Lufthansa Cargo Management ProgramPre-Readings

Below you will find a document with links to the articles that are required as pre-reading for module 4.

The readings for module 4 can be downloaded via the links provided in this document.

Click here to download the reading list

The readings and some extra materials for the case study can be downloaded via the links provided in this document.

Click here to download the reading list

Case Study

For the United Airlines case study, please consider answering the following questions and discuss these with your teams. We will discuss them in the first session of the second day.

  • What is the problem that Stephanie Buchanan is attempting to address by increasing the number of "out-and-back" flights at United?
  • What is the value to a customer of flying on an airline?
  • Do you think that increasing the volume of out-and-back flights will address Stephanie's problem?
  • What are the other approaches to the problem of missed flights that might be employed rather than a shift to more out-and-back flights?
  • How would the increased cost of flying a greater number of out-and-back flights impact the customer value and customer willingness to pay?
  • What should Stephanie do?



The readings can be downloaded via the links provided in this document.

Click here to download the reading list


In these videos I will introduce you the very interesting topic of strategy. In particular, I will be looking at not simply strategy, but competitive strategy. Often strategies are developed as if an organization operated in a vacuum. However, in the "real" world, organizations compete for customers, suppliers, regulator attention, financial resources, share holders, etc. The competitive nature of an organization's environment, its chosen industry and market, determines how much financial surplus it can expect to retain for its ongoing operations. The strategy that a firm in a competitive environment employs must address the actions it expects competitive firms to take and it must address the response of other important actors in its chosen industray and market segments.



So just what is "strategy?"

Strategy, and competitive strategy in particular, is a relatively recent addition to the management lexicon.  While informal planning has always been assumed to be a part of any executive's job, formal strategiy planning did not arrive in the general education of managers until the early 1960s.  The introduction of strategic planning, as we shall see, arose out of work done by military planners to anticipate and counter agression by Communist nations after the Second World War.




Other voices on strategy

In the prior video you were introduced to two important views of strategy.  Alfred Chandler's concept that the development of a strategy must precede the development of an organization structure.  The structure of the organization, in other words, must fit the streategy the firm is pursuing.  The addition of game theoretic thinking brings competitors and environmental actors explicitly into the firm's strategy development process and forms the foundation for the development of a truly competitive strategy.  From a military strategy perspective, much of modern competitive strategy finds its roots in the work of Carl von Clausewitz and his seminal military strategy book "On War."  Igor Ansoff, often called the father of modern business strategy, developed his ideas concerning business strategy while he was working for the RAND Corporation, a United States military think tank, after the Second World War.  Finally, Michael Porter, as you will find out, is the modern father of competitive strategy a concept he introduced to students at the Harvard Business School only in 1977 and the general management market through his book "Competitive Strategy" in 1980.



Porter on strategy

Porter's view of what makes up a useful competitive strategy needs to be both emphasized and fully understood.  First, it is not being the most efficient or effective at what you do, although this is an important tactical objective.  Second, it is about establishing a unique position for the firm (think Apple or Swatch) that is based on activities, processes, and/or resources that competitors do not perform, have access to, and cannot copy.  Strategy also is about what you will not do.  I cannot emphasize this last point enough.  Too often organizations pursue any and every opportunity that comes their way.  This is not strategy.  It diverts attention from strategy, corrupts the focus of resources and the value chain, and dilutes the value proposition.  "Just say NO!" is as important to strategy as ensuring that all factors are aligned and delivering on the firm's promises.  



Characteristics of good strategy

A good strategy is composed of a distinctive value proposition (why should anyone buy what I am selling and how is it different from what everyone else is selling); a tailored value chain (the value chain that delivers the value proposition must be constructed to deliver that proposition in an effective and efficient manner); must be different from the value chain of competitors (the structure must not be easily imitated by the competition); there must be fit across the value chain (everything in the value chain must work together like a well oiled machine to deliver on the value proposition); and the strategy must not change frequently (strategy is a long term vision of how value is to created and delivered, not a fashion statement).



Strategy theory development over time
As noted previously, business strategy as a formal process is a relatively new addition to management thinking.  It has evolved during its short period of use in industry from a pure planning process to one that is today more focused on capabilities, value creation, and dynamics.  In the early days of business strategy (not that long ago if you are an antique like me) concepts out of military thought, as demonstrated by Igor Ansoff, and management history, as demonstrated by Alfred Chandler, dominated the practice.  These practices were enhanced by the likes of Michael Porter and the big consulting firms, primarily the Boston Consulting Group under Bruce Henderson and McKinsey under the leadership of Joe Bower, to take a more market and industry focused perspective of strategy. The market based view was enhanced further in the 1980s and 1990s with a new emphasis placed on the resources available to the firm for carrying out any strategy (note that the slide indicates the "popular" names associated with this addition, the actual "father" of this approach was Birger Wernerfelt who wrote the first academic article on the topic in 1984).  Finally, in the mid to late 1990s, strategy began to turn back to the issue of value creation and linking the inside activities of a firm to its outside customers and their actual needs.  Not shown on the chart, but now another evolution in strategic thinking begun in the early 2000s, is the concept of dynamic capabilities.  This topic will be discussed later, but covers the idea that in today's fast moving environment firms must be able to take advantage of opportunities as they arise and not "plod along" trying to follow a predefined set of strategic initiatives.



The 10 "schools" of strategy
Henry Mintzberg, a Canadian business school professor and researcher on strategy, identifies ten different schools of thought on strategy design.  These ten schools of thought formed the basis of his famous book on strategic thinking, The Strategy Safari.  Mintzberg is a bit biased in his categories and in his critiques of the various schools of thought as he has his own "5P" model of strategy development (Plan, Ploy, Pattern, Position, Perspective) that incorporates many of the ten schools of thought that he criticizes.  The ten schools of thought are informative, however, in helping us understand the numerous perspectives of strategic thinking that have been developed in the short time since business strategy has been around.  A couple of points to keep in mind with looking at the ten schools of thought.  First, schools 1 and 2 are essentially the same thing.  Ansoff was at RAND for many years before going into the academy so his "design school" is simply an elaboration on RAND's "planning school."  Second, the entrepreneurial school, which is once more gaining noteriety in today's startup world, is the outgrowth of Joseph Schumpeter's Vienna school of economics thinking and his "creative destruction" approach to incumbents and entrepreneurs.  Mintzberg's cognitive school emerges from the decision making research of Herbert Simon, Daniel Kahneman, Amos Tversky, and James March in biases and "satisficing" intrude on making "optimal" decisions.  The learning school is based on work done by Charles Lindblom's idea that because of cognitive overload we "muddle through."  It also leverages James Brian Quinn's thoughts on "logical incrementalism" to argue that strategy is not bold, but the result of a company just "muddling through."  The power school is more focused on how an organization, or its employees, can strategicly influence its environment to achieve some objective.  The key writers in this model are Gerald Selancik and Jeffrey Pfeffer.  The culture school is the home of the resource based view (RBV) of strategy.  Its major concepts evolve from a book by Edith Penrose on why firms diversify and the work of Birger Wernerfelt.  The final school that I will comment on is the environmental school (school 10 is a catch all with not much going for it).  The environmental school is a catch all for contingency theory, ecological development, institutional theory and a number of other theories that describe how the environment around an organization shape it and its strategy.  No single proponent can be named that leads any of these areas although you can go back to Max Weber to see that this school of thought has a long history.



Levers of strategic success
Ultimately, managers want to understand what levers they can pull to steer their organizations to success.  The slide shown in this video demonstrates that there are remarkably few levers that an executive needs to worry about when steering an organization.  Profit is simply the difference between revenues and costs.  If you want to steer by increasing revenue you can compete in the market based on time (introducing new products more quickly than your competition), sales (providing greater coverage, more information, better support, etc.), or by pricing (low price with better or equal performance, high price with better performance).  If you want to steer by cost you can increase your productivity, lower your input costs, and produce on a faster or more responsive schedule.  There aren't too many more levers to pull than those shown.  

The strategy process

The strategy generation process is a cyclical process driven by an organizations objectives.  It revolves around determining what the position of the firm is versus its environment and competition, where it has strengths and weaknesses, developing a plan to attack its competition where they are weak and it is strong, bolstering its areas of weakness, implementation of the strategic plan, and monitoring/steering the organization to achieve the plan.  The cyclical process means that nothing is cast in stone and everything is subject to updating based on a simple concept of action/reaction.



Steps in the strategy process
As noted previously, strategy development and execution is driven by the objectives of the firm.  These objectives in turn are driven by the firm's stakeholders.  It is critical that one start out understanding what the firm wishes to achieve or, like Alice in Wonderland when confronted by the Cheshire Cat, if you don't know where you want to go, then any direction is perfectly fine.




Tools for developing a strategy
Numerous tools, frameworks, models, etc. have been developed over time to assist an organization in developing its strategy.  Tools for building a vision, decomposing the vision into a mission and, finally, turning the mission into measurable objectives exist.  For the analysis of markets, the environment, and the firm we have SWOT analyses, PESTL analyses, life cycle analyses, scenario analysis, Porter's five forces, detailed competitor analysis, customer and market segmentation analysis, etc.  (we will discuss these tools in more depth later in the video series).  Internal to the firm one can use product portfolio analysis, sales analyses, value chain analysis, core competency analysis, perform benchmarking and other numerous operational analyses.  From all this work a strategy can be developed and decomposed so it rolls down to each business unit, market, geography, etc.  Implementation can be planned based on an understanding of timing and options, which can be aided by real options analyses.  



Evolution of strategic analysis tools
As with anything used by managers and promoted by business schools and/or consultants, tool popularity waxes and wanes over time.  The graphic shown in this video shows a recent review of the tools that strategic planners are using the most, and tools tha aren't being used very much.  Because this is a recent chart you can see management's focus areas.  The regard for customer resource management (CRM) tools indecates that generating more sales is a key consideration.  The similar positioning of strategic planning is also interesting, although one has to wonder whether this was a bit biased since the chart was generated by a consulting firm.  

Setting your objectives

An organization's objectives drive its strategy.  Strategies are simply plans for achieving these objectives.  If an organization does not know what it wishes to achieve, then developing a strategic plan is a waste of time.  This means that the leaders of an organization must spend time understanding what the firm wishes to accomplish before they attempt to develop any sort of strategy.



The vision thing
An organization's vision establishes what its core purpose for existance is.  A vision is a short, meaningful statement that tells employees and the external world why the company exists and what it hopes to achieve by delivering on its value proposition.  The vision of an organization should remain relatively steady through time.  A "typical" vision statement:  Amazon's vision is "...to be earth's most customer centric company; to build a place where people can come to find and discover anything they might want to buy online.” 




Stakeholders and their objectives
Every company is composed of internal and external stakeholder groups.  Attempting to satisfy the desires of all of these groups is a difficult task as many of their deisres conflict.  However, it is the responsibility of management to listen to these groups, undertand their aspirations, and incorporate as many of these desires in the objectives that are set for firm.  Linking the outside world to the inside activities of the firm is one of the most critical tasks of senior management.



Listening to stakeholders
Each stakeholder group has certain expectations and differing degrees of influence.  Shareholders generally sit at the top of the influence hierarchy in publicly traded companies.  They focus on monetary returns for their investments in the stock of the company.  Other entities that have a financial interest in the company include banks and lenders, managers, employees, and suppliers.  Customer interest in the company is based on the comapany's value proposition, after sales support, and continuity related factors.  Sitting at the bottom of most organization influence charts are the communities in which the companies operate and the governments that regulate their actions.  This seems rather counter intuitive, but the expectations of these stakeholders appear generally in the compliance objectives of the organization and not in its overall market outlook.  We see this today in the difficulty that many organizations are having in living up to the CSR statements that they have made. 



Management/stakeholder tension
Corporate management, like all stakeholders, is concerned with the answer to the question "What is in this for me?"  Self interest of the various stakeholders creates a tension between what management establishes as the objectives of the firm and what the stakeholders want as the answer to the question posed.  The ability of the firm's management to handle this tension successfully is one of the key ingredients of whether or not a firm will be able to sustain a competitive position in its market.

The importance of vision

Without a clear vision an organization cannot focus on long term objectives.  The organization's vision establishes the purpose the firm and its direction of movement.  This vision remains the lode star for the firm as it attempts to navigate through the many challenges that markets and competitors confront it with year in and year out.  The vision centers the organization and reminds everyone what the firm is all about and what their destination is.



The importance of mission
While your vision sets out your purpose and direction, your mission establishes how you propose to go about achieving your vision.  The mission defines the firm's core values, its approach to doing business, how it will meet the needs of its stakeholders, and the actions it will take to achieve its vision.  Using Amazon as an example once more, the mission of Amazon is to "continually raise the bar of the customer experience by using the internet and technology to help consumers find, discover and buy anything, and empower businesses and content creators to maximise their success. We aim to be Earth's most customer centric company." 


Corporate objectives
Out of the vision and mission corporate executives need to establish objectives, targets that are measureable.  Executives should use these objectives to define strategic excellence positions that differentiate them from competitors as well as financial and operational performance targets that determine the short term progress of the firm towards its long term vision.  One of the key objective categories for any organization is its financial objectives.  This objective will be discussed in more detail in several of the videos that follow.

Economic value

Economic value add is a measure of how much value a firm generates over other potential investments with similar risk profiles.  During the 1990s this measure, which is calculated by subtracting the cost of capital from the return on capital for the firm.  While in the abstract this is a non-controversial approach to determining how an organization is doing financially, its application resulted in some interesting and unintended outcomes.  I say this because to calculate both the return on capital and the weighted average cost of capital you have to divide several terms by the total amount of capital employed in the organization.  To increase economic value as a manager you can focus on increasing the numerator in the return on capital calculation (mainly your operating profits) or decreasing the numerator in the cost of capital calculation (composed of cost of equity and debt, which managers have little direct control over).  A manager can also lower the overall capital employed, which has a much higher impact on the return on capital employed component of the calculation than on the cost of capital calculation.  As it is much easier to get rid of "capital employed" by outsourcing capital intensive activities than be figuring out how to increase revenues and operational efficiencies, guess what savvy executives did....they outsourced production activities to third parties.  This allowed the management teams to achieve their bonus objectives while "hollowing out" the companies they were supposedly managing for the long term.  Today economic value add as a factor in management incentive packages has become far less prevalent than it was 25 years ago.



An example
The economic value calculation is a very simple calculation based on some standard financial figures reported by most publicly traded companies.  In this example we see a report from the RWE Group of companies, a large European energy group.  Operating profits for the group are divided by total assets (capital) employed to arrive at the Return on Capital Employed (ROCE) factor in the EVA calculation.  Next we see a single figure for the average cost of debt and equity for the company for the year.  At the bottom of the chart we simply plug the resulting numbers for the group into our EVA calculation (16.4 - 9.0 = 7.4) to get the EVA for RWE for this example year.  The figure of 7.4% indicates that an investor who invested in RWE for the year would have received a return on their investment of 7.4% more than they would have received if they had invested in a similarly risky alternative investment.  If management at RWE wanted to increase their bonuses by increasing the EVA, they might have difficulty because this would require increasing operating profits or lowering cost of capital, both of which are very difficult to control by managers.  However, managers can control the sale of assets so by focusing on the Capital Employed column managers could do some very interesting things to increase their short term gains at the long term expense of the company.  Needless to say, EVA is a two edged sword.

How do you value a firm?
The simple financial valuation calculation for a firm is to look at the annual cash flow expected from the firm and discount back to the present the value of these cash flows.  I say that this is the simple valuation calculation because in today's valuation markets where Internet startups are being valued in multiples of billions of dollars while still losing money, one has to believe that there are other factors involved, and there are.  However, for our purposes in this discussion, the simple valuation approach makes sense as it is the generally accepted approach for most "traditional" firms.

Balanced portfolios
To lower risks and, therefore, the cost of capital, firms need to balance their portfolio of businesses.  This means looking at the various mechanisms for risk balancing.  These include product diversification, geographic diversification, vertial integration, and market diversification (regulated vs unregulated, etc.).  Firms with a well balanced portfolio of businesses have lower borrowing costs and, therefore, lower costs of capital.  


The balanced scorecard
The balanced scorecard concept arrived at the same time as EVA.  By using the framework provided by the balanced scorecard managers are able to cascade down through an organization actions that support the vision, mission, and strategy of the firm.  Setting business process improvement targets, customer satisfaction targets, and employee training targets that align with the achievement of financial results allows managers to build a measurement framework that facilitates the tracking of corporate progress towards financial objectives.

Analysis

To a certain extent, the setting of objectives can occur in a vacuum.  Objective setting is driven by stakeholder needs, management desires, environmental factors, and competitor moves.  Before objectives can be achieved, however, management must understand what it is capable of doing.  This is a non-trivial task and one that external CEOs often forget about.  Objectives established on the deck of the starship Enterprise generally have no possibility of being achieved even if Captain Piccard commands the crew to "Make it so." This meas that, at a minimum, the firm must understand what its strengths, weaknesses, opportunities, and threats (SWOT) are so that it can realisticly attempt to achieve its objectives.



Internal vs external conditions
A firm's strengths and weaknesses are a result of its internal capabilities, historical product-market decisions, and supply chain decisions.  A detailed analysis and clear understanding of where the firm is strong in these factors and where it is weak viz its objective set is key to being able to understand what it can do today and where it will need to invest if it wishes to achieve its objectives.  
The opportunities and threats that a firm faces are understood by doing an external environmental analysis.  A global trends and impacts analysis conducted using a Political, Economic, Social, Technological, Environmental, Legal (PESTEL) can provide management with an understanding of how the global environment is changing and the impact of these changes on its operations.  Lifecycle analyses of products, technologies, capabilities, etc. can help the firm understand where its product portfolio is heading and how well its resources are positioned in the changing marketplace.  Scenarios can provide guidance on best case, worst case, and optimistic evolutions of the global market and their impact on the firm's operations.  Industry trends are also relevant so analyses based on Porter's 5 forces framework, competitor analyses, and product/market segment analyses are required.  All of this analytical work can expose potential threats to the firm's position and opportunities that it might exploit in the future.  


Where do we make money?

When examining internal operations, a company should always try to determine where it makes money.  This analysis focuses on the product portfolio of the company and attempts to allocate costs, not on an accounting basis, but on an actual basis to determine whether the products in the portfolio are contributing in a positive or negative manner to the profitability of the firm.  This analysis also identifies those products that are contributing the most to the firm's profits and those that, while profitable, may be contributing only a small amount to profits.  Decisions about which products to support, which to prune, and which to emphasize can be made based on the results of this type of an analysis.



Product lifecycles
The products that a firm offers to the market evolve according to different lifecycles.  Mature products may contribute significant profits to the firm, but be in declining markets.  New products may be contributing little, or requiring significant investments, but be in rapidly growing market segments.  A company should try to balance its portfolio of products and services so that it is not exposed to situations in which its mature products, which contribute significant amounts to its profitability, are not balanced by new products with high potential.  Such situations put the organization at risk of declining profits without the potential for countering these declines with new products.




Market positions
How the various business units of the firm stack up in the market against the competition is an extremely important fact to understand.  If a firm is positioned in either first or second place in a relatively concentrated market (i.e., few competitors), then it has the potential to extract significantly more "rents" from customers than a company with lower market share.  In a highly competitive market with numerous competitors (e.g., a market characterized by commodities) being in first of second position may not provide the firm with much pricing advantage over the competition.  Understanding the competitive landscape aides management in determining whether to maintain, invest for growth, or deinvest in various businesses for the long term benefit of the firm.



The value chain
When analyzing the firm's strengths and weaknesses, it is important to not only look inside the organization, but up and down the firm's value chain.  Modern organizations compete via their value chains, not by their internal operations only.  Whether the firm's value chain is acting as a competitive weapon for the firm or is inhibiting the firm's ability to compete can determine whether or not a firm can sustain its profitability over the long term.  As Michael Porter indicates in his definition of competitive advantage, the firm's value chain must be aligned with the firm's product/market requirements and organized in a manner that is difficult to copy for the firm to achieve long term competitive advantage.  



Advanteges/weaknesses along the value chain
To examine the competitive strengths and weaknesses of an organization's value chain, a simple qualitative analysis can be performed to see how the firm stacks up against each of its major competitors.  This simple analysis can provide directional information to management as to where it needs to improve operations.  In addition, if there is disagreement in how any value chain function is performing versus the competition, this can signal management to dig deeper and perform a more detailed analysis of that particular function to see how it really stacks up against the competitors.



Where do you add value?
By analyzing its value chain, a firm can determine where it adds value, and where it is simply adding costs.  Such an analysis is extremely important in understanding the value adding activities that lead to customers buying the firm's products or services.  This type of study requires a detailed knowledge of what customers value in the firm's products or services and an understanding of how each value chain function contributes to these value propositions.



Value addition - an example
To conduct an analysis of value added through the value chain, an organization can look at the margins realized in each of the value chain functions.  These margins represent "willingness to pay" by the customer of that function.  As an initial view of the value addition steps, this is both a simple and informative exercise.  Suppliers who hold monopolistic control of a function in the value chain may be reaping more margin than their true contribution to the firm's overall value proposition.  The firm should look closely at these value added figures to determine whether margins are actually in line with value created for the firm.  Actions should be taken to correct any out of line contributions (in both directions) so that the firm and its customers benefit from true value generation and not profit piracy.



Core competencies
Achieving an organization's strategic objectives requires resources.  This means that if the objectives defined by the organization's vision, mission, and stakeholder analyses require resources that the organization does not have, then the organization will either have to develop those resources internally or purchase them "on the market."  An analysis of what the firm's current portfolio of resources are capable of is, therefore, critical to developing a clear understanding of what the firm can actually achieve.  It should be noted that the definition of what a firm's core competencies are should be driven by what it is attempting to achieve.  A firm may be very good at designing and producing high performance internal combustion engines (ICEs).  However, if the market demands that mobility be powered by electric vehicles, the firm's core capabilities in ICEs may blind it to the fact that it has no core competency in what the market wants or what it may have established as its future strategic objectives.
An organization's core competencies should provide it with something difficult for competitors to copy in order to be of use in establishing a competitive advantage.  This means that only those skills that, as shown in video, provide some unique and sustainable value to the customer; that are scarce and difficult to imitate; that are hard to substitute; that block potential competitors from entering the market; and that can be leveraged to produce numerous product/market entries should be considered as core capabilities.  One should also be aware that, just as in evolution, as a firm becomes better and better at doing a particular thing, it becomes less competent at doing other things.  This means that if its market changes (e.g., moving from ICEs to electric motors), then the firm may not be able to respond and, like the dinosauers, it may go extinct.  


Industry analysis - Porter's 5 forces

To begin examining the opportunities and threats that a firm faces in its markets, a good starting point is to conduct a "five forces" analysis.  A five forces analysis examines how intense competition is within the firm's industry segment; how strong customers are viz the firm; how strong suppliers are viz the firm; what are the threats of new entrants coming into the market; and what are the threat of substitutes taking away from the firm's market.  Additional external factors can be incorporated into the five forces analysis by conducting a Political, Economic, Society, Technology, Environment, and Legal (PESTEL) analysis.  By integrating these two analyes an organization can obtain a very good picture of where growth opportunities exist and where threats from various potential competitors might arise.



Industry analysis - an example
The German power industry chart presented in this video provides an example of how an organization can synthesize its external industry analysis to see how its market is evolving and whether this evolution provides opportunities or only threats to its existance.  Such an analysis gives a good picture of the trajectory of the market that management can examine to see if its objectives are consistent with market evolution.  Gaps and inconsistencies in objectives versus the markets trajectory need to be address if the firm is to achieve success.  As Warren Buffet has been noted as saying:  "When an industry with a reputation for difficult economics meets a manager with a reputation for excellence, it is usually the industry that keeps its reputation intact."

Regulatory impacts on business
It is interesting to see how strong regulations can impact an industry.  In the energy business, deregulation of the the market provided both opportunities and threats to established firms.  Opportunities arose by providing the means to disaggregate operations and potentially generate profits at each level of disaggregation.  Threats arose due to new competitors and the potential for existing businesses to fail in true competitive situations.  The deregulation of banking, airlines, freight transport, telecommunications, and many other industries saw many existing firms prosper and others fail.  Management's ability to clearly understand how its industry is likely to evolve when undergoing such change and to orient its business portfolio to take advantage of the opportunities presented and avoid the threats inherent in change, is the primary factor in whether a business will succeed in the new environment or fall by the wayside.

Pulling your SWOT analysis together

The importance of doing a thorough SWOT analysis should be clear by now.  If an organization is going to truly position its products and services in a competitive market for long term success, it will need to understand the dynamics of the current market and the trajectory it is traveling.  Without such an understanding management is navigating in the dark and the likelihood of running aground is much higher than the likelihood of remaining profitable over the long term.

Developing the strategy

We have seen how an organization needs to go about defining its objectives and understanding its strengths, weaknesses, opportunities, and threats.  It is now time to address the issue of how an organization can use all of this information to develop its strategy for achieving its objectives, addressing market opportunities, building on its strengths, bolstering its weaknesses, and avoiding external threats.



Strategic options and choice
An organization has available to it multiple strategies that could potentially allow it to achieve its objectives.  It is the job of the managers of the various parts of the organization to build an integrated set of strategies whose sum, if achieved, allows the organization as a whole to reach its objectives.  In developing their strategies, an organization's managers need to consider numerous factors, explore alternative, consider their options, and finally decide on a direction that they believe will allow them to achieve thier unit's objectives.  Corporate executives interact with these unit managers to ensure that the options selected truly do lead to overall success for the organization.




A game theoretic approach
Strategic options can be analyzed using the theory of games originally introduced by John von Neumann and Oskar Morgenstern after the Second World War.  Game theory posits that strategies are not implemented in a vacuum.  Competitors are developing their own strategies trying to take your thinking into account.  Therefore, you need to develop your strategy taking the competition's thinking into account.  Game theory assumes that for every action you take, there is a reaction that the other "players" in the "game" will have and you need to take this into account in developing your strategy.  



Corporate vs Business Unit strategies
Many firms are organized around a central "corporate" function that oversees the activities of divisions or strategic business units (SBUs).  This organization structure is found in many large national and multi-national companies and is called the 'M' Form of organization ('M' stands for multi-divisional).  This form of organization was first researched by Alfred Chandler in his book Strategy and Structure.  Because the corporation wishes to achieve certain objectives and each of the SBUs want to achieve certain objectives, it is the responsibility of corporate executives to manage the strategy process so that the sum total of SBU strategies achieve the objectives of the total corporate entity.  Corporate management regulates the SBU strategies by both setting objectives for the SBUs and supply resources to them.  



Organizational implications of strategy
By examining the structure of the Deutsche Bahn group we can see how difficult it might be for an exectuive group to develop a clear set of objectives for the group while attempting to reconcile the needs of each business unit.  We also see how conflicts might arise between business units that compete for very similar customers in similar markets.  Achieving strategy alignment and allocating resources appropriately is a difficult task for an organization like Deutsche Bahn that has been managed historically as a quasi-governmental entity and whose acquisition strategies have been driven more by political initiatives rather than market potentials.  


Corporate strategy components

Large, complex organizations must develop processes by which they establish responsbilities for various areas of strategic decision making.  As the figure in this video indicates, at the corporate level decisions concerning the configuration of the firm are primary.  Where should resources be allocated?  What markets should be pursued?  What products should be made? What geographies should be addressed? and What should be insourced versus outsourced?  are all relevant decisions for corporate strategy consideration.  



Corporate strategy - an example
RWE's structure aligns logically with its value chain allowing RWE to achieve the relatively high (for its industry) economic value add that was discussed earlier.  By ensuring alignment along one's value chain, it is much easier to direct resources and achieve strategic intent than if a chaotic and non-alignable structure with overlapping responsibilities exists.  




Organizing for strategic alignment
RWE's structure aligns logically with its value chain allowing RWE to achieve the relatively high (for its industry) economic value add that was discussed earlier.  By ensuring alignment along one's value chain, it is much easier to direct resources and achieve strategic intent than if a chaotic and non-alignable structure with overlapping responsibilities exists. 



Strategy option selection - an example

Using RWE once more as an example, its corporate management had a number of potential options that they could have pursued in developing RWE's competitive strategy.  These options vary from focusing on only one aspect of their production value chain (generation) to getting rid of all their assets and becoming a pure marketing organizations.  Management's decision was to remain vertically integrated and expand geographically to compensate for the deregulated competition that they knew would arise in their home market after deregulation.  A matrix like the one shown in the video helps simplify the decision making process and can lead to more clear thinking about what strategy to pursue when complex strategic alternative are available.  




Business unit strategy implementation

Up to this point we have focused primarily on the corporate component of strategy formulation.  In real companies, divisions or SBUs have much to say about an organization's strategy.  SBU managers are concerned about the strategic success of their business units.  For organizations that have purchased entities and structured these acquired operations as independent business units (e.g., Deutsche Bahn and its Schenker busines unit), the business unit may have little concern for the overall corporate strategy, but significant interest in its own strategy.  However, if properly aligned, business unit strategy focuses on how the business unit plans to compete in its markets to achieve strategic success.  



Strategy/market dynamics
As was noted earlier, competition can be thought of as a game.  As an organization implements its strategy its competitors react to the strategy requiring the organization to incorporate the new market dynamic into its strategic thinking and plan.  This process makes strategy development a dynamic process, not the "once a year" planning process that many organizations currently employ.  Japanese companies have come to embrace this dynamic approach to strategy formulation and reformulation in a process that they call Hoshin Kanri or policy deployment.  This process updates strategic objectives on a regular monthly cycle based on market reactions to corporate actions.  While taking considerable effort, it leads to strategic responses that are aligned with corporate objectives and ensures that the organization remains directionally stable.



Porter's generic strategies
Michael Porter, in his book on Competitive Strategy, indicated that there are essentially three generic strategices that are available for a firm to pursue.  The firm can seek to be a differentiated product player in a broad market (e.g., Apple).  The firm can seek to be the lowest cost player in a broad market (e.g.,Aldi).  The firm can seek to focus on a market nice and either pursue a differentiation strategy (e.g., Beiersdorf) or a low cost strategy (e.g., house brands of canned vegitables).  What Porter's generic strategies approach attempts to convey is that an organization must focus its efforts to achieve excellence in one of these niche areas to achieve long term competitive success.  Failure to do so, Porter says, traps an organization "in the middle" where it is attempting to achieve multiple incompatible objectives and, therefore, dooms it to poor performance.

Generic strategy examples
A couple of examples might help in understanding the implications of Porter's generic strategies idea.  In the world of consultancy there are high end "boutique" consulting firms such as McKinsey, Bain, and BCG.  These firms focus on differentiating their service offering and command significantly higher prices for their engagements.  Former accounting firm consulting practices, while not inexpensive, focus on the a hybrid strategy of trying to be less expensive and more operational/implementation focused in their positioning.  Finally, many smaller consulting firms battle it out in various niches where particular skills, such as systems integration or lean management, are important and low cost is a differentiator.  
We can also see similar differentiation strategies in the consumer electronics industry.  Bang & Olufsen competes on differentiated high end of the market while low cost producers like Grundig compete in the cost sensitive end of the market.  Companies like Samsung try to diversify their portfolios and provide examples of hybrid strategies, competing in certain high end niches while providing middle market and low end products as well.  



Ansoff's product/market matrix
Examining the options available to a SBU for market competition we can see several potential actions that the SBU can take based on its product portfolio.  If a product is in the growth stage of its lifecycle and it has a large potential market, then the business unit may wish to "buy" market share through a market penetration strategy.  If the product is maturing and growth is on the decline, a strategy of market extension and further development could potential stave off market collapse.  If there are either unaddressed geographic markets or new markets in which an existing product could be positioned, then a diversification strategy might be appropriate.  Finally, and always with an eye on portfolio balance, the SBU might wish to develop new products to both ensure its long term success, but also to fill segments in its existing market that it feels it can exploit profitably.  



BCG's growth/share matrix
One of the most successful tools released into the strategy development domain (along with Porter's five forces and SWOT analysis) is the Boston Consulting Group's growth/share matrix.  This simple 2X2 matrix maps market growth against relative market share of each product in an organization's portfolio.  By using circles with a diameter reflecting either the product's overall sales or its contribution to profits, a company can determine how well positioned each product in its portfolio is.  Products positioned in low growth markets with poor market shares are candidates for divestiture.  Products in low market growth markets, but with strong market positions, are cash generators that can be used to throw off cash for funding the growth of products in high growth markets. Products in high growth markets with poor current market shares are candidates for selective investment and pruning.  Products in high growth markets with high market share are candidates for aggressive funding so they maintain their position for future exploitation when the market slows down.  The growth share matrix is another tool that captures a significant amount of information in an easy to understand format for management decision making.



Time-based levers of strategy
Depending on a company's time horizon, strategic decisions can be broken down into short term tactical decisions and long term strategic decisions.  Tactical decisions focus on price and volume while long term decisions are concerned with capacity, scale, technology, markets, new products, and geographies.  Management of the business unit must address both time frames if it is to ensure the long term viability of the business unit.

Concluding the strategy safari

I conclude this introduction to strategy with several observations.  First, the development of a strategy for an organization is one of the most significant elements of ensuring the long term viability of the firm.  Second, in developing a strategy a firm must recognize that it is competing in a market composed of intelligent competitors.  Therefore, it needs to take into account their reactions to any strategic move it makes when planning its strategy.  Third, for a strategy to succeed, all elements of a firm's supply chain must be organized and aligned to deliver the value proposition underlying the strategy.  Without alignment, it is not possible to achieve long term strategic objectives in a planned manner.  Fourth, strategy development is a dynamic process, but vision and mission development requires continuity and long term commitment.  Finally, hope is not a strategy.  To have a strategy is to have done your homework, examined your organization inside and outside, understood your core capabilities, and developed a plan that takes advantage of your strengths, the opportunities presented by the market, avoids threats observed in the market, and addresses the weaknesses of your organization.  That is strategy.  It is a lot of work, but its outcome, if properly done, is long term success.

Last modified: Wednesday, 10 July 2024, 3:13 PM