed costs per passenger kilometre.
• Rewards to staff for continuous cost reduction provides incentives for new
efficiencies.
Location advantage Inexpensive premises offer a great cost advantage as do appropriately located
operations, which provide, for example, easy distribution of products.
• Budget airlines located at less expensive airports; for example, landing at Orly
instead of Charles de Gaulle in Paris.
• Initially low-cost carriers offered routes in high cost locations or places that
lacked direct links (i.e. were not serviced by full-service carriers). This meant
higher ticket prices for customers and/or more inconvenience to travel.
• Expansion of networks to mostly low-cost airports.
QUESTION 3.11
All three of these organisations have a focus generic strategy.
Smiggle has a focus strategy based on a single customer segment. Smiggle differentiates its products as
being bright, stylish stationery and storage products that are designed to organise workspaces and energise
their users with colour. The competitive scope is a single segment of the market. The target market of
Smiggle is young teenagers and most of its merchandise is priced below $20 for affordability.
The Just Group have a focus strategy based on the customer segment. They differentiate their products
as affordable, ’fast fashion’ with frequently changing ranges of funky products. This also applies to their
only non-clothing brand, Smiggle. The competitive scope is a much smaller subset than the industry as it
is targeted to children and young people.
Lagardere Services Asia–Pacific have a focus strategy based on the focused functional capability of
operating different stores under their customer’s own branded banners at Australian airports. Again, the
market segment is a single segment: the target market is consumers visiting Australian airports.
QUESTION 3.12
Key Markets and Customers
Zara aims to create responsible passion for fashion among a broad spectrum of consumers spread across
different cultures and age groups. Their customers are individual consumers who are interested in fashion,
changing trends and have an attitude of being willing to change and influence, and also be influenced by
fashion trends.
Markets
Zara has 2266 stores located in leading cities in 96 countries. Zara also has online stores in 24 countries
as mentioned in the article.
Key Products
Affordable fashion that is constantly changing as the needs and tastes of their customers change — fast
fashion.
Generic Strategy
Zara is pursuing a focus strategy. Their focus is on a particular type of customer who is interested in
fashion. This is a single customer segment of the total market for the industry. Their source of competitive
advantage is differentiation. They tailor their products to the needs and tastes of their customers, supplying
quick responses to changes in taste and fashion that are affordable and ’disposable’ as tastes, needs
and trends quickly change. Their product changes happen on a much quicker turnaround than their
Pdf_Folio:533

competitors —they create new designs and get them in the stores in a week or two, compared to most
fashion brands (which take up to six months to supply).
Evaluation of Success of Zara’s Strategy in Securing and Maintaining a
Zara has been immensely successful in maintaining their competitive advantage with their focus strategy.
This has been shown in a number of ways.
• The size of the business has grown quickly. Zara was founded in 1975 as a family business and has since
expanded to 2266 stores in 96 countries plus 24 online stores (as mentioned in the article). Zara is one
of, if not the most, successful fashion retail brands in the world. It is the world’s largest fast fashion
retailer.
• Zara appears to have been very profitable. One of their founders, Amancio Ortega, is the sixth richest
man in the world. The article points to significant investments made in the business, such as their highly
efficient and automated logistics system.
• Zara’s success has come despite the fact they use almost no advertising. Only 0.3% of sales is spent
on advertising, compared to an average of 3.5% spent by their competitors. Their founder, Ortega, has
never spoken to the media nor personally advertised Zara in any way. This points to the success of their
products in satisfying the needs of the customers rather than through branding or persuasion.
• Further evidence of the success of Zara’s customer-centric focus strategy is their customer’s repeat visits.
While most retailers may expect a shopper to visit their store three times per year, Zara’s shoppers visit
17 times per year. This shows the success of constantly changing inventory that follows the needs, tastes
and trends of the fashion items.
QUESTION 3.13
The vision for Genetic Technologies is:
to be a world leader in the development and commercialisation of genetic risk assessment technology.
The article talks about the focused differentiation strategy that Genetic Technologies follows to achieve
that vision.
The BSC should be constructed in order to link the objectives of the different perspectives of the
organisation to achieve the vision and strategy. The objectives should have measures associated with them
for the organisation to monitor their achievement.
The following is a suggestion for some objectives and measures that could be selected by Genetic
Technologies, based on the information in the reading. Note that many measures are indications of the types
of measures that should be thought about rather than specific measures that would be easy to implement.
There could be many other objectives and measures that would be suitable.
Financial Perspective
Objective: Earn sufficient revenues to cover operating costs, fund R&D and commercialisation costs, and
a reasonable return to shareholders:
• revenue growth
• net profit growth
• share price.
Customer Perspective
Objective 1: Improve the testing experience for patients:
• feedback from patients on comfort, time in clinic and pre-test information
• average time taken between test and result
• number of different test types available.
Objective 2: Improve the accessibility and convenience of test ordering for physicians:
• number of sales staff visits to physicians
• feedback from physicians on ease of process and company support
• percentage of marketing/training/information plan timeframes met.
Internal Perspective
Objective 1: Maintain laboratory facilities to a very high standard:
• percentage of appropriate accrediting bodies are accredited with
Pdf_Folio:534

• number of accreditations renewed
• expenditure on new laboratory equipment.
Objective 2: Become a world leader in the commercialisation of genetic assessment tests:
• number of patents applied for and granted
• time taken from patent to production process in place
• number and size of distribution channels in place for launch
• timeframes met for pre-launch, launch and post-launch marketing plans executed.
Learning and Growth Perspective

Objective: Maintain world leadership in research and development of genetic assessment tests:
• expenditure on R&D projects
• number and quality rankings of published research articles
• number and quality rankings of conferences attended
• number and quality of research partnership projects
• number and stages of new test developments.
Given the information provided for Genetic Technologies, it seems that the company would have
performed very well on measures in the learning and growth and internal perspectives. They appear to
be a leader in R&D and bringing their products to market as they have two first-to-market genetic risk
assessment tests available. Their laboratories are also at a very high standard. The launch aspects of their
internal perspectives may not have performed so well, given the poor revenue results.
They do not appear to be doing well on the customer perspective, given the lack of sales revenues.
The time taken for results and the accuracy of the results are positive aspects of this perspective. The
poor revenues may be a result of poor performance in getting physicians on board to order the tests, or
physicians being unable to convince their patients of the need.
The organisation is performing very poorly on the financial perspective given their continued losses and
very low share price.
QUESTION 3.14
Please note that the following tests are not evaluating whether these key success factors are important or
not. We have already advised that they are very important and critical to the success of any organisation
in this industry.
What we show in this table is whether Platinum has achieved strategic capabilities in those key success
factors.
Key
success Platinum’s Valuable to the Difficult to imitate or Non- Strategic
factor position customer? Is it rare? replicate? substitutable? capability?
Yes No No Yes No
Having It has two Pharmacies require Major Having links with At the Platinum has
links with contracts a choice of many industry suppliers is required moment in the same
suppliers with major different types of competitors in order to enter the the industry, access to
(i.e. manufacturers ethical, OTC and TPC have market as opposed there are no manufacturer
manufac- for direct products, which are contracts to it being a point substitute products
turers for distribution made by different as well. of differentiation. capabilities as other
supply of and several manufacturers. Platinum has to that could wholesalers.
product) under have links with achieve this It is in
negotiation. manufacturers to key success no better
supply their products factor. position than
for distribution. There any of its
can only be a point of competitors.
difference between
other suppliers if
there are exclusive
supply arrangements
in place.
(continued)
Pdf_Folio:535

(continued)
Key
success Platinum’s Valuable to the Difficult to imitate or Non- Strategic
factor position customer? Is it rare? replicate? substitutable? capability?
Having Platinum Customers expect Major The strict criteria and At present, It has less
an does not their distributor to competitors rigorous procedures physical coverage
extensive have national supply to all locations are in all to obtain a license delivery than its main
distri- coverage nationally, as this states makes it difficult for across a competitors
bution (unlike is the service they and have new entrants to set wide range that have
network the major currently receive. extensive up. of areas is national
competitors). However, not all distribution However, existing essential. distribution.
It does not customers are networks. competitors can This cannot Platinum
service national and other (and have) negotiate be replaced has the
hospitals, only suppliers can provide their own distribution by a same direct
retail outlets. products to fill networks. substitute distribution
any gaps in range capability. contracts
and geographic as other
coverage. Although wholesalers
Platinum does not have with
supply nationally, other manu-
this does allow it to facturers.
provide a personal
and geographically
focused service that
other providers do
not.
Having Has pick- Allows for quicker Full-line While in theory pick- No At the
cost- to-light order picking and competitors to-light technology alternative moment,
effective technology fewer errors than use manual can be implemented or substitute Platinum
distri- and low using manual labour. labour to pick by others, the cost to to a cost- is the only
bution infrastructure Platinum agents orders, so are implement has been effective company
operations costs. are not trained likely to make prohibitive for major distribution with a new
Relationships in knowledge of more errors competitors to date, is currently and efficient
with pharmaceuticals. when fulfilling so Platinum is the available. order-picking
manufacturers Less training costs for orders. only competitor with technology
allow use of Platinum. Platinum pay this technology. and lower
manufacturers’ commission Difficult to change fixed selling
These plus fixed costs that
representatives costs for sales only on sales. existing arrangements
to provide Competitors for sales staff. provides it
reduces the cost with a cost
advice to retail base so that higher pay salary
pharmacies. package advantage
discounts can be (through
Sales agents offered to customers. which
Increases efficiency).
are paid a 2% This
commission their fixed
only for ethical costs. advantage
and OTC sales will remain
and 10% for in place
TPC. until others
implement
the same
technology.
On the basis of the analysis of Platinum’s position against the key success factors for the industry, the
only strategic competitive advantage that Platinum currently has is in relation to a cost-effective distribution
operation. Platinum has pick-to-light technology, which gives it a lower cost structure compared to its full-
line competitors. They also have lower fixed selling costs than their competitors. This allows Platinum to
offer higher discounts to pharmacists, which assists in gaining market share. This strategic capability is
likely to remain in place until its competitors implement the same, equivalent or even better technologies
to achieve efficiency gains and cost savings in their operations.
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QUESTION 3.15
The Genetic Technologies SWOT analysis can be summarised as follows. SWOT items are in bold and the
points underneath are evidence for the classification from the reading.
Leading market position History of operating losses

• First to market with a genetic test for breast • Weak financials
cancer risk • Still not yielding return from R&D
• Now up to 3rd generation breast cancer risk test • Needed recent capital raising to continue
• First to market with colorectal cancer risk test • Low and decreasing revenues
Focused R&D • Revenue has declined from AU$5 million in 2014 to
• Current products’ successful R&D AU$25 500 in 2019
• Type 2 diabetes and cardiovascular risk tests
currently in validation
• Melanoma and prostate cancer risks in pipeline
Highly accredited laboratory
• Among the first of its type accredited by NATA
(Australia), Royal College of Pathologists of
Australia (RCPA), Clinical Laboratory Improvement
Amendments (CLIA) (the US) and International
Organization for Standardization (ISO) (Europe).
Growing acceptance of genetic testing for risk of Increased competitive pressures

cancer • Major pharmaceutical and biotechnology companies
• Moving into healthcare mainstream could launch products that make Genetic
Rapidly ageing population Technologies products uncompetitive or obsolete
• More referrals as people age Stringent government regulations
Incomes and health consciousness increasing • Genomic testing in its infancy yet already highly
• Individuals willing to self-order and pay for testing regulated. Failure to comply can cause serious delays
to market or cancellation of permissions
QUESTION 3.16
Remote Environment — Business Strategy
Genetic Technologies’ current business strategy of funding their own R&D to generate intellectual
properties in genetic risk assessment testing for disease is consistent with the remote environment trends
of increased demand for these kinds of tests. The increase in demand is from greater acceptance of this
kind of testing, ageing populations requiring more tests, and increased individual interest and incomes to
order their own testing.
Industry Environment — Business Strategy

The threat of new entrants to the industry is low given the high price of building and accrediting
laboratories, the heavy regulation, and finding highly skilled staff. These difficulties give suppliers some
power — it is hard to tell the extent from the information given. Genetic Technologies already have a well-
regarded laboratory. Buyers are mostly doctors and also individuals, and it is possible they have relatively
high power. These are risk assessments — preventative rather than remedial — and therefore discretionary.
They are currently in 20 centres in 8 US states. Currently there are no substitutes for the tests. Profitability is
likely to be medium, at least until genetic testing takes off further and becomes regarded as more essential.
This is not consistent with their current strategy, as their R&D and commercialisation strategy requires
high returns if they are the exclusive sellers of the technology.
Key Competitor — Business Strategy

Genetic Technologies is a leader in the development and commercialisation of genetic testing. They were
first to market with the breast cancer risk assessment and are now on their third refinement of the product.
They are first to market for the colorectal cancer genetic test. Their accuracy of test results are consistently
very high and their turnaround times are superior to stated requirements. Their leading market position
gives them an advantage over their competitors.
Pdf_Folio:537

Business Strategy — Key Stakeholders
Genetic Technologies current strategy of R&D and commercialisation of their intellectual property are
likely to be consistent with the CEO and Chief Scientist stakeholders, if their expectations are to be working
at the cutting edge of an area of biotechnology.
Shareholders are likely to find the current business strategy as inconsistent with their needs, given the
poor financial performance. Staff may find that the strategy does not meet their expectations, given the
financial performance of the company. Customers are likely to find that the current strategy is meeting
their expectations for reasonable, important risk assessments. This will be helped by the price reduction
in 2011 from US$3000 per test in 2011 to US$249.
Business Strategy — Strategic Drivers

Genetic Technologies is currently focused on the US market, given the size and affluence of the market
there. They are offering their own intellectual property products and are using a focus strategy as there is
a single segment of the market they are focused on — clients who have an interest in particular types of
cancer risk assessment. Their products are strongly differentiated from others in that they are the first to
market with their new genetic risk assessment tests: they appear to have a competitive advantage, at least
for now.
Business Strategy — Performance

Genetic Technologies’ current strategy of R&D and commercialisation of their intellectual property has
performed well, in terms of having focused R&D that has produced commercialised products such as
GeneType for breast cancer and colorectal cancer.
However, the strategy requires high returns if they are the exclusive sellers of the technology. They
have consistently made significant losses since the data shown from 2014. From this viewpoint, it is not
consistent.
Business Strategy — Capabilities

Genetic Technologies’ current strategy of R&D and commercialisation of their intellectual property is
consistent with the capabilities. They have proven that they can develop and bring new innovations to
market. Their ability to sell their products, or possibly convince the market of their need for the products,
is questionable given their revenue performance.
Overall, the current business strategy is consistent with their current situation except in the all-important
area of delivering financial returns to them. This is extremely important because it will be impossible for
them to continue in the long run unless they can properly monetise their R&D.
QUESTION 3.17
CBA mentions four different stakeholder groups in this slide — Customers, Our People (their staff), the
Community and Shareholders.
Given the order of the stakeholders listed, it would appear from this slide that CBA have a stakeholder
view of the business. They give precedence on this slide to their customers. This looks as though they
are important to the bank — and given their customers are a significant percentage of the population and
economy of Australia, they would seem to be very important indeed.
They give second-billing to their staff, who would also be regarded as very important in the stakeholder
view. The community is next and last in the list is the shareholder–owners, whose interests in the
profitability of the bank are more likely greater than that of the other groups.
However, this is slide number 34. Preceding this is 33 slides of financial results of significant interest
to specific groups — the other financial institutions such as those mentioned, who are both suppliers,
customers and shareholders of CBA. The leadership group of the Managing Director, CEO and CFO meet
key stakeholders, such as their largest shareholders and investors, for individual briefings prior to the event.
It seems from this evidence that they have a greater focus on their shareholders than might be surmised
from looking solely at slide number 34.
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MODULE 4
QUESTION 4.1
Based on the Ansoff matrix, growth within existing products and markets is market penetration.
Contribution to achieving growth within existing products

Strategies and markets
• Working with landlords to reduce • This is a strategy to reduce costs and achieve higher sales per
Myer’s footprint, with a target of a square metre of retail space they lease, which would result in
5–10% reduction in gross lettable area improved performance. It also includes exiting space that is
(GLA) and the possible closure of some not achieving satisfactory returns (in the context of the overall
stores performance of the space that they lease across their store
network).
• Refurbishing some stores to transform • This is a strategy to try and attract their current customers to come
the customer experience to the store more frequently (as well as attract new customers).
There are similarities here to the Zara approach described in
example 4.1.
• Rolling out of new and ‘Only at Myer’ • This is a strategy to try and attract their current customers to come
brands, with more than 90 new brands to the store more frequently (as well as attract new customers), by
to be added having products that can’t be purchased anywhere else. There are
similarities here to the Zara approach described in example 4.1.
• Having a significant increase in • This strategy could be described as a mixture of upselling and
products available online, including the cross selling. By having more products available online, Myer
addition of several new concessions would be hoping that it will sell more to online shoppers and
possibly attract store customers to use its online channel.
• This strategy also attempts to better leverage and improve the ROI
from Myer’s investments in e-commerce systems and processes.
• Expanding the most successful brands • This is a strategy of optimising the use of available store space
to additional stores across the Myer by stocking products that they know sell well, will turn over more
network quickly and are also less likely to need to be discounted, with the
intention of improving margins per area of retail space they lease.
• Exiting of non-performing brands • This is an exit strategy — removing some products/services that
have been identified as unprofitable as part of the organisational
performance analysis.
• Investing for improvement in the online • This investment is to improve an existing channel/market where
platform their current customers shop. It would also aim to grow their
market share/concentration of online shoppers.
• Lowering promotional markdowns and • This strategy involves two approaches: exiting non-performing
better management of shrinkage brands (which are likely to be the major contributors to the need
to discount and mark down stock) and expanding more profitable
brands (both previously discussed).
• Shrinkage is stock loss and/or theft — putting in place strategies to
deal with this this would improve Myer’s performance immediately
if successful (and the fact that it is a stated strategy suggests that it
is an issue for them).
• Furthering reductions in supply chain • This is an example of changing distribution channels for products
costs and centralisation of distribution and services (e.g. removal or replacement of under-performing
supply chain partners) to achieve efficiencies that would be
expected to reduce costs and therefore improve performance.
• Having a disciplined focus on inventory • This is another efficiency strategy and is implied in some of the
management other strategies previously mentioned (e.g. focussing on high-
performing brands and existing non-performing brands. implying
better turnover and better management of shrinkage).
Pdf_Folio:539

QUESTION 4.2
According to the PDMA, a new product is generally defined as:
a product (either a good or service) new to the firm marketing it. The definition excludes products that are
only changed in promotion.
It could be argued that Cadbury has introduced a new range of chocolates that is sufficiently different
to their core range to be classified as new product development. However, some of the chocolate flavours
will only be available for a promotional period, and the PDMA definition of new product development
excludes products that are only changed in promotion.
New product development could also be supported by the fact that Cadbury is expanding the
product/service line by adding different flavour options to the current options on offer.
Alternatively, market penetration could be argued on the basis that new chocolate flavours will be sold
alongside the core range, so they are just new flavours, and not new products, and they will sold to the
same customers (who might buy more through upselling, which is a feature of market penetration) through
the same channels.
On balance, even though some of the flavours will only be offered during a promotional period, there
is strong evidence to suggest that the new flavours represent a new product, although either could be
successfully argued.
Getting the classification ‘right’ is not the point. Rather, thinking about the options and what is needed,
and the possible risks associated with successful implementation is the key consideration for organisations.
The risk for Cadbury is that the new flavours will not increase overall sales of their products (e.g. customers
might still only buy one flavour from the increased choice available) or that some of the flavours will not
be successful.
QUESTION 4.3
Using the Ansoff product/market matrix classifications, you could classify the original iPod, iPod nano
and iPod touch as follows. Even though the new models (nano, shuffle, touch) are all called ‘iPod’, it seems
more appropriate to classify them as new products. Although they are still portable music players, they
differ considerably from the original version.
However, classifying the classic model is a bit trickier. You might argue that the classic model is the
same product, even though newer versions have been released, because the concept has remained virtually
unchanged. Alternatively, you could argue that it is a new product because the latest version is so different
from the first one released in 2001 in terms of its look, feel and features, as well as the significant changes
in technology. As a result, you could use either classification as long as you logically and clearly link it to
the product being analysed.
QUESTION 4.4
Details of the key actions Disney took for its new streaming service compared against each of the generic
new product development process steps are as follows.
Step Description Disney key actions Evaluation of Disney’s key actions
Generating and Generating product In terms of the new product Disney was aware of the success of streaming as a
capturing ideas ideas is the first development process, the media channel as it had been licensing its content to
step for most concept was to offer their Netflix.
product development own streaming service Creation of content is core business and a key
processes. What which would be launched strength for Disney — it includes Marvel Studios,
possible responses to coincide with the expiry Pixar, Lucasfilm, National Geographic, and of course
are there to the of their license contract Walt Disney Pictures and Walt Disney Animation
organisations with Netflix. Studios, which are all well-known consumer
SWOT? What are the products and brands. This portfolio provides Disney
consumers’ unmet with a library of existing content and a steady flow of
needs? new television shows and movies.
Having their own (well known) content would remove
a key risk that other streaming service providers face
— that is, having a supply of quality content.
Pdf_Folio:540

Screening ideas Once a number of No specific information It is likely that Disney had data about the relative
ideas have been provided, however the popularity of its media content from its licensing
identified, they idea of developing its own arrangements, as well as sales data from movie
must be evaluated streaming service had releases and data about the growth of streaming
against a variety of obviously been developing services. Netflix had created a market for streaming,
criteria, such as the for some time. As part of and this underpinned Disney’s strategy to develop
problem they solve its preparations Disney+ its own streaming service.
for customers, the had acquired control of
potential investment streaming technology
costs to develop the company BAMTech a
product, the fit with couple of years earlier.
the organisation’s It is not clear what other
existing strategy, the companies they may have
potential costs, and looked at as alternatives.
the profits and return
on investment on the
product.
Product This involves the No specific information Prototype development was left to the company
development development of a is provided as to what Disney acquired, as they had the capability.
working prototype was involved in the BAMTech’s office in Amsterdam was the head-
of the product, development of the service quarters for monitoring a trial of their streaming
transforming it from that was subsequently services, which would take place in the Netherlands.
a concept into a tested. This makes a lot of sense for market testing and
tangible product that integration, with the company making changes close
can be test-marketed. to the customer.
Test marketing Marketplace testing Disney made the service The approach Disney took provided a good test
helps to identify any available in the Netherlands market size to capture user issues (and several key
changes that need to in the form of a two-month pieces of feedback were provided to them through
be made features and free trial to study consumer this process).
price and to verify response and identify It also managed any risks that their system would
market demand. and solve any technical fail if they had used a larger test market population.
problems before the formal (Even where initial interest is high, problems in the
launch. early days of an online service can quickly destroy
The Netherlands market trust and positive sentiment).
provided Disney with the They also captured data about levels of usage to
opportunity to test the verify market demand, and used the opportunity to
service among a population let anyone interested sign up, which would have
with access to high-speed helped them work out who their key customer
internet and high familiarity segments would be and if there were any distinct
with the Disney brands, yet value propositions for those segments.
a much smaller population
Social media spread of the trial would have also
of users than in its home
affirmed demand and built awareness of the product
North American market —
to be launched.
there was little chance the
Disney+ servers would be The free trial concept with automatic conversion to
overwhelmed, no matter a subscriber was also a clever way of getting people
how popular the trial. to try their streaming service and become familiar
with how to use it, increasing the chance that they
Disney appears to have
would become paying customers.
offered the free trial to
anyone interested rather
than targeting specific
users or user groups.
News of the trial spread
quickly in the Netherlands,
both through conventional
and social media. As is
common practice with
free trials, trial participants
would automatically
be switched to a paid
subscription unless they
opted out before the formal
launch.
(continued)
Pdf_Folio:541

(continued)
Step Description Disney key actions Evaluation of Disney’s key actions
Launch Launching the Disney’s decision to test The test marketing in the Dutch market would have
product in the market the service in a smaller enabled modelling of the likely uptake of their
is the next step. This market reflects the streaming service in the US market (and other
involves making the importance to the company markets) and given them confidence to be able
product available of getting the US launch to price their service very attractively relative to
through the various right. competitor offers.
channels to market, Disney+’s launch price
ensuring that the in the US was about
product’s availability half the price of Netflix’s
is appropriately most popular package.
communicated to In Europe, the price was
all stakeholders and roughly equivalent to
marketing activities to Netflix. Disney made
make customers and various special deals
consumers aware of available for people willing
the new product and to sign up for longer-term
to generate demand. subscriptions.
Commercialisa- Commercialisation Disney announced that The roll out for commercialisation once the service
tion means taking the one day after the formal was launched in North America would have
successfully built, launch in the USA, Canada been fairly standard. It is assumed that some
test-marketed and and Netherlands, it had customisation would be undertaken for specific
launched product exceeded 10 million markets however.
and supporting its subscribers. A week later it
ongoing success launched in Australia, New
in the overall Zealand and Puerto Rico.
marketplace. By early 2020 subscription
numbers had grown to
close to 30 million. This
was expected to increase
substantially as the service
became available in 15
more European countries
and in India in the first half
of 2020.
After-sales This is support for Some technical issues These issues are limited, as they uncovered most
service the product in the have arisen, with some issues during the test phase. However, there could
marketplace. Service users needing to reset potentially be technical issues in markets that don’t
can include activities their passwords to gain have high-speed internet that they are not aware of
such as processing access and some users and that they will uncover as they roll out the service
returns and repairs, complaining that the in more countries around the world.
responding to episodes of some television
consumer enquiries, series are not presented in
providing training in chronological sequence.
product use. After-
sales service can be
expensive if there
are issues with the
product that haven’t
been identified or
resolved in earlier
stages.
Disposal/ The replacement, Not applicable Not applicable

recycling disposal and/or
recycling of products
is often included in a
‘cradle-to-grave’
approach in
the design and
development of new
products.
Pdf_Folio:542

QUESTION 4.5
The market research approaches that Cadbury would have used to introduce its new flavours of chocolate
are development and delivery, because these approaches are most useful where there is a prototype
product/service solution that has been developed.
The techniques they used could have included:
• focus groups (’What do you think about the flavours of the chocolate?’ in a group of people that are
considered to be the target market for the product)
• choice models (’Which one of the chocolate flavours do you prefer from the choices I am presenting
you with?’)
• surveys (’How do you rank the flavours I am putting in front of you/you are tasting?’).
QUESTION 4.6
They key feedback Disney received from the pilot revealed two threshold attributes and two performance
attributes that needed to be addressed.
The threshold attributes are attributes that customers would expect without asking. In this case, being
able to pause a show and resume viewing at the viewer’s convenience and being able to adjust the volume.
Both of these attributes are seen as standard inclusions with television viewing (streaming or otherwise);
customers are used to having and using these attributes and they would be annoyed if they weren’t available.
In terms of performance attributes, these are nice to have and are suggested by customers on the basis
of their experience with other products. However, their absence may not be a dealbreaker with respect to
someone subscribing. Performance attributes are almost always a solution that exists with another product
or service (whether indirectly or directly in competition).
For example, having controls configured similarly to Netflix is not a delighter, as the solution already
exists through Netflix (customers can only make suggestions like this because a solution does already
exist). On that basis it is a performance attribute rather than a delighter. This is a good suggestion as it
makes switching between and using services easier for the customer.
This discussion is summarised in the following table.
Customer feedback Kano classification Basis for classification
The service did not allow users Threshold attributes — Being able to pause a show has become a
to resume a movie or television Must-be’s standard feature of streaming services. It is
program from where they left off. If this attribute isn’t fulfilled, not the sort of requirements that a customer
If they paused or stopped part- then customers will be would state as they would assume that they
way through a show, when they dissatisfied. However, could do this. It is not something that would
returned they had to fast-forward fulfilment doesn’t increase differentiate a product or customers would
to find where they were up to. satisfaction. be willing to pay extra for.
Some test users gave feedback Threshold attributes — Being able to control the volume of a TV is
that the volume seemed too Must-be’s expected. It is not the sort of requirements
low, no matter how they set the If this attribute isn’t fulfilled, that a customer would state as they would
volume on their television. then customers will be assume that they could do this. It is no.t
dissatisfied. However, something that would differentiate a product
fulfilment doesn’t increase or customers would be willing to pay extra
satisfaction. for.
Another test user suggested the Performance attribute Without this feedback being addressed, this
recommendations algorithm (to Customers will be satisfied would be a major annoyance for customers.
suggest what to watch based on if this attribute is there This is particularly the case where they have
past viewing) was not as a good and dissatisfied if it isn’t an equivalent product or service (e.g. Netflix)
as Netflix’s. (e.g. kms/litre petrol that they are familiar with using by way of
performance from a car). comparison.
One user suggested to Disney Performance attribute Without this feedback being addressed, this
that it make its controls more Customers will be satisfied would be a major annoyance for customers.
similar to Netflix so that Netflix if this attribute is there This is particularly the case where they have
users did not have to learn a and dissatisfied if it isn’t an equivalent product or service (e.g. Netflix)
new way to interact with their (e.g. kms/litre petrol that they are familiar with using by way of
hardware in order to use the performance from a car). comparison.
Disney+ service.
Pdf_Folio:543

QUESTION 4.7
Customers purchase, hire and use products and services to get a specific job done, exchanging their time,
money or attention for something that has value for them. They key to developing a solution for these
customers is understanding their ‘jobs to be done’.
IKEA’s customers want contemporary furniture at affordable prices, and to be able to use and enjoy
that furniture in their own homes, recreating the showroom staging of their shops. Having to assemble the
furniture provides a hurdle or pain point between their purchase and enjoyment of their purchase, which
could be an insurmountable barrier to purchase for some potential customers.
While having to assemble the furniture partly explains the affordability of the furniture, by providing a
solution that is easy and affordable, IKEA is removing a pain point for the customers who do not want to
(or have the skills to) assemble their own furniture, but want the furniture.
QUESTION 4.8
There are many ways this question can be answered, but broadly speaking:
1. The service encounter is designed to provide an enjoyable shopping experience that brings customers
back time and time again through affordable fashion that rotates frequently (so fear of missing out drives
repeat visitation). This includes locating shops in the right places, helping customers choose what they
want to buy (supported by technology) and helping them buy either in-store or online.
2. Value is co-created through the interactions staff and customers have, sales data and other feedback
provided to the design team, and promoting customer promotion of the brand.
3. This is all put together (the sociocultural configuration) in physical and online stores with appropriate
staffing so that customers can access the product they want when they want.
Key points are summarised in the following table.
Service design
component What it is Zara’s components of service design
The service A focus on the experiences people • Locating physical stores where they are most
encounter have as they engage in interactions frequented
with touchpoints provided by • Providing the hottest trends at affordable prices
others, often organisations but and branded value of trend-right product at
possibly by other individuals appealing prices
• Providing reasons for customers to visit stores
— e.g. augmented reality technology so
customers can view images of models wearing
the clothing they are interested in by using
their mobile phones or engaging with special
displays in the store
• Securing sales even if products aren’t in store
— technology and mobile connectivity linking a
customer’s shopping visit and providing access
to inventory not present in the specific location.
• Investing in the workforce for positive staff
interactions in store
Value co-creating A focus on the dynamic exchanges • Leveraging customer social media and
system of resources and processes that customer input to create the customer as the
achieve outcomes for the actors Chief Customer Officer
involved, typically organisations but • Proactively capturing customer feedback and
possibly individuals responding to it through what is offered
• Analysis of what’s selling and being said on
social media platforms to inform products and
ranges, resulting in a highly curated product
environment offering scarce supply and new
styles that rotate rapidly
Pdf_Folio:544

Sociocultural How everything is put together, • Store location strategy — stores where the
configuration which emerges through the shoppers are
practice, providing interfaces • A highly engaged workforce and highly
through which everyone involved engaged interactions with customers
engages with the service and
service resources
QUESTION 4.9
Potential advantages and disadvantages, along with risks, of the proposed ‘outcomes based’ pricing model
are as follows.
Perspective Advantages Disadvantages Risks
Service • Quicker and easier to • Contracts vary in size and • The automated process
provider quote fees for service complexity and are not cannot be used on all
• Standardised contract standard agreements (e.g. ones that
between service • Contracts could have are not standardised)
provider and client complexity that can’t be easily • Other providers with lower
for service automated overheads could undercut
• Increases capacity • Easier contracts for review the price for some contract
to evaluate more provide training and types
agreements with development opportunities • Risk to service provider if
available resources for less experienced staff something is missed in the
• Easier for other organisations automated review process
to compete for this business that impacts client negatively
Client • A known cost the • Assumes contract has been • Risk to company if
client can budget for constructed as the client something is missed in the
• Generally expected intended in the first place — automated review process
to be a lower cost which may not be the case that impacts client negatively
service
• Fast turnaround if
contract is standard
QUESTION 4.10
The Clean Team followed the design thinking process, which is synonymous with human-centred design.
What the team did against the four key stages outlined in the Designing for Growth Field Book (Liedtka
et al. 2019) is summarised in the following table.
Prior to this, the project had been scoped and planned (as per the pre-work specified) with the goal
of developing a comprehensive sanitation system that delivers and maintains toilets in the homes of
subscribers.
Design thinking stage

(based on the Designing
for Growth Field Book) What this stage involves What the Clean Team did
What is Research and developing design • Extensive interviews

criteria • Interviews with sanitation experts
• Shadowing a toilet operator in their work
• Analysis of the history of sanitation in
Ghana and what had happened previously
What if Coming up with ideas based on • Capturing requirements for what toilets
design criteria identified from the needed to look like and how waste should
outputs of the research be collected
• Brainstorming with its partners and
everyday Ghanaians
(continued)
Pdf_Folio:545

(continued)
Design thinking stage
(based on the Designing
for Growth Field Book) What this stage involves What the Clean Team did
What wows Surfacing assumptions and • Building a handful of prototypes and

coming up with prototypes modifying existing portable toilets
• A live prototype of the Clean Team service
that was developed
What works Getting feedback and iterating • Got great results, went ahead with
prototypes to arrive at a solution manufacturing, and as of 2012, the toilets
to be implemented are in production
QUESTION 4.11
This question is asking you to translate the figure into the Eliminate–Raise–Reduce–Create grid. Create
factors of competition are on the far right of the figure, as they did not exist before.
Eliminate Raise
• Corrosion • Price
• Environmental friendliness
Reduce Create
• Maintenance costs • Aesthetic design
• Fuel consumption • Customer friendliness
QUESTION 4.12
Zara has a highly evolved data infrastructure that allows for efficient analysis of what’s selling and being
said on social media platforms. This data is used to improve various aspects of the business from product
offerings to service enhancements. This two-way communication between the customer and Zara allows
for continual improvement of products and services.
QUESTION 4.13
It is assumed that DiDi’s main objectives for entering the Australian ride share market are to achieve market
penetration and development, capture market share, and to learn how to operate in Australia (as they are a
Chinese company).
Based on the interview, the decision not to enter larger cities such as Sydney was on the basis that they
wanted to ’gain an intimate knowledge of the market before expanding rideshare services nationwide’.
Geelong was chosen as DiDi’s first Australian market, largely due to it having the highest ridesharing
penetrations of any city in Australia at the time (2018). In other words, the population in Geelong was
using ridesharing more than anywhere else in Australia. DiDi has since become available in Melbourne,
Newcastle, Brisbane and the Gold and Sunshine Coasts, south and north of Brisbane.
The following table summarising DiDi’s market entry objectives has been adapted from table 4.15.
Considerations Objectives Enablers
Market Resources Learning Coordination
Expectations Capture market Learn to compete

share in Australia (they
are a Chinese
company)
Key performance Growth Supply access Development of a

indicators (KPIs) Market share (approved localised mobility
drivers) solution
Pdf_Folio:546
Timing Follower

Type of locations High penetration of
(in Australia) rideshare users
Not mainstream cities
Mode of entry Wholly owned

subsidiary
QUESTION 4.14
Ultimately, a franchisor will have more control and influence over the standard of the product that is
produced and the marketing that is undertaken in relation to the product or organisation. Brand and
product consistency is assured with franchising agreements and so the organisation’s reputation can
be controlled by the ultimate owner. Franchising also allows for a more cost-effective operation as it
centralises purchasing and serves as a source of capital for the franchisor when new franchisees buy in.
In regards to licensing, although many conditions must be met by the licensee, it does not require the
same training, IT systems, recruitment methods and consistency across the range of operations (like there
is with franchising) that ultimately result in the success of the product.
Boost Juice has also expanded into international markets, something that is more easily achieved through
franchising as there is a more controlled environment. Therefore, the standard and the quality of the product
are more likely to be maintained through this expansion process.
QUESTION 4.15
International companies engage in an increasing number of strategic alliances, which they form to serve
different purposes. The primary purpose of an alliance can be:
• a means of entry into an unfamiliar market (as with a joint venture)
• a means of accelerating the learning of a new technology
• to share the R&D costs of new products
• to share marketing costs or distribution channels.
Multiple alliances are formed to cover every aspect of an international company’s activities where it does
not have the resources, capability or desire to do this alone. Even for large and well-financed companies,
there are too many opportunities, and technology is too complex, to be able to master every opportunity
as it arises. Alliances provide a network of support and capability that almost all companies value highly.
QUESTION 4.16
Coca-Cola’s acquisition of Costa has two main objectives.
1. To learn the coffee business through acquiring an already established competitor with a known brand
(in selected markets). Costa provides Coca-Cola with strong expertise across the coffee supply chain,
including sourcing, vending and distribution. This would speed up learning for Coca-Cola and reduce
risks associated with developing, growing and establishing their own coffee products and brands in the
global marketplace.
• Grow and develop market share. The acquisition provides the platform to leverage Costa’s already
substantial international footprint and expand their products and services into other markets where
Coca-Cola is already established, using the Coca-Cola ‘system’. Coca-Cola had identified coffee as
a growth opportunity, and also recognised it did not have capabilities in this area, hence the learning
objective from the acquisition as well.
2. Foreign Direct Investment (FDI) — Coca-Cola’s acquisition of Costa is a ‘brownfield’ acquisition;
that is, the acquisition of an existing overseas business. Costa has an international footprint, including
operations in China, Europe, Asia–Pacific, the Middle East and Africa.
3. Ansoff product/market matrix classification — this would be classified as related diversification on the
basis that while both the products (coffee products, vending machine products, home coffee products,
in-house roasted coffee) and the markets (coffee retail outlets and multiple geographic locations), these
are another type of beverage which is a core business for Coca-Cola and Coca-Cola already has a global
market presence.
Pdf_Folio:547

Diversification into new products or services and markets usually requires new or different capabilities
and/or resources or experience that the organisation does not have, and as such is higher risk. However,
acquisition of an organisation with the necessary capabilities to run those activities under the auspices of
Coca-Cola, removes substantial risk.
QUESTION 4.17
Oil is formed from organic materials that are buried deep within layers of rocks and that decompose in the
absence of oxygen to form petroleum. The organic materials are formed from the remains of plants and
animals that, over millions of years, have fallen to the floor of shallow seas and been covered by layers of
sediment (e.g. salt, sand, clay).
Supply chain
stage Description Capabilities required
Exploration Exploration of oil is conducted both on land Ability to collect data from potential sites
and on continental shelves across the world. Workforce skilled in the reading of geological
It is a very expensive exercise, as detecting data
oil deposits involves seismic surveys and Expensive equipment
the use of advanced technology (e.g. laser
and satellite).
Drilling Over the decades, drilling technology has Oil drilling equipment (technically advanced)
advanced greatly, allowing oil producers to Major capital access for setting up oil wells
access more deposits and thus resulting in and constructing pipelines
an increase in reserves. Engineering project management
Market development capabilities
Environmental health and safety compliance
Transportation After the crude oil is extracted from oil wells, Large capital investment in specialised
it is transported to the production units transport vehicles
through pipelines, train cars and large oil Import/export
trucks. Regulatory compliance
Environmental health and safety compliance
Refining At the production unit, it is processed Product development Industrial marketing

and refined into different products that Environmental health and safety compliance
include liquefied petroleum gas (LPG), Purchasing (spot market)
petrol/gasoline, jet fuel, kerosene, middle
Processing economies of scale
distillates including heating oil and diesel
fuel, residual fuel oil and asphalts.
Sale of petrol These products are then transported to their Distribution outlets (e.g. petrol stations)
actual points of sale, from where they are Environmental health and safety compliance
supplied to the eventual consumers. Consumer protection compliance
QUESTION 4.18
In your answer, you should consider factors such as the organisation’s familiarity with the target country
and any similarities or differences in the legal environments of the two countries. It is important to consider
the organisation’s existing business practices and how well they fit with those of the target country in order
to evaluate areas such as corporate governance and legal costs. Where there are distinct differences between
the two countries, the operating costs will be affected by the need to operate in the new environment.
It is also important to consider the internal capabilities of the organisation. Factors such as the availability
of qualified staff in the new operation can have a significant impact on operating effectiveness. Any costs
of recruiting and hiring qualified staff or relocating existing staff to the new operation should be included
in the establishment costs of the operation. This can be complicated by immigration laws regarding foreign
workers. It is vital to have suitably qualified staff in any organisation, particularly where issues such as
foreign exchange transactions, currency hedging or the use of new reporting requirements are relevant.
You should also consider any required infrastructure expenditure to establish the new operation. Where
there are variations between the systems in use, it may be necessary to purchase new hardware to operate
the venture. Additionally, there would be costs associated with training existing staff on any new systems
introduced.
Pdf_Folio:548

A further consideration is the taxation regime of the target country. Where the tax system is complex,
there is a need for an accountant with strong local taxation knowledge.
For any expansion strategy to succeed, it is vital that there be strong financial management. This is even
more important when the strategy requires operating across national borders.
The following table summarises the key accounting issues that need to be considered.
Accounting Issue Key consideration
Foreign exchange risks • If an organisation changes its operating strategy to incorporate online or
international sales or purchases, there can be a risk of exchange losses or gains
• When an organisation establishes a physical presence in a foreign country on
its own behalf, the process of consolidating local reports into the reports of the
parent organisation will reflect any exposure to such risks
• The introduction of exchange risk to the costing of a product can create
complications because it introduces an aspect of uncertainty to the production
costs
Preparing multiple sets of • Need to prepare and lodge multiple sets of accounts for different operating
accounts entities and in different jurisdictions
• May be a number of entities with different reporting dates and different
requirements
Incompatible IT systems • If an organisation uses a market development strategy of acquiring an existing

operation in a new market, it must factor into the acquisition cost any costs
related to necessary changes to the operation’s existing IT systems. Integrating
or combining systems could be costly and difficult
• Complexity is added when acquiring new organisations that use different
accounting packages from those used by the acquiring entity, especially if the
parent entity is trying to consolidate reports from different operating entities
Varying business conduct • All countries have their own independent legal systems with laws governing
standards business conduct in their jurisdictions
• A market development strategy requiring international operations must take into
account the legal requirements governing both its existing operations and its
planned international operations
Taxation • Taxation rates and compliance requirements vary significantly from one country
to another
• The differences in taxation laws between countries also require that an
organisation have access to a taxation expert which adds costs to the business
• The collection, reporting and payment of taxes adds a further level of complexity
to the operations of the organisation
Transfer pricing • Transfer pricing relates to the prices set for the internal exchange of goods or
services between different parts of an organisation (which may be in different
countries). All prices must be set at market value, and market value often
depends on the geographic location in which a given part of the organisation
is operating
• Many countries impose significant fines and penalties for breaches in this area.
Rules and regulations are in place to ensure organisations place proper values on
transfers, and these are strictly enforced
QUESTION 4.19
1. Win Win Parenting enters new markets in two ways.
• Direct selling to consumers who can access their training online from wherever they are located.
• Working with companies that deliver their programs on their behalf. It is assumed, as the approach
is not stated explicitly, that these companies license the use of Win Win Parenting materials and that
they would pay Win Win Parenting a proportion of the fees they collect for those services. Win Win
Parenting would keep all materials current and up to date.
There is no evidence that they have a physical presence in any of the markets that they export to.
Pdf_Folio:549

2. You would expect to see the following listed on the organisation’s IP register.
• Trademark for the business and its identity (name, logo) in each of the specified geographic markets
(United States, the United Kingdom and New Zealand) and for the relevant business categories where
they compete (e.g. education programs).
• Copyright for the materials they use in their training programs (may be several entries for the various
different materials they create).
The register would include details of when IP was registered, expiration dates and other relevant
information.
3. On the basis of the business model, Win Win Parenting should not have any accounting issues if it
specifies its fees and charges in Australian dollars. If it does charge in other currencies (e.g. US$ in the
US), then it would need to manage exchange rate risks and make allowances for currency conversion.
QUESTION 4.20
• Organisational leaders establish the mission, vision and goals of the organisation, which provide the
context for developing strategies related to development of products, services and markets. Any changes
to the organisation’s mission, vision and goals since Costa’s acquisition by Coca-Cola must foster a
culture that ensures everyone is aligned with the same mission, vision and goals.
• Leaders need to balance a series of competing priorities. They need to create a prioritised development
plan to consolidate existing Costa operations into the Coca-Cola business and then identify opportunities
for expansion that leverages each organisation’s strengths and capabilities to achieve the acquisition
benefits.
• Management must be able to make decisions around resources, budgets and performance metrics. Key
milestones and performance targets need to be set and monitored to track progress.
• Managers need to provide organisational systems and designs that support the innovation process.
Systems and processes need to be provided to enable everyone to access relevant information so that
they have the information they need to contribute to organisational development.
MODULE 5
QUESTION 5.1
Module 1 introduced a set of questions that can be used to assess the effectiveness of the way in which an
organisation has stated its vision. These are as follows (LSIS 2009, based on Kotter 1996, p. 67).
1. Does it convey a picture of what the future will look like? Yes, an elite sporting museum that will feature
the past achievements in sport, the present trends and athletes, and will envisage the future, and what it
may be in the world of sport.
stakeholders? It appeals to the long-term members as it recaptures the passion and the importance
of sporting moments, not just those that have happened, but that will happen in the future. Employees
can be excited by the prospect of a product that will continually evolve with time — with every new
moment created, a new feature will be added to the collection. Customers and partners are excited by
the second part of the vision, as it reminds us of the significance of sporting moments and achievements,
not just for sporting fans, but for individuals around the world; they become a story. It provides a sense
of importance to the organisation and what it does, not ‘just sport’.
3. Does it comprise realistic, attainable goals? To become an elite sporting museum featuring past and
present achievements, and indicating what the future may hold, is realistic and achievable. While the
overall vision appears to be realistic and achievable, there are no specific goals to evaluate in terms of
whether they are attainable.
4. Is it clear enough to provide guidance in decision making? The vision provides guidance on what
the organisation wants to achieve, and at a high level could assist decision makers in their response.
However, this is difficult to do at a more detailed level, where for instance a choice between two great
pieces of sporting memorabilia is needed due to funding restrictions. To a limited degree, yes, it can
guide decisions at a high level.
Pdf_Folio:550

conditions? The vision is definitely general enough to allow for individual initiatives to come through
and develop. There are always going to be sporting moments in time. The vision does not articulate
which are the most important, or how to best display them, it just illustrates the greatness of them and
how much opportunity in the future there is for more great moments to shape people’s lives. Therefore,
the vision is flexible, as it does not articulate the specifics of sport, just the general importance and
values.
6. Is it easy to communicate; can it be clearly explained in five minutes? Yes, the vision is articulated so
that it alone can describe what it is trying to achieve and envisage.
7. Is it ambitious enough to force people out of comfortable routines? This may not be evident in the
MOSM vision. Although the vision attempts to stress the great significance of sporting memorabilia
and achievements on individual lives (not just the athletes), it is not done through eliciting change in
people, or creating something so ambitious that it will force people out of their routines. However,
it could also be argued that the vision elicits emotions in people that may encourage them to behave
differently, or visit the museum, or change their attitude towards sporting memorabilia to be that little
bit more enthusiastic towards it.
QUESTION 5.2
The following goals could be added.
Technology goals
Customer Implement a social media strategy, whereby customers can interact with the
business and other consumers in a real-time environment.
Learning and growth Implement online training for employees to improve accessibility and convenience.
Internal process To enhance the museum experience, invest in virtual and interactive exhibitions.
Financial Invest in an automated financial and accounting system, such as Zero, to increase
the accuracy and efficiency of reporting.
QUESTION 5.3
As the core values of MOSM include pride, commitment, community, dedication and leadership, the
leadership executive may adopt the following practices.
1. Active listening and empathy to internal and external communities.
2. Ethical based leadership.
3. Availability and accessibility to all employees.
4. Strong sporting and business knowledge.
5. Be committed and dedicated to work activities and exude enthusiasm.
6. Offer encouragement through the hard times and offer rewards of success.
7. Foster camaraderie, trust and caring.
QUESTION 5.4
MOSM could benefit from technology, artificial intelligence and chatbots in the following ways.
• Real time answers to sporting-related history questions.
• Data capture of the most viewed and popular collections.
• Data capture of the least viewed and popular collections.
• Prediction of daily visitor numbers.
• Personalised experiences based on visitor likes and dislikes.
• Increased interactivity within collections.
• Enhanced visualisations.
• Improved visitor experience through real-time interactivity.
These benefits would position MOSM as a customer centric and innovative tourist outlet, and ultimately
improve its competitive advantage.
Pdf_Folio:551

QUESTION 5.5
The strategic options listed for MOSM align with the categories of strategic drivers as follows.
Strategic options Strategic drivers
Expand into the hospitality industry with a five-star Product and services competencies
restaurant attached to the museum. New product development
Position MOSM as a world-class sporting attraction Product and services competencies

and focus more attention on the domestic market. New market development
Maintain and develop the current collection as MOSM’s Product and services competencies
main product offering. New product development
Target full-priced customers, moving away from the Product and services competencies
reduced-price school group customers. New market development
Use social media to attract untapped customers. Operational competencies

Capturing customers through new channels
Provide a modern experience at MOSM through Operational competencies

interactive displays and digital edutainment. Building delivery through channel development
QUESTION 5.6
Possible impacts to the operational competency and organisational and people competency as a result of
Kmart’s new inventory system can be seen below.
Revenue
Possible increased
revenue from
increased turnover
Costs
Set-up costs,
Operational lever
ongoing fees and
charges
Growth
Possible groth if
system is
Strategic option successful
Strategic driver New inventory
Product/services management
system Structure
Unchanged or
reorganised
Skills
Additional
Organisational training, system
and people lever manintenance
Capabilities
Technological
capabilities and
logistics
management is
required
Pdf_Folio:552

QUESTION 5.7
In order to enhance the customer experience and increase consumer satisfaction, MOSM is considering
the investment into interactive displays. This option requires effort due to the large monetary investment
as well as installation time. However, this option will result in an enhanced and innovative customer
experience, which could lead to further customer attraction and increased sales. Thus, this option is likely
to be classified as ‘blood, sweat and tears’.
QUESTION 5.8
When you answer this question, it is important to refer back to the module to ascertain exactly what each
evaluation criterion is asking to be assessed. For instance, ‘size and value’ refers to the market, and how
much of the market that particular option can expect to capture.
You should ensure that the description for each criterion, as detailed in the module, is what you are
assessing. This will show through in the description of why the ranking was awarded to each option.
There are virtually unlimited possible answers for this question.
The allocation of points across the evaluation criteria can vary, as long as the sum is 100 points. Then
the scoring for each option against each criteria involves judgement. Different people may allocate scores
somewhat differently, though a general pattern should emerge.
Evaluation criteria Points Option 1 Option 2 Option 3
Decrease the discount Increase the number Review processes and

given on school group of volunteer hours, to procedures to make
admission prices. reduce costs relating to them more efficient.
full-time staff.
Size and value 20 May reduce the number More volunteers This option should
of school group visitors, provides more staff and increase size and value
particularly those allows MOSM to serve by enhancing efficiency
groups which are most more visitors. so that MOSM can
price sensitive; may handle more customers.
make more room for
non-school groups.
Growth potential 20 The expected decrease MOSM should be able More efficient processes
in school group to service more visitors set the future stage
attendance may make with more volunteer for growth but do not
more room for non- staff. The volunteer staff in themselves lead to
school group visitors; might have interesting greater growth.
otherwise growth is ideas about how to
limited if there are no grow the organisation.
new customers to make
up this gap.
Profitability 15 School group visitors More volunteer staff More efficient processes
may be less profitable may reduce the need should increase
than non-school group to hire additional paid profitability by cutting
visitors (in admission staff, thus limiting costs, if revenues are
ticket prices, but also some costs — although held at the same level.
in gift shop sales); volunteers may cause
a full audit should be additional costs
conducted here. There by needing more
could be some backlash coordination because
from regular visitors they work fewer hours.
about the new policies,
which are less friendly
to school groups.
(continued)
Pdf_Folio:553

(continued)
Evaluation criteria Points Option 1 Option 2 Option 3
Return on investment 10 Must conduct a Volunteers can provide The costs for the
thorough analysis of great benefits at process review exercise
costs (e.g. lost school reduced costs. should be lower than
groups) to benefits the potential long-term
(e.g. more non-school benefits.
group customers).
Internal rate of return 10 Consider the IRR Consider the IRR This IRR may be
(IRR) relative to the other relative to the other promising as the costs
two options. two options, likely to be may be particularly low
quite high. and lead to long-term
gains.
Distribution access 2.5 Could consider other MOSM must be careful There are no expected
routes to school groups, to develop long- issues here. The
perhaps early morning standing relationships analysis should certainly
hours before regular with volunteers for consider the links to
museum hours. access to distribution distribution.
channels.
Value proposition 2.5 Groups may have Volunteers may offer Offers a critical value
better-value options an excellent value proposition related
with other museums or proposition. to potentially greater
cultural activities. efficiency.
Capabilities 2.5 Certain new capabilities Volunteers will require May help the
may be required to more development. organisation to develop
offer a more hands-on new capabilities; some
experience to student capabilities are also
groups that pay a initially required to
greater amount. conduct the analysis.
Resources 5 People and time may May require some May help the
be needed to handle resources to grow organisation to develop
the new admissions volunteer base. new resources; some
outcomes. resources are also
initially required to
conduct the analysis.
Capacity 2.5 Thoroughly examine More volunteers Should increase

how this option will should increase overall capacity by improving
affect overall capacity capacity. efficiency.
of staff and MOSM
building.
Service 5 There may be Volunteers must be Should consider

unforeseen service thoroughly trained the need to provide
aspects linked to to provide customer highquality service.
reducing the prices. service.
Risks (including CSR) 5 There are potential risks Volunteers may not stay Potential risk of
of a backlash for not long. There is a need accidentally losing
providing a community for a full-time staff to some of the best
service. manage activities. components of
MOSM by focusing
on efficiency.
Total 100
Pdf_Folio:554

QUESTION 5.9
Candidates will need to think broadly and apply their own knowledge of risks in the workplace to answer
this question. Many of the risks will be related to costs; however, it is important to think about other
risks that are evident in developing strategies and implementing change (to be discussed in module 6).
Think about, for example, resources, culture, capabilities, performance, motivation, operating processes,
reputation and business continuity.
The following is a sample answer linked to the fourth strategic option identified in case study 5.1: MOSM
strategic options.
Target full-priced customers, moving away from the reduced-price school group customers.
School groups are the largest customer segment (45% of all sales). The large number of visits by this
group is what helped MOSM to achieve revenues of $8 million ($750 000 above expected revenues).
If MOSM pursues this strategy, the potential risk issue is that it they may not achieve enough growth
in adult ticket sales to cover the loss of revenue from school groups. There is also a risk that this decision
alienates or annoys the school groups. There may be a decline in revenues from this customer group and
MOSM’s reputation may also be harmed if there is a decline in customer satisfaction.
One consequence of this risk may be reduced revenues. We could estimate this to be moderate.
The likelihood will depend on the implementation skills of the group. This will be affected by skills and
available resources. We could estimate the likelihood as possible.
As such, the risk level would be high.
The mitigation action may involve a stakeholder management plan to ensure more adult tickets are sold
while maintaining strong relationships with students and school groups. The mitigation owner would be
someone with enough authority to properly evaluate and implement the mitigation strategy.
QUESTION 5.10
The ‘what-if’ calculation for McDonalds is shown below.
Value to the organisation = annual revenue × percentage return of organisational revenue
= 4 billion × 0.5
= 200 000 000

= 200 000 000 × 0.75
= 150 000 000
QUESTION 5.11
How does the business strategic theme fit with the Coles is in the ‘maturity’ stage of the industry life cycle.
industry’s life cycle? This initiative will ensure that the business does not enter
the ‘decline’ stage as many industries are moving to more
environmentally responsible processes.
How does the business strategic theme fit with trends With the rise of the threat of climate change, many
in the external environment that are influencing future businesses are choosing to invest in environmentally friendly
industry growth? (See the PESTEL model factors in initiatives.
module 2.)
How does the business strategic theme support As above.

emerging trends in the industry?
How does the business strategic theme fit with The majority of businesses throughout Australia are
emerging markets in the industry? investing in environmentally friendly initiatives so this
strategy aligns with emerging markets.
How does the business strategic theme fit with trends This strategic initiative ensures that Coles is managing its
in the external environment that are influencing future competitive rivalry and overcomes new market entrants.
industry profitability? (Porter’s five forces model)
(continued)
Pdf_Folio:555

(continued)
How does the business strategic theme fit in the As competitors are investing in similar strategic initiatives,
competitive environment? How will it change how the this strategy will ensure that Coles remains competitive.
organisation is positioned relative to competitors?
If the business strategic theme means entering Coles is not entering a new industry.
an industry that the organisation is not already in,
what impact will it have on competition and market
share?
How does the business strategic theme change the Dependent on consumer environmental concerns, they may
factors of competition in the industry? change their shopping preference based on the business’s
environmental initiatives.
How does the business strategic theme fit with industry This initiative supports industry regulation and control and
key success factors? innovation.
How does the business strategic theme fit with This initiative aligns with global markets are many industries
developments in global markets? are attempting to reduce their impact on climate change.
How does the business strategic theme change the Inbound and outbound logistics are enhanced. This initiative
industry value chain? creates value for the organisation, consumers and the
environment.
QUESTION 5.12
Typical questions to ask Comments
How does the business strategic theme fit with the The organisation wished to grow and compete against
organisation’s strategy? the market leaders, Telstra and Optus. This initiative
helps the organisation do so.
How will the business strategic theme contribute to Increased revenue and market size.
achieving the strategy?
How does the business strategic theme meet Increased shareholder revenue.
stakeholder requirements?
What impact will the business strategic theme have on Costs will increase, but so will revenue.
organisational revenue and costs?
What impact will the business strategic theme have on Products and services will need to be re-evaluated to
the organisation’s current products and services? suit new market needs and gaps.
How does the business strategic theme fit with the The current portfolio of products and services are
organisation’s current portfolio of products, services or appropriate, but they will need to be re-evaluated.
markets in development?
What impact will the business strategic theme have Brand equity should be enhanced.
on the organisation’s reputation and/or brand in
the market?
How will the business strategic theme change the Inbound and outbound logistics as well as marketing
organisation’s value chain? and sales will change.
What will happen if the organisation does not The merger will fail.
implement the business strategic theme?
Are there any reputation risks associated with the If the merger is unsuccessful, the brand equity will
business strategic theme? decrease.
Does the organisation have the capabilities for success These are massive companies merging together. They
in this strategic theme? If not, can the required have the capabilities to achieve such a merger.
capabilities be obtained?
Pdf_Folio:556

QUESTION 5.13
Are the cost–benefit projections for the business Cost-benefit projections are robust. The most important
strategic theme robust? What are the key assumptions dependency is that there will be huge monetary costs if
and dependencies on which they are based? the acquisition is not smooth and efficient.
What capabilities are required to implement the All capabilities are required. Officeworks operates
business strategic theme and does the organisation under Wesfarmers, so they certainly have the
have them? capabilities.
Can capabilities that the organisation does not have be Yes, as Officeworks operates under Wesfarmers.
easily sourced elsewhere to implement the business
strategic theme?
Do current staff have the skills to implement the Officeworks may have to invest in further training, in
business strategic theme and, if not, can the skills be particular, in diagnosing technological problems and
easily acquired? outsourcing this to the Geeks2U employees.
Has the organisation done something similar to this No.

particular business strategic theme in the past and was
it successful?
If the organisation wasn’t successful at implementing N/A.

something similar to this particular business strategic
theme in the past, what evidence is there to suggest
that it would be successful this time around?
Can the organisation access the capital required to Yes.

implement the business strategic theme?
What government or other support would the None.

organisation require to implement the business
strategic theme?
Does the organisation have the capacity to service Yes.

additional demand that the strategic business theme is
projected to create?
What are the key risks inherent in implementing The key risk is that the acquisition is not smooth
the business strategic theme and how can they be and efficient. Further, that the businesses do not
minimised or managed? complement each other and staff are not properly
trained and integrated into the organisation. To
minimise this, senior management must heavily invest
in training and creating a positive organisational culture.
What will be the impact on the organisation if the The acquisition will fail.
worst-case scenario of implementing the business
strategic theme is realised?
Does the organisation have the capability and Yes.

resources to implement the business strategic theme
in a timely way?
Are there some key decision points to be considered in Training and creating a positive organisational culture.
implementing the business strategic theme that mean Also, ensuring efficient internal processes.
investment and other risks can be minimised/man-
aged?
Who owns the IP associated with the business Wesfarmers owns the IP. Officeworks can operate it.
strategic theme and does the organisation have
freedom to operate with it?
Pdf_Folio:557

QUESTION 5.14
What will the business strategic theme deliver to the Diversity and quality of product lines. Enhanced
organisation in terms of benefits? customer retention and satisfaction.
What is it about the business strategic theme that will Diversity and quality of product lines.
be valued by customers?
What is it about the business strategic theme that will The Iconic sources products from thousands of budget
be difficult for competitors to copy? and high-end brands, which many competitors cannot
achieve.
What is it about the business strategic theme that will A large diversity of quality products.
make the organisation superior to what its competitors
are offering?
What will the business strategic theme deliver that is Both budget and high-end goods.
rare or unusual?
What is it about the business strategic theme that will Solid supplier relationships.
make it difficult for competitors to offer substitutes?
What is it about the business strategic theme that Market size.

makes it appropriate for this organisation, and not
another, to implement it?
Does the organisation have any unique competitive Investment into research and development. Efficient
advantages in its operations, systems and processes, internal processes and distribution of products. Skilled
people skills, research and development, marketing, employees and a superior organisational culture.
manufacturing equipment, intellectual property, etc.
that would enable it to succeed with this particular
business strategic theme where competitors would
fail?
What is stopping anyone else from implementing this Supplier relationships are already established with The
particular business strategic theme? Iconic.
How are competitors likely to react if the organisation Competitors may consider a similar strategy.
implements the business strategic theme?
Are there any reputation risks associated with the No.

business strategic theme?
Does the organisation have freedom to operate with Yes.

intellectual property required for the business strategic
themes in specific markets and, if so, which ones?
QUESTION 5.15
Questions Response
How does the business strategic theme fit with the The technology fits well with the industry’s life cycle
industry’s life cycle? as it moves to more environmentally responsible
processes.
How does the business strategic theme fit with trends The technology fits well with external environmental
in the external environment that are influencing future considerations for growth, particularly with regard
industry growth (PESTEL model factors)? to sustainability and sociocultural factors which are
driving changes in manufacturing practices. The use of
wheat straw (which was previously unusable) instead of
wood chips is very favourable.
Pdf_Folio:558

How does the business strategic theme fit with It will enable a competitive advantage over lower-
emerging markets in the industry? cost producers in emerging markets. It provides an
alternative to substitute paper and plastic packaging
solutions that have been developed by competitors.
How does the business strategic theme fit with trends It should enable products to attract higher margins and
in the external environment that are influencing future move the focus away from low-cost manufacturing.
industry profitability (Porter’s five forces model)? Technology provides the opportunity to radically
change the paper manufacturing process globally and
improve margins significantly.
How does the business strategic theme fit in the It will give a competitive advantage to the company but
competitive environment? How will it change how the could change competitor relationships.
organisation is positioned relative to competitors?
Overall Summary of External Consistency

The technology fits well with changes in the external environment where products that can be recycled
are seen as more attractive. Issues include tightening environmental and other compliance regulations that
place Australian manufacturers at a disadvantage to international competitors. Also, the reducing import
tariff rates make product produced more cheaply overseas attractive in price for local consumers, partic-
ularly in the lower-value product areas. However, it will change the nature of competitive relationships.
Questions Response
How does the business strategic theme fit with There is no evidence that this aligns with strategy, which
the organisation’s strategy? states that the company is aiming to:
‘Move from being a domestic paper manufacturer to

become a leading supplier of communications paper
and high-performance packaging, servicing a global
market. Organic growth is to be achieved by product or
marketing innovation and through a focus on sales and
marketing to leverage its brand strengths. Other growth
would be through acquisition, where acquisitions deliver
improved shareholder value.’
The company also competes on the basis of low cost and

this theme would probably change that.
How will the business strategic theme contribute The activities are being managed by a separate company but
to achieving the strategy? would enable expansion of the Paper Co. product range.
How does the business strategic theme meet Profitability will be squeezed for manufacturers as they
stakeholder requirements? have to comply with increasingly stringent environmental
regulations, increasing prices for energy and water and
the need to invest in high-cost plant and equipment to
keep manufacturing efficient and therefore competitive.
This technology addresses these issues.
What impact will the business strategic theme Impacts may include increased revenues from licensing the
have on organisational revenue and costs? product, reduced costs from implementing the technology,
and potentially higher costs from purchasing help to run the
licensing part of the business.
How will the business strategic theme change the Current competitors could become customers.
organisations value chain?
What will happen if the organisation does not A competitive technology could be developed, but at
implement the business strategic theme? the very least it should be used by the company itself.
Additionally, it will become more difficult to compete in the
industry because of increasingly stringent environmental
compliance requirements.
(continued)
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(continued)
Questions Response
Are there any reputation risks associated with the By implementing the new technology through a separate
business strategic theme? company structure, risks to Paper Co. are minimised. Key
risks would be technological failure.
Overall Summary of Internal Consistency

The theme is not internally consistent with the strategy as stated, but there are considerable competitive
risks if Paper Co. does not take advantage of the technology itself.
Feasibility
Questions Responses
What capabilities are required to implement the New capabilities are required, and they will need to be
business strategic theme and does the organisation acquired by the new company.
have them?
Has the organisation done something similar to No — this is a new business model approach (though
this particular business strategic theme in the past, it has been used and implemented successfully by
and was it successful? others).
If the organisation wasn’t successful at implementing Successful pilot plant trial, and trial with a competitor
something similar to this particular business strategic organisation (tissue manufacturer).
theme in the past, what evidence is there to suggest it
would be successful this time around?
Can the organisation access the capital required to The capital required to build the manufacturing plants
implement the business strategic theme? would be raised by floating part of the equity of the
new company, Enviro Technology Ltd, on the Australian
Securities Exchange.
Has the organisation got the capability and resources New capabilities (mainly skills-based) will need to be
to implement the business strategic theme in a timely acquired.
way?
Overall Summary of Feasibility

Overall, the successful pilot plant approach and the fact that the technology has been integrated into current
manufacturing operations imply that the technical risk aspects have been addressed. The financial risks
also seem to be covered through the capital-raising plan. Market risks are less clearly addressed. While the
company will require new capabilities to implement the business model, it should be possible to acquire
these capabilities, and so overall the concept and the model appears feasible.
Questions Responses
What will the business strategic theme deliver to the Access to new technology that addresses a number
organisation in terms of benefits? of external issues that are limiting the growth and
profitability of the industry.
What is it about the business strategic theme that will The environmental aspects — lower water use,
be valued by customers? no noxious emissions, use of wheat straw rather than
wood chips, fewer chemicals.
Does the organisation have any unique competitive The global patent and the pilot and other
advantages in, for example, its operations, systems manufacturing plant built to produce the product.
and processes, people skills, research and Integration into own manufacturing processes.
development, marketing, manufacturing equipment or
intellectual property, that would enable it to succeed
with this particular business strategic theme where
competitors would fail?
Pdf_Folio:560

What is stopping anyone else from implementing this Patent protection.
particular business strategic theme?
How are competitors likely to react if the organisation Develop substitutes or license the technology.
implements the business strategic theme?
Are there any reputation risks associated with the Limited, as the technology will be delivered through a
business strategic theme? separate company structure.
Overall Summary of Competitive Advantage

The competitive advantage is strong because of the global patent, but competitor reaction is difficult to
judge at this stage.
Overall Summary of Evaluation

While it is not currently internally consistent with the organisation’s stated strategy, the business strategic
theme is strongly consistent with the external environment and the issues affecting the industry’s future
growth and profitability. Given that these issues affect Paper Co.’s continued competitive position based
on its current low-cost strategy, it may be difficult to sustain this in the long term. Therefore, this theme
provides an attractive alternative. The organisation will require new capabilities, but the business model
is not new (having been applied elsewhere) so it should be possible to acquire the necessary skills. The
approach of establishing the technology in a separate listed company protects Paper Co. and its brand from
risks associated with technological failure.
Although the theme appears to offer a sustainable competitive advantage, more information would be
needed on the size and value of the proposed market — that is, how many target paper manufacturers
around the world are potential licensees of the technology?
This then leads to questions about the basis of charging license fees (e.g. turnover, employee numbers).
This needs to be carefully worked out as companies may be reluctant to reveal this type of information
to an organisation they see as a competitor. Questions then need to be asked about capacity to supply and
service the potential market and the implications for further investment in production capacity.
This information should be pulled together into a cost–benefit analysis with sensitivities to show best-
and worst-case scenarios and key strategies that can mitigate any identified risks.
QUESTION 5.16
1. Does it convey a picture of what the future will look like? Yes, a move into a new market for the future
and a new destination is identified.
stakeholders? The move appeals to the internal stakeholders; however, a strong case for the new
employees and customers in the UK is unclear.
3. Does it comprise realistic, attainable goals? To enter a new market and present what the future may
hold, the goals must be realistic and achievable. While the overall vision appears to be realistic and
achievable, there are no specific goals to evaluate in terms of whether they are attainable, and the article
suggests that there are difficulties with attaining new goals.
4. Is it clear enough to provide guidance in decision making? The vision provides some guidance on what
the organisation wants to achieve, and at a high level could assist decision makers in their response.
However, this is difficult to do at a more detailed level of how international market entry will occur and
how the differences in the new destination will be recognised and dealt with.
conditions? The vision is definitely general enough to allow for individual initiatives to come through
and develop. The vision does not clearly articulate the needs of changing conditions and environments.
6. Is it easy to communicate; can it be clearly explained in five minutes? Yes, the vision is articulated so
that it alone can describe what it is trying to achieve and envisage. This is not the issue with this vision
and venture.
Pdf_Folio:561

7. Is it ambitious enough to force people out of comfortable routines? It could also be argued that the
vision elicits emotions in people that may support the move to a new market and elicit a positive
response in shareholders; however, the lack of informative content in the vision may not support moving
stakeholders from a comfortable position on markets to a new market entry strategy.
Overall the article presents the new direction; however, it discusses how Bunnings’ new strategy was ill
conceived.
MODULE 6
QUESTION 6.1
Strategy: Wesfarmers’ strategy was to enter the UK homewares market by acquiring an existing business,
Homebase. Homebase stores would continue to operate as they always had until a pilot program involving
a small number of new Bunnings-branded concept stores had proven that the Bunnings format could
succeed. However, Wesfarmers removed the concessions and changed the product offering to Bunnings
style which attracted a more male target market, and alienated their female market. Further, this happened
in an uncertain macro environment (Brexit) and deteriorating UK retail environment.
Structure: The Bunnings entry to the UK market failed on many aspects of structure, including that
management did not follow the strategy and did not consult with local management to learn about the UK
market. The Wesfarmers ‘loose/tight’ operating model, which devolves great autonomy to business unit
managers while maintaining strict financial control from headquarters, meant having the power to deviate
from the strategy to try to meet financial targets. This meant a misalignment of the strategy of ‘hasten
slowly’ script and structure. This was compounded by the failure of Wesfarmers management to intervene
when the Australian management based in the UK began to deviate from the agreed strategy, which led to
further strategic errors.
Systems: Information flow was particularly problematic in that the Australian managers in the UK
abandoned the pre-set strategy and failed to consult with local UK management. This meant that they
failed to build an understanding of how the Homebase business worked. They also failed to analyse why
some converted Bunnings stores saw sales uplift of more than 50%.
Style: Style was a major source of failure in Bunnings’ UK entry. Sacking local management and closing
popular brand mini-stores (concessions) that were operating within Homebase stores meant Australian
managers failed to consult local UK management about the changes, thus alienating them with Homebase
employees. The ‘loose/tight’ model suggests the company’s slow roll-out plan was mismatched with its
tolerance around financial results.
Staff : By imposing unexpected changes, many of which were unpopular with customers and undermined
the existing Homebase business, as welll as sacking local management, staff were alienated from the
strategy, and this created poor employee morale.
Shared values: The Australian managers’ failure to consult with local UK managers, and eventually sack
them, alienated UK management and staff. Decisions and changes that were at odds with what customers
wanted and expected created poor performance and friction between the values of staff and management.
The failure to align the strategy and shared values meant Wesfarmers never discovered whether Bunnings
and Homebase could in fact co-exist on the basis of shared values.
Skills: The Australian management failed to understand the UK market. Further, they sacked the local
managers who could have provided insight. In doing so, they also alienated the staff and lost the alignment
of staff efforts with customer needs.
QUESTION 6.2
An evaluation of the suitability of each structural change given BP’s strategic goals at the time is as follows.
Component of organisational
Strategic goals at the time structure Suitability of the change
Increase return on average Complexity: Complex Suitable: it made each department

capital employed accountable
Formalisation: Not formal Suitable: the leaders had a broad scope

of work to implement strategic direction
Pdf_Folio:562

Centralisation: Decentralised Suitable: the decisions were made by
leaders to maximise returns
Focus on new energies and Complexity: Not complex Suitable: being able to consult with
future strategies other areas of the business would help
in implementation of future strategies
Formalisation: Formal Suitable: this ensured that there was

accountability on achieving the strategic
goals
Centralisation: Decentralised Not suitable: shifting central functions

to the business unit may mean that they
can’t focus on new strategies
Focus on meeting changing Complexity: Complex Unsuitable: high level of coordination

stakeholder expectations and communication about meeting
stakeholders’ expectations
Formalisation: Formal Unsuitable: there needs to more

flexibility around trying to meet
changing stakeholder expectations
Centralisation: Centralised Unsuitable: the stakeholders impact

each section of the organisation and
centralising the decisions takes the
emphasis off stakeholder decisions
QUESTION 6.3
An evaluation of whether the structure of LJ Hooker Home Loans is an organic or a mechanistic system
is as follows.
Case fact Mechanistic or organic Evaluation
Franchise offering Mechanistic system Because franchisees need to adhere

to franchise guidelines on systems,
branding and products
Branded LJ Hooker Home Loan Mechanistic system Franchisees need to brand their
stores businesses according to the brand
guidelines of the business
Only three funders Mechanistic system The franchisees can only use the three
funders that are in partnership with the
LJ Hooker Home Loans
Each franchisee having multiple Organic system Franchisee owners can recruit their own
loan writers staff to write loans
Entrepreneurs to grow the business Organic system Franchisees need to be entrepreneurial

which requires initiative and creativity
Processing all of its business Mechanistic system LJ Hooker Home Loans specifies where
offshore the loans are processed/internal system
Strategic partnership with Mechanistic system A partnership that has been specified
CoreLogic by LJ Hooker Home Loans provided by
the organisation
Using digital lead generation Organic system Digital leads can be used or not be used
by franchisees — it is their decision to
follow up or not
Consequently, LJ Hooker Home Loans uses a mixture of mechanistic and organic systems.
Pdf_Folio:563

QUESTION 6.4
Strategic difference Examination of how Zara have used their systems
Superior customer service Making more styles more frequently, enabling more choice for customers more
often as systems enable quick turnaround of designs
RFID enabled to provide clothes in high demand to customers faster
Fast fulfilment of online orders enabling deliveries quicker
Achieve competitive More fashionable clothes faster as the trend teams track bloggers/current
advantage trends, therefore able to produce fashionable clothes faster
Sophisticated technology systems to track trends back to head office
Inventory management allows Zara to produce garments efficiently, enabling

clothes to get to retail outlets quicker
Fast customer insights as frontline staff collect information to flow back to head
office to provide current information on customers
State of the art distribution management system reduces costs and increases
efficiencies in getting clothes to customers faster
QUESTION 6.5
The toxic culture of Swimming Australia affected the team’s performance for the following reasons.
• Inter-group conflicts within the organisation. Reports of bullying and team members focusing on their
own goals means that there weren’t any coordinated or supportive practices in place to assist with
performance.
• Ineffective communication. The issues were obvious but were ignored by key members of the team,
which implicitly condoned the behaviour which led to poor morale.
• Consensus on change. There wasn’t any team cohesion and individualism prevailed, which meant an
uncoordinated approach to the strategy of success.
• Consensus on criteria for measuring results. The swimming team held divergent views from the rest of
the Australian Olympic Team on what it meant to be part of the Australian squad at the Olympics. This
could have impacted the overall performance as there were wasn’t an agreed approach to measurement
of success as a team.
• Maintenance and change. The performance only marginally improved four years later at the 2016 Rio
Olympic Games, demonstrating a lack of maintenance in the team’s culture.
QUESTION 6.6
Compare Contrast
Message Delivery of a message from the top The style of the law firm partner’s message is
position of the audience. different as it is more formal in an annual report
rather than a blog by Richard Branson, which
reflects more light-hearted topics and a lighter
attitude.
Method Both communication methods are Blogs are more regular and able to change easily,
electronically distributed, which reflecting a more relaxed and easygoing approach.
enables wider distribution. Annual report is only once a year and doesn’t
change throughout the year, demonstrating a more
formal approach.
Pdf_Folio:564

QUESTION 6.7
An analysis of why Emerald Aged Care Group’s communication was successful is as follows.
Communication goals There was a specific goal to change the behaviour of the
organisation and it was very clear.
Communication audiences The target audiences were identified — both permanent and
casual staff members — as they were the key members of
staff who needed to change behaviour.
Emerald needed the team leaders to communicate the
strategy as well.
Audiences such as the families and senior management also
had an interest in the progress of the change strategy.
Key messages The message was targeted to the audience:

– staff needed to know ‘how the process would change and
why it needs to change’
– families needed to know if it improved the wellbeing of
their family member
– senior management needed to know the outcome.
As there was a very simple key message, it could be
understood quickly and easily.
Communication methods The communications methods were targeted to each

audience: team leaders communicated to staff; casual staff
received an SMS as they aren’t always at work; permanent
staff received communication in a different way as they are
more often at work.
Tactical communication planning The plan enabled a timeframe on implementation and

ensured key audiences were reached with the right methods.
This ensured more efficient and efficient delivery of the
communication.
Communication measurement and evaluation Regular results through feedback were being measured to
ensure the communication was reaching the audiences
and the audiences were understanding the message. An
overall evaluation was determined based on resident’s overall
wellbeing and staff feedback. This enabled the organisation
to monitor and control the methods and message to ensure it
was achieving its goal.
QUESTION 6.8
Nike’s shift to a more sustainable supply chain strategy can be considered a lasting change for the following
reasons.
• A compelling case has been clearly articulated. The worsening public perceptions due to the negative
practices of their suppliers were impacting sales and brand loyalty.
• A clear vision. Nike released the factory names that supplied them, which provided a clear vision as to
what the change was and how it would turn around the negative publicity and community concerns.
• A well-defined strategy. Nike did an audit that provided details of the strategyand what was needed to
create change. Nike also developed strategies around sustainability and compliance. Employees worked
across product groups, which meant they were embedded in different parts of organisation effecting
change.
• Adequate resources. Nike invested in field managers to monitor the implementation to ensure compli-
ance. Nike also invested in a global database to provide information back to head office to assist in
control and evaluation of achieving the strategy.
• Organisational/physical capability. Nike created a division that provided the skills to integrate the vision
into the organisation.
• Sufficient motivation. The brand image was at risk, which would impact loyalty, sales and future
reputation.
• Robust communication mechanisms. Nike conducted an external expert review, released the factory
names, and advertised its new transparency to demonstrate the new change strategy.
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QUESTION 6.9
Steps Key initiatives Analysis
Establishing a sense of Regan identified a communication Regan identified that there wasn’t a
urgency gap that QBE ’never really created defined purpose in the organisation;
a sense of what QBE was’. creating one provided the direction of
the strategy.
Forming a powerful guiding The chairman describes himself as Having a supportive Chair means that
coalition an inspirational leader. resources will be made available.
Leadership team instilled the The leadership team helps drive the
importance of improving on the vision throughout the organisation,
details. creating more opportunities for success.
Creating a vision To become a leader in customer A clear picture helps align the
satisfaction in the insurance organisation’s employees on where QBE
industry. are going and why they are creating
a clear path of the future, which aids
employee engagement in the vision.
Communicating the vision Regan has made himself relatable Regan’s behaviour demonstrates the
and accessible for employees vision and helps engage employees to
through a range of measures, want to achieve the vision too.
including a weekly video chat.
Empowering others to act, The business units have been Regan helped QBE’s business units
and eliminating obstacles given new resources to help them to achieve the vision by allocating
comply. resources.
Senior executive was given
responsibility for rolling out the
Brilliant Basics plan.
Planning for and creating There is now some sense of The sense of consistency across the
short-term wins consistency across operations world helps show employees that the
around the world. strategy is working and keeps them
engaged.
Consolidating Divestment decisions, with QBE By divesting, Regan continues to enact

improvements and selling its Latin American and change and improve organisational
producing still more change Thai businesses and exiting some performance that creates a positive
segments of the US market. financial and reputation effect.
Institutionalising new Changes are embedded in By anchoring them in the systems,

approaches systems, processes, policies and processes, policies and culture, more
culture. permanent change will be evident.
QUESTION 6.10
Change management ensures that strategy implementation is supported and an effective transition from
the current to the desired state is achieved. A change plan operates alongside the strategy implementation
process and manages the various change components related to implementation. Change operates at all
levels of the organisation, assisting employees, teams and the organisation to make the necessary changes to
implement and adopt the strategic projects to achieve the organisation’s vision. It also operates at different
stages of the implementation process to ensure that the change is managed. Integrating the change within
the organisation increases productivity and decreases resistance to the change, which is what the change
management process focuses on.
QUESTION 6.11
Project Reason Analysis
Business Intelligence project Initiatives wasn’t managed An emergent strategy changed the implemen-
as a central program tation plan and was therefore over budget
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New Products for Members No input from staff As there wasn’t any input from staff on how
project to resource the project, they didn’t engage or
prioritise their activities for the project
New Coursework for the Strategic project initiatives Needed to identify any external forces that
Future project weren’t realistic and would impact milestones, as well as test
achievable whether targets were realistic
QUESTION 6.12
Recommendations
Red status 1. Discuss with owners (SF, SW) to seek understanding of causes of the red status of
the project.
2. Determine if more resources are required to improve the status of the project.
Orange status 1. Create timeframes with owners to remedy status.

2. In conjunction with senior managers, reprioritise staff work to ensure status
improves.
QUESTION 6.13
External factor Examination
Australian Government’s reluctance to provide support This impacts the customer’s ability to charge their
for the roll-out of charging stations cars, therefore impacting on their convenience of use,
furthering their reluctance to purchase.
The cost of charging stations would also be put onto
the car company, increasing costs for the organisation.
Customer’s unwillingness to buy electric cars Unwillingness to buy electric cars due to a reluctance
to change would require a shift in the attitude and
behaviour of the customer to create a market for
the electric car. Therefore, this would create costs in
marketing to educate and change behaviour.
Demand in Europe for electric cars Higher demand in Europe would change the focus onto
this market as the demand is there.
QUESTION 6.14
Recommended non-financial KPIs Justification
Customer satisfaction Higher customer satisfaction leads to increased brand loyalty

and repeat purchases.
Higher customer satisfaction would ensure more ethical
practices.
Employee engagement Higher employee engagement would mean higher customer

satisfaction, less employee turnover, less absenteeism.
Environmental/sustainable practices More environmental responsibility by the organisation.
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QUESTION 6.15
Common pitfalls of strategy implementation Examination
Transforming strategic thinking into action Failure to put correct systems in place, leading to
inefficiencies and lack of good information.
Not focusing on building the business of MLC, meaning
that management wasn’t responding to market
conditions.
Failure of management to control business, thus
there is a misalignment between resourcing and
implementation.
Environmental uncertainty Regulatory conditions meant more resources required,

as well as a different type of skills and expertise.
Customers wanted a suite of business products;
however, there didn’t seem to be any proper research
into attitudes and preferences.
Financial downturn wasn’t managed effectively.
MODULE 7
QUESTION 7.1
Categorisation
• Brosa Studio’s business model has arisen because technology has enabled it.
• It is categorised as a transformation, because it is very different to traditional furniture shops.
Case facts and Justification

• Customers go to a website to buy furniture and homewares direct from makers here and overseas.
• They have just launched a studio showroom that does contain furniture pieces, like more traditional
furniture stores. However, no salespeople help unless the customer wants it. QR codes are used to bring
up prices, materials and dimensions of the item — and also to purchase it on the spot.
• The Studio allows customers to bring in a photo of their space and to convert it into a virtual room, and
then ‘try out’ different products in it. Can use a specific style or try different styles out. Do not have to
buy but can leave with a link to the list of items and take swatches home.
• Can ask staff questions over the phone, on Instagram, through online chat or email.
• When delivery is arranged, customers receive a text with a suggested delivery day and the customer can
reply with availability.
• Can log in online to track the driver during delivery, so the customer can reduce their waiting time.
• A service is available to deliver, assemble and take the packaging away.
Analysis of Value Creation

• This is valuable to the customer because the website and link to their wishlist is available online on
demand, and they can ask questions anytime.
• Customers have a better way of envisaging how the furniture might look in their room, and a better way
of tracking possibilities and alternatives.
• Customers benefit from less unproductive time spent waiting for delivery.
• Brosa Studio captures value through gaining market share of customers who value the benefits as above.
These are likely to be busy people who do not want to shop around and try to envisage different looks
and keep a record of the alternatives. Their online system means they do not have to hold stock and
warehouse items. Their showroom is new and they do have this amount of inventory to deal with only.
They have automated some of the salesperson’s tasks with the QR codes. They can track their customers’
online behaviour over the types of items on their wishlists and could customise their marketing to the
customer.
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QUESTION 7.2
In this instance, technological advancements in renewable technology form part of an ‘extension’
strategy for Orsted, allowing them to conduct their business in new ways, with the long-term view for
‘transformation’ replacing established ways of doing business. At this stage, Orsted appears to have made
green energy economically sustainable, meeting the needs of a number of key stakeholders.
Investors want to see a good financial return on investment. Orsted is an attractive investment, not only
for its strong growth, but also as a sustainable long-term prospect. Customers want to help contribute
towards climate change mitigation. Orsted helps them do this by offering access to sustainable energy,
although the case does not disclose whether that comes at a premium or not. Suppliers of renewable
technology and infrastructure will be benefiting from the redesign of Orsted’s business model as they build
new facilities and convert existing ones to help them reach their emission targets. The Danish government is
benefitting as Orsted’s initiatives have helped them to make progress towards their climate commitments
under the Paris agreement. Other countries and communities will benefit from Orsted’s investment in
offshore facilities. Society is benefitting from reduced emissions and a more environmentally friendly,
durable Denmark/world.
The stakeholders that might be negatively affected by this development include suppliers providing
traditional technology as well as employees skilled in the old technology, who might not be employable
in the new business model.
In conclusion, this case illustrates how goal alignment between key stakeholders, combined with
technological advancements, resulted in business model transformation for Orsted.
QUESTION 7.3
KEY PARTNERS KEY ACTIVITIES VALUE PROPOSITIONS CUSTOMER CUSTOMER
• Shipping companies 1. Merchandising of its E-commerce RELATIONSHIPS SEGMENTS
such as UPS, FedEx, digital and physical To provide an online • Best-in-class fulfillment Business clients
and DHL which provide goods. shopping platform that systems, allowing • Operate as retailers
shipping services for 2. Development, design offers and quickly customers on Amazon’s websites.
Amazon’s fulfillment and optimisation of its delivers a wide to receive their orders • Require closed services
process to ensure platforms. selection of goods, at within 1–2 days. and infrastructure.
timely arrival of 3. Manage supply chain competitive prices to • ‘Customer first’ service • Advertise on Amazon.
products. and logistics to ensure any person with an mindset regardless of
• Major retail companies quick delivery. customer segment. Retail clients
internet connection at
such as Nike, Best 4. Secure and build a their convenience. • Online/phone • Purchase products
Buy and Calvin Klein, partnership with its communication listed on Amazon.
Amazon Web Services:
who want to increase supplier and sellers. channels and built-in • Purchase Amazon’s
To provide cloud
their sales by selling on 5. Support the production support channels on subscription services
services, infrastructure
Amazon, consequently of movies or shows on Amazon hardware. (Prime).
and data strorage to
increasing Amazon’s its Prime video platform.
business clients in an
market presence. 6. Acquire new ventures to
agile, flexible, scalable
support its ecosystem.
and secure from.
KEY RESOURCES CHANNELS
• Shipping services. • Global distrbution
• Warehouses and channels through
fulfillment centres. shipping partners and
• Servers for AWS and fully streamlined
cloud services. fulfillment centres.
• Technological • Enormous online
infrastructure and marketing and
software engineers. advertising platforms.
• Fulfillment for other
retailers. indirectly
advertises Amazon.
• Online/phone
customer service.
• Investment in IT is essential to enable Amazon to continue to • E-commerce and fulfillment are low margin due to costs
operate on a global scale. related to warehousing and upkeeping fulfillment entries.
• Customer communication through their customer service centres • High margin revenue streams from AWS, advertising and
are a significant cost. subscription service.
• Well scaled and efficient fulfillment centre and processes allow for • Low upkeep and variable costs allow AWS, advertising and
optimised costs. subscription service to be the primary profit driver for Amazon,
• Large investment and fixed costs form when expanding Amazon despite being a significantly smaller revenue stream.
Prime to international markets.
• Building new fulfillment centres means investment is a key strategy
for Amazon.
• Comparatively lower costs for managing and upkeeping AWS servers.
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QUESTION 7.4
The value each player can bring to the development of the electric vehicle is as follows.
• Vehicle manufacturers: these are most likely to be the technological ‘spiders in the web’, bringing
together their expertise in traditional car manufacturing and suppliers offering renewable energy
solutions.
• Consumers: customers might ultimately not only buy energy, but also start to generate it, either while on
the move or at home. Consumer preferences shape the product and thus they participate in co-creation
of the product.
• Government agencies: given that the success of this ecosystem depends on network economics (i.e. the
more people make use of the system, the more infrastructure will be created, the more commercially
interesting it all becomes). The government can play a significant role in getting the ball rolling via
grants and investments.
• Investors: investment is needed in both the technology and the infrastructure. This can be supported
by government grants (as mentioned above) or motivated by commercial or social gains as consumers
demand greener transport.
• Urban planners: for full adoption of electric cars, charging stations will need to be available in car
parks, shopping centres and other roadside service facilities. This is especially poignant in countries
like Australia where cars often need to travel long distances. This size and scope provides particular
challenges to urban planners in our region, who have to balance current demand with future potential
and accessibility requirements.
• Renewable energy companies: their role is to look beyond energy production to include other infras-
tructure such as charging stations.
• Providers of charging stations (both electric and renewable): the value of these players is in enhancing
the possible range of electric vehicles. In the long term these players might become dealers in energy
(i.e. not only selling energy but also buying excess energy generated by customers).
• Software developers: for these players the quality and innovativeness of their solutions is going to
be key.
It is important to note that, in the above, little has been mentioned about the intrinsic rewards (more
motivated employees and suppliers) and social rewards (being societally recognised for sustainability,
thus enhancing a business’ reputation) relating to participating within the electric vehicle ecosystem. It is
very difficult to put a number on these rewards, but they can potentially easily surpass the extrinsic rewards
discussed above.
QUESTION 7.5
The impact of electric vehicles on the automotive ecosystem is as follows.
• Automakers. Automakers are realising that the surge is arriving sooner than expected, paving the way
for new internal power centres and external partnerships.
• Dealers. The dealer business model will undergo changes as electric vehicle maintenance costs are
expected to be lower than those of conventional cars.
• Suppliers. Powertrain-related suppliers will need to reinvent themselves to be relevant in the future.
• End customers. Customers prefer vehicles that are fun to drive and packed with the latest technology
and features.
• Government regulations. Governments may bank on electric vehicles to meet their climate change goals.
QUESTION 7.6
For the business, Audi provides business with a stable cash flow through a monthly fee. People may not
change their subscription but let it go on. Data ID is available about the customers: who the customers are,
who repeats, what they like, and can track trends such as preferences for SUVs, big cars or sports cars as
the trends emerge.
For the customer, there is more choice and freedom to consume goods when they want. Subscriptions
can roll on without having to make the effort of comparing cars, buying them, getting them serviced, and
so on. You can also get a more customised version, though this will take time.
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QUESTION 7.7
In the rational approach to strategy, it is assumed that one can develop and implement a good strategy by
working through a series of steps that follow one after another (as outlined in modules 2–6). Typically,
these steps involve a thorough analysis of the external and internal environments, before a new or revised
strategy is formulated and an implementation plan is created.
The traditional approach is less effective in situations of significant uncertainty, as the data is not
available for the analysis required. In this case, discovery-driven planning may be a better option.
The discovery-driven planning approach recognises that (a) environments continuously change and are
ambiguous, (b) it is very unlikely to obtain all the information that you will need for your strategic plan
and (c) what might have worked in the past, might not work in the current environments. As such, the
discovery-driven planning approach allows for trial and error, learning through experimenting and building
in flexibility throughout the strategy development process.
This table represents some of the core differences.
Rational approach Discovery-driven planning
The plan is judged by how close outcomes come to It is assumed that plan parameters may change as new
projections information is revealed
If a positive outcome is predicted it is reasonable to Funds are released based on the accomplishment of
fund an entire project key milestones or checkpoints
Uses project management tools such as stage-gate Traditional project management tools are not well
model which rely on a linear process suited for the uncertainty and iterative nature of
innovation projects and start-ups
QUESTION 7.8
Although design thinking was initially designed as a product development tool, the principles have been
adopted in relation to problem solving and strategy development. Like discovery-driven planning, design
thinking takes a non-linear, iterative approach to decision making, questioning assumptions and refining
solutions for continuous improvement. It relies on customer feedback and therefore requires significant
customer involvement. Subsequently, decisions are powered by a thorough understanding of the needs and
wants of customers, their likes and dislikes. The key advantage of taking a design thinking approach is the
ability for the organisation to convert strategic decisions into customer value and market opportunities.
QUESTION 7.9
Use a test market before launching to ensure the right features are offered:
• build the community first outside the crowdfunding platform
• when using crowdfunding remove ‘psychological obstacles’ by aiming for an achievable amount
• test different crowdfunding platforms.
QUESTION 7.10
The entrepreneurial strategy compass can be applied to BuzzFeed to determine their strategic options.
• Intellectual property. BuzzFeed created value within the existing marketplace by supplying news and
entertainment sourced from around the world to its subscribers, saving them time by consolidating the
most popular information from a wide array of other websites, and offering them a global perspective
to news and entertainment.
• Architectural. BuzzFeed added to the value chain by instant messaging links of popular stories from
other websites to subscribers. They then added curators to provide summaries. Later, they split the news
and entertainment components into two separate entities. Video has since been added and now accounts
for more than half of their content.
• Disruption. BuzzNews used the analytics available through internet platforms to analyse the most
popular stories from around the world and then collate them for subscribers. This represented a
disruption in the news industry in regard to the way news companies sourced their content. They
aim to continue to take advantage of advances in technology, such as machine learning and artificial
Pdf_Folio:571

intelligence, to improve customer relationship and find new opportunities to ‘redefine how news and
entertainment work in the internet, mobile and social context’.
• Value chain. BuzzFeed and BuzzNews have created value for the news and entertainment providers that
write the original content by circulating their content and increasing their global reach.
QUESTION 7.11
1. Alibaba has applied the principles for managing through disruption as follows.
Issue Managerial implications
Organisations depend Jack Ma invested in technology based on customer insights. First by linking
on customers and Chinese businesses to export markets with Alibaba, then by setting up Alipay to
investors for resources give mistrustful customers peace of mind when buying online.
Small markets do not This was never really an issue for Jack Ma as his target market was Chinese
meet the growth needs consumers and businesses, which represents a significant market.
of large companies
Markets that do not exist Many of Jack Ma’s innovations have been ‘discovery based’. Alipay was in
cannot be analysed response to a discovered mistrust in the digital world. The look and feel of Alibaba’s
websites are also a result of discovery-based research, reflecting Chinese culture.
An organisation’s Little is spoken about in the article regarding the resources and capabilities at
capabilities define its Alibaba, as it largely focuses on Jack Ma. It is implied, however, that the research
disabilities and insight capabilities are substantial. As are technology capabilities, that are
being utilised to create new opportunities based on customer insights.
Technology supply There were a number of examples of Jack Ma considering markets external to his
may not equal market existing one to create opportunity. These include:
demand - establishing Taobao as a defensive strategy against eBay entering the Chinese
market
- establishing Alipay to allay customer mistrust in the digital economy and
encourage more businesses to get on board with Alibaba.
2. Value proposition.
Alibaba offers five primary value propositions: accessibility, customisation, convenience, risk reduction,
and brand/status to the Chinese market. eBay offers four primary value propositions: accessibility,
customisation, risk reduction and brand/status. The main difference in these value propositions relates
to convenience and cultural sensitivity.
• Convenience. Alibaba offers convenience by making its service easy to use and providing valuable
infrastructure support services for sellers, which you could argue eBay also does. Alibaba is able to
reduce buyers’ wait times by shipping a high volume of products, rather than relying on individual
sellers to send items. However, if you consider Amazon, they too offer this value proposition.
• Cultural sensitivity. Alibaba’s products are specifically built to satisfy the needs of the Chinese market.
This not only impacts the actual services offered, but more specifically on the look and feel of their
platform.
QUESTION 7.12
Four recommendations on how to successfully enter India as a wine manufacturer are as follows.
Case facts: characteristics of the emerging market Recommendation on how to successfuly enter India
Sociopolitical institutions Lobby government to relax alcohol advertisements
Characteristic distribution channels Use hotel chains as a primary market, with retailers as
secondary market
Strategic partnership with an Indian wine manufacturer
to sell wine
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Raw materials are often plentiful, but other resources Export the product as complete so there isn’t any
are constrained reliance on India’s raw materials
Low-income conditions suggest business models Export lower quality product to keep cost low
that focus on high volumes of low-margin
transactions
QUESTION 7.13
Examination
Analysis Google have taken a leadership position in ensuring their core product is
performing better than competitors
Google’s core capabilities are continually being developed through innovating their
algorithm
Google have strong financial resources available to reinvest in the organisation and
product development
Predictive analysis Using industry outsiders and scholars to inform their strategy
An adapted 7-S framework Vision: adding value for investors as Google’s parent reached market capitalisation
of $1 trillion
Capabilities: quick turnaround times in decision making, using teams to react
quickly, using industry outsiders to help with planning strategies to disrupt
competitors
Tactics: continuing to provide resources into innovating products and revenue
models through their research teams, research days and their Google X
QUESTION 7.14
Huanxi and ByteDance exhibited the following characteristics of an agile organisation.
1. A people-centred culture with networks of self-managing teams. This is not apparent in the case.
2. Fast decision cycles. Lost in Russia was planned for release for the Lunar New Year (January 25).
COVID-19 began in China in December 2019. It was recognised by the World Health Organisation on
January 8, 2020. China did not implement restrictions on travel and public gatherings until January 23.
Huanxi and ByteDance showed their fast decision cycles by being able to respond to these events even
as they were unfolding. Both companies needed to change their existing business models in order to
come up with a solution. The two companies negotiated within a day and the film was released two
days later.
3. A purpose to co-create value for all stakeholders. Huanxi was motivated by needing to recoup its
production costs in order to repay its investors. ByteDance has seen substantial growth in user numbers
since collaborating with Huanxi. They are now considering other joint projects to take advantage of this
new relationship.
The risks and benefits associated with the change in business model for both companies are outlined in
the table below.
Company Risks Benefits
Huanxi Disrupting the cinema industry. The Able to recoup production costs and pay
‘freemium’ business model represents investors
a significant disruption to the cinema Were able to bypass other competitors such as
industry and may impact on the growth and Alibaba and Tencent
profitability of the entire industry
Opportunity to co-produce content and develop
a new online cinema channel
(continued)
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(continued)
Company Risks Benefits
ByteDance Losing existing users — changing the Substantial growth in user numbers
business model to include commercial Positive sentiment towards the company from
videos longer than 15 seconds (rather than Lost in Russia viewers
the 15 second user-generated videos it was
originally streaming) may have upset the Opportunity to co-produce content and develop
existing users a new online cinema channel
Return on investment –- not getting enough

streaming views and/or advertisers to
recoup the RMD630million investment
QUESTION 7.15
The following table shows how NYT has shifted resources and built capability.
Resource shifting Capability building
Replacement of Jill Abramson, who was opposed to Launched New York Times Digital as a separate entity
digital integration with Dean Baquet with new people, systems and culture
Elimination of 100 newsroom jobs Promoting and bringing in talent with digital and mobile
communication skills
Reorganisation of newsroom leadership around four Establishment of Beta Group — an in-house digital
deputy editors development group, developing mainly apps for mobile
platforms (e.g. NYT Now and NYT Cooking)
Integration of journalism and technology Development of digital skills with all journalists
User subscription-based business model introduced Wirecutter acquired providing reviews of consumer
products
Established T Brand Studio to create ‘native’

advertising and other marketing and creative services
T Brand studio acquired Hello Society, a leader in.

influencer marketing and Fake Love, and experiential
design studio (including virtual and augmented reality)
The difficulties faced included the following.

• Not competitive with digital native start-ups — lacked innovation and feature development.
• Not competitive with the digital giants — Apple, Amazon, Microsoft and Netflix.
• Digital platform attracted visitors but initially struggled to attract advertisers.
• Initial online subscription offer was unsuccessful.
• Metered access model was more successful in attracting subscribers and advertisers, but advertising
revenue still not able to offset the decline in advertising in print media and growth remains modest.
QUESTION 7.16
Using IBM’s Emerging Business Organisation (EBO) model, NYT leadership has responded to the
challenges of the internet in the following ways.
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Business Horizons Leadership response
Mature business – Changing the executive editor and removing 100 positions in the newsroom to
defend and increase the profitability of the existing print business
– Training reporters to work with technology to better integrate journalism and
technology
Growth business – Establishing a digital platform

– Introducing a user subscription-based, metered access business model
– Re-organising the newsroom around four deputy editors
– Promoting and bringing in reporters with digital communication skills
– Establishing an in-house technology development unit to develop apps for
mobile platforms
Future business – Investing in emerging opportunities by:

(a) Establishment of an in-house marketing and creative services unit
(b) Acquisition of other complementary services such as Wirecutter to provide
consumer reviews, Hello Society for influencer marketing and Fake Love,
specialising in experiential design
QUESTION 7.17
1. (a) NYT management have used the following approach to strategy.
• Leaders of organisations pursuing business model innovation must find ways to innovate
alongside their existing business model and may need to maintain multiple business models
during a transition period.
– NYT management maintained the traditional business model while also establishing a new
digital platform with its own subscription-based business model.
• Leaders of organisations implementing business model innovation need to encourage knowledge
sharing, overcome social and behaviour barriers to change, encourage organisational learning,
support creativity and experimentation, allocate sufficient resources, provide legitimacy to the
process and ensure decision makers throughout the organisation are aligned to the organisation’s
strategy.
– NYT management began by replacing the executive editor who was seen as a barrier to change.
– Journalism and technology was integrated to remove further social and behavioural barriers.
– Reporters with digital communication skills were promoted and hired to increase their digital
capabilities.
– Reporters were trained in technology to encourage organisational learning.
• Leaders seeking a digital transformation should establish goals before choosing technology,
integrate internal and external expertise, involve customers in decision, manage the impact on
employees and adopt aspects of a start-up culture.
– New York Times Digital was established as a separate entity with the people, systems and
culture of a dot com start-up.
– Decisions were made based on an innovation report designed to rethink their digital strategy.
– Internal and external expertise was integrated through the promoting and hiring of reporters
with digital skills and the integration of journalism and technology.
– There is no evidence that customers were involved in any of the strategic decisions.
– It also does not appear that the impact on employees was managed very well, with 100
people leaving in one day described as ’the most extraordinary collection of talent, of human
knowledge, that has ever left the New York Times in a single day’.
• Business model innovation is often best achieved by replacing top-down management approaches
with teams empowered to make decisions at lower levels of the organisation. The leader’s role
focuses more on culture and shared vision.
– The newsroom was re-organised around four deputy editors.
• Leaders must decide whether developing a new business model or copying another’s innovation
is the best approach.
– NYT leaders developed the metered access subscription model for their online users.
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• Leaders of start-up ventures often face higher uncertainty and risk, fewer resources and less
experience than those of established businesses and thus need particularly strong problem-solving
abilities, the ability to think and act quickly and high tolerance for risk.
– While it’s true that NYT leaders faced high uncertainty and risk in the digital space, they had
the advantage of being well resourced and also had many years of experience in the news
industry.
– This did not negate the need for problem-solving which was often achieved through the
commissioning of reports.
– Leaders in a traditional business seldom have a high tolerance for risk. This may have been
somewhat addressed with the replacement of the CEO and executive editor.
– The leaders in the new division NYT Digital were set up to think and act quickly and more
like a start-up.
• The pace of change and innovation requires practising and aspiring leaders to undertake ongoing
development through formal and informal channels in order to develop the skills and knowledge
to make strategic decisions.
– There is no evidence of this in the example given.
(b) The following represent some of the key differences in the strategic approach of BuzzFeed versus
NYT.
BuzzFeed NYT
BuzzFeed is free to its customers and relies on NYT’s main revenue stream is from subscribers.
advertisers.
BuzzFeed employees are all digital. NYT is currently integrating journalism and technology
through training and hiring.
BuzzFeed source their content from existing news NYT rely on their own reporters and content.
sources, collating and redistributing them.
BuzzFeed has a global perspective due to variety of NYT rely on their reporters to source information on
sources used. global issues.
BuzzFeed uses analytics to choose their content NYT rely on their reporters to supply relevant
based on popularity, ensuring that the content remains content. Analysis of its value is done after its release.
customer focused.
BuzzFeed utilises various communication channels in NYT is building capabilities in technology for various
social and mobile platforms. platforms.
BuzzFeed have expanded into video, as well as written NYT rely on written content.
content, based on consumer demand.
BuzzFeed content is grouped according to key NYT acknowledge the need to group content in
customer themes. relevant themes and is working towards this end.
BuzzFeed utilises new technology to improve NYT have established and acquired a number of
customer relationships, customise offerings and create new technology players to build their own technical
opportunities. capabilities.
The competitive strengths and weaknesses of BuzzFeed and NYT include the following.
Company Strengths Weaknesses
BuzzFeed • Customer/user focused • Uncertain revenue stream

• Strong customer relationships • Relies on external content
• Strong relationships with partners • Relies on external R&D/technology
• Digital natives • Quality assurance/reliability of contents
• Committed to social and mobile platforms
• Utilises analytics
• Utilises cutting-edge technology
• Diversity of contents
• Global perspective
• Low cost structure
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NYT • Certain revenue stream • More local than global in perspective
• Owns contents • High cost structure
• Quality/reliability of contents • Low customer engagement
• Establishment and acquisition of
technology and R&D
(c) The following will help evaluate whether Buzzfeed could fend off copycat behaviour by NYT.
– The established player has a major strength that it relies on for its success. NYT’s major strength
is the quality and reliability of its content, which is written and owned in-house.
– There is a product offering of value to a market segment that the dominant player’s major strength
works against. The market values diversity of content with a global perspective, social media
presence and interaction all factors that are weaknesses for NYT
– Imitating the offering would negatively impact on the established player’s main business.
Offering free, global news and entertainment content has a significant impact on NYTs main
business.
– If the offering succeeds, the established player could only copy it or compete directly with it by
giving up their main strength. Although NYT do not have to give up their key strength, they have
had to significantly build new capabilities in order to compete.
In summary, BuzzFeed are well placed to fend off copycat behaviour by NYT. Their customer
relationships, analytic capabilities and diversity of content and sources are difficult for NYT to
emulate or compete with, particularly on social and mobile platforms.
(d) Both companies have taken a different approach to staying ahead of technical developments. While
BuzzFeed utilises new technology from third parties to improve their customer relationships, service
offerings and to create opportunities, NYT has chosen to establish or acquire businesses to develop
and utilise new technology opportunities. Whether or not either business take full advantage of
these opportunities will be more dependent on how well they interpret market and customer trends
and behaviours, and the foresight of leaders and managers to take action on opportunities as they
are identified.
Pdf_Folio:577

INDEX
3D printing technology 242 Arm & Hammer 223–5 BRITA 230–1
3DSimo, crowdsourcing and Arterys 251 broad strategic options 331
crowdfunding 444–5 artificial intelligence (AI) 103, 240, Museum of Sport Memorabilia
3M leadership 286, 288 251 (MOSM) 332
7-Eleven’s labour cost 56 Asia-Pacific Economic Cooperation Brosa 423
7-S framework 364–80 (APEC) 292 brownfield operation 269
Google 367–8 ATO See Australian Taxation Office BSC See balanced scorecard
staff 377–80 augmented and virtual reality 105, 443 Budget Direct Insurance 327
structure 368–74 Austrade 292 Bunnings 262–3
systems 374–6 Australian accounting services industry, Burberry 284
supply demand 97 business analytics
ABC 266 Australian architectural industry, five and Lululemon Athletica 327
ability to analyse data 158–9 forces analysis 124–5 evaluating strategic options using
ABS 106 Australian chocolate industry, strategic 318–21
ACCC See Australian Competition and groups 136–7 risk assessment using 326–8
Consumer Commission Australian Competition and Consumer business conduct standards 279
access to distribution channels 117 Commission (ACCC) 110, 141, business ecosystems 426
access to good data 157–8 142 value co-creation in 431–3
access-over-ownership model 436 Australian domestic airline industry value-based strategy in 449–51
accountants segments 88–9 business environment 364
traditional role of 58, 59 Australian Prudential Regulation business ecosystems 426
accounting services industry, silent Authority (APRA) 401 change drivers 419–26
disruption 93–8 Australian Taxation Office (ATO) 94, hypercompetition 426–7
acquisition 270 97 business ethics 55–8
Adelaide Bank Group, culture and authoritarian leadership 49 business impact assessment 381
strategy 379 automation 239, 420 business incubator 471
advanced analytics, in fisheries industry autonomous vehicle technology 458 business intelligence (BI) 73
75–8 business model 27–30, 427
advanced data analytics 240 backward integration 271 emerging national markets and
affective computing 105 balanced scorecard (BSC) 179–85, 459–61
AfterPay 116 300, 312, 396–9 leadership and management 473–7
ageing population 103 four perspectives of 180 new, rapid growth 438–9
agile approach 443 objectives and measures 181 sustainability and 458–9
agile organisations 464–7, 483 Qantas 397 technology and 455
characteristics of 466 basis of competition 129–31 business model canvas 28–30, 428–31
agile projects 393 chocolate manufacturing industry for an online retailer 429–30
Ahisa 127 130–1 interrelating components of 429
AI See artificial intelligence behavioural approach 37–8 Newvines Ltd 429–30
AirAsia, low-cost generic strategy benchmarking 178–9, 192 business model innovation 427–8
172–3 Bendigo Bank, culture and strategy 379 leading 472–3
Airbnb 436, 438, 456 benefit corporations 459 Business Roundtable 58
organisational design 373 benefit-risk analysis 275 business strategy 21
service design 238–9 Best Management Practice (BMP) 389 role of innovation in 174–5
Alibaba 166, 453–5 Beyond Skin 127 buyer experience cycle 245–6
aligning broad strategic options 331 BI See business intelligence buyer power 119–20, 124
alliances 451–2 big data 74, 127, 149, 157, 375 buyer utility map 245
Amazon 116, 141, 430, 431, 437, 481, analytics 74 BuzzFeed 447
482 block strategy 456
six-page memo 10–11 Blockbuster 80 Cadbury 131, 220
ambient experience 105 blockchain 105 Cancer Council NSW
analytics 105 Blue Ocean strategy 175, 235, 243–5 alignment of shareholder needs
Ansoff product/market matrix 214, Cirque du Soleil 248–9 152–3
216–17, 219, 223 factors of competition 245–7 capabilities 188, 217, 261, 336
antitrust framework 142 four actions framework 247 appraising 191–7
APEC See Asia-Pacific Economic process 247 creation of 190–1
Cooperation strategy canvas 245–7 defined 187
Apple 84, 122, 141, 220 utility levers 245 framework 188
App Store 433 BMP See Best Management Practice functions 190
computer industry 23 Boeing 787 31–2 rare 192
ecosystem 122 Boston Consulting Group (BCG) product strategic 193–4
iPod 29–30 matrix 166–7 Capability Maturity Model (CMM)
appraisal system 400 BP 371 20–1
APRA See Australian Prudential Brave Gentleman 127 capital requirements 117
Regulation Authority
Pdf_Folio:578
Bridgeland College 135 Cardinal Path 320–1
578 INDEX
cash flow 19 purpose and strategy 13–14 strategic drivers of See strategic
Castle Confectionery Company (CCC) Rumelt’s criteria 336–8, 340 drivers
164 strategic fit 17–18 customer 163–4
CBA See Commonwealth Bank of strategic stretch 17–18 experience 474
Australia strategy versus tactics 17 markets 163, 220, 255–6
CCC See Castle Confectionery Company value proposition 14–16 perspective 179
centralisation of organisation 369 values 25 satisfaction 234
versus decentralisation 372 vision 25 customer value proposition 27
Chan, Jeffrey 39 competitive business environment
change drivers 419–26 benchmarks 178–9 dashboards 398–9
emerging national markets 426 competitive position 132–6 data analysis 251
strategic options 455–61 competitors 132–6 data analytics 157–62
sustainability 424–5 complexity of organisation 369 Dickey’s Barbecue Pit 161
technology 420–4 consensus decisions 54 into commercial insight 159–62
change management 377 Consumer Protection Act 1986 279 Rio Tinto 161–2
coercive style 48 contingencies 341–2 Siem Car Carriers (SCC) 159
collaborative style 48 contingency approach 38 strategy 51
consultative style 48 convenience decisions 54 Transport for London (TfL) 158
defined 380 conventional planning 440 Walmart 160
directive style 48 versus discovery-driven planning data management approach 138
impact on organisation 388–9 441 data visualisation 160
key components of 381–3 convergence of business and IT 81 data-driven network effects 141
mature organisations’ response to copyright 281 decentralised organisation 372
disruptive 92 core business types 22–4 decision making 53–4, 477–9
structured approach 383–8 customer relationship business 22 decorative branded paint industry, five
styles 48 focus and conflicts 23 forces analysis 124–5
change process 468 infrastructure business 22 Della 127
change readiness assessments 381 product innovation business 22 Design Council’s double-diamond model
change strategy 381 corporate social responsibility (CSR) 232
channels 167–8 55 design thinking 241–4, 442–3
circular design 108 corporate strategy 21 stage 242
Cirque du Soleil 250 Corporations Act 2001 (Cth) in Australia DIC Australia/New Zealand 24
applying Blue Ocean thinking 248–9 279 Dickey’s Barbecue Pit, data analytics
eliminate–raise–reduce–create grid cost–benefit 160
249 analysis 328–9 differentiation advantage 168
factors of competition 248 Nike 329 differentiation strategy 169–71
new value curve 249 quantifying 328–9 digital disruption 456–8
classical formulation 439 Cotton On 57 digital economy
climate change 107, 108 Cotton On Foundation 57 competition issues 140–3
closed innovation 469 Country Nomad education industry protect and promote competition in
closed-loop production 459 134–5 142
cloud computing 105, 421–2 CPA digital innovation 210
technology 393 and leadership 409–10 digital platform model 436
CMM See Capability Maturity Model and strategy 408–9 digital platforms 141–2, 213
co-creation 433 performance of organisation 410–11 digital transformation 473, 474
Coca-Cola, acquiring Costa 270–1 role 149, 157, 159, 160, 408–11 digital twins 105, 396
Cochlear 80 in external environment analysis discovery-driven planning 440–1
cognitive computing 105 72–3 conventional planning versus 441
collaboration 393, 470 in new product, service and market disillusionment 46
collaborative decisions 54 development 208–9 disposal/recycling 230
collaborative leadership 49 in strategy and leadership 58–64 disruption 71, 92–9, 433–5
command decisions 54 in strategy development 297 and strategic innovation 452–5
Commonwealth Bank of Australia crowdfunding 444–5, 459 managing 480–1
(CBA) 202 CSR See corporate social responsibility disruptive technology 93, 139
communication 52–3, 382–3 culture diversification 214–5, 217, 222–6, 277
technology for 382 indicators of 378 divestment 215, 216
competency modeling 189 organisational 50–1 drivers–levers interaction 311–4
competition strategy-supportive 377–80 dynamic capabilities, versus routine
basis of 129–31 culture management 377, 380 capabilities 463–4
strategic 129 current performance assessment Dyson 236
competition law enforcement 142 156–63
competitive advantage 12–18, 168–75, data analytics 157–62 e-commerce business models 213
188, 192, 209, 427 framework for 162–3 East Shore University 135
business models 27–30 internal analysis 157–62 easyJet 122
goals 26–7 operational drivers of See operational EB Games 333–4
levels of strategy 21–4 drivers eBay 436
mission 25 people and organisational drivers economic factors 106–7, 405
productivity frontier 16
Pdf_Folio:579
185–7 issues 107
INDEX 579
economies of scale 116–17, 141 external environment 8, 72 challenges of 33–5
ecosystems 426 analysis of 72 defined 30
business 426 industry 73–9 driving forces of 31
value co-creation in 431–3 role of the CPA 72–3 risks 33
value-based strategy in 449–51 defined 72 goals 26–7, 300–1, 341
innovation 426 monitoring 399–400 goods and services tax (GST) 280
platform 426 ExxonMobil 272 Google 141–2, 185, 367–8, 450, 462,
service 426 469
effective brand support 131 Facebook 40, 141, 142, 153, 154 Google Analytics 160
effective decision-making processes factors of competition 245–7 organisational vision 298
59 Cirque du Soleil 248 values 300
effective leader 42 fashion industry 108 mission statement 299
effective marketing 131 FDI See foreign direct investment government policy 117
effective measurement criteria 176–8 feasibility, Rumelt’s criteria 335–6, green house emission 108
efficient distribution networks 131 338 group inertia 405
efficient selling 131 financial goals 409 growth 90–1
electric vehicle ecosystem 432–3 financial metrics 73 factors influencing 100–1
Emerald Aged Care Facility 383 financial perspective 179 growth perspective 179
emergent approaches to strategy financial statement analysis 297 GST See goods and services tax
design thinking 442–3 financial technology (FinTech) 93, 95,
discovery-driven planning 440–1 97 H&M sustainability strategy 424–5
lean start-up 444–5 fisheries industry, advanced analytics in habit and security 405
emerging business organisation 479, 75–8 Hertz Australia 28
480 five-stage design-thinking process 242 high-performing organisations 218
emerging manufacturing paradigm Flexicar 28 high-profile brands 131
459 focus on experience 77 Hipsters For Sisters products 127
emerging national markets 426 focus strategy 173–4 Homebase UK 262–3
and business models 459–61 Fonterra Co-operative Group Ltd horizontal integration 271
emotion AI 105 market expansion 221 Huanxi Media Group 466
emotional intelligence 484 for-profit organisations 176 human resources 189
entrepreneurial orientation 467 forecasting 297 human-centred design 241–4
entrepreneurial process 468 Foreign Corrupt Practices Act 1977 hypercompetition 426–7
entrepreneurial strategy compass 446 (US) 279 Google 462
entrepreneurialism 479 foreign direct investment (FDI) 269 strategic approach 461–3
environmental dynamism 419, 467 foreign exchange risks 277–8 hyperdisruptive business models
environmental factors 107–8 formal leadership development 484 access-over-ownership model 436
issues 108 formal strategy process 404 digital platform (or marketplace)
environmental uncertainty 407–8 formalisation of organisation 369 model 436
established businesses 480 franchising 266–7 experience model 437
leadership for 479–81 free model 435–6 free model 435–6
ethical considerations 111 freemium model 436 freemium model 436
ethical technology 106 fresh food industry value chain 82 hypermarket model 437
ethics functional analysis 190, 191 service ecosystem model 437
classical view of 55–6 functional strategy 21–2 subscription model 435
socio-economic view of 56–8 future profitability 125 hypermarket model 437
values and 55
European Commission 141 gap analysis 199–202 IBM 122, 479
evaluation criteria, explanations for areas of focus 200 Innovation Jam 288
316–18 for surface coatings division 200–1 IDEO.org
evaluation using business analytics generic strategy innovation personas 287
318–21 differentiation 169–71 IKEA 237
Event Workforce Group (EWG) 447 focus 173–4 IMF See International Monetary Fund
evolutionary formulation 440 innovation in 174–5 implementation 362
existing markets, new product for 219 low cost 171–3 incompatible IT systems 279
existing overseas organisation 269–71 generic strategy canvas 245, 246 incubators 471–2
existing product 219–20 Genetic Technologies Ltd 183–4 indirect substitutes 121
for new markets 220–2 geographic markets 163 industry 71, 163
exit strategy 456 development 257 defined 71
experience model 437 expanding into 256–7 industry analysis
explicit knowledge 186 GFC See global financial crisis and online retail industry 115–16
exponential intelligence 105 gift economy 459 defined 73
exporting 263–5 GlaxoSmithKline 284 industry definition 79–99
extended SWOT analysis 213 global financial crisis (GFC) 408 industry life cycle 89–99
extension 420–1 global markets 31 industry segmentation 87–9
external analysis 138, 140–3, 204 global pharmaceutical value chain value chain 81–7
and internal analysis 197–202 85–6 industry environment analysis 115–25
external consistency, Rumelt’s criteria globalisation 60, 104 industry external environment analysis
332–4, 337–8
Pdf_Folio:580
benefits of 35–6 73–9
580 INDEX
industry key success factors 131–2 intrapreneur 468 transactional 45
industry life cycle 89–99 intrapreneurship 468–9 transformational 45–7
decline or renewal 91–2 invest in disruption model 456 theories 37–8
disruptions 92–9 investment 468 versus management 38–40
growth 90–1 IoT See Internet of Things leadership and management
maturity 91 IP See intellectual property data management approach
shake-out 91 IP Australia 282 138
start-up 90 iPhone 122, 132 external analysis 138
industry maturity 19–21 IT See information technology from external to internal analysis
industry profitability 115–25 iTunes 436 140–3
Porter’s five forces 116–18 responding to change 138–9
power of suppliers 118–25 Japan Airlines (JAL) 42–4 revisiting the role of the CPA
industry segmentation 87–9 JCPenney 32 139–40
Australian domestic airline industry strategic sourcing locations 33 leader’s role
88–9 joint ventures 268–71 business ethics 55–8
retail clothing industry 87 communication 52–3
industry size 116 Kano performance attributes model decision making 53–4
industry value chain 81–7 234 in strategic alignment 301–2
informal leadership development Kaufland 35 lean product development 252
484–5 Keep Company 127 lean start-up 444–5
information technology (IT) key performance indicators (KPIs) legal factors 109–10
for new market development 256–7 363, 396, 400, 401 issues 110
for new product and service key performance metrics (KPMs) LEGO 433
development 251–4 340–2 licensing 265–6
outsourcing 86 key resources and processes 28 Lime 482
systems 374–6 key success factors limited implementation focus
innovation 9, 209–214, 426 for new market development 311 405
3M 226–7 product and service 310–11 Lindt 131
business model 427–8 Kmart Australia 84, 313 listening 53
digital 213 knowledge Littler 240
ecosystems 426 conversion 187 LJ Hooker Home Loans 373–4
effort 213–14 management 186 long-term goals 409
groups and types 210 spiral 186 long-term strategic value 273
hubs 471–2 knowledge-based view of strategy low cost generic strategy 171–3
in business 210–3 464 low-cost advantage 168
in business strategy 174–5 Kodak 236 low-end disruption 434
intermediaries 471 Kotter’s eight-step process for change Lululemon Athletica
leadership for 286–90 385–8 business analytics and 327
strategic and organisational success KPIs See key performance indicators value/effort assessment for 315
factors 210 KPMs See key performance metrics weighted criteria for 317–18
Zara 210–2 luxury goods industry, remote
Innovation Jam 288 LDC Co Ltd (LDC) 278 environment 112–14
insufficient funding 409 Le Buns 127
intangible resources 189 leadership 8 M&As See mergers and acquisitions
intellectual property (IP) 3M 286, 288 Maison de Mode 127
categories of 281 and management management
defined 281 business model 473–7 development 483–5
rights 281, 284 internal analysis 202–5 leadership versus 38–40
protecting 282, 284–5 balancing stability and change 47–8 management by walking around
strategy 282–4 CPAs and 409–10 (MBWA) 53
intensity of industry rivalry 122–4 defined 37 management roles, in strategic alignment
issues 123 development 483–5 301–2
interaction costs 22 external analysis 204 managing culture 380
interfirm collaboration 452 flexibility 47 market 71, 163
internal analysis 140–43, 148, 157–62 for established businesses 479–81 defined 71, 126
external and 197–202 for innovation 286–90 market analysis 297
leadership and management 202–5 for start-ups 479 market attractiveness 259–63
role of CPA in 149, 157 introduction to 36–45 market development 9, 214, 220–2
internal consistency, Rumelt’s criteria role of 204 key success factors for 311
334–5, 337–8 role of CPA in 58–64 legislations 279
internal environment 148 strategic 40–5 resources 261–3
analysis of 70 strategic decisions 203 market entry
internal process perspective 179 styles 37–8, 45 modes of 263–71
international expansion 257 and organisational culture 50–1 advantages and disadvantages
international growth options 257 intensity of change 48–9 274–7
International Monetary Fund (IMF) organisational lifecycle stage 50 objectives of 258–9
291 team and individual developmental market expansion, accounting issues
Internet of Things (IoT) 90
Pdf_Folio:581
stage 49 with 277–81
INDEX 581
business conduct standards 279 networking 53 organisation systems 374–6
foreign exchange risks 277–8 new business models, rapid growth organisational
incompatible IT systems 279 438–9 organisational capabilities See
preparing reports 278 new business overseas establishment capabilities
strategy 221 269 culture 50–1, 189, 363
taxation 279–80 new drug development process 231 design 368–74
transfer pricing 280–1 new geographic markets in digital platform companies 373
market growth 260 development 257 principles of 372–4
market matrix 214, 216–17, 219, 223 expanding into 256–7 drivers 185–187, 309–10
market penetration 214–15, 217 modes of entry 263–71 lever 311
growth 217–19 new market development 215 life cycle 50
market profitability 260 attractiveness 259–63 maturity 19–21
market research, role of 233 customer 255–6 politics 406, 407
market segmentation 126–7 expansion, accounting issues strategy, success of 75
analysis 127–9 277–81 structure 368–74, 468, 473
Australian domestic airline industry geographic components of 369
127–8 development of 257 drivers of 369
marketplace model 436 expanding into 256–7 transformation 474
Mars Petcare 14 modes of entry 263–71 Organisations Act (Cap. 50, 1994
maturity 91 key success factors for 311 Revised Edition) in Singapore 279
MBWA See management by walking market entry Organization for Economic Co-operation
around advantages and disadvantages and Development (OECD) 291
McDonald’s 267 274–7 Orsted 425
McKinsey 7-S framework See 7-S modes of 263–71 outsourcing 372
framework objectives of 258–9
McKinsey & Co. 213 mergers and acquisitions 271–4 Paper Co.
McKinsey analytics survey 158 resources 261–3 business strategic option 339
mechanistic versus organic systems using IT to support 256–7 organisational information 338–9
372–4 new product 215, 219–20 paralysis by analysis 404
Melbourne Victory 152 for existing markets 219 patents 281
merger analysis 142 new product development (NPD) 215, peer-to-peer innovation 458–9
mergers and acquisitions (M&As) 226 people and organisational drivers
271–4 process 227–33 185–7
guidelines 273 Zara 228–229 people drivers 309–10
value of 273–4 new service development 215, 236–41 performance assessment
metrics and performance 341–2 new-market disruption 434 current See current performance
metrics control 341–2 Newvines Ltd 429–30 assessment
Microsoft 330, 393, 460, 481 business model canvas 430 framework for 162–3
Microsoft Windows 122 niche strategy 456 performance measurement 396–9
milk strategy 456 Nike 329, 372 balanced scorecard 396–9
mission 25, 299 sustainable supply chain 384–5 performance measurement criteria
modernising core technology 105 Nokia 131 176–8
Moodle 282 non-substitutable resource or capability personal computers (PCs), standards
MOSM See Museum of Sport 193 wars 253–4
Memorabilia not-for-profit organisation 176 Pfizer 151–2
Mountain Bikes Direct 15–16 NPD See new product development organisational culture 378
Museum of Sport Memorabilia (MOSM) pharmaceutical industry, key success
goals 300–1, 340 OECD See Organization for Economic factors 193
grouping strategic options 331–2 Co-operation and Development pharmaceutical product development
internal and external factors 303–4 offshoring 86 231
mission statement 299 ongoing monitoring of environment Philips 470
operational drivers 308–9 399–400 platform ecosystem 426
organisational and people online customer markets 256 platformisation 141
competencies 310 online learning 53 Platinum Pharmaceuticals Ltd
organisational vision 298 online retail industry, industry analysis (Platinum) 194
report card 390, 391 and 115–16 PLCs See Personal Learning Clouds
risk assessment 325–6 open innovation 288–9, 458 political factors 109
risk rating 325 at Philips 470 pollution 107
Rumelt’s criteria for evaluating operational drivers 470, see also Porter’s five forces model 115–18
337–8 strategic drivers Porter’s generic strategies 169
strategic option 307–9 balanced scorecard 179–85 power 405
strategy 341 competitive business environment of buyers 119–20
SWOT analysis 304 benchmarks 178–9 issues 119–20
effective measurement criteria of complements 122
NAB, failure for 407–8 176–8 issues 122
NABI 250 operational levers 311 of substitutes 120–1
Nestlé 131 operations 307–9 issues 121
Netflix 4, 92, 434
Pdf_Folio:582
organic systems 372–4 of suppliers 118–25
582 INDEX
issues 118–19 revenue growth 180 stability and change 47–8
relationships 405 reward systems 400–2 staff 377–80
power distance 51 rigid strategy processes 404 stakeholder management 381–2,
predictive analytics 318–9 Rio Tinto 161–2 481–3
preparing reports 278 Rise Above Custom Drone Solutions stakeholders 149
prescriptive analytics 318–9 160 categories 154–5
Pret A Manger 267 risk 105, 321 conflict 154
prices 260 current likelihood 324 groups
proactiveness 467 framework 322–6 relative power of 154–5
processual formulation 440 issues identification 322–3 techniques for interacting 155–6
product and service, key success factors management 392 identifying 150–2, 156
310–11 possible causes 323 needs 150–2
product development 9, 214, 217, possible consequences 323–4 assess alignment of 152–4
219–20, 277 rating 324–6 standards 253
Arm & Hammer 223–5 strategy 408 Staples, Inc.
to embed in a service 254–5 taking 467 customer market expansion 221–2
product differentiation 117 treatment 326 customer segmentation and channels
Product Quality Law of the People’s risk assessment, defined 321 222
Republic of China 2000 279 five-step process 322–6 start-ups 90, 444–7, 470, 473
product-service systems 458 Museum of Sport Memorabilia failure of 479
productivity frontier 16 325–6 leadership for 479
products and markets, market penetration quantifying costs and benefits 328–9 versus incumbents 481
growth 217–9 timing 329–30 STEEPLE analysis 101, 104, 109
products and services 164–7 using business analytics 326–8 Stella McCartney’s product 127
professional services value chain 84 RMIT University 26–7 strategic alignment, leadership and
profit formula 27 routine capabilities, dynamic capabilities management roles 301–2
program management 389–95 versus 463–4 strategic alliances 267–8
defined 389 routinisation 464 strategic business unit (SBU) 21
project 233 Rumelt’s criteria strategic capabilities 193–4, 463
governance 392 competitive advantage 336–40 strategic communication plan 382
initiatives 393 evaluating the MOSM’s broad strategic competition 129
management 389–95 strategic option 337–8 strategic decisions 203
defined 389 external consistency 332–4 strategic drivers 306–7
performance 394–5 feasibility 335–6 channels 167–8
management systems 286 internal consistency 334–5 competitive advantage 168–75
risk 392 Ryanair 122, 451 customer 163–4
Prospa 20 decisions 306
PTL Co Ltd (PTL) 278 generic strategy 168–75
Sandberg, Sheryl 40
purpose 13–14 industry 163
Sarbanes-Oxley Act 2002 (US) 279
SBU See strategic business unit markets 163
Qantas 163, 397
SCC See Siem Car Carriers products and services 164–7
QBE Insurance 387–8
selective information processing 405 strategic options by 306
quantum computing 105
service design strategic fit 17–18, 314
Airbnb 238–9 strategic groups 136–7
R.M. Williams 170
rational approach to strategy 8–10 components of 237–9 Australian chocolate industry 136
rational decision making 53–4 service development 9 strategic inertia 404
readiness for change 483 service ecosystem model 437 strategic initiatives, project and program
regulation 142 service ecosystems 426 management 389–95
regulation and compliance 109 service, productising 239 strategic innovation 452–5, 468
regulatory conditions 407 shake-out 91 strategic leaders
related diversification 222 shareholder value 182 and managers 75
remote environment analysis 99–115 shareholder view 176 defined 41
future expectations 99–100 sharing economy 459 role of 41
process 100–15 short-term goals 409 strategic leadership 40–5
summarising 112–15 short-term strategic value 273 core tasks 41
resource allocation 410 Siem Car Carriers (SCC) 159 Japan Airlines 42–4
resource-based view of strategy 463 Singapore Economic Development strategic networks 452
resources 187, 188 Board (EDB) 292 strategic options 307–11, 314
appraising 191–7 Slack 481 evaluation
defined 187 small and medium-sized enterprises using business analytics 318–21
framework 188 (SMEs) 149, 160 using Rumelt’s criteria 332–40
human 189 SMEs See small and medium-sized integrating 330–40
intangible 189 enterprises value/effort assessment tool 314–15
tangible 189 Smiggle 173–4 weighted criteria evaluation tool
responding to change 138–9 social enterprises 459 315–18
responsibility of managers 203 social factors 102–4 Zara 312
retail clothing industry, segmentation of social venture start-ups 479 strategic partnerships 451–2
87
Pdf_Folio:583
software development 393 strategic risks 322
INDEX 583
strategic stretch 17–18 and business models 458–9 unrelated diversification 223
strategic themes 297, 330, 341 sustainable competitive advantage
strategic thinking 42–5 131 value 82
transforming into action 403–4 sustainable value innovation 424 co-creation 431–3
strategically important projects 233–6 switching costs 117 creation 59
strategising process 468 SWOT analysis 197–9, 213 innovation 245
strategy Museum of Sport Memorabilia negotiation 470
activities 8 304 partake 470
alternative approaches 439–40 systemic formulation 440 proposition 14–16, 27, 133, 261
compass 445–9 systems break down 375–6 Mountain Bikes Direct 15–16
defined 3 provision 470
development 9 tacit knowledge 186 realisation 470
in practice 10–11 tactics, strategy versus 17 value chain 81–7
digital disruption 456–8 tangible resources 189 for a pair of fine-wool trousers 83
emergent approaches to taxation 279–80 for drug discovery 85
design thinking 442–3 team management 377 global pharmaceutical 85–6
discovery-driven planning technological developments 104 globalisation of 86
440–1 technological factors 104–6 professional services 84
lean start-up 444–5 issues 106 value chain analysis 191
evolution of 3–6 technological innovation 285 value-added tax (VAT) 280
implementation 9–10 technology 420–4 value-based management 176
levels of 21–4 and business models 455 value-based strategy 449–51
maturity of industry 19–21 embedding products into services value-capture model See value-based
organisational maturity 19–21 239–41 strategy
process 6–11 for communication 382 value/effort assessment tool 314–15
purpose and 13–14 Technology, Entertainment, Design Lululemon Athletica 315
resources and capabilities in 187–97 (TED) 422–3 values 25, 185, 300, 341
role of CPA in 58–64 technology-enabled business models, and ethics 55
role of leaders 51–8 leadership and management of resources and capabilities 192
business ethics 55–8 473–7 stakeholders 58
communication 52–3 Tesla 437, 470 VAT See value-added tax
decision making 53–4 TfL See Transport for London VCRs See videocassette recorders
The Big Issue 370 vertical integration 271
versus tactics 17
The New York Times (NYT), leadership videocassette recorders (VCRs),
strategy analysis 70
and management 474–7 standards wars 253–4
framework for 71, 149
The Soulshine 127 Virgin Australia 88
strategy canvas 245–7
The Ten Faces of Innovation (Kelley) Virgin Galactic 482
US municipal bus industry 250
287 virtual teams 392–5
strategy development 296, 298–9, 404
The Third Estate 127 vision 25, 298–9, 341
failure 403
threat of new entrants 116–18, 124
key performance metrics 340–2
issues 117–18
reviewing 342–3 Walmart, analytics 160
timely feedback 375
role of CPA in 297 Walt Disney 229
timing risks 329–30
strategy implementation 51, 362–3 Water and Sanitation for the Urban Poor
toiletry wholesaling industry, key
7-S framework See 7-S framework (WSUP) 243, 244
success factors 193
common pitfalls 403–8 Webjet 456
top 10 global companies by market
designing and developing plans weighted criteria evaluation tool
capitalisation 140
363–4 315–18
Toyota 372
failure 403, 404, 411 what-if analysis 328
trademarks 281
key considerations 393 wicked problems 399
traits approach 37
managing the politics of 405–7 Win Win Parenting 282–3
transactional leadership 45
resistance to 404–5 Winc 252
transfer pricing 280–1
role of CPA in 408–11 Windows 10 update 330
transformation 421, 433–5
strategy process women’s clothing retail market
transformational leader 46, 47
emerging business models 418 segmentation 126
transformational leadership 45–7
internal environment analysis 148 Woolworths 375–6
balancing stability and change 47
strategy-supportive culture 377–80 WorkSafe Victoria 319
impact on individuals 46–7, 51
strong brand names 131 World Bank 261, 291
strategy process 46
strong merchandising 131 World Trade Organization (WTO) 109,
Transport for London (TfL) 158
subscription model 435 291
Treasury Wine Estates (TWE) 282
substitute power 120–1, 124
substituted accounting period 278 Uber 91, 110, 431, 436, 438 XYZ Co Ltd 278
substituting patented medicines with cultural transformation 386–7
generic medicines 120–1 diversification 223 Zara 210–12, 228–9
supplier power 118–25 organisational design 373 strategic options 312
supply chain management 452 unicorn companies 438 systems and implementation prowess
supply chain partnerships 452 Unicorn Goods 127 376
SUSI Studio 127 University of Excellence 135 Zuckerberg, Mark 40
sustainability 424–5
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GSL 2022 (3rd Ed)

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GSL 2022 (3rd Ed)

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CPA PROGRAM

Third edition updates

CPA Program team

Module 1: An Introduction to Strategy and Leadership 1

MODULE 1 Understanding the External

BEFORE YOU BEGIN

Module Weightings and Study Time Requirements

TABLE 1 Module weightings and study time

1. An introduction to strategy and leadership 10 10

2. Understanding the external environment 15 15

3. Understanding the internal environment 15 15

4. Product, service and market development 15 15

7. Strategy and leadership for emerging business models 15 15

xii SUBJECT OUTLINE

My Online Learning and your eBook

GENERAL EXAM INFORMATION

SUBJECT OUTLINE xiii

After completing this module, you should be able to:

Global strategy and leadership

Emerging business models

Understanding the context of

Source: CPA Australia 2020.

2 Global Strategy and Leadership

1.1 INTRODUCING STRATEGY AND LEADERSHIP

THE EVOLUTION OF STRATEGY

MODULE 1 An Introduction to Strategy and Leadership 3

But the world around us is changing rapidly.

TECHNOLOGY INSIGHT 1.1

How Leaders in Data and Analytics Have Pulled Ahead

4 Global Strategy and Leadership

FIGURE 1.2 Data, analytics and industry competition

% of respondents reporting a change in nature of industry competition 2017 2018 % change,

+144 +143 +91 +52 +14 +4

MODULE 1 An Introduction to Strategy and Leadership 5

Current data practices at respondents’ organisations,1 At high-performing At all

1.1 Explain the evolution of the practices of strategy and leadership.

1.2 THE STRATEGY PROCESS

6 Global Strategy and Leadership

Global strategy and leadership

Exploring options Developing strategy Implementation and

Emerging business models

Source: CPA Australia 2020.

MODULE 1 An Introduction to Strategy and Leadership 7

THE RATIONAL APPROACH TO STRATEGY

Module 2: Understanding the External Environment

Module 3: Understanding the Internal Environment

8 Global Strategy and Leadership

Module 4: Product, Service and Market Development

Module 5: Strategy Development

Module 6: Strategy Implementation

MODULE 1 An Introduction to Strategy and Leadership 9

Module 7: Strategy and Leadership for Emerging Business Models

STRATEGY DEVELOPMENT IN PRACTICE

Amazon’s Six-Page Memo

10 Global Strategy and Leadership

MODULE 1 An Introduction to Strategy and Leadership 11

TECHNOLOGY INSIGHT 1.2

Building Competitive Advantage on Data

TABLE 1.1 Gaining competitive advantage from data

Issue Requirement for competitive advantage

1. Value-add from Customer data can contribute to competitive advantage if it adds

12 Global Strategy and Leadership

7. Speed to market Data-enabled improvements that can be quickly developed and