S TANDFORD E XECUTIVE P ROGRAMME ON S TRATEGY AND O RGANISATION EPSO ‘98

EPSO ‘98 : T ABLE OF C ONTENTS T HINKING vs P LANNING S TRATEGY & M ANAGEMENT L EADERSHIP & I NTENT B USINESS S TRATEGY T O C OMPETE T O O RGANISE A DVANTAGE & C HANGE S TRATEGIC P OSITION G LOBALISATION T O M ANAGE I NFLUENCE & P OWER WRAP-UP P AGE 3 P AGE 24 P AGE 39 P AGE 51 P AGE 74 P AGE 95 P AGE 111 P AGE 138 P AGE 154 P AGE 179 P AGE 206 P AGE 214

EPSO ‘98 S TRATEGY & M ANAGEMENT

The Role of Strategy How can my organisation and I succeed? Today and tomorrow In a changing - but always complex and tough environment Create value Get to keep some of it Others are trying to do the same, and their success often means your failure. Others will try to claim shares of the value you create Strategy is about finding a way to succeed and then doing it. STANFORD - EPSO 98 STRATEGY The Answer The Difficulty The Issue

How can my organisation and I succeed?

Today and tomorrow

In a changing - but always complex and tough environment

Create value

Get to keep some of it

Others are trying to do the same, and their success often means your failure.

Others will try to claim shares of the value you create

Strategy is about finding a way to succeed and then doing it.

A statement of how we intend to succeed Business unit and corporate Market and non-market Organisational Scope Basis for competitive advantage Basis for profitability (Functional) (Performance measures) (Goal) What (business/customer/technological) opportunities we will pursue Equally important, what we are not going to do. The Role of Strategy STANFORD - EPSO 98 STRATEGY Elements of Competitive Strategy What is strategy Scope

A statement of how we intend to succeed

Business unit and corporate

Market and non-market

Organisational Scope

Basis for competitive advantage

Basis for profitability

(Functional)

(Performance measures)

(Goal)

What (business/customer/technological) opportunities we will pursue

Equally important, what we are not going to do.

Creating value means doing something different or better than the next best. Differentiation and cost “What we will not do” is at least as important as “what we will do” You cannot be all things to all people Moving to the frontier (“operational excellence”) versus taking a position (“strategic choice”) Resources: tangible and intangible Capabilities: ability to acquire and deploy resources to solve classes of problems and create value Position: attractiveness (cost/differentiation) relative to others Applies resources Utilises capabilities STANFORD - EPSO 98 STRATEGY The Role of Strategy Value Creation Strategy as Choice Resources, Capabilities & Position

Creating value means doing something different or better than the next best.

Differentiation and cost

“What we will not do” is at least as important as “what we will do”

You cannot be all things to all people

Moving to the frontier (“operational excellence”) versus taking a position (“strategic choice”)

Resources: tangible and intangible

Capabilities: ability to acquire and deploy resources to solve classes of problems and create value

Position: attractiveness (cost/differentiation) relative to others

Applies resources

Utilises capabilities

STANFORD - EPSO 98 “ Frontier” Lower Cost Differentiate STRATEGY Moving [A] to the frontier (“operational excellence”) vs taking[B] a position (“strategic choice”) [A] [B]

You succeed only if you get to keep some of the value created potential industry earnings (PIE) competitors, current and potential supplier power customer power government and other non-market forces Demand level and price-responsiveness Market growth Cost of inputs Technology of production and distribution STANFORD - EPSO 98 STRATEGY The Role of Strategy Keeping Value Created Ingredients in the PIE

You succeed only if you get to keep some of the value created

potential industry earnings (PIE)

competitors, current and potential

supplier power

customer power

government and other non-market forces

Demand level and price-responsiveness

Market growth

Cost of inputs

Technology of production and distribution

A major element of strategy is in how you get a bigger slice But there is a danger that in trying for a bigger piece, you reduce the size of the total pie. The size of the PIE and your ability to capture and hold some of it depend crucially on actors operating outside the normal market context and thus on your ability to operate effectively there. This means your strategy has to account for and incorporate non-market considerations. Issues Institutions Interests Information STANFORD - EPSO 98 STRATEGY Cutting up the PIE The Role of Strategy Non-Market Issues The Non-market Environment: 4 I’s

A major element of strategy is in how you get a bigger slice

But there is a danger that in trying for a bigger piece, you reduce the size of the total pie.

The size of the PIE and your ability to capture and hold some of it depend crucially on actors operating outside the normal market context and thus on your ability to operate effectively there.

This means your strategy has to account for and incorporate non-market considerations.

Issues

Institutions

Interests

Information

Affect the size of the PIE v. Affect its division? Complements, independent or substitutes? Integrated A strategy implies certain activities that need to be carried out to realise the strategy Value chain and support How will these be handled? People Features Architecture Processes and procedures Culture (set of beliefs that we share about why we are doing this), values and assumptions STANFORD - EPSO 98 STRATEGY Market and Non-market Elements of Strategy Activities Organisation The Role of Strategy We need a lot of everything to move the boat

Affect the size of the PIE v. Affect its division?

Complements, independent or substitutes?

Integrated

A strategy implies certain activities that need to be carried out to realise the strategy

Value chain and support

How will these be handled?

People

Features

Architecture

Processes and procedures

Culture (set of beliefs that we share about why we are doing this), values and assumptions

Complements: doing (more of) one makes doing (more of) the others more valuable or effective Fit: coherence among complements Success requires finding or creating fit within and between your strategy and your organisation, and between each and the environment. What business we are in How being in these together is going to create value above what they create individually STANFORD - EPSO 98 STRATEGY Corporate Strategy Complementarities and Fit The Role of Strategy

Complements: doing (more of) one makes doing (more of) the others more valuable or effective

Fit: coherence among complements

Success requires finding or creating fit within and between your strategy and your organisation, and between each and the environment.

What business we are in

How being in these together is going to create value above what they create individually

Determinants of Performance STANFORD - EPSO 98 PERFORMANCE Strategy Resources Capabilities Position Environment PIE Competitors Customers Suppliers Complementors Government Social ... Organisation People Features Activities PERFORMANCE

General Management Understand the basis for current performance Identify external (market and non-market) and internal developments that present threats and opportunities Develop/select a (market, non-market and organisational) strategy to meet these goals Implement it successfully Adapt the strategy and organisation to changes in the internal and external environments anticipation and forecasting emergent strategies and selection Develop new capabilities Shape the environments STANFORD - EPSO 98 PERFORMANCE

Understand the basis for current performance

Identify external (market and non-market) and internal developments that present threats and opportunities

Develop/select a (market, non-market and organisational) strategy to meet these goals

Implement it successfully

Adapt the strategy and organisation to changes in the internal and external environments

anticipation and forecasting

emergent strategies and selection

Develop new capabilities

Shape the environments

Context Some firms dominate their market while others prosper by concentrating on a small market segment. Strategic management is about developing a set of tools which is essential to the array of choices firms face, ranging from: which products and services to pursue what human resource management policies to implement whether to alter the organisational structure, etc. The decisions must be implemented by employees in different functional areas and geographies. Developing and implementing a “broad plan of action” to enhance the performance of the organisation is the objective of strategic management. Performance is the result of the fit between the actions that the firm takes and the strategic context in which they are taken. STANFORD - EPSO 98 MANAGEMENT

Some firms dominate their market while others prosper by concentrating on a small market segment.

Strategic management is about developing a set of tools which is essential to the array of choices firms face, ranging from:

which products and services to pursue

what human resource management policies to implement

whether to alter the organisational structure, etc.

The decisions must be implemented by employees in different functional areas and geographies.

Developing and implementing a “broad plan of action” to enhance the performance of the organisation is the objective of strategic management.

Performance is the result of the fit between the actions that the firm takes and the strategic context in which they are taken.

Choices The choices a firm makes about how it acquires and deploys its assets are the main way in which it influences its performance. This is what the firm ultimately controls. The actions that were appropriate in the old context are no longer effective in countering the potential loss of competitive advantage. The extent to which the acquisition and deployment of assets dictated by a firm’s strategy will achieve the organisation’s objectives is affected by the context in which the strategy is undertaken. The firm’s context consists of: its external environment: industry and non-market characteristics its internal context: here, a broad action plan frequently depends upon some constellation of specific key assets. STANFORD - EPSO 98 MANAGEMENT You have the same when you modify your asset intensity, the way you finance it or you apply new management rules. This is certainly the greatest danger resulting from the lack of awareness and flexibility

The choices a firm makes about how it acquires and deploys its assets are the main way in which it influences its performance. This is what the firm ultimately controls.

The actions that were appropriate in the old context are no longer effective in countering the potential loss of competitive advantage.

The extent to which the acquisition and deployment of assets dictated by a firm’s strategy will achieve the organisation’s objectives is affected by the context in which the strategy is undertaken.

The firm’s context consists of:

its external environment: industry and non-market characteristics

its internal context: here, a broad action plan frequently depends upon some constellation of specific key assets.

Environment What works in one context may fail in another Strategy is dynamic. Globalisation, for instance, may change the nature of competition in a previously domestic industry as foreign firms enter the market. The firm’s strategic and environmental context can also change as a result of actions taken by the firm itself. Firms sometimes deliberately act to change their context. There are many measures of firm performance: market share, reputation, innovation, brand image, profitability, employee satisfaction, etc. It is important to be clear about which of these different kinds of performance we have in mind. The question of objectives is important: e.g. one of the stated goals of General Electric under the leadership of Jack Welch is to be “number one or number two”. STANFORD - EPSO 98 MANAGEMENT

What works in one context may fail in another

Strategy is dynamic. Globalisation, for instance, may change the nature of competition in a previously domestic industry as foreign firms enter the market.

The firm’s strategic and environmental context can also change as a result of actions taken by the firm itself. Firms sometimes deliberately act to change their context.

There are many measures of firm performance: market share, reputation, innovation, brand image, profitability, employee satisfaction, etc. It is important to be clear about which of these different kinds of performance we have in mind.

The question of objectives is important: e.g. one of the stated goals of General Electric under the leadership of Jack Welch is to be “number one or number two”.

Goals Typically being “number one or number two” is not the ultimate goal of a firm. The explicit or implicit overarching objective is the maximisation of the owners’ wealth. In practice there are two main sets of reasons why behaviour may deviate from the pursuit of this goal: a firm may have been established with a social goal - for instance its devotion to the environment may well make it a less profitable enterprise. The second reason is the goals of managers are not necessarily aligned with those of the owners. The ability of management to pursue its personal agenda at the shareholders’ expense is constrained by the ability of shareholders to replace management. STANFORD - EPSO 98 MANAGEMENT

Typically being “number one or number two” is not the ultimate goal of a firm. The explicit or implicit overarching objective is the maximisation of the owners’ wealth.

In practice there are two main sets of reasons why behaviour may deviate from the pursuit of this goal:

a firm may have been established with a social goal - for instance its devotion to the environment may well make it a less profitable enterprise.

The second reason is the goals of managers are not necessarily aligned with those of the owners. The ability of management to pursue its personal agenda at the shareholders’ expense is constrained by the ability of shareholders to replace management.

Goals To the extent firms can and do define their overarching goals differently from profit-making maximisation, those differences must be recognised in formulating and implementing strategy. To the extent that firms define their overarching goal in terms of actors within the firm, strategy formulation and implementation must be sensitive to issues of politics, influence, and incentives inside the firm. The general manager’s role is not simply to oversee those functional areas, but rather to set the strategic direction and goals for the business that serve as a guide for the development of functional area policies. The general manager fulfils a variety of roles including performance of ceremonial duties, acting as a company spokesman, allocating resources, dealing with day-to-day crisis, etc. STANFORD - EPSO 98 MANAGEMENT

To the extent firms can and do define their overarching goals differently from profit-making maximisation, those differences must be recognised in formulating and implementing strategy.

To the extent that firms define their overarching goal in terms of actors within the firm, strategy formulation and implementation must be sensitive to issues of politics, influence, and incentives inside the firm.

The general manager’s role is not simply to oversee those functional areas, but rather to set the strategic direction and goals for the business that serve as a guide for the development of functional area policies.

The general manager fulfils a variety of roles including performance of ceremonial duties, acting as a company spokesman, allocating resources, dealing with day-to-day crisis, etc.

Role It is incorrect to equate “senior” and “general”. There are often managers quite low in the hierarchy who do have general manager responsibilities. The image of the general manager as the “captain of the ship” is open to two broad criticisms: One centres on the extent to which strategy is “top down” and the second concerns whether strategy within organisations is really planned at all, or evolves in a somewhat haphazard fashion. In small firms, even where the process is more participatory and hardly resembles the “captain of the ship”, ultimate responsibility for strategy typically rests with the senior general management. The “top down” view can be of only limited applicability to a multi-business enterprise. The top managers cannot play the strategic decision-making role we have ascribed to the general manager. STANFORD - EPSO 98 MANAGEMENT

It is incorrect to equate “senior” and “general”. There are often managers quite low in the hierarchy who do have general manager responsibilities.

The image of the general manager as the “captain of the ship” is open to two broad criticisms: One centres on the extent to which strategy is “top down” and the second concerns whether strategy within organisations is really planned at all, or evolves in a somewhat haphazard fashion.

In small firms, even where the process is more participatory and hardly resembles the “captain of the ship”, ultimate responsibility for strategy typically rests with the senior general management.

The “top down” view can be of only limited applicability to a multi-business enterprise. The top managers cannot play the strategic decision-making role we have ascribed to the general manager.

Evolution In a stable environment, an industry is populated by firms with routinised behaviour that is well-adapted to their environment. Quinn argues that “the processes used to arrive at the total strategy are typically fragmented, evolutionary and largely intuitive” and describes this as “logical incrementalism”. Firms can be seen as a collection of routines that are largely tacit knowledge. Burgelman argues that reasonably complex organisations are subject to both evolutionary and planned processes. At any point in time senior management is responsible for articulating a strategy that is consistent with the strategic context the firm faces. STANFORD - EPSO 98 MANAGEMENT

In a stable environment, an industry is populated by firms with routinised behaviour that is well-adapted to their environment.

Quinn argues that “the processes used to arrive at the total strategy are typically fragmented, evolutionary and largely intuitive” and describes this as “logical incrementalism”. Firms can be seen as a collection of routines that are largely tacit knowledge.

Burgelman argues that reasonably complex organisations are subject to both evolutionary and planned processes. At any point in time senior management is responsible for articulating a strategy that is consistent with the strategic context the firm faces.

Perspectives A perspective on strategy: Limits to control: Luck matters! Adaptation is a double-edged sword: a firm that is the best at some narrowly defined task may find itself suddenly at a competitive disadvantage when the environment is no longer favourable for the task. Change is difficult: a declaration by top management that the firm will change does not make change happen. “Lower” management matters: There are many examples in which the unauthorised and unanticipated actions of lower management and/or operational personnel have profoundly affected the performance of the firm. Strategy process is complex. STANFORD - EPSO 98 MANAGEMENT

A perspective on strategy:

Limits to control: Luck matters!

Adaptation is a double-edged sword: a firm that is the best at some narrowly defined task may find itself suddenly at a competitive disadvantage when the environment is no longer favourable for the task.

Change is difficult: a declaration by top management that the firm will change does not make change happen.

“Lower” management matters: There are many examples in which the unauthorised and unanticipated actions of lower management and/or operational personnel have profoundly affected the performance of the firm.

Strategy process is complex.

Small business or business unit Some special issues are more prominent in new, small businesses: No internal capital market Differential access to external capital markets Fewer inertial forces: companies do not have strong organisational routines that keep the firm moving in a given direction. A well-articulated and communicated strategy can serve the purpose of forcing the company to be self-conscious about its strategic direction. The “top down” view of strategy is clearly most applicable: the “captain of the ship” metaphor applies much better here than elsewhere. Private non-profit organisations are in some sense owned by their customers and/or the larger community and the objectives of the organisation must reflect those broader interests. STANFORD - EPSO 98 MANAGEMENT

Some special issues are more prominent in new, small businesses:

No internal capital market

Differential access to external capital markets

Fewer inertial forces: companies do not have strong organisational routines that keep the firm moving in a given direction. A well-articulated and communicated strategy can serve the purpose of forcing the company to be self-conscious about its strategic direction.

The “top down” view of strategy is clearly most applicable: the “captain of the ship” metaphor applies much better here than elsewhere.

Private non-profit organisations are in some sense owned by their customers and/or the larger community and the objectives of the organisation must reflect those broader interests.

Conclusion An exceptional rate of return cannot be earned by the average firm. With many firms chasing the same opportunities, the competitive interaction of those firms quickly dissipates any profits. Many firms will use all the tools we will discuss and still earn only a normal return because earning even a normal return is not easy. Because in final analysis, people make the difference. In strategic management, we seek to understand how to recognise a twenty-dollar bill when its lying there and how to build long term advantage from transitory opportunity. STANFORD - EPSO 98 MANAGEMENT

An exceptional rate of return cannot be earned by the average firm.

With many firms chasing the same opportunities, the competitive interaction of those firms quickly dissipates any profits.

Many firms will use all the tools we will discuss and still earn only a normal return because earning even a normal return is not easy. Because in final analysis, people make the difference.

In strategic management, we seek to understand how to recognise a twenty-dollar bill when its lying there and how to build long term advantage from transitory opportunity.

EPSO ‘98 T HINKING vs P LANNING

Introduction A general manager must have a cognitive map of the relationship between actions, context and performance. The vast majority of mature companies have a systematic, formal strategic planning routine as their strategy process. The strategic plan is as much a part of the political process of resource allocation within the firm as it is an attempt to think creatively about business unit strategy. Strategic thinking is the general managers’ ability to develop and maintain a conceptual map of their businesses that ties together the elements and that provides them with the ability to think through, “on their feet”, the impact of changes in their internal and external environment. Increasingly, general managers will be expected to have a mental strategic model of the business that they run that consists of a comprehensive understanding of the forces at work. STANFORD - EPSO 98 THINKING VS PLANNING

A general manager must have a cognitive map of the relationship between actions, context and performance.

The vast majority of mature companies have a systematic, formal strategic planning routine as their strategy process.

The strategic plan is as much a part of the political process of resource allocation within the firm as it is an attempt to think creatively about business unit strategy.

Strategic thinking is the general managers’ ability to develop and maintain a conceptual map of their businesses that ties together the elements and that provides them with the ability to think through, “on their feet”, the impact of changes in their internal and external environment.

Increasingly, general managers will be expected to have a mental strategic model of the business that they run that consists of a comprehensive understanding of the forces at work.

The Fall and Rise of Strategic Planning Strategic planning, when it arrived on the scene in the mid-60s, involved separating thinking from doing and created a new function staffed by specialists: strategic planners. Strategic planning, however, is not strategic thinking. The strategy making process should consist of capturing what the manager learns from all sources and then synthesising that learning into a vision of the direction that the business should pursue. Planners should make their contribution around the strategy-making process rather than inside it. By redefining the planner’s job, companies will acknowledge the difference between planning and strategic thinking. Strategic thinking is about synthesis. STANFORD - EPSO 98 THINKING VS PLANNING

Strategic planning, when it arrived on the scene in the mid-60s, involved separating thinking from doing and created a new function staffed by specialists: strategic planners.

Strategic planning, however, is not strategic thinking.

The strategy making process should consist of capturing what the manager learns from all sources and then synthesising that learning into a vision of the direction that the business should pursue.

Planners should make their contribution around the strategy-making process rather than inside it.

By redefining the planner’s job, companies will acknowledge the difference between planning and strategic thinking.

Strategic thinking is about synthesis.

The Fall & Rise of Strategic Planning Life is larger than our categories. Real strategic change requires inventing new categories, not rearranging old ones. Strategic planning has not only never amounted to strategic thinking but has, in fact, often impeded it. The problem is that planning represents a calculating style of management, not a committing style. Strategies take on value only as committed people infuse them with energy. If an organisation is managed by intuitive geniuses there is no need for formal strategic planning. For strategic planning, the grand fallacy is this: because analysis encompasses synthesis, strategic planning is strategy making. In addition, this rests on 3 fallacious assumptions : prediction is possible strategist can be detached from the subjects of their analysis strategy making process can be formalised STANFORD - EPSO 98 THINKING VS PLANNING

Life is larger than our categories. Real strategic change requires inventing new categories, not rearranging old ones.

Strategic planning has not only never amounted to strategic thinking but has, in fact, often impeded it.

The problem is that planning represents a calculating style of management, not a committing style. Strategies take on value only as committed people infuse them with energy.

If an organisation is managed by intuitive geniuses there is no need for formal strategic planning.

For strategic planning, the grand fallacy is this: because analysis encompasses synthesis, strategic planning is strategy making. In addition, this rests on 3 fallacious assumptions :

prediction is possible

strategist can be detached from the subjects of their analysis

strategy making process can be formalised

The Fall and Rise of Strategic Planning Many practitioners and theorists have wrongly assumed that strategic planning, strategic thinking and strategy making are all synonymous, at least in best practice. The failure of strategic planning is the failure of systems to do better than, or even nearly as well as, human beings. Planning could not learn. Strategies cannot be created by analysis, but their development can be helped by it. Planners should work in the spirit of what could be called a “soft analyst”, whose intent is to pose the right questions rather than find the right answers. STANFORD - EPSO 98 THINKING VS PLANNING

Many practitioners and theorists have wrongly assumed that strategic planning, strategic thinking and strategy making are all synonymous, at least in best practice.

The failure of strategic planning is the failure of systems to do better than, or even nearly as well as, human beings. Planning could not learn.

Strategies cannot be created by analysis, but their development can be helped by it.

Planners should work in the spirit of what could be called a “soft analyst”, whose intent is to pose the right questions rather than find the right answers.

The Fall and Rise of Strategic Planning Planning cannot generate strategies. Strategic programming involves three steps: codification, elaboration, and conversion of strategies. This requires a good deal of interpretation and careful attention to what might be lost in articulation: nuance, subtlety, qualification. Some of the most important strategies in organisations emerge without the intention or sometimes even the awareness of top managers. “The real purpose of effective planning is not to make plans but to change the mental models that decision makers carry in their heads”. Systems do not think and when they are used for more than the facilitation of human thinking, they can prevent thinking. STANFORD - EPSO 98 THINKING VS PLANNING

Planning cannot generate strategies.

Strategic programming involves three steps: codification, elaboration, and conversion of strategies.

This requires a good deal of interpretation and careful attention to what might be lost in articulation: nuance, subtlety, qualification.

Some of the most important strategies in organisations emerge without the intention or sometimes even the awareness of top managers.

“The real purpose of effective planning is not to make plans but to change the mental models that decision makers carry in their heads”.

Systems do not think and when they are used for more than the facilitation of human thinking, they can prevent thinking.

What is strategy? Positioning - once the heart of strategy - is rejected as too static for today’s dynamic markets and changing technologies. In many industries, however, what some call hyper-competition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition. Bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions. Operational effectiveness and strategy are both essential to superior performance. But they work in very different ways. STANFORD - EPSO 98 THINKING VS PLANNING

Positioning - once the heart of strategy - is rejected as too static for today’s dynamic markets and changing technologies.

In many industries, however, what some call hyper-competition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition.

Bit by bit, almost imperceptibly, management tools have taken the place of strategy. As managers push to improve on all fronts, they move farther away from viable competitive positions.

Operational effectiveness and strategy are both essential to superior performance. But they work in very different ways.

Operational Effectiveness Operational effectiveness (OE) means performing similar activities better than rivals perform them. Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilise its inputs by, for example, reducing defects in products or developing better products faster. In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways. Differences in operational effectiveness among companies are pervasive. Some companies are able to get more out of their inputs than others because they eliminate wasted effort, employ more advanced technology, motivate employees better, or have greater insight into managing particular activities or sets of activities. STANFORD - EPSO 98 THINKING VS PLANNING

Operational effectiveness (OE) means performing similar activities better than rivals perform them.

Operational effectiveness includes but is not limited to efficiency. It refers to any number of practices that allow a company to better utilise its inputs by, for example, reducing defects in products or developing better products faster.

In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways.

Differences in operational effectiveness among companies are pervasive. Some companies are able to get more out of their inputs than others because they eliminate wasted effort, employ more advanced technology, motivate employees better, or have greater insight into managing particular activities or sets of activities.

What is strategy? Improving operational effectiveness is a necessary part of management, but it is not strategy. Both are essential but the two agendas are different. The operational agenda involves continual improvement everywhere there are no tradeoffs. Failure to do this creates vulnerability even for companies with a good strategy. The operational agenda is the proper place for constant change, flexibility and relentless efforts to achieve best practice. The strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit. It involves the continual search for ways to reinforce and extend the company’s position. It demands discipline and continuity; its enemies are distraction and compromise. STANFORD - EPSO 98 THINKING VS PLANNING

Improving operational effectiveness is a necessary part of management, but it is not strategy. Both are essential but the two agendas are different.

The operational agenda involves continual improvement everywhere there are no tradeoffs. Failure to do this creates vulnerability even for companies with a good strategy.

The operational agenda is the proper place for constant change, flexibility and relentless efforts to achieve best practice.

The strategic agenda is the right place for defining a unique position, making clear trade-offs, and tightening fit. It involves the continual search for ways to reinforce and extend the company’s position. It demands discipline and continuity; its enemies are distraction and compromise.

Benchmarking The more benchmarking companies do, the more they look alike. Gradually, managers have let operational effectiveness supplant strategy. The result is zero-sum competition, static or declining prices, and pressures on costs that compromise companies ability to invest in the business in the long term. Competitive strategy is about being different, about choosing a different set of activities to deliver a unique mix of value; about choosing to perform activities differently or to perform different activities than rivals . Strategy is the creation of a unique and valuable position, involving a different set of activities. The essence of strategic positioning is to choose activities that are different from those of rivals. If the same set of activities were best to produce all varieties, meet all needs, and access all customers, companies could easily shift among them and operational effectiveness would determine performance. STANFORD - EPSO 98 THINKING VS PLANNING

The more benchmarking companies do, the more they look alike.

Gradually, managers have let operational effectiveness supplant strategy. The result is zero-sum competition, static or declining prices, and pressures on costs that compromise companies ability to invest in the business in the long term.

Competitive strategy is about being different, about choosing a different set of activities to deliver a unique mix of value; about choosing to perform activities differently or to perform different activities than rivals .

Strategy is the creation of a unique and valuable position, involving a different set of activities.

The essence of strategic positioning is to choose activities that are different from those of rivals. If the same set of activities were best to produce all varieties, meet all needs, and access all customers, companies could easily shift among them and operational effectiveness would determine performance.

Tradeoffs A sustainable strategic position requires tradeoffs Simply put, a tradeoff means that more of one thing necessitates less of another Positioning tradeoffs are pervasive in competition and essential to strategy False tradeoffs between cost and quality occur primarily when there is redundant or wasted effort, poor control or accuracy, or weak co-ordination . Strategy is making tradeoffs in competing. The essence of strategy is choosing what not to do. Without tradeoffs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated. Again, performance would once again depend wholly on operational effectiveness . STANFORD - EPSO 98 THINKING VS PLANNING

A sustainable strategic position requires tradeoffs

Simply put, a tradeoff means that more of one thing necessitates less of another

Positioning tradeoffs are pervasive in competition and essential to strategy

False tradeoffs between cost and quality occur primarily when there is redundant or wasted effort, poor control or accuracy, or weak co-ordination .

Strategy is making tradeoffs in competing. The essence of strategy is choosing what not to do.

Without tradeoffs, there would be no need for choice and thus no need for strategy. Any good idea could and would be quickly imitated. Again, performance would once again depend wholly on operational effectiveness .

Fits Fit drives both competitive advantage and sustainability While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities. Fit locks out imitators by creating a chain that is as strong as its strongest link. Fit is a far more central component of competitive advantage than most realise. The more a company’s positioning rests on activity systems with second- and third-order fit, the more sustainable its advantage will be. Fit means that poor performance in one activity will degrade the performance in others, so that weaknesses are exposed and more prone to get attention. STANFORD - EPSO 98 THINKING VS PLANNING

Fit drives both competitive advantage and sustainability

While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities.

Fit locks out imitators by creating a chain that is as strong as its strongest link.

Fit is a far more central component of competitive advantage than most realise.

The more a company’s positioning rests on activity systems with second- and third-order fit, the more sustainable its advantage will be.

Fit means that poor performance in one activity will degrade the performance in others, so that weaknesses are exposed and more prone to get attention.

Fit & Choices Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability. Finding a new strategic position is often preferable to being the second or third imitator of an occupied position. Tailoring organisation to strategy, in turn, makes complementarities more achievable and contributes to sustainability. Continuity fosters improvements in individual activities and the fit across activities, allowing an organisation to build unique capabilities and skills tailored to its strategy. Frequent shifts in positioning are costly. The inevitable result of frequent shifts in strategy, or of failure to choose a distinct position in the first place, is “me-too” or hedged activity configurations, inconsistencies across functions, and organisational dissonance. STANFORD - EPSO 98 THINKING VS PLANNING

Strategy is creating fit among a company’s activities. The success of a strategy depends on doing many things well and integrating among them. If there is no fit among activities, there is no distinctive strategy and little sustainability.

Finding a new strategic position is often preferable to being the second or third imitator of an occupied position.

Tailoring organisation to strategy, in turn, makes complementarities more achievable and contributes to sustainability.

Continuity fosters improvements in individual activities and the fit across activities, allowing an organisation to build unique capabilities and skills tailored to its strategy.

Frequent shifts in positioning are costly.

The inevitable result of frequent shifts in strategy, or of failure to choose a distinct position in the first place, is “me-too” or hedged activity configurations, inconsistencies across functions, and organisational dissonance.

Choice A sound strategy is undermined by a misguided view of competition, by organisational failures, and, especially, by the desire to grow. Managers have become confused about the necessity of making choices. The pursuit of operational effectiveness is seductive because it is concrete and actionable. Caught up in the race for operational effectiveness, many managers simply do not understand the need to have a strategy. Some managers mistake “customer focus” to mean they must serve all customer needs or respond to every request from distribution channels. Others cite the desire to preserve flexibility. Tradeoffs are frightening, and making no choice is sometimes preferred to risking blame for a bad choice. STANFORD - EPSO 98 THINKING VS PLANNING

A sound strategy is undermined by a misguided view of competition, by organisational failures, and, especially, by the desire to grow.

Managers have become confused about the necessity of making choices.

The pursuit of operational effectiveness is seductive because it is concrete and actionable.

Caught up in the race for operational effectiveness, many managers simply do not understand the need to have a strategy.

Some managers mistake “customer focus” to mean they must serve all customer needs or respond to every request from distribution channels. Others cite the desire to preserve flexibility.

Tradeoffs are frightening, and making no choice is sometimes preferred to risking blame for a bad choice.

Choice A company may have to change its strategy if there are major structural changes in its industry. A company’s choice of a new position must be driven by the ability to find new tradeoffs and leverage a new system of complementary activities into a sustainable advantage . Newly empowered employees, who are urged to seek every possible source of improvement, often lack a vision of the whole and the perspective to recognise tradeoffs. The failure to choose sometimes comes down to the reluctance to disappoint valued managers or employees. Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. STANFORD - EPSO 98 THINKING VS PLANNING

A company may have to change its strategy if there are major structural changes in its industry.

A company’s choice of a new position must be driven by the ability to find new tradeoffs and leverage a new system of complementary activities into a sustainable advantage .

Newly empowered employees, who are urged to seek every possible source of improvement, often lack a vision of the whole and the perspective to recognise tradeoffs. The failure to choose sometimes comes down to the reluctance to disappoint valued managers or employees.

Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers.

EPSO ‘98 L EADERSHIP & I NTENT

Role The Role of leadership : Strong leaders willing to make choices are essential. In many companies, leadership has degenerated into orchestrating operational improvements and making deals. General management’s core is strategy: defining and communicating the company’s unique position, making tradeoffs, and forging fit among activities. The leader must provide the discipline to decide which industry changes and customer needs the company will respond to, while avoiding organisational distractions and maintaining the company’s distinctiveness. One of the leader’s jobs is to teach others in the organisation about strategy - and to say no . One of the most important factors of an explicit, communicated strategy is to guide employees in making choices that arise because of tradeoffs in their individual activities and in day-to-day decisions. STANFORD - EPSO 98 LEADERSHIP

The Role of leadership :

Strong leaders willing to make choices are essential.

In many companies, leadership has degenerated into orchestrating operational improvements and making deals.

General management’s core is strategy: defining and communicating the company’s unique position, making tradeoffs, and forging fit among activities. The leader must provide the discipline to decide which industry changes and customer needs the company will respond to, while avoiding organisational distractions and maintaining the company’s distinctiveness.

One of the leader’s jobs is to teach others in the organisation about strategy - and to say no .

One of the most important factors of an explicit, communicated strategy is to guide employees in making choices that arise because of tradeoffs in their individual activities and in day-to-day decisions.

Strategic Intent Strategic intent, on the one hand, envisions a desired leadership position and establishes the criterion the organisation will use to chart its progress. Strategic intent is more than simply unfettered ambition. The concept also encompasses an active management process that includes: focusing the organisation’s attention on the essence of winning; motivating people by communicating the value of the target; leaving room for individual and team contributions; sustaining enthusiasm by providing new operational definitions as circumstances change; and using intent consistently to guide resource allocations . Strategic intent captures the essence of winning. Strategic intent is stable over time. STANFORD - EPSO 98 LEADERSHIP

Strategic intent, on the one hand, envisions a desired leadership position and establishes the criterion the organisation will use to chart its progress.

Strategic intent is more than simply unfettered ambition. The concept also encompasses an active management process that includes:

focusing the organisation’s attention on the essence of winning;

motivating people by communicating the value of the target;

leaving room for individual and team contributions;

sustaining enthusiasm by providing new operational definitions as circumstances change;

and using intent consistently to guide resource allocations .

Strategic intent captures the essence of winning.

Strategic intent is stable over time.

Strategic Intent On studying the strategies of senior managers in America, Europe and Japan, two contrasting models of strategy emerge: one which Western managers will recognise, centres on the problem of maintaining strategic fit. The other centres on the problem of leveraging resources. Both models recognise the problem of competing in a hostile environment with limited resources. Both models recognise that relative competitive advantage determines relative profitability. The first emphasises the search for advantages that are inherently sustainable, the second emphasises the need to accelerate organisational learning to outpace competitors in building new advantages. The first leads to a search for niches, the second produces a quest for new rules that can devalue the incumbent’s advantages. STANFORD - EPSO 98 LEADERSHIP

On studying the strategies of senior managers in America, Europe and Japan, two contrasting models of strategy emerge: one which Western managers will recognise, centres on the problem of maintaining strategic fit. The other centres on the problem of leveraging resources.

Both models recognise the problem of competing in a hostile environment with limited resources.

Both models recognise that relative competitive advantage determines relative profitability. The first emphasises the search for advantages that are inherently sustainable, the second emphasises the need to accelerate organisational learning to outpace competitors in building new advantages.

The first leads to a search for niches, the second produces a quest for new rules that can devalue the incumbent’s advantages.

Strategic intent The first seeks to reduce financial risk by building a balanced portfolio of cash-generating and cash-consuming businesses. The second seeks to reduce competitive risk by ensuring a well-balanced and sufficiently broad portfolio of advantages. In the first model, resources are allocated to product-market units. In the second , investments are made in core competencies as well as in product-market units. Top management works to assure that the plans of individual strategic units don’t undermine future developments by default. Both models recognise the need for consistency in action across organisational levels. The first , consistency between corporate business levels is a matter of conforming to financial objectives. The second model, business-corporate consistency comes from allegiance to a particular strategic intent. Business-functional consistency comes from intermediate-term goals. STANFORD - EPSO 98 LEADERSHIP

The first seeks to reduce financial risk by building a balanced portfolio of cash-generating and cash-consuming businesses. The second seeks to reduce competitive risk by ensuring a well-balanced and sufficiently broad portfolio of advantages.

In the first model, resources are allocated to product-market units. In the second , investments are made in core competencies as well as in product-market units. Top management works to assure that the plans of individual strategic units don’t undermine future developments by default.

Both models recognise the need for consistency in action across organisational levels. The first , consistency between corporate business levels is a matter of conforming to financial objectives. The second model, business-corporate consistency comes from allegiance to a particular strategic intent. Business-functional consistency comes from intermediate-term goals.

Strategic intent Many companies are more familiar with strategic planning than they are with strategic intent. Strategic intent sets a target that deserves personal effort and commitment. Strategic intent gives employees the only goal that is worthy of commitment. The important question is not “How will next year be different from this year?” but “What must we do differently next year to get closer to our strategic intent?” We don’t believe that global leadership comes from an undirected process of intrapreneurship. Behind such programs lies a nihilistic assumption: the organisation is so hidebound, so orthodox ridden that the only way to innovate is to put a few bright people in a dark room, pour in some money, and hope that something wonderful will happen. Here the value added of the top management is low indeed. STANFORD - EPSO 98 LEADERSHIP

Many companies are more familiar with strategic planning than they are with strategic intent.

Strategic intent sets a target that deserves personal effort and commitment.

Strategic intent gives employees the only goal that is worthy of commitment.

The important question is not “How will next year be different from this year?” but “What must we do differently next year to get closer to our strategic intent?”

We don’t believe that global leadership comes from an undirected process of intrapreneurship. Behind such programs lies a nihilistic assumption: the organisation is so hidebound, so orthodox ridden that the only way to innovate is to put a few bright people in a dark room, pour in some money, and hope that something wonderful will happen.

Here the value added of the top management is low indeed.

Strategic intent Middle managers must do more than deliver on promised financial targets, they must also deliver on the broad direction implicit in their organisation’s strategic intent. Whereas the traditional view of strategy focuses on the degree of fit between existing resources and current opportunities, strategic intent creates an extreme misfit between resources and ambitions. No one knows what the terrain will look like at mile 26, so the role of top management is to focus the organisation’s attention on the ground to be covered in the next 400 metres. As with strategic intent, top management is specific about the ends, but less prescriptive about the means. Corporate challenges come from analysing competitors as well as from the foreseeable pattern of industry evolution. STANFORD - EPSO 98 LEADERSHIP

Middle managers must do more than deliver on promised financial targets, they must also deliver on the broad direction implicit in their organisation’s strategic intent.

Whereas the traditional view of strategy focuses on the degree of fit between existing resources and current opportunities, strategic intent creates an extreme misfit between resources and ambitions.

No one knows what the terrain will look like at mile 26, so the role of top management is to focus the organisation’s attention on the ground to be covered in the next 400 metres.

As with strategic intent, top management is specific about the ends, but less prescriptive about the means.

Corporate challenges come from analysing competitors as well as from the foreseeable pattern of industry evolution.

Strategic intent Companies that set corporate challenges to create new competitive advantages quickly discover that engaging the entire organisation requires top management to create a sense of urgency Develop a competitor focus at every level through widespread use of competitive intelligence Provide employees with the skills they need to work effectively Give the organisation time to digest one challenge before launching another. The “wait and see if they’re serious this time” attitude ultimately destroys the credibility of corporate challenges. Establish clear milestones and review mechanisms to track progress and ensure that internal recognition and rewards reinforce desired behaviour. It is important to distinguish between the process of managing corporate challenges and the advantages that the process creates. STANFORD - EPSO 98 LEADERSHIP

Companies that set corporate challenges to create new competitive advantages quickly discover that engaging the entire organisation requires top management to create a sense of urgency

Develop a competitor focus at every level through widespread use of competitive intelligence

Provide employees with the skills they need to work effectively

Give the organisation time to digest one challenge before launching another. The “wait and see if they’re serious this time” attitude ultimately destroys the credibility of corporate challenges.

Establish clear milestones and review mechanisms to track progress and ensure that internal recognition and rewards reinforce desired behaviour.

It is important to distinguish between the process of managing corporate challenges and the advantages that the process creates.

Strategic intent The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. An organisation’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all. The wider a company’s portfolio of advantages, the less risk it faces in competitive battles. For instance the Japanese TV manufacturers in the 1970s and 1980s thought of the various sources of competitive advantage as mutually desirable layers, not as mutually exclusive choices. What some call competitive suicide - pursuing both cost and differentiation - is exactly what many competitors strive for. STANFORD - EPSO 98 LEADERSHIP

The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today.

An organisation’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all.

The wider a company’s portfolio of advantages, the less risk it faces in competitive battles.

For instance the Japanese TV manufacturers in the 1970s and 1980s thought of the various sources of competitive advantage as mutually desirable layers, not as mutually exclusive choices.

What some call competitive suicide - pursuing both cost and differentiation - is exactly what many competitors strive for.

Strategic intent The route to competitive revitalisation implies a new view of strategy: Strategic intent assures consistency in resource allocation over the long term. Clearly articulated corporate challenges focus the efforts of individuals in the medium term. Competitive innovation helps reduce competitive risk Few companies recognise the value of documenting failure. Fewer still search their own managerial orthodoxy for the seeds for competitive surrender. STANFORD - EPSO 98 INTENT

The route to competitive revitalisation implies a new view of strategy:

Strategic intent assures consistency in resource allocation over the long term.

Clearly articulated corporate challenges focus the efforts of individuals in the medium term.

Competitive innovation helps reduce competitive risk

Few companies recognise the value of documenting failure. Fewer still search their own managerial orthodoxy for the seeds for competitive surrender.

Strategic intent Playing by the leader’s rules is usually competitive suicide. The strategist’s goal is not to find a niche within the existing industry space but to create new space that is uniquely suited to the company’s own strengths, space that is off the map. In such cases, it is not the industry that is mature, but the executives’ conception of the industry. A narrow concept of maturity can foreclose a company from a broad stream of future opportunities. Companies can be over-committed to organisational recipes, such as strategic business units and the decentralisation an SBU structure implies. Few companies with a strong SBU orientation have built successful global distribution and brand positions. Economies of scope may be as important as economies of scale in entering global markets. But capturing economies of scope demands inter-business co-ordination that only top management can provide. STANFORD - EPSO 98 INTENT

Playing by the leader’s rules is usually competitive suicide.

The strategist’s goal is not to find a niche within the existing industry space but to create new space that is uniquely suited to the company’s own strengths, space that is off the map.

In such cases, it is not the industry that is mature, but the executives’ conception of the industry.

A narrow concept of maturity can foreclose a company from a broad stream of future opportunities.

Companies can be over-committed to organisational recipes, such as strategic business units and the decentralisation an SBU structure implies.

Few companies with a strong SBU orientation have built successful global distribution and brand positions.

Economies of scope may be as important as economies of scale in entering global markets. But capturing economies of scope demands inter-business co-ordination that only top management can provide.

Strategic intent Rewarding business unit managers solely on the basis of their performance against return on investment targets often leads to denominator management because executives soon discover that reductions in investment and headcount - the denominator - “improve” the financial ratios by which they are measured more easily than growth in the numerator - revenues. The concept of the general manager as a movable peg reinforces the problem of denominator management. Honesty and humility on the part of top management may be the first prerequisite of revitalisation. Where strategy formulation is an elitist activity it is also difficult to produce truly creative strategies. The challenge will be to enfranchise employees to invent the means to accomplish ambitious ends. Senior managers lack the courage to commit their companies to heroic goals. STANFORD - EPSO 98 INTENT

Rewarding business unit managers solely on the basis of their performance against return on investment targets often leads to denominator management because executives soon discover that reductions in investment and headcount - the denominator - “improve” the financial ratios by which they are measured more easily than growth in the numerator - revenues.

The concept of the general manager as a movable peg reinforces the problem of denominator management.

Honesty and humility on the part of top management may be the first prerequisite of revitalisation.

Where strategy formulation is an elitist activity it is also difficult to produce truly creative strategies.

The challenge will be to enfranchise employees to invent the means to accomplish ambitious ends. Senior managers lack the courage to commit their companies to heroic goals.

EPSO ‘98 B USINESS S TRATEGY

Framework Strategic thinking is about understanding the relationships among the business’ external environment, its strategic assets, its action plan, and its performance . Strategy is the framework that acts as a bridge between the managers’ analysis of the business’ external and strategic environments and the specific actions the firm should take to enhance its performance given that environment. It defines a framework for guiding the choice of actions. A strategy is the starting point for developing a detailed action plan. In defining strategy we also want to distinguish it from other terms that are often mentioned in relation to strategy, such as vision, mission, values, and purpose - often useful complements to strategy but generally different from, and very imperfect substitutes for strategy. STANFORD - EPSO 98 The role of business strategy BUSINESS STRATEGY

Strategic thinking is about understanding the relationships among the business’ external environment, its strategic assets, its action plan, and its performance .

Strategy is the framework that acts as a bridge between the managers’ analysis of the business’ external and strategic environments and the specific actions the firm should take to enhance its performance given that environment.

It defines a framework for guiding the choice of actions.

A strategy is the starting point for developing a detailed action plan.

In defining strategy we also want to distinguish it from other terms that are often mentioned in relation to strategy, such as vision, mission, values, and purpose - often useful complements to strategy but generally different from, and very imperfect substitutes for strategy.

Framework Strategy is not in itself a list of tactics. Strategic assets are used to describe the attributes of a firm which are key determinants of its performance. Strategic actions used to describe the major resource commitments. Strategic actions are strategic because they importantly affect strategic assets. Strategy can be best described in terms of the following four components: A clear set of long-term goals The scope of the business Competitive advantage, and Logic STANFORD - EPSO 98 Defining business strategy BUSINESS STRATEGY

Strategy is not in itself a list of tactics.

Strategic assets are used to describe the attributes of a firm which are key determinants of its performance.

Strategic actions used to describe the major resource commitments. Strategic actions are strategic because they importantly affect strategic assets.

Strategy can be best described in terms of the following four components:

A clear set of long-term goals

The scope of the business

Competitive advantage, and

Logic

Building blocks The first element of a coherent strategy is a clear set of long-term goals such as “dominate the market”, be “technology leader”, or be the “premium quality firm”. These goals must be enduring. To be directional, these goals must be more specific than the overarching edict of “profit maximisation”. A long-term goal such as this is so broad that it has very little strategic content. Long-term goals are part of strategy insofar as they provide guidance as to what plan of action should be adopted. By clearly staking out a desired competitive position the firm may be able to persuade rivals to focus their efforts elsewhere. STANFORD - EPSO 98 A clear set of long term goals BUSINESS STRATEGY

The first element of a coherent strategy is a clear set of long-term goals such as “dominate the market”, be “technology leader”, or be the “premium quality firm”.

These goals must be enduring.

To be directional, these goals must be more specific than the overarching edict of “profit maximisation”. A long-term goal such as this is so broad that it has very little strategic content.

Long-term goals are part of strategy insofar as they provide guidance as to what plan of action should be adopted.

By clearly staking out a desired competitive position the firm may be able to persuade rivals to focus their efforts elsewhere.

The scope also defines ( implicitly ) the activities the firm will not undertake. The statement of scope defines the firm’s position with respect to these broad and controversial strategic issues. Competitive advantage is the how of strategy . A high performance firm must achieve advantage over the relevant competitors. A firm does not need to have an advantage over all its competitors. A firm will do better if its source of competitive advantage is unique to it. There are many sources of competitive advantage including: lower costs, higher quality products, more brand equity, the capacity to innovate more quickly, a superior service capability, a better business location. The fact that firm is better must be linked to its ability to achieve its long-term goals within the scope of the firm’s strategy. Building blocks STANFORD - EPSO 98 Scope Competitive advantage BUSINESS STRATEGY

The scope also defines ( implicitly ) the activities the firm will not undertake.

The statement of scope defines the firm’s position with respect to these broad and controversial strategic issues.

Competitive advantage is the how of strategy .

A high performance firm must achieve advantage over the relevant competitors.

A firm does not need to have an advantage over all its competitors.

A firm will do better if its source of competitive advantage is unique to it.

There are many sources of competitive advantage including: lower costs, higher quality products, more brand equity, the capacity to innovate more quickly, a superior service capability, a better business location.

The fact that firm is better must be linked to its ability to achieve its long-term goals within the scope of the firm’s strategy.

The most important element of a strategy is the logic by which the firm intends to achieve its strategic goals. The “why” is the logic of the strategy . Strategy contains the core argument for why and how the firm will succeed . Until one is able to articulate how the above components of strategy come together to provide a coherent and convincing case for why the firm may succeed, one has only a list of elements and not a strategy. Building blocks STANFORD - EPSO 98 Logic BUSINESS STRATEGY

The most important element of a strategy is the logic by which the firm intends to achieve its strategic goals.

The “why” is the logic of the strategy .

Strategy contains the core argument for why and how the firm will succeed . Until one is able to articulate how the above components of strategy come together to provide a coherent and convincing case for why the firm may succeed, one has only a list of elements and not a strategy.

Firms often commit their major goals and corporate philosophy in a “Mission Statement” or “Statement of Purpose”. A cynical view is that they are largely public relations statements, but in fact they can serve several positive functions, among them that if there is a goal conflict among members of an organisation, the mission statement can serve to clarify the firm’s goals. A mission statement can help promote consistency between the views of the company’s leaders and the company’s strategy. However, whatever value these statements have, they should not be confused with a statement of the firm’s strategy Building blocks STANFORD - EPSO 98 Relationship of strategy to mission, purpose, and values BUSINESS STRATEGY

Firms often commit their major goals and corporate philosophy in a “Mission Statement” or “Statement of Purpose”.

A cynical view is that they are largely public relations statements, but in fact they can serve several positive functions, among them that if there is a goal conflict among members of an organisation, the mission statement can serve to clarify the firm’s goals.

A mission statement can help promote consistency between the views of the company’s leaders and the company’s strategy.

However, whatever value these statements have, they should not be confused with a statement of the firm’s strategy

The general manager must have some sense about technological trajectories, competitors’ likely actions and developing market opportunities. The term “vision” is often used to describe the strategist’s plan for closing the gap between current reality and a potential future. Coming up with an articulation of long-term goals is easier if one has a clear vision of where the strategy is intended to take the firm. Developing and communicating an envisioned future for a firm in a rapidly changing and uncertain world is a leadership function of general managers. A firm involved in fundamentally changing its strategic direction, a clear (and clearly articulated) vision of where the strategy is intended to take the company and why it has a chance for success is important to attract and motivate employees and investors . Building blocks STANFORD - EPSO 98 Vision BUSINESS STRATEGY

The general manager must have some sense about technological trajectories, competitors’ likely actions and developing market opportunities.

The term “vision” is often used to describe the strategist’s plan for closing the gap between current reality and a potential future.

Coming up with an articulation of long-term goals is easier if one has a clear vision of where the strategy is intended to take the firm.

Developing and communicating an envisioned future for a firm in a rapidly changing and uncertain world is a leadership function of general managers.

A firm involved in fundamentally changing its strategic direction, a clear (and clearly articulated) vision of where the strategy is intended to take the company and why it has a chance for success is important to attract and motivate employees and investors .

It is important to be clear that a vision is not always necessary for strategy and it is never sufficient. A great vision without supporting strategy is unlikely to succeed. Some companies have failed because there was no action plan that guided the firm to the acquisition and deployment of strategic assets that might yield competitive advantage given the vision. Vision provides a guide to strategy formulation, but it is not a substitute for strategy. Building blocks STANFORD - EPSO 98 BUSINESS STRATEGY

It is important to be clear that a vision is not always necessary for strategy and it is never sufficient.

A great vision without supporting strategy is unlikely to succeed. Some companies have failed because there was no action plan that guided the firm to the acquisition and deployment of strategic assets that might yield competitive advantage given the vision. Vision provides a guide to strategy formulation, but it is not a substitute for strategy.

A firm’s strategy, although clear, may never be publicly articulated. The absence of a public, explicit strategy statement is in sharp contrast to the Mission Statement, which a firm often goes to pains to disseminate widely. There are three main reasons why firms refrain from publishing their strategy : The most common reason is that senior general management has a mutual understanding of what the strategy is and simply does not bother to formulate an explicit strategy statement . A firm may be pursuing its strategy quite unselfconsciously . A firm may be confused as to what its strategy is or the components of the strategy do not hang together particularly well. Since the process of being precise about the strategy reveals these inconsistencies, often accompanied by disagreement and conflict among senior management, such firms often prefer to focus on the details of the next year’s business plan than to confront the fundamentals of their strategy. STANFORD - EPSO 98 The strategy statement BUSINESS STRATEGY

A firm’s strategy, although clear, may never be publicly articulated. The absence of a public, explicit strategy statement is in sharp contrast to the Mission Statement, which a firm often goes to pains to disseminate widely. There are three main reasons why firms refrain from publishing their strategy :

The most common reason is that senior general management has a mutual understanding of what the strategy is and simply does not bother to formulate an explicit strategy statement .

A firm may be pursuing its strategy quite unselfconsciously .

A firm may be confused as to what its strategy is or the components of the strategy do not hang together particularly well. Since the process of being precise about the strategy reveals these inconsistencies, often accompanied by disagreement and conflict among senior management, such firms often prefer to focus on the details of the next year’s business plan than to confront the fundamentals of their strategy.

Benefits A Top management may believe that its strategy is so “unique” that every competitor would copy it, if only they knew it! There are several benefits that come from articulating and communicating a strategy for the business: Clarity Co-ordination- an explicit strategy serves as a co-ordinating mechanism . Incentives Efficiency - day to day decisions can be evaluated in terms of whether they “fit” the existing strategy. Evaluation/Adaptation - this is useful in tracking how well the strategy is performing. Change - a significant change in the firm’s strategy almost always requires a clear articulation of the proposed new strategy so that it can be implemented by all relevant parts of the firm. However, being explicit about strategy can reinforce rigidity and inertia. STANFORD - EPSO 98 BUSINESS STRATEGY

A Top management may believe that its strategy is so “unique” that every competitor would copy it, if only they knew it!

There are several benefits that come from articulating and communicating a strategy for the business:

Clarity

Co-ordination- an explicit strategy serves as a co-ordinating mechanism .

Incentives

Efficiency - day to day decisions can be evaluated in terms of whether they “fit” the existing strategy.

Evaluation/Adaptation - this is useful in tracking how well the strategy is performing.

Change - a significant change in the firm’s strategy almost always requires a clear articulation of the proposed new strategy so that it can be implemented by all relevant parts of the firm.

However, being explicit about strategy can reinforce rigidity and inertia.

Benefits In most practical situations the firm will not be able to boil its strategy down to a single sentence. The statement needs to be detailed enough to do justice to its components. The strategy statement can be seen as an “elevator pitch”, a statement of the firm’s strategy that is sufficiently detailed to be useful, yet concise enough to be delivered in an elevator ride from the lobby. STANFORD - EPSO 98 BUSINESS STRATEGY

In most practical situations the firm will not be able to boil its strategy down to a single sentence.

The statement needs to be detailed enough to do justice to its components.

The strategy statement can be seen as an “elevator pitch”, a statement of the firm’s strategy that is sufficiently detailed to be useful, yet concise enough to be delivered in an elevator ride from the lobby.

Adapt & Focus If the firm’s external environment has changed in significant ways, the managers may have responded by taking appropriate actions. If these actions are inconsistent with the old strategy, the strategy has de facto been changed, perhaps without the managers recognising how it has changed. Identifying the existing strategy is necessary to crafting an accurate and useful strategy statement. Outsiders who are analysing the firm either for competitive or investment reasons or with an eye to a merger or acquisition are also interested in identifying the firm’s strategy. Financial statements contained in annual reports, web page, investor information kits, etc are rarely coherent and comprehensive statements of strategy . STANFORD - EPSO 98 Strategy identification BUSINESS STRATEGY

If the firm’s external environment has changed in significant ways, the managers may have responded by taking appropriate actions. If these actions are inconsistent with the old strategy, the strategy has de facto been changed, perhaps without the managers recognising how it has changed.

Identifying the existing strategy is necessary to crafting an accurate and useful strategy statement.

Outsiders who are analysing the firm either for competitive or investment reasons or with an eye to a merger or acquisition are also interested in identifying the firm’s strategy.

Financial statements contained in annual reports, web page, investor information kits, etc are rarely coherent and comprehensive statements of strategy .

Dynamic process To identify a firm’s strategy it is necessary to look at what the firm’s actual policies are and what the firm actually does: its pattern of decisions. More often, what the firm does provides additional information about its strategy. Thus the starting point for strategy identification is an examination of the firm’s approach to business in each of its key areas of operation: finance, sales and marketing, manufacturing, procurement, R&D, marketing, formal and informal organisation structure, human resources management policies, etc. Strategy formulation is a dynamic process. The criteria that are typically used for strategy evaluation are internal and external consistency. STANFORD - EPSO 98 Strategy evaluation BUSINESS STRATEGY

To identify a firm’s strategy it is necessary to look at what the firm’s actual policies are and what the firm actually does: its pattern of decisions. More often, what the firm does provides additional information about its strategy.

Thus the starting point for strategy identification is an examination of the firm’s approach to business in each of its key areas of operation: finance, sales and marketing, manufacturing, procurement, R&D, marketing, formal and informal organisation structure, human resources management policies, etc.

Strategy formulation is a dynamic process.

The criteria that are typically used for strategy evaluation are internal and external consistency.

Consistency Three are three main tests for internal consistency of a strategy : Appropriate and mutually consistent policies : One would, for instance, expect a firm that has a strategy predicated in part on exceptional levels of service to have recruitment and training policies designed to deliver this. Moreover , the policies in different parts of the organisation should be mutually reinforcing and consistent with the strategy . A tightly coupled organisation : the formal and informal elements of the firm’s organisation should be mutually reinforcing and support the strategy. Fit with the firm’s strategic assets : the firm must have the necessary strategic assets - resources, capabilities and position - to successfully implement the strategy or else it must have a credible plan for developing or acquiring them. STANFORD - EPSO 98 BUSINESS STRATEGY

Three are three main tests for internal consistency of a strategy :

Appropriate and mutually consistent policies : One would, for instance, expect a firm that has a strategy predicated in part on exceptional levels of service to have recruitment and training policies designed to deliver this. Moreover , the policies in different parts of the organisation should be mutually reinforcing and consistent with the strategy .

A tightly coupled organisation : the formal and informal elements of the firm’s organisation should be mutually reinforcing and support the strategy.

Fit with the firm’s strategic assets : the firm must have the necessary strategic assets - resources, capabilities and position - to successfully implement the strategy or else it must have a credible plan for developing or acquiring them.

Consistency The criteria used in evaluating the strategy are closely linked to the logic of the strategy statement. The internal and external consistency criteria are related to a tool that is often used for strategy evaluation known as SWOT Analysis, an acronym for business unit’s S trengths, W eaknesses, O pportunities, and T hreats. Thus a firm’s strengths and weaknesses are relevant to the firm’s strategy since it must build on the firm’s strategic strengths and mitigate its weaknesses . The firm must take strategic actions to overcome its weaknesses and improve the strategic context of the firm going forward. STANFORD - EPSO 98 BUSINESS STRATEGY

The criteria used in evaluating the strategy are closely linked to the logic of the strategy statement.

The internal and external consistency criteria are related to a tool that is often used for strategy evaluation known as SWOT Analysis, an acronym for business unit’s S trengths, W eaknesses, O pportunities, and T hreats.

Thus a firm’s strengths and weaknesses are relevant to the firm’s strategy since it must build on the firm’s strategic strengths and mitigate its weaknesses .

The firm must take strategic actions to overcome its weaknesses and improve the strategic context of the firm going forward.

Consistency While SWOT Analysis can only serve as a preliminary data organisation component of those exercises, the use of the work “analysis in the term “SWOT Analysis” is something of an overstatement since this tool amounts to only an inventory and sorting of the major factors relevant to the firm’s strategic situation. This, however, is not enough. The strengths and weaknesses of the business unit must be appraised in relation to its strategy and, in particular, the logic of the strategy. Strategy evaluation cannot proceed without a well thought out strategy, preferably embodied in a strategy statement. Internal consistency involves an audit of the firm’s policies to ensure that they are consistent with, and support, the logic of the strategy . STANFORD - EPSO 98 BUSINESS STRATEGY

While SWOT Analysis can only serve as a preliminary data organisation component of those exercises, the use of the work “analysis in the term “SWOT Analysis” is something of an overstatement since this tool amounts to only an inventory and sorting of the major factors relevant to the firm’s strategic situation.

This, however, is not enough. The strengths and weaknesses of the business unit must be appraised in relation to its strategy and, in particular, the logic of the strategy.

Strategy evaluation cannot proceed without a well thought out strategy, preferably embodied in a strategy statement. Internal consistency involves an audit of the firm’s policies to ensure that they are consistent with, and support, the logic of the strategy .

Evolution Strategy identification and evaluation are the initial steps in formulating and implementing a new strategy. The remaining steps are : Developing strategic options: A strategic option should be a coherent, self contained strategy with the four elements of long-term goals, scope, competitive advantage and logic . Evaluating strategic options: The chosen strategy should exploit opportunities presented by the external environment that the firm’s strategic assets position it well to do. If a strategic option represents a departure from the past strategy, a change in policies and organisation will likely have to be made. Strategy implementation: The starting conditions for developing and evaluating strategy are formed by prior implementation actions. It is therefore misleading to think of implementation as merely the mechanical carrying out of a plan of action. Within a larger organisation, the co-operation and buy-in of managers in other business units as well as senior management is typically required => Strategy communication. STANFORD - EPSO 98 The strategy process and strategic change BUSINESS STRATEGY

Strategy identification and evaluation are the initial steps in formulating and implementing a new strategy. The remaining steps are :

Developing strategic options: A strategic option should be a coherent, self contained strategy with the four elements of long-term goals, scope, competitive advantage and logic .

Evaluating strategic options: The chosen strategy should exploit opportunities presented by the external environment that the firm’s strategic assets position it well to do. If a strategic option represents a departure from the past strategy, a change in policies and organisation will likely have to be made.

Strategy implementation: The starting conditions for developing and evaluating strategy are formed by prior implementation actions. It is therefore misleading to think of implementation as merely the mechanical carrying out of a plan of action. Within a larger organisation, the co-operation and buy-in of managers in other business units as well as senior management is typically required => Strategy communication.

The evaluation of business strategy For many executives strategy evaluation is simply an appraisal of how well a business performs. This line of reasoning misses the whole point of strategy - that the critical factors determining the quality of current results are often not directly observable or simply measured. Business strategy evaluation requires a reasonable store of situation-based knowledge. A strategy need not be wrong or right in any absolute sense. Many people find it easier to set or try to achieve goals than to evaluate them. This arises out of a tendency to confuse values, which are fundamental expressions of human personality, with objectives, which are devices for lending coherence to action . STANFORD - EPSO 98 BUSINESS STRATEGY

For many executives strategy evaluation is simply an appraisal of how well a business performs. This line of reasoning misses the whole point of strategy - that the critical factors determining the quality of current results are often not directly observable or simply measured.

Business strategy evaluation requires a reasonable store of situation-based knowledge.

A strategy need not be wrong or right in any absolute sense.

Many people find it easier to set or try to achieve goals than to evaluate them. This arises out of a tendency to confuse values, which are fundamental expressions of human personality, with objectives, which are devices for lending coherence to action .

The evaluation of business strategy For our purposes a strategy is a set of objectives, policies, and plans that, taken together, define the scope of the enterprise and its approach to survival and success. Four broad criteria for evaluating strategy are: Consistency Consonance Advantage Feasibility A strategy that fails to meet one or more of these criteria is strongly suspect. STANFORD - EPSO 98 The principles of strategy evaluation BUSINESS STRATEGY

For our purposes a strategy is a set of objectives, policies, and plans that, taken together, define the scope of the enterprise and its approach to survival and success.

Four broad criteria for evaluating strategy are:

Consistency

Consonance

Advantage

Feasibility

A strategy that fails to meet one or more of these criteria is strongly suspect.

The evaluation of business strategy Even strategies that are the result of formal procedures may easily contain compromise arrangements between opposing power groups. A key function of strategy is to provide coherence to organisational action. Organisational conflict is often a symptom of managerial disorder but may also indicate problems of strategic inconsistency. A final type of consistency that must be sought in strategy is between organisational objectives and the values of the management group. The key to evaluating consonance is an understanding of why the business, as it currently stands, exists at all and how it assumed its current pattern. STANFORD - EPSO 98 Consistency Consonance BUSINESS STRATEGY

Even strategies that are the result of formal procedures may easily contain compromise arrangements between opposing power groups.

A key function of strategy is to provide coherence to organisational action.

Organisational conflict is often a symptom of managerial disorder but may also indicate problems of strategic inconsistency.

A final type of consistency that must be sought in strategy is between organisational objectives and the values of the management group.

The key to evaluating consonance is an understanding of why the business, as it currently stands, exists at all and how it assumed its current pattern.

The evaluation of business strategy Competitive strategy is the art of creating or exploiting those advantages that are most telling, enduring, and most difficult to duplicate. The idea that certain arrangements of one’s resources can enhance their combined effectiveness, and perhaps even put rival forces in a state of disarray, is at the heart of the traditional notion of strategy. A strategy’s purpose is to provide structure to the general issue of the business’ goals and approaches to coping with its environment. The issue of feasibility arises with regard to whether the organisation has demonstrated that it possesses the problem-solving ability required by the strategy. The purpose of strategy is to effectively deploy the unique and distinctive resources of an enterprise. STANFORD - EPSO 98 Advantage Feasibility BUSINESS STRATEGY

Competitive strategy is the art of creating or exploiting those advantages that are most telling, enduring, and most difficult to duplicate.

The idea that certain arrangements of one’s resources can enhance their combined effectiveness, and perhaps even put rival forces in a state of disarray, is at the heart of the traditional notion of strategy.

A strategy’s purpose is to provide structure to the general issue of the business’ goals and approaches to coping with its environment. The issue of feasibility arises with regard to whether the organisation has demonstrated that it possesses the problem-solving ability required by the strategy.

The purpose of strategy is to effectively deploy the unique and distinctive resources of an enterprise.

The evaluation of business strategy The issues involved are too closely associated with the distribution of power and authority for either strategy formulation or evaluation to take place in an ivory tower environment. Ultimately, a firm’s ability to maintain its competitive position in a world of rivalry and change may be best served by managers who can maintain a dual view of strategy and strategy evaluation. STANFORD - EPSO 98 BUSINESS STRATEGY

The issues involved are too closely associated with the distribution of power and authority for either strategy formulation or evaluation to take place in an ivory tower environment.

Ultimately, a firm’s ability to maintain its competitive position in a world of rivalry and change may be best served by managers who can maintain a dual view of strategy and strategy evaluation.

EPSO ‘98 T O C OMPETE!

Customer Intimacy and Other Value Disciplines How did Nike, a start-up company with not reputation behind it, manage to run past Adidas, a long-time solid performer in the sport-shoe market? The answer is that Nike redefined value for customers in their respective markets. They built powerful, cohesive business systems that could deliver more of that value than competitors. They raised customers’ expectations beyond the competition’s reach. Today’s customers have an expanded concept of value that includes convenience of purchase, after-sale service, dependability, etc. Companies that have taken leadership positions in their industries in the last decade typically have done so by narrowing their business focus, not broadening it. They have become champions in one of the following disciplines: operational excellence, customer intimacy or product leadership . STANFORD - EPSO 98 TO COMPETE

How did Nike, a start-up company with not reputation behind it, manage to run past Adidas, a long-time solid performer in the sport-shoe market?

The answer is that Nike redefined value for customers in their respective markets. They built powerful, cohesive business systems that could deliver more of that value than competitors. They raised customers’ expectations beyond the competition’s reach.

Today’s customers have an expanded concept of value that includes convenience of purchase, after-sale service, dependability, etc.

Companies that have taken leadership positions in their industries in the last decade typically have done so by narrowing their business focus, not broadening it. They have become champions in one of the following disciplines: operational excellence, customer intimacy or product leadership .

Customer Intimacy and Other Value Disciplines Dell Computer, for instance, is a master of operational excellence. Customer intimacy, the second value discipline, means segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches. Companies combine detailed customer knowledge with operational flexibility. Product leadership means offering customers leading-edge products. Nike excels in product leadership. Companies that push the boundaries of one value discipline while meeting industry standards in the other two gain such a lead that competitors find it hard to catch up . Less focused companies must do far more than simply tweak existing processes to gain this advantage. Companies that pursue the same value discipline have remarkable similarities, regardless of their industry. But across two disciplines, the similarities end. STANFORD - EPSO 98 TO COMPETE

Dell Computer, for instance, is a master of operational excellence. Customer intimacy, the second value discipline, means segmenting and targeting markets precisely and then tailoring offerings to match exactly the demands of those niches. Companies combine detailed customer knowledge with operational flexibility. Product leadership means offering customers leading-edge products. Nike excels in product leadership.

Companies that push the boundaries of one value discipline while meeting industry standards in the other two gain such a lead that competitors find it hard to catch up .

Less focused companies must do far more than simply tweak existing processes to gain this advantage.

Companies that pursue the same value discipline have remarkable similarities, regardless of their industry. But across two disciplines, the similarities end.

Customer Intimacy and Other Value Disciplines An example of operational excellence is GE’s white goods business. In the 1980s, in order to transform itself in a low-cost, no-hassle supplier to dealers, GE designed its so-called Direct Connect programme which meant reinventing the business to embody its operational excellence discipline. With Direct Connect, GE manufactures in response to customer demand - not inventory. In doing this, GE has captured a valuable commodity from its dealers: data on the actual movement of its products. With Direct Connect, GE knows that vendors’ orders are, in fact actual sales to customers. The system has reduced and simplified a complex and expensive warehousing and distribution system down to ten strategically located warehouses. GE has reengineered the process that begins with order entry and ends with product or service delivery in a way that emphasises efficiency and reliability. STANFORD - EPSO 98 Operational Excellence TO COMPETE

An example of operational excellence is GE’s white goods business. In the 1980s, in order to transform itself in a low-cost, no-hassle supplier to dealers, GE designed its so-called Direct Connect programme which meant reinventing the business to embody its operational excellence discipline. With Direct Connect, GE manufactures in response to customer demand - not inventory.

In doing this, GE has captured a valuable commodity from its dealers: data on the actual movement of its products. With Direct Connect, GE knows that vendors’ orders are, in fact actual sales to customers.

The system has reduced and simplified a complex and expensive warehousing and distribution system down to ten strategically located warehouses.

GE has reengineered the process that begins with order entry and ends with product or service delivery in a way that emphasises efficiency and reliability.

Customer Intimacy and Other Value Disciplines Customer intimacy entails tailoring and shaping products and services to fit an increasingly fine definition of the customer. This can be expensive, but customer-intimate companies are willing to spend now to build customer loyalty for the long term . One principle that companies adopting this policy understand well is the difference between profit or loss on a single transaction and profit over the lifetime of their relationship with a single customer. A leading financial brokerage firm, for instance, recently installed a telephone-computer system capable of recognising individual clients by their telephone numbers when they call. The system routes investors with large accounts and frequent transactions to their own senior account representative. To pursue a strategy of customer intimacy, an company has to create the organisation, build the information systems and educate and motivate the people required to pursue the strategy. STANFORD - EPSO 98 Customer Intimacy TO COMPETE

Customer intimacy entails tailoring and shaping products and services to fit an increasingly fine definition of the customer. This can be expensive, but customer-intimate companies are willing to spend now to build customer loyalty for the long term .

One principle that companies adopting this policy understand well is the difference between profit or loss on a single transaction and profit over the lifetime of their relationship with a single customer.

A leading financial brokerage firm, for instance, recently installed a telephone-computer system capable of recognising individual clients by their telephone numbers when they call. The system routes investors with large accounts and frequent transactions to their own senior account representative.

To pursue a strategy of customer intimacy, an company has to create the organisation, build the information systems and educate and motivate the people required to pursue the strategy.

Customer Intimacy and Other Value Disciplines To pursue a policy of product leadership, all a company’s businesses and management processes have to be engineered for speed. Product leaders do not stop for self-congratulation, they are too busy raising the bar . It is not enough to come up with a new product; you have to come up with a new way to go to market as well. Product leaders create and maintain an environment that encourages employees to bring ideas into the company and they listen to and consider these ideas. Moreover, product leaders continually scan the landscape for new product or service possibilities. The strength of product leaders lies in reacting to situations as they occur. Product leaders are their own fiercest competitors STANFORD - EPSO 98 Product Leadership TO COMPETE

To pursue a policy of product leadership, all a company’s businesses and management processes have to be engineered for speed.

Product leaders do not stop for self-congratulation, they are too busy raising the bar .

It is not enough to come up with a new product; you have to come up with a new way to go to market as well.

Product leaders create and maintain an environment that encourages employees to bring ideas into the company and they listen to and consider these ideas. Moreover, product leaders continually scan the landscape for new product or service possibilities.

The strength of product leaders lies in reacting to situations as they occur.

Product leaders are their own fiercest competitors

Customer Intimacy and Other Value Disciplines Innovators are willing to take the long view of profitability, recognising that whether they extract the full profit potential from an existing product or service is less important to the company’s future than maintaining its product leadership edge and momentum. Such companies are never blinded by their own success. Product leaders also possess the infrastructure and management systems needed to manage risk well . Once a company has become an industry leader, the greater challenge is to sustain the required focus, to drive the strategy relentlessly through the organisation, to develop the internal consistency and to confront radical change. Many companies falter simply because they lose sight of their value discipline . Reacting to market-place and competitive pressures, they pursue initiatives that have merit on their own but are inconsistent with the company’s value discipline. STANFORD - EPSO 98 Sustaining the lead TO COMPETE

Innovators are willing to take the long view of profitability, recognising that whether they extract the full profit potential from an existing product or service is less important to the company’s future than maintaining its product leadership edge and momentum. Such companies are never blinded by their own success.

Product leaders also possess the infrastructure and management systems needed to manage risk well .

Once a company has become an industry leader, the greater challenge is to sustain the required focus, to drive the strategy relentlessly through the organisation, to develop the internal consistency and to confront radical change.

Many companies falter simply because they lose sight of their value discipline . Reacting to market-place and competitive pressures, they pursue initiatives that have merit on their own but are inconsistent with the company’s value discipline.

Customer Intimacy and Other Value Disciplines The key to gaining and sustaining value leadership is focus, but the management of a company that is a value leader must stay alert . Companies that sustain value leadership within their industries will be run by executives who do not only understand the importance of focusing the business on its value discipline but also push relentlessly to advance the organisation’s operating model. They will personally lead the company’s drive to develop new capabilities and to change the imbedded work habits, processes, and attitudes that prevent them from achieving excellence in the discipline they have chosen. By leading the effort to transform their organisations, these individuals will be preparing their companies to set new industry standards, to redefine what is possible, and to forever change the terms of competition. STANFORD - EPSO 98 TO COMPETE

The key to gaining and sustaining value leadership is focus, but the management of a company that is a value leader must stay alert .

Companies that sustain value leadership within their industries will be run by executives who do not only understand the importance of focusing the business on its value discipline but also push relentlessly to advance the organisation’s operating model. They will personally lead the company’s drive to develop new capabilities and to change the imbedded work habits, processes, and attitudes that prevent them from achieving excellence in the discipline they have chosen.

By leading the effort to transform their organisations, these individuals will be preparing their companies to set new industry standards, to redefine what is possible, and to forever change the terms of competition.

` As globalisation breaks down barriers between national and regional markets, competitors are multiplying and reducing the value of national market share. In this more dynamic business environment, strategy has to become correspondingly more dynamic. In such an environment, the essence of strategy is not the structure of a company’s products and markets but the dynamics of its behaviour . There are four basic principles of capabilities-based competition: The building blocks of corporate strategy are not products and markets but business processes. Competitive success depends on transforming a company’s key processes into strategic capabilities that consistently provide superior value to the customer. STANFORD - EPSO 98 Four basic principles of capabilities- based competition Competing on Capabilities: The New Rules of Corporate Strategy TO COMPETE

As globalisation breaks down barriers between national and regional markets, competitors are multiplying and reducing the value of national market share.

In this more dynamic business environment, strategy has to become correspondingly more dynamic. In such an environment, the essence of strategy is not the structure of a company’s products and markets but the dynamics of its behaviour .

There are four basic principles of capabilities-based competition:

The building blocks of corporate strategy are not products and markets but business processes.

Competitive success depends on transforming a company’s key processes into strategic capabilities that consistently provide superior value to the customer.

Competing on Capabilities: The New Rules of Corporate Strategy Companies create capabilities by making strategic investments in a support infrastructure that links and transcends traditional SBUs and functions. The champion of a capabilities-based strategy is the CEO. A capability is a set of business processes strategically understood. A capability is strategic only when it begins and ends with the customer . Capabilities-driven companies conceive the organisation as a gigantic loop that begins with identifying the needs of the customer and ends with satisfying them. Because a capability is “everywhere and nowhere”, no one executive controls it entirely. Leveraging capabilities requires a panoply of strategic investments across SBUs and functions and beyond what traditional cost-benefit metrics can justify. STANFORD - EPSO 98 TO COMPETE

Companies create capabilities by making strategic investments in a support infrastructure that links and transcends traditional SBUs and functions.

The champion of a capabilities-based strategy is the CEO.

A capability is a set of business processes strategically understood.

A capability is strategic only when it begins and ends with the customer .

Capabilities-driven companies conceive the organisation as a gigantic loop that begins with identifying the needs of the customer and ends with satisfying them.

Because a capability is “everywhere and nowhere”, no one executive controls it entirely. Leveraging capabilities requires a panoply of strategic investments across SBUs and functions and beyond what traditional cost-benefit metrics can justify.

Competing on Capabilities: The New Rules of Corporate Strategy Building strategic capabilities cannot be treated as an operating matter and left to operating managers, to corporate staff, or still less to SBU heads. It is the primary agenda of the CEO . Only the CEO can focus the entire company’s attention on creating capabilities that serve customers. Only the CEO can identify and authorise the infrastructure investments on which strategic capabilities depend. Only the CEO can insulate individual managers from any short-term penalties to the P&Ls of their operating units that such investments might bring about. A CEO’s success in building and managing capabilities will be the chief test of management skill in the 1990s. The prize will be to outperform competition along five dimensions: Speed Consistency Acuity Agility Innovativeness STANFORD - EPSO 98 TO COMPETE

Building strategic capabilities cannot be treated as an operating matter and left to operating managers, to corporate staff, or still less to SBU heads. It is the primary agenda of the CEO . Only the CEO can focus the entire company’s attention on creating capabilities that serve customers. Only the CEO can identify and authorise the infrastructure investments on which strategic capabilities depend. Only the CEO can insulate individual managers from any short-term penalties to the P&Ls of their operating units that such investments might bring about.

A CEO’s success in building and managing capabilities will be the chief test of management skill in the 1990s. The prize will be to outperform competition along five dimensions:

Speed

Consistency

Acuity

Agility

Innovativeness

Competing on Capabilities: The New Rules of Corporate Strategy The starting point is for senior managers to undergo a fundamental shift of perception that allows them to see their business in terms of strategic capabilities . They then need to identify and link together essential business processes to serve customer needs. Finally they can reshape the organisation to encourage the new kind of required behaviour. There are four steps by which any company can transform itself into a capabilities-based competitor: Shift the strategic framework to achieve aggressive goals Organise around the chosen capability and make sure employees have the necessary skills and resources to achieve it. STANFORD - EPSO 98 Becoming a capabilities-based company TO COMPETE

The starting point is for senior managers to undergo a fundamental shift of perception that allows them to see their business in terms of strategic capabilities .

They then need to identify and link together essential business processes to serve customer needs.

Finally they can reshape the organisation to encourage the new kind of required behaviour.

There are four steps by which any company can transform itself into a capabilities-based competitor:

Shift the strategic framework to achieve aggressive goals

Organise around the chosen capability and make sure employees have the necessary skills and resources to achieve it.

Competing on Capabilities: The New Rules of Corporate Strategy Make progress visible and bring measurements and reward into alignment. Do not delegate the leadership of the transformation . This top-down change process has the paradoxical result of driving business decision making down to those directly participating in key processes. This leads to a high measure of operational flexibility and an almost reflex-like responsiveness to external change. A company that focuses on strategic capabilities can compete in a remarkable diversity of regions products and businesses. Strategic advantages built on capabilities are easier to transfer geographically than more traditional competitive advantages . STANFORD - EPSO 98 A new logic of growth: the capabilities predator TO COMPETE

Make progress visible and bring measurements and reward into alignment.

Do not delegate the leadership of the transformation .

This top-down change process has the paradoxical result of driving business decision making down to those directly participating in key processes. This leads to a high measure of operational flexibility and an almost reflex-like responsiveness to external change.

A company that focuses on strategic capabilities can compete in a remarkable diversity of regions products and businesses.

Strategic advantages built on capabilities are easier to transfer geographically than more traditional competitive advantages .

Competing on Capabilities: The New Rules of Corporate Strategy For the moment, capabilities-based companies have the advantage of competing against rivals still locked into the old way of seeing the competitive environment. This will not last forever. The future of capabilities-based competition might be found in two fast-growing regional banks: Wachovia Corporation and Bank One. Both banks compete on capabilities, but in a different way . Wachovia competes on its ability to understand and serve the needs of individual customers, a skill that manifests itself in probably the highest “cross-sell ratio” of any bank in the country. Where Wachovia focuses on meeting the needs of individual customers, Bank One’s distinctive ability is to understand and respond to the needs of entire communities. The central organisational role in the Bank One business system is played not be front-line employees but by the presidents of the 51 affiliate banks in the Bank One network. STANFORD - EPSO 98 A new logic of growth: the capabilities predator TO COMPETE

For the moment, capabilities-based companies have the advantage of competing against rivals still locked into the old way of seeing the competitive environment. This will not last forever.

The future of capabilities-based competition might be found in two fast-growing regional banks: Wachovia Corporation and Bank One. Both banks compete on capabilities, but in a different way .

Wachovia competes on its ability to understand and serve the needs of individual customers, a skill that manifests itself in probably the highest “cross-sell ratio” of any bank in the country.

Where Wachovia focuses on meeting the needs of individual customers, Bank One’s distinctive ability is to understand and respond to the needs of entire communities.

The central organisational role in the Bank One business system is played not be front-line employees but by the presidents of the 51 affiliate banks in the Bank One network.

Competing on Capabilities: The New Rules of Corporate Strategy These presidents select products, establish prices and marketing strategy, make credit decisions and set internal management policies. They have the authority to mould bank products and services to local conditions, but they are also expected to learn from best practice. Both Wachovia and Bank One are decentralised but focused, single-minded but flexible. But there the similarities end - both banks focus on different business processes: Wachovia on transfer of customer specific information across numerous points of customer contact; Bank One on the transfer of best practices across affiliate banks. Wachovia’s capability is embedded in the training of personal bankers so the bank has made few acquisitions and can only integrate them slowly. Bank One’s capabilities by contrast, are especially easy to transfer to new acquisitions. All the company needs is to install its corporate MIS and intensively train the acquired bank’s senior officers, a process that can be done in a few months. STANFORD - EPSO 98 TO COMPETE

These presidents select products, establish prices and marketing strategy, make credit decisions and set internal management policies. They have the authority to mould bank products and services to local conditions, but they are also expected to learn from best practice.

Both Wachovia and Bank One are decentralised but focused, single-minded but flexible. But there the similarities end - both banks focus on different business processes: Wachovia on transfer of customer specific information across numerous points of customer contact; Bank One on the transfer of best practices across affiliate banks.

Wachovia’s capability is embedded in the training of personal bankers so the bank has made few acquisitions and can only integrate them slowly. Bank One’s capabilities by contrast, are especially easy to transfer to new acquisitions. All the company needs is to install its corporate MIS and intensively train the acquired bank’s senior officers, a process that can be done in a few months.

Competing on Capabilities: The New Rules of Corporate Strategy Wachovia’s capability to serve individual customers by cross-selling a wide range of banking products will in the long term probably allow the company to extract more profit per customer than Bank One. These differences can be deep-seated. Capabilities are often mutually exclusive. Choosing the right ones is the essence of strategy. STANFORD - EPSO 98 TO COMPETE

Wachovia’s capability to serve individual customers by cross-selling a wide range of banking products will in the long term probably allow the company to extract more profit per customer than Bank One.

These differences can be deep-seated. Capabilities are often mutually exclusive. Choosing the right ones is the essence of strategy.

Competing on Capabilities: The New Rules of Corporate Strategy Time is just one piece of a more far-reaching transformation in the logic of competition. For a glimpse of the new world of capabilities-based competition, consider the reversal of fortunes represented by Kmart and Wal-Mart. In 1979 Kmart was king of discount retailing. Today Wal-Mart. Today Wal-Mart is the largest and highest profit retailer in the world. The real secret of Wal-Mart’s success lies in a set of strategic business decisions that transformed the company into a capabilities-based competitor. Wal-Mart’s goals were simple: to provide customers access to quality goods, to make these goods available when and where customers want them, to develop a cost structure that enables competitive pricing, and to build and maintain a reputation for absolute trustworthiness. STANFORD - EPSO 98 TO COMPETE

Time is just one piece of a more far-reaching transformation in the logic of competition.

For a glimpse of the new world of capabilities-based competition, consider the reversal of fortunes represented by Kmart and Wal-Mart. In 1979 Kmart was king of discount retailing. Today Wal-Mart. Today Wal-Mart is the largest and highest profit retailer in the world.

The real secret of Wal-Mart’s success lies in a set of strategic business decisions that transformed the company into a capabilities-based competitor.

Wal-Mart’s goals were simple: to provide customers access to quality goods, to make these goods available when and where customers want them, to develop a cost structure that enables competitive pricing, and to build and maintain a reputation for absolute trustworthiness.

Competing on Capabilities: The New Rules of Corporate Strategy This strategic vision reached its fullest expression in a logistics technique known as “cross-docking”. Cross-docking enables Wal-Mart to achieve the economies that come from purchasing full truckloads of goods while avoiding the usual inventory and handling cost. Another key component of Wal-Mart’s logistics infrastructure is the company’s fast and responsive transportation system. The cross-docking approach places a premium on frequent, informal co-operation among stores, distribution centres, and suppliers - with far less centralised control. The job of senior manager of Wal-Mart, then, is not to tell individual store managers what to do but to create an environment where they can learn from the market - and from each other. STANFORD - EPSO 98 TO COMPETE

This strategic vision reached its fullest expression in a logistics technique known as “cross-docking”.

Cross-docking enables Wal-Mart to achieve the economies that come from purchasing full truckloads of goods while avoiding the usual inventory and handling cost.

Another key component of Wal-Mart’s logistics infrastructure is the company’s fast and responsive transportation system.

The cross-docking approach places a premium on frequent, informal co-operation among stores, distribution centres, and suppliers - with far less centralised control. The job of senior manager of Wal-Mart, then, is not to tell individual store managers what to do but to create an environment where they can learn from the market - and from each other.

Competing on Capabilities: The New Rules of Corporate Strategy The final piece of the capabilities mosaic is Wal-Mart’s human resources system. The company has set out to enhance its organisational capability with programmes like stock ownership and profit sharing geared towards making its personnel more responsive to customers. Kmart did not see its business this way. It managed its business by focusing on a few product-centred strategic business units, each a profit centre under strong, centralised line management. The difference is that Wal-Mart emphasises behaviour - the organisational practices and business processes in which capabilities are rooted - as the primary object of strategy and therefore focuses its managerial attention on the infrastructure that supports capabilities. In industry after industry, established competitors are being out-manoeuvred and overtaken by more dynamic rivals. STANFORD - EPSO 98 TO COMPETE

The final piece of the capabilities mosaic is Wal-Mart’s human resources system. The company has set out to enhance its organisational capability with programmes like stock ownership and profit sharing geared towards making its personnel more responsive to customers.

Kmart did not see its business this way. It managed its business by focusing on a few product-centred strategic business units, each a profit centre under strong, centralised line management.

The difference is that Wal-Mart emphasises behaviour - the organisational practices and business processes in which capabilities are rooted - as the primary object of strategy and therefore focuses its managerial attention on the infrastructure that supports capabilities.

In industry after industry, established competitors are being out-manoeuvred and overtaken by more dynamic rivals.

Marks & Spencer Ltd.: Summary Creating value for customers is the ultimate foundation of a successful business strategy. Successful business strategies combine concerns for differentiation and cost in unique ways. Distinctive competencies in relationship building with key parties (customers, suppliers, employees) are a powerful potential source of competitive advantage. The core values that top management associates with the survival and success of the firm can be a strong driver of business strategy. In reality, culture and strategy are inherently intertwined. Implementing a business strategy requires relentless attention and continuous alertness to deviations from core values and to opportunities to leverage them. STANFORD - EPSO 98 TO COMPETE

Creating value for customers is the ultimate foundation of a successful business strategy.

Successful business strategies combine concerns for differentiation and cost in unique ways.

Distinctive competencies in relationship building with key parties (customers, suppliers, employees) are a powerful potential source of competitive advantage.

The core values that top management associates with the survival and success of the firm can be a strong driver of business strategy. In reality, culture and strategy are inherently intertwined.

Implementing a business strategy requires relentless attention and continuous alertness to deviations from core values and to opportunities to leverage them.

Strategy as an organisational learning process is driven by the development of distinctive competencies and capabilities: Competitive advantages rooted in organisational learning may be more sustainable (because harder to imitate), but less easy to transfer (because harder to fully comprehend). Marks & Spencer Ltd.: Summary STANFORD - EPSO 98 CAPABILITIES OPPORTUNITIES STRATEGY TO COMPETE

Strategy as an organisational learning process is driven by the development of distinctive competencies and capabilities:

Competitive advantages rooted in organisational learning may be more sustainable (because harder to imitate), but less easy to transfer (because harder to fully comprehend).

EPSO ‘98 T O O RGANISE

What is organisation design? Organisations are collections of people with some common purposes whose activities are co-ordinated and motivated through various means within the contest of certain organisation features . Organisational features can be classified into three types: Architecture Processes Culture The architecture of the organisation includes its scope and boundaries, the internal structure of authority relations and sub-units, the design of jobs, the allocation of decision power, the corporate governance system, the financial structure and other features that are formally defined and often regulated by contracts. Terms such as organisational change or re-organisation are often used to refer to change in these architectural features but this alone is unlikely to be very effective if the processes and culture are left unaltered. STANFORD - EPSO 98 Architecture TO ORGANISE

Organisations are collections of people with some common purposes whose activities are co-ordinated and motivated through various means within the contest of certain organisation features .

Organisational features can be classified into three types:

Architecture

Processes

Culture

The architecture of the organisation includes its scope and boundaries, the internal structure of authority relations and sub-units, the design of jobs, the allocation of decision power, the corporate governance system, the financial structure and other features that are formally defined and often regulated by contracts. Terms such as organisational change or re-organisation are often used to refer to change in these architectural features but this alone is unlikely to be very effective if the processes and culture are left unaltered.

Processes refers to the ways in which the organisation’s work actually gets done. Processes include both the formal and the informal mechanisms for gathering and transmitting information, setting objectives and plans, obtaining and allocating resources and monitoring and rewarding performance. The more formal ones might be easily changed; the informal ones are no less important, but are harder to change . The organisational culture includes the beliefs , special language , and mental maps that distinguish the organisation. The beliefs concern the organisation’s fundamental values and purposes, how people are to interact with one another and with outsiders. These features powerfully shape behaviour. They are also persistent, very hard to manage and to change deliberately . What is organisation design? STANFORD - EPSO 98 Processes Culture TO ORGANISE

Processes refers to the ways in which the organisation’s work actually gets done. Processes include both the formal and the informal mechanisms for gathering and transmitting information, setting objectives and plans, obtaining and allocating resources and monitoring and rewarding performance.

The more formal ones might be easily changed; the informal ones are no less important, but are harder to change .

The organisational culture includes the beliefs , special language , and mental maps that distinguish the organisation. The beliefs concern the organisation’s fundamental values and purposes, how people are to interact with one another and with outsiders. These features powerfully shape behaviour. They are also persistent, very hard to manage and to change deliberately .

Organisation design involves selecting the people and the features of the organisation. Good design means selecting these to maximise performance. Strategy and the environment obviously affect performance too. To these we add the design of the organisation. There are direct links between the organisation and the strategy. People may be the key resources that the firm has and may be the repositories of its capabilities. Thus the choice of strategy and organisation are interconnected and should be done together. What is organisation design? STANFORD - EPSO 98 TO ORGANISE

Organisation design involves selecting the people and the features of the organisation.

Good design means selecting these to maximise performance.

Strategy and the environment obviously affect performance too.

To these we add the design of the organisation.

There are direct links between the organisation and the strategy. People may be the key resources that the firm has and may be the repositories of its capabilities. Thus the choice of strategy and organisation are interconnected and should be done together.

Organising for Performance and Growth Use all aspects to affect behaviour: People - Architecture - Processes - Culture Seek both initiative and co-operation STANFORD - EPSO 98 Organisational design TO ORGANISE Common brand versus division-specific Level at which P&L responsibility lies Extent and funding of shared services Design of pay system The boundaries (internal and external) of the firm and the nature and intensity of incentives (explicit and implicit, objective and subjective, financial and intrinsic) are major determinants of the location on the frontier. Examples of Trade-off: Initiative vs. Co-operation

Use all aspects to affect behaviour: People - Architecture - Processes - Culture

Seek both initiative and co-operation

Common brand versus division-specific

Level at which P&L responsibility lies

Extent and funding of shared services

Design of pay system

The boundaries (internal and external) of the firm and the nature and intensity of incentives (explicit and implicit, objective and subjective, financial and intrinsic) are major determinants of the location on the frontier.

Organising for Performance and Growth STANFORD - EPSO 98 Trade-off Initiative Co-operation More entrepreneurial More co-operative TO ORGANISE

Organising for Performance and Growth Strong boundaries and incentives lead to strong initiative decentralise/disaggregate individual performance-based rewards Weak boundaries and incentives facilitate co-operation common identity and fate through the organisation rewards not contingent on individual performance STANFORD - EPSO 98 Initiative vs. Co-operation TO ORGANISE

Strong boundaries and incentives lead to strong initiative

decentralise/disaggregate

individual performance-based rewards

Weak boundaries and incentives facilitate co-operation

common identity and fate through the organisation

rewards not contingent on individual performance

Organising for Performance and Growth STANFORD - EPSO 98 Disaggregated Firm Initiative Co-operation Market/entrepreneurial Firm Classic Bureaucracy TO ORGANISE

Organising for Performance and Growth IT facilitates both co-operation (better information sharing) and initiative (better performance measurement. Adding “linkage managers” may facilitate co-operation while not hurting initiative. STANFORD - EPSO 98 I Organisational Investment and Innovation: Move out the frontier Examples: Shifting the Frontier TO ORGANISE C

IT facilitates both co-operation (better information sharing) and initiative (better performance measurement.

Adding “linkage managers” may facilitate co-operation while not hurting initiative.

Organisational Learning STANFORD - EPSO 98 Behavioural Objectives of Design Architecture Processes/Routines Culture (Capability-based) Sustainable Competitive Advantage Initiative Co-operation Learning TO ORGANISE

Behavioural Objectives of Design: Dynamics I DENTIFY THE S TRATEGY STANFORD - EPSO 98 Scope (Capability- based) Sustainable Competitive Advantage Goals & Basis for Profitability I MPLEMENT A S TRATEGY Architecture Processes / Routines Culture I NITIATIVE C O-OPERATION L EARNING D RIVES Implies & Drives Implies & Drives R ESOURCES C APABILITIES P OSITION TO ORGANISE D RIVES

I DENTIFY THE S TRATEGY

Organisational Learning Organisational learning occurs through three stages variation/experimentation stage necessarily a decentralised process requiring a de-coupling of organisational units (lack of standardisation/inter-dependence across units) selection among alternatives selection procedures can vary in terms of their centralisation retention of “best practices” knowledge transfer implies coupling of organisational units STANFORD - EPSO 98 Variation/ Selection/ Retention Model TO ORGANISE

Organisational learning occurs through three stages

variation/experimentation stage

necessarily a decentralised process requiring a de-coupling of organisational units (lack of standardisation/inter-dependence across units)

selection among alternatives

selection procedures can vary in terms of their centralisation

retention of “best practices”

knowledge transfer implies coupling of organisational units

Organisational Learning Reasons 1 : Organisations are unwilling to experiment Strong incentives tend to undercut because hard to design incentives for exploratory activity. Most cultures punish failure Reason 2 : Learning requires “slack” in organisation, and there is generally a lack of tolerance for slack Variation requires resources devoted to “deviant” activities Example: “bootlegging” at 3M, RISC at Intel Selection/transfer cannot occur without organisational resources dedicated to transfer Example: peer assists at BP STANFORD - EPSO 98 Two reasons why organisations are typically poor learners TO ORGANISE

Reasons 1 : Organisations are unwilling to experiment

Strong incentives tend to undercut because hard to design incentives for exploratory activity.

Most cultures punish failure

Reason 2 : Learning requires “slack” in organisation, and there is generally a lack of tolerance for slack

Variation requires resources devoted to “deviant” activities

Example: “bootlegging” at 3M, RISC at Intel

Selection/transfer cannot occur without organisational resources dedicated to transfer

Example: peer assists at BP

Organisational Learning These reasons why organisations are poor learners can be understood in terms of a single learning dilemma: There exists a trade-off between devoting resources to long term learning benefits and short-term operating efficiency benefits . Challenge of organisational learning: variation requires de-coupling of organisational units Efficient knowledge transfer requires tight coupling of organisational units There is thus a tension between organisational design that facilitates the emergence of new ideas. organisational design that allows the effective dissemination and refinement of the best ideas. STANFORD - EPSO 98 Learning Dilemma TO ORGANISE

These reasons why organisations are poor learners can be understood in terms of a single learning dilemma:

There exists a trade-off between devoting resources to long term learning benefits and short-term operating efficiency benefits .

Challenge of organisational learning:

variation requires de-coupling of organisational units

Efficient knowledge transfer requires tight coupling of organisational units

There is thus a tension between

organisational design that facilitates the emergence of new ideas.

organisational design that allows the effective dissemination and refinement of the best ideas.

Organisational Learning Culture Trust to facilitate information transfer about failure as well as success Spirit of “generalised reciprocity” Processes/routines coalitional, grass-roots basis for decision making STANFORD - EPSO 98 Cultural and procedural support for loosely coupled architecture TO ORGANISE

Culture

Trust to facilitate information transfer about failure as well as success

Spirit of “generalised reciprocity”

Processes/routines

coalitional, grass-roots basis for decision making

Organisational Learning Balancing strong culture of co-operation with strong individual incentives Deciding on the right amount of slack to be devoted to learning Beware of tightly coupled imitators! A fast, tightly-coupled second mover can overwhelm a (slack) learning organisation. Trying to systemise complex tacit knowledge A real danger that systemisation of complex, tacit knowledge removes essential content Less systematic knowledge requires stronger reliance on strong personal ties and less reliance on more formal means of information. STANFORD - EPSO 98 Challenges of loosely-coupled organisation TO ORGANISE

Balancing strong culture of co-operation with strong individual incentives

Deciding on the right amount of slack to be devoted to learning

Beware of tightly coupled imitators! A fast, tightly-coupled second mover can overwhelm a (slack) learning organisation.

Trying to systemise complex tacit knowledge

A real danger that systemisation of complex, tacit knowledge removes essential content

Less systematic knowledge requires stronger reliance on strong personal ties and less reliance on more formal means of information.

EPSO ‘98 A DVANTAGE & C HANGE

Defending Positional Advantage EXTERNAL CHANGE Life cycle changes Demand changes Supply changes STANFORD - EPSO 98 CONTEXT : Internal and External ACTION : Internal and External PERFORMANCE Sources and Effects of Change ADVANTAGE & CHANGE

EXTERNAL

CHANGE

Life cycle changes

Demand changes

Supply changes

Defending Positional Advantage Outside the organisation industry changes supply chain changes outside the supply chain Inside the organisation technical innovation behavioural innovation strategic and non-strategic STANFORD - EPSO 98 Sources of Change ADVANTAGE & CHANGE

Outside the organisation

industry changes

supply chain changes

outside the supply chain

Inside the organisation

technical innovation

behavioural innovation

strategic and non-strategic

Defending Positional Advantage Hardware/ Software Suppliers STANFORD - EPSO 98 C Example: IT Outstanding Technological change Vertical  horizontal Forward integration IT Outsource Firms Enterprise IT Consumers Application change Process change Needs change C ADVANTAGE & CHANGE

Hardware/

Software

Suppliers

Technological change

Vertical  horizontal

Forward integration

Application change

Process change

Needs change

Defending Positional Evolution of industries Competition among incumbents positional advantage capabilities advantage Entry STANFORD - EPSO 98 Effects of change ADVANTAGE & CHANGE Effects on industrial “stages” Vertical-to-horizontal Evolution of industries

Evolution of industries

Competition among incumbents

positional advantage

capabilities advantage

Entry

Effects on industrial “stages”

Vertical-to-horizontal

Defending Positional Advantage STANFORD - EPSO 98 Evolution: industry stages Emerging Growth Maturity Decline ADVANTAGE & CHANGE

Defending Positional Evolution: vertical and horizontal industries (the complements problem): Computers Telecommunications Automobiles “Vertical” industries Co-ordination by firm Competition at endpoint only Dominance of chain STANFORD - EPSO 98 Evolution of industries ADVANTAGE & CHANGE

Evolution: vertical and horizontal industries (the complements problem):

Computers

Telecommunications

Automobiles

“Vertical” industries

Co-ordination by firm

Competition at endpoint only

Dominance of chain

Defending Positional “Horizontal” Industries Co-ordination by market Competition at each layer Dominance of segment Vertical to horizontal Competition in components Higher quality more competitive pricing Slower standard formation Integration more difficult for user STANFORD - EPSO 98 ADVANTAGE & CHANGE

“Horizontal” Industries

Co-ordination by market

Competition at each layer

Dominance of segment

Vertical to horizontal

Competition in components

Higher quality

more competitive pricing

Slower standard formation

Integration more difficult for user

Defending Positional Competition among incumbent firms Fragility of first-mover advantage outdated resources lost leverage Position vs. Capability Competition: re-creating advantage Leveraging existing capabilities Creating new first mover advantage Example: “Value added contracting” Risk sharing Measuring effects Opportunism STANFORD - EPSO 98 ADVANTAGE & CHANGE

Competition among incumbent firms

Fragility of first-mover advantage

outdated resources

lost leverage

Position vs. Capability

Competition: re-creating advantage

Leveraging existing capabilities

Creating new first mover advantage

Example: “Value added contracting”

Risk sharing

Measuring effects

Opportunism

Defending Positional Responding to Entry Accommodate or attach anticipate reactions think more than one move ahead goals and signposts Communicate intent signalling vs. cheap talk commitment internal and external Pro-active vs. Reactive investing in entry barriers shaping rivals’ strategies STANFORD - EPSO 98 ADVANTAGE & CHANGE

Responding to Entry

Accommodate or attach

anticipate reactions

think more than one move ahead

goals and signposts

Communicate intent

signalling vs. cheap talk

commitment

internal and external

Pro-active vs. Reactive

investing in entry barriers

shaping rivals’ strategies

Strategic Dissonance Aligning corporate strategy and strategic action is a key top management responsibility . Such alignment is driven by the strategic intent of the CEO who relentlessly develops the firm’s capabilities and transforms the basis of competition in the industry to the firm’s advantage. In extremely dynamic industries , alignment between a firm’s strategic intent and strategic action is not likely to last. Inevitably, strategic actions will begin to lead or lag strategic intent . Such divergences between intent and action cause “strategic dissonance” in the organisation. New strategic intent must be based on top management’s capacity to take advantage of the conflicting information generated by strategic dissonance. Not all dissonance is strategic. Companies experience some level of dissonance as a result of routine disagreements and conflicts. Companies need managers precisely to mediate and resolve these sorts of frictions. Dissonance is strategic when it signals impending industry or corporate transformation . STANFORD - EPSO 98 ADVANTAGE & CHANGE

Aligning corporate strategy and strategic action is a key top management responsibility . Such alignment is driven by the strategic intent of the CEO who relentlessly develops the firm’s capabilities and transforms the basis of competition in the industry to the firm’s advantage.

In extremely dynamic industries , alignment between a firm’s strategic intent and strategic action is not likely to last. Inevitably, strategic actions will begin to lead or lag strategic intent . Such divergences between intent and action cause “strategic dissonance” in the organisation. New strategic intent must be based on top management’s capacity to take advantage of the conflicting information generated by strategic dissonance.

Not all dissonance is strategic. Companies experience some level of dissonance as a result of routine disagreements and conflicts. Companies need managers precisely to mediate and resolve these sorts of frictions. Dissonance is strategic when it signals impending industry or corporate transformation .

Strategic Dissonance Strategic dissonance signals a strategic inflection point . This term is used to describe the giving way of one type of industry dynamics to another; the change of one winning strategy to another; the replacement of an existing technological regime by a new one. These changes create a “valley of death” for the incumbents because they materially affect their profitable growth trajectories . It is very difficult to clearly perceive the new industry equilibrium or winning strategy that loom beyond a strategic inflection point. How to tell signal from noise ? Voices sounding danger ahead will emerge from people that know more because they spend time outdoors where the storm clouds - unaffected by company beliefs, dogmas, and rhetoric - start blowing in their face. It is wise to keep in mind that when spring comes, snow melts first at the periphery : that is where it is most exposed. STANFORD - EPSO 98 Strategic inflection point ADVANTAGE & CHANGE

Strategic dissonance signals a strategic inflection point .

This term is used to describe the giving way of one type of industry dynamics to another; the change of one winning strategy to another; the replacement of an existing technological regime by a new one. These changes create a “valley of death” for the incumbents because they materially affect their profitable growth trajectories .

It is very difficult to clearly perceive the new industry equilibrium or winning strategy that loom beyond a strategic inflection point.

How to tell signal from noise ? Voices sounding danger ahead will emerge from people that know more because they spend time outdoors where the storm clouds - unaffected by company beliefs, dogmas, and rhetoric - start blowing in their face.

It is wise to keep in mind that when spring comes, snow melts first at the periphery : that is where it is most exposed.

Strategic Dissonance Top management’s strategic recognition of an SIP happens in three stages: recognising the growing divergence between what the company currently puts forth as its strategy and the actions taken by its managers Asking “is it one - a SIP?” Trying to discern the newly emerging strategic picture and providing a framework in which a new strategic intent can be formulated. STANFORD - EPSO 98 ADVANTAGE & CHANGE

Top management’s strategic recognition of an SIP happens in three stages:

recognising the growing divergence between what the company currently puts forth as its strategy and the actions taken by its managers

Asking “is it one - a SIP?”

Trying to discern the newly emerging strategic picture and providing a framework in which a new strategic intent can be formulated.

Strategic Dissonance Five dynamic forces The basis of competitive advantage Distinctive competence Top management corporate strategy Strategic action Internal selection environment that comprises administrative elements and cultural elements. During some periods, these five forces are in harmony. Over time , however, the dynamic forces tend to diverge and their harmonious relationships are broken , thereby creating strategic dissonance in the organisation. STANFORD - EPSO 98 ADVANTAGE & CHANGE

Five dynamic forces

The basis of competitive advantage

Distinctive competence

Top management corporate strategy

Strategic action

Internal selection environment that comprises administrative elements and cultural elements.

During some periods, these five forces are in harmony.

Over time , however, the dynamic forces tend to diverge and their harmonious relationships are broken , thereby creating strategic dissonance in the organisation.

Strategic Dissonance The most fundamental and least readily visible source of strategic dissonance derives from the divergence between the changing basis of competition in the industry and the firm’s distinctive competencies, the latter becoming less relevant for competitive advantage . Companies often experience an inertial aftermath of success . They continue to rely on their distinctive competencies, even when the competition changes. Companies usually organise themselves in such a way that the employees representing these competencies are likely to have the greatest influence in the strategic decision-making process. In sum, firm-level competencies and the basis of competition in the industry often evolve along independent paths. Dynamically matching firm-level distinctive competencies and the basis of competition in the industry is a tough top management challenge. It requires top management to watch closely the evolution of the industry structure as well as to be alert to the strategic implications of unanticipated new developments in the company’s competencies. STANFORD - EPSO 98 Sources of strategic dissonance ADVANTAGE & CHANGE

The most fundamental and least readily visible source of strategic dissonance derives from the divergence between the changing basis of competition in the industry and the firm’s distinctive competencies, the latter becoming less relevant for competitive advantage .

Companies often experience an inertial aftermath of success . They continue to rely on their distinctive competencies, even when the competition changes. Companies usually organise themselves in such a way that the employees representing these competencies are likely to have the greatest influence in the strategic decision-making process.

In sum, firm-level competencies and the basis of competition in the industry often evolve along independent paths. Dynamically matching firm-level distinctive competencies and the basis of competition in the industry is a tough top management challenge. It requires top management to watch closely the evolution of the industry structure as well as to be alert to the strategic implications of unanticipated new developments in the company’s competencies.

Strategic Dissonance One driver of this divergence is inertia in corporate strategy. Corporate strategy reflects top management’s beliefs about the basis of success of the firm . Top managers are deeply influenced by their perception of what made the company successful. Intertwined with these inertial self-perceptions is emotional attachment on the part of top management to the business that made the company successful. Top management hesitates to change the strategy because the consequences are not completely clear. If inertia in corporate strategy leads to change that is too slow, top managers can also change the corporate strategy too fast - in ways that stretch beyond what the company is capable of doing. The other driver of this divergence are the independent strategic actions taken by middle-level managers. STANFORD - EPSO 98 Divergence between stated strategy and strategic action ADVANTAGE & CHANGE

One driver of this divergence is inertia in corporate strategy. Corporate strategy reflects top management’s beliefs about the basis of success of the firm . Top managers are deeply influenced by their perception of what made the company successful.

Intertwined with these inertial self-perceptions is emotional attachment on the part of top management to the business that made the company successful.

Top management hesitates to change the strategy because the consequences are not completely clear.

If inertia in corporate strategy leads to change that is too slow, top managers can also change the corporate strategy too fast - in ways that stretch beyond what the company is capable of doing.

The other driver of this divergence are the independent strategic actions taken by middle-level managers.

Strategic Dissonance While some actions may turn out to be helpful, there is also potential danger associated with strategic actions of middle-level managers that diverge from the official strategy. If the basis of competition in the industry changes the company’s distinctive competencies, the firm’s official strategy and the strategic actions of middle-level managers all start diverging from each other . How can a company possibly survive? In the face of a SIP, a company’s internal selection environment may be more important for survival than its stated strategy. The role of the internal selection environment is to regulate the allocation of the company’s scarce resources - cash, competencies and capabilities, and senior management attention - to strategic action while the official strategy is in flux and new strategic intent has not yet been formulated and articulated. STANFORD - EPSO 98 Role of internal selection environment ADVANTAGE & CHANGE

While some actions may turn out to be helpful, there is also potential danger associated with strategic actions of middle-level managers that diverge from the official strategy.

If the basis of competition in the industry changes the company’s distinctive competencies, the firm’s official strategy and the strategic actions of middle-level managers all start diverging from each other .

How can a company possibly survive?

In the face of a SIP, a company’s internal selection environment may be more important for survival than its stated strategy. The role of the internal selection environment is to regulate the allocation of the company’s scarce resources - cash, competencies and capabilities, and senior management attention - to strategic action while the official strategy is in flux and new strategic intent has not yet been formulated and articulated.

Strategic Dissonance A company can continue to be successful for some time if its internal selection environment selects actions that are consistent with competitive reality even while becoming de-coupled from the official corporate strategy. The continued success provides then a time cushion for bringing corporate strategy back in line with strategic action. The internal selection processes leading up to the formulation of new strategic goals critically depends on top management’s strategic recognition capacity . One type of strategic recognition involves top management’s ability to recognise the strategic importance of actions by middle-level managers who try to tie a new business initiative to the corporate strategy - providing legitimacy for the new business. A second type of strategic recognition involves top management’s ability to recognise the strategic importance of actions of middle-level managers that diminish the legitimacy of an existing business and decouple it from the corporate strategy. STANFORD - EPSO 98 ADVANTAGE & CHANGE

A company can continue to be successful for some time if its internal selection environment selects actions that are consistent with competitive reality even while becoming de-coupled from the official corporate strategy. The continued success provides then a time cushion for bringing corporate strategy back in line with strategic action.

The internal selection processes leading up to the formulation of new strategic goals critically depends on top management’s strategic recognition capacity . One type of strategic recognition involves top management’s ability to recognise the strategic importance of actions by middle-level managers who try to tie a new business initiative to the corporate strategy - providing legitimacy for the new business.

A second type of strategic recognition involves top management’s ability to recognise the strategic importance of actions of middle-level managers that diminish the legitimacy of an existing business and decouple it from the corporate strategy.

Strategic Dissonance Strategic dissonance, strategic inflection points, and strategic recognition are tools for managing the major transformations that companies must bring about in the face of discontinuous change . Through the valley of death, the old and the new basis of competition, the old and the new distinctive competence, the old and the new strategy, and the old and new strategic action are all in play together. Top management must help ensure that the firm’s internal selection environment continues to reflect the real competitive pressures in the external environment. A necessary condition is that the company has a management information system that reflects how its businesses are really doing in the competitive environment . This allows top management to ask sharp questions, on a regular basis, about why the company’s businesses are performing the way they are. STANFORD - EPSO 98 Managing strategic dissonance Help internal selection reflect external reality; allow dissent ADVANTAGE & CHANGE

Strategic dissonance, strategic inflection points, and strategic recognition are tools for managing the major transformations that companies must bring about in the face of discontinuous change . Through the valley of death, the old and the new basis of competition, the old and the new distinctive competence, the old and the new strategy, and the old and new strategic action are all in play together.

Top management must help ensure that the firm’s internal selection environment continues to reflect the real competitive pressures in the external environment. A necessary condition is that the company has a management information system that reflects how its businesses are really doing in the competitive environment . This allows top management to ask sharp questions, on a regular basis, about why the company’s businesses are performing the way they are.

Strategic Dissonance Constantly watching competitors - old and new - is mandatory behaviour for top management. Why are they strong competitors? What do they do that we cannot do better? It is also important that the firm’s internal selection environment values dissent and controversy surrounding the interpretation of the data. This is difficult, because organisations are uncomfortable with internal dissent. Debating tough issues is only possible where people will speak their minds without fear of punishment . A key role of top management is to provide an umbrella against such fears . Top management may not be competent to judge personally the issues but it is up to them to create a fear-free internal selection environment. First, don’t shut people up and, second, if they disagreed and were right, congratulate them! STANFORD - EPSO 98 ADVANTAGE & CHANGE

Constantly watching competitors - old and new - is mandatory behaviour for top management. Why are they strong competitors? What do they do that we cannot do better?

It is also important that the firm’s internal selection environment values dissent and controversy surrounding the interpretation of the data. This is difficult, because organisations are uncomfortable with internal dissent.

Debating tough issues is only possible where people will speak their minds without fear of punishment .

A key role of top management is to provide an umbrella against such fears . Top management may not be competent to judge personally the issues but it is up to them to create a fear-free internal selection environment.

First, don’t shut people up and, second, if they disagreed and were right, congratulate them!

Strategic Dissonance How the top management reacts, emotionally, to strategic dissonance is an important issue when dealing with a SIP. When the business gets into serious difficulties or key managerial assumptions are challenged, objective analysis takes second seat to personal/emotional reactions: Denial  Escape or Diversion  Acceptance  Pertinent Action Frequent public speeches on vague subjects given by CEO’s of companies facing difficult times or the move of corporate headquarters away from the centre of business action are signs of attempted escape. Diversion often involves major acquisitions unrelated to the core business that faces a SIP . STANFORD - EPSO 98 Don’t dismiss strategic dissonance ADVANTAGE & CHANGE

How the top management reacts, emotionally, to strategic dissonance is an important issue when dealing with a SIP.

When the business gets into serious difficulties or key managerial assumptions are challenged, objective analysis takes second seat to personal/emotional reactions:

Denial  Escape or Diversion  Acceptance  Pertinent Action

Frequent public speeches on vague subjects given by CEO’s of companies facing difficult times or the move of corporate headquarters away from the centre of business action are signs of attempted escape.

Diversion often involves major acquisitions unrelated to the core business that faces a SIP .

Strategic Dissonance Effective top managers go through these first two stages as well, but they are able to move on to the acceptance and pertinent action stages before it is too late. Ineffective top managers are unable to do so and have to be removed. Replacement of corporate leaders in the face of SIP is far more motivated by the need to put distance between the present and the past than by getting someone better. Top management must try to surmise what the new equilibrium of forces in the industry will look like and what the new winning strategy will be, knowing that they cannot get it completely right. Top management must use the information that is generated by strategic dissonance when trying to discern the true new shape of the company on the other side of the valley . It must be a realistic picture grounded in the company’s distinctive competencies. STANFORD - EPSO 98 Formulate new strategic intent based on strategic recognition ADVANTAGE & CHANGE

Effective top managers go through these first two stages as well, but they are able to move on to the acceptance and pertinent action stages before it is too late. Ineffective top managers are unable to do so and have to be removed.

Replacement of corporate leaders in the face of SIP is far more motivated by the need to put distance between the present and the past than by getting someone better.

Top management must try to surmise what the new equilibrium of forces in the industry will look like and what the new winning strategy will be, knowing that they cannot get it completely right.

Top management must use the information that is generated by strategic dissonance when trying to discern the true new shape of the company on the other side of the valley . It must be a realistic picture grounded in the company’s distinctive competencies.

Strategic Dissonance Coming out of a difficult period, top management is more likely to have a sense of what they don’t want the company to become before they know what they do want it to become. Leadership here implies changing with the environment and the organisation. Reality must lead top management rather than the other way around. This is difficult because top management is expected to have vision. Getting through the period of immense change requires reinventing - or perhaps rediscovering - the company’s identity. Since companies and their leaders are shaped by their past, this is truly hard. STANFORD - EPSO 98 ADVANTAGE & CHANGE

Coming out of a difficult period, top management is more likely to have a sense of what they don’t want the company to become before they know what they do want it to become.

Leadership here implies changing with the environment and the organisation. Reality must lead top management rather than the other way around. This is difficult because top management is expected to have vision.

Getting through the period of immense change requires reinventing - or perhaps rediscovering - the company’s identity. Since companies and their leaders are shaped by their past, this is truly hard.

Strategic Dissonance Seeing, imagining, sensing the new shape of the company is only one step. Getting there requires more wrenching actions. These moves we have called strategic actions and they involve (re)assigning resources in order to pursue the new strategic intent . Corporate strategy is realised by performing a series of such strategic actions, and not via strategic planning. The wisdom necessary to guide a company through transformational changes cannot, as a practical matter, reside only in the head of the CEO . Middle managers have the hands-on exposure, but, by necessity their experience is specialised, not company-wide. What is needed is real-time mining of the middle managers’ insights, exposing all that information to searing intellectual debate, and letting this ferment take place until the shape of the other side of the valley is sufficiently clear that a dedicated march in its direction is feasible. STANFORD - EPSO 98 Move from strategic intent to strategic action ADVANTAGE & CHANGE

Seeing, imagining, sensing the new shape of the company is only one step. Getting there requires more wrenching actions. These moves we have called strategic actions and they involve (re)assigning resources in order to pursue the new strategic intent . Corporate strategy is realised by performing a series of such strategic actions, and not via strategic planning.

The wisdom necessary to guide a company through transformational changes cannot, as a practical matter, reside only in the head of the CEO .

Middle managers have the hands-on exposure, but, by necessity their experience is specialised, not company-wide.

What is needed is real-time mining of the middle managers’ insights, exposing all that information to searing intellectual debate, and letting this ferment take place until the shape of the other side of the valley is sufficiently clear that a dedicated march in its direction is feasible.

Strategic Dissonance There is an inverted-U type of relationship between the intensity and duration of constructive intellectual debate in a company and its long-term ability to manage through SIPs . Too little intellectual debate means that middle managers do not challenge one another as long as the favour is reciprocated. Too much intellectual debate paralyses the company because most energy is used up seeking to win the debate for the sake of winning rather than for the sake of the company. During strategic dissonance, top management must let go some whole they are not sure. (This is not easy: top management is paid for being sure!) But then they must pull strategic action and strategy back in line and direct the march. Strategic leadership means encouraging debate and bringing debate to a conclusion . STANFORD - EPSO 98 ADVANTAGE & CHANGE

There is an inverted-U type of relationship between the intensity and duration of constructive intellectual debate in a company and its long-term ability to manage through SIPs .

Too little intellectual debate means that middle managers do not challenge one another as long as the favour is reciprocated.

Too much intellectual debate paralyses the company because most energy is used up seeking to win the debate for the sake of winning rather than for the sake of the company.

During strategic dissonance, top management must let go some whole they are not sure. (This is not easy: top management is paid for being sure!) But then they must pull strategic action and strategy back in line and direct the march.

Strategic leadership means encouraging debate and bringing debate to a conclusion .

Strategic Dissonance Top management must deliberately use the company’s uncommitted resources that accumulate in good times by responding to early signs of strategic dissonance and by supporting new initiatives before strategic dissonance emerges. The internal selection environment that we are describing is one in which there are both strong bottom-up and top-down forces. Can these forces both be strong at the same time? They can, if the company has the rugged, confrontational/collegial culture that is desirable. First, this culture, tolerates - even encourages - debate. These debates are vigorous, devoted to exploring issues, and indifferent of rank. They are focussed on finding what is best for the company. Second, it is capable of making - and accepting - clear decisions; with the entire organisation capable of supporting the decision. STANFORD - EPSO 98 Culture is the key ADVANTAGE & CHANGE

Top management must deliberately use the company’s uncommitted resources that accumulate in good times by responding to early signs of strategic dissonance and by supporting new initiatives before strategic dissonance emerges.

The internal selection environment that we are describing is one in which there are both strong bottom-up and top-down forces.

Can these forces both be strong at the same time?

They can, if the company has the rugged, confrontational/collegial culture that is desirable.

First, this culture, tolerates - even encourages - debate. These debates are vigorous, devoted to exploring issues, and indifferent of rank. They are focussed on finding what is best for the company.

Second, it is capable of making - and accepting - clear decisions; with the entire organisation capable of supporting the decision.

Strategic Dissonance An organisation that has a culture that approximates these two requirements is a powerful adaptive (learning) organisation. It is the culture that works best when top management has to navigate between letting chaos reign and reining in chaos. Top management’s capacity for strategic recognition is enabled in major ways by the ability of the company’s internal selection environment to distinguish signal from noise. This, in turn, depends on the comprehensiveness, depth, and rigour of intellectual debate among middle and top managers, which is the cultural feature most telling of a company’s long-term ability to manage through SIPs. STANFORD - EPSO 98 ADVANTAGE & CHANGE Conclusion

An organisation that has a culture that approximates these two requirements is a powerful adaptive (learning) organisation.

It is the culture that works best when top management has to navigate between letting chaos reign and reining in chaos.

Top management’s capacity for strategic recognition is enabled in major ways by the ability of the company’s internal selection environment to distinguish signal from noise.

This, in turn, depends on the comprehensiveness, depth, and rigour of intellectual debate among middle and top managers, which is the cultural feature most telling of a company’s long-term ability to manage through SIPs.

EPSO ‘98 S TRATEGIC P OSITION

Strategic advantage in the distribution relationships Many forms of valuable strategic position. Most capabilities become less unique time after time but if you are there you have an advantage ? The balance of power in “vertical” relationships Managing power in “vertical” relationships. This is not a condition of the market, this is relationship that can be managed. Gaining strategic advantage by adding value Established relationships as informal alliance. Buyers and suppliers relationship should be socially defined as well. All these are true within SBU’s in a “Global” Firm STANFORD - EPSO 98 STRATEGIC POSITION

Many forms of valuable strategic position. Most capabilities become less unique time after time but if you are there you have an advantage ?

The balance of power in “vertical” relationships

Managing power in “vertical” relationships. This is not a condition of the market, this is relationship that can be managed.

Gaining strategic advantage by adding value

Established relationships as informal alliance. Buyers and suppliers relationship should be socially defined as well.

All these are true within SBU’s in a “Global” Firm

Managing Suppliers: Incentive systems in Japanese and U.S. Industry Japanese industry is characterised by close and extensive links between manufacturers and their parts suppliers. According to the Ministry of International Trade and Industry (MITI), “Japanese manufacturing industry owes its competitive advantage and strength to its subcontracting structure”. The ratio of the inputs a firm purchases to the value of its outputs averages 69% in Japan and 58% in the U.S. In response to Japanese competition in the photocopier market in the early 1980s, Xerox reduced its pool of suppliers from over 5,000 companies to 400 and trained the selected suppliers in quality control. These changes recognise the indubitable success of Japanese methods of organising production. STANFORD - EPSO 98 STRATEGIC POSITION

Japanese industry is characterised by close and extensive links between manufacturers and their parts suppliers. According to the Ministry of International Trade and Industry (MITI), “Japanese manufacturing industry owes its competitive advantage and strength to its subcontracting structure”.

The ratio of the inputs a firm purchases to the value of its outputs averages 69% in Japan and 58% in the U.S.

In response to Japanese competition in the photocopier market in the early 1980s, Xerox reduced its pool of suppliers from over 5,000 companies to 400 and trained the selected suppliers in quality control.

These changes recognise the indubitable success of Japanese methods of organising production.

Managing Suppliers: Incentive systems in Japanese and U.S. Industry The principal-agent theory models the design of incentive systems using modern game theory. Bargaining power is unequally distributed Principal-agent theory recognises this bargaining asymmetry. The principal is modelled as having the most of the bargaining power, in the sense that he is able to design the transaction and set the terms of the exchange. The agent (or supplier) has two advantages: On the one hand, his ability to reject the proposed contract. On the other, the fact that knowledge is power. The supplier being a specialist in his work, is likely to be better informed about the details of his production conditions than the buyer. STANFORD - EPSO 98 STRATEGIC POSITION

The principal-agent theory models the design of incentive systems using modern game theory.

Bargaining power is unequally distributed

Principal-agent theory recognises this bargaining asymmetry. The principal is modelled as having the most of the bargaining power, in the sense that he is able to design the transaction and set the terms of the exchange.

The agent (or supplier) has two advantages: On the one hand, his ability to reject the proposed contract. On the other, the fact that knowledge is power. The supplier being a specialist in his work, is likely to be better informed about the details of his production conditions than the buyer.

Managing Suppliers: Incentive systems in Japanese and U.S. Industry Ongoing relationships can serve in place of formal contracts in creating incentives for co-operative behaviour. The game theoretic idea is that repeated interactions, like contracts, permit co-operation to occur. In an ongoing situation, people co-operate because it is in their interests to do so. “ Goodwill “ and “give-and-take” are expected to temper the pursuit of self-interest . The point of the repeated-game argument is that players co-operate now for fear of being cut off from profits in the future. The proposition that repetition can induce co-operation has a technical caveat of practical significance. A repeated game has many equilibria, only some of which involve co-operation . STANFORD - EPSO 98 Incentives for co-operation STRATEGIC POSITION

Ongoing relationships can serve in place of formal contracts in creating incentives for co-operative behaviour.

The game theoretic idea is that repeated interactions, like contracts, permit co-operation to occur. In an ongoing situation, people co-operate because it is in their interests to do so.

“ Goodwill “ and “give-and-take” are expected to temper the pursuit of self-interest .

The point of the repeated-game argument is that players co-operate now for fear of being cut off from profits in the future.

The proposition that repetition can induce co-operation has a technical caveat of practical significance. A repeated game has many equilibria, only some of which involve co-operation .

Managing Suppliers: Incentive systems in Japanese and U.S. Industry There are also outcomes in which each player rationally seeks all short-run gains. No one player by himself can ensure that a co-operative equilibrium is played; to move from a “bad” equilibrium to a “good” one would require a co-ordinated change in all players’ strategies . The significance of this is that the co-operation that can result from ongoing relationships is fragile. The manufacture of an item requiring some specific investment cannot be contracted to another firm unless short-term profit-seeking can be curtailed and can be seen to be curtailed. A firm should contract out the production of a component when outside production costs less than in-house production. The word “cost” should be interpreted here in the Economics 101 sense of opportunity cost. STANFORD - EPSO 98 Specific investment Subcontracting vs in-house production STRATEGIC POSITION

There are also outcomes in which each player rationally seeks all short-run gains. No one player by himself can ensure that a co-operative equilibrium is played; to move from a “bad” equilibrium to a “good” one would require a co-ordinated change in all players’ strategies . The significance of this is that the co-operation that can result from ongoing relationships is fragile.

The manufacture of an item requiring some specific investment cannot be contracted to another firm unless short-term profit-seeking can be curtailed and can be seen to be curtailed.

A firm should contract out the production of a component when outside production costs less than in-house production.

The word “cost” should be interpreted here in the Economics 101 sense of opportunity cost.

Managing Suppliers: Incentive systems in Japanese and U.S. Industry A firm’s opportunity cost is its actual production cost plus any profits it could have earned from alternative uses of its resources of capital and labour. The opportunity cost of in-house production is higher when the firm’s labour force is already fully utilised than when the alternative to doing this particular task is for some workers to be idle. Quality is the inverse of quantity. Low-quality parts can be expensive for the buyer even if they are low-priced. Thus cost is to interpreted as properly incorporating quality considerations. Comparative production costs are the strongest predictor of make-0r-buy decisions. STANFORD - EPSO 98 STRATEGIC POSITION

A firm’s opportunity cost is its actual production cost plus any profits it could have earned from alternative uses of its resources of capital and labour.

The opportunity cost of in-house production is higher when the firm’s labour force is already fully utilised than when the alternative to doing this particular task is for some workers to be idle.

Quality is the inverse of quantity. Low-quality parts can be expensive for the buyer even if they are low-priced. Thus cost is to interpreted as properly incorporating quality considerations.

Comparative production costs are the strongest predictor of make-0r-buy decisions.

Managing Suppliers: Incentive systems in Japanese and U.S. Industry Japanese manufacturers who were asked in a survey why they subcontract rather than produce in house gave the following answers: To sustain a long-term relationship to obtain high-quality products from vendor to use unique technology of vendor because vendors respect delivery times to make use of vendor’s low production costs The fraction of production-cost increases that the buyer permits the supplier to pass on in price increases should be higher: the less scope there is for discretionary cost reductions by the supplier and the more risk-averse the supplier relative to the buyer STANFORD - EPSO 98 Risk sharing vs incentives STRATEGIC POSITION

Japanese manufacturers who were asked in a survey why they subcontract rather than produce in house gave the following answers:

To sustain a long-term relationship

to obtain high-quality products from vendor

to use unique technology of vendor

because vendors respect delivery times

to make use of vendor’s low production costs

The fraction of production-cost increases that the buyer permits the supplier to pass on in price increases should be higher:

the less scope there is for discretionary cost reductions by the supplier

and

the more risk-averse the supplier relative to the buyer

Managing Suppliers: Incentive systems in Japanese and U.S. Industry In the US, the contract gives no incentive to supplier firms to hold down wage costs. When a risk-averse small firm transacts with a risk-neutral large firm, a mutually profitable exchange of risk can be made. A large firm that pushed undue risk on to its small subcontractors would be acting against its own interest; and the evidence indicates that firms do not, in fact, behave in this way. When multiple sourcing is used, the buyer should make the price paid to one supplier vary with the other suppliers’ costs. This two-vendor policy is designed to protect the firm against interruptions in supply as well as to give the firm a standard for comparing suppliers on cost, quality, etc. STANFORD - EPSO 98 Multiple sourcing STRATEGIC POSITION

In the US, the contract gives no incentive to supplier firms to hold down wage costs.

When a risk-averse small firm transacts with a risk-neutral large firm, a mutually profitable exchange of risk can be made.

A large firm that pushed undue risk on to its small subcontractors would be acting against its own interest; and the evidence indicates that firms do not, in fact, behave in this way.

When multiple sourcing is used, the buyer should make the price paid to one supplier vary with the other suppliers’ costs.

This two-vendor policy is designed to protect the firm against interruptions in supply as well as to give the firm a standard for comparing suppliers on cost, quality, etc.

Managing Suppliers: Incentive systems in Japanese and U.S. Industry If the supplier’s costs are expected to fall during the course of a contract due to learning by the supplier, the buyer should not plan to adjust the price downwards in response to cost improvements. Rather, he should announce in advance the time-path of the price, based on his prediction of a reasonable rate of innovation, and then keep to this price path. The second policy induces more innovation , for he supplier is rewarded for his effort by extra profits; By promising to discriminate in favour of incumbent suppliers at the next contract-renewal time, the buyer can induce the incumbents to undertake cost-reducing innovations or to achieve high-quality outputs. STANFORD - EPSO 98 The time-path of prices The pros and cons of bidding competition STRATEGIC POSITION

If the supplier’s costs are expected to fall during the course of a contract due to learning by the supplier, the buyer should not plan to adjust the price downwards in response to cost improvements. Rather, he should announce in advance the time-path of the price, based on his prediction of a reasonable rate of innovation, and then keep to this price path.

The second policy induces more innovation , for he supplier is rewarded for his effort by extra profits;

By promising to discriminate in favour of incumbent suppliers at the next contract-renewal time, the buyer can induce the incumbents to undertake cost-reducing innovations or to achieve high-quality outputs.

Managing Suppliers: Incentive systems in Japanese and U.S. Industry Japanese industry can be understood as having attained, as the end-point of an evolutionary process, a complex system of incentives to which firms respond rationally. Japanese practice provides several lessons on how to organise inter-firm relationships. Whether an item should be contracted out depends on relative cost - measuring cost as opportunity cost - of in-house and external production; and on the amount of specific investment needed to produce the item. Policies towards suppliers must balance contradictory goals. Pricing policies should be designed to give subcontractors incentives to lower production costs and raise quality; but the pursuit of incentives should be tempered by the fact that it is not in the procuring firm’s interest to push undue risk on to the subcontractors. STANFORD - EPSO 98 Conclusion STRATEGIC POSITION

Japanese industry can be understood as having attained, as the end-point of an evolutionary process, a complex system of incentives to which firms respond rationally.

Japanese practice provides several lessons on how to organise inter-firm relationships. Whether an item should be contracted out depends on relative cost - measuring cost as opportunity cost - of in-house and external production; and on the amount of specific investment needed to produce the item.

Policies towards suppliers must balance contradictory goals. Pricing policies should be designed to give subcontractors incentives to lower production costs and raise quality; but the pursuit of incentives should be tempered by the fact that it is not in the procuring firm’s interest to push undue risk on to the subcontractors.

Complementarity The idea that strategy and structure need to fit with one another and with the business environment is an old one, as is the recognition that there may be several distinct patterns among these variables that are coherent, but not necessarily equally good. The key ideas are complements and non-convexity. We focus on “activities”, choices that influence performance. Two such activities are complements when doing (more of) one of them increases the returns to doing (more of) the other. A good price and high quality are complements if higher quality makes demand less elastic. Coherence among a group of complements involves doing all of them at a high level or all at a low level, because increasing any of them increases the return to increasing all of them . STANFORD - EPSO 98 STRATEGIC POSITION

The idea that strategy and structure need to fit with one another and with the business environment is an old one, as is the recognition that there may be several distinct patterns among these variables that are coherent, but not necessarily equally good. The key ideas are complements and non-convexity.

We focus on “activities”, choices that influence performance. Two such activities are complements when doing (more of) one of them increases the returns to doing (more of) the other.

A good price and high quality are complements if higher quality makes demand less elastic.

Coherence among a group of complements involves doing all of them at a high level or all at a low level, because increasing any of them increases the return to increasing all of them .

Complementarity GM in the 80s spent more than the market value of Toyota and Nissan together on flexible automation, but did not change other elements of their strategy and organisation appropriately. At the end of the decade they set a new world record for corporate losses in a single year. With a system of complements, any environmental change that increases the attractiveness of increasing one of the activities actually favours increasing them all. Intuitively, this is because an increase in one activity raises the return to increasing each of the others. The complexity of finding fit across the many dimensions of strategic and organisational choices and between these and the environment means that imitation of successful strategies and organisations may be hard . STANFORD - EPSO 98 STRATEGIC POSITION

GM in the 80s spent more than the market value of Toyota and Nissan together on flexible automation, but did not change other elements of their strategy and organisation appropriately. At the end of the decade they set a new world record for corporate losses in a single year.

With a system of complements, any environmental change that increases the attractiveness of increasing one of the activities actually favours increasing them all. Intuitively, this is because an increase in one activity raises the return to increasing each of the others.

The complexity of finding fit across the many dimensions of strategic and organisational choices and between these and the environment means that imitation of successful strategies and organisations may be hard .

Complementarity The complexity of finding fit might also make analyses of companies’ success based on fit seem like ex post rationalisation. What we would expect is that, as opportunities arise, companies adjust their policies and add activities that are complementary with what they already have. Thus they would evolve towards patterns of strategy and organisation that are marked by fit among complementary activities. A tight fit among strategic and structural choices and with the environment can yield great strength. The danger is however that an unforeseen change will knock everything out of alignment. In “tight coupling” where each feature fits tightly with the others, a change in any one would necessitate changing others to maintain performance. STANFORD - EPSO 98 STRATEGIC POSITION

The complexity of finding fit might also make analyses of companies’ success based on fit seem like ex post rationalisation.

What we would expect is that, as opportunities arise, companies adjust their policies and add activities that are complementary with what they already have. Thus they would evolve towards patterns of strategy and organisation that are marked by fit among complementary activities.

A tight fit among strategic and structural choices and with the environment can yield great strength.

The danger is however that an unforeseen change will knock everything out of alignment. In “tight coupling” where each feature fits tightly with the others, a change in any one would necessitate changing others to maintain performance.

Indivisibilities, Increasing Returns and Organisational Change What strategy and organisation are best depends on the technological opportunities, factor market conditions, the nature of product market competition, etc. There may be multiple coherent patterns that are equally good in a given environment. Two factors are important in tracking the best strategy and organisation: non-convexities (which largely reflect indivisibility) and non-concavities (which reflect increasing returns of different sorts). Traditional models in the social and managerial sciences usually assumed that choices are infinitely divisible and that if there is an objective that is being maximised, then there is a unique choice that maximises the objective. Mathematical assumptions are that the choice set is convex. This is inconsistent with increasing returns, where the more you do, the lower the cost of doing even more. STANFORD - EPSO 98 STRATEGIC POSITION

What strategy and organisation are best depends on the technological opportunities, factor market conditions, the nature of product market competition, etc. There may be multiple coherent patterns that are equally good in a given environment.

Two factors are important in tracking the best strategy and organisation: non-convexities (which largely reflect indivisibility) and non-concavities (which reflect increasing returns of different sorts).

Traditional models in the social and managerial sciences usually assumed that choices are infinitely divisible and that if there is an objective that is being maximised, then there is a unique choice that maximises the objective.

Mathematical assumptions are that the choice set is convex. This is inconsistent with increasing returns, where the more you do, the lower the cost of doing even more.

Indivisibilities, Increasing Returns and Organisational Change Suppose changes in the environment change the connection between choice and performance, so that the optimal choice changes, but that the general shape of the relationship is maintained. First, there may be multiple choices and some may yield much better performance than the others. The local choice is best. It is possible that managers cannot find a better solution unless every element of strategy and organisational design is changed in a co-ordinated fashion. Large co-ordinated changes are not easy and to bring them about requires several elements of leadership, such as vision, ability to communicate, persuasion, and courage. Continuous change in the environment can, in the presence of non-concave performance functions, result in discreet, substantial changes in the optimum configuration of strategy and organisation. STANFORD - EPSO 98 STRATEGIC POSITION

Suppose changes in the environment change the connection between choice and performance, so that the optimal choice changes, but that the general shape of the relationship is maintained.

First, there may be multiple choices and some may yield much better performance than the others.

The local choice is best.

It is possible that managers cannot find a better solution unless every element of strategy and organisational design is changed in a co-ordinated fashion.

Large co-ordinated changes are not easy and to bring them about requires several elements of leadership, such as vision, ability to communicate, persuasion, and courage.

Continuous change in the environment can, in the presence of non-concave performance functions, result in discreet, substantial changes in the optimum configuration of strategy and organisation.

EPSO ‘98 G LOBALISATION

Understanding Global Strategy Being able to develop and implement an effective global strategy is the acid test of a well managed company . Companies also need to globalise, integrating their world-wide strategy. This global integration contrasts with the multinational approach in which companies set up country subsidiaries that design, produce, and market products or services tailored to local needs. This multinational model is now in question and may be considered a “multilocal strategy” in contrast to a truly global strategy. The question managers should ask is : How global is their industry and how global should their business strategy be ? An industry is global to the extent that there are inter-country connections. A strategy is global to the extent that it is integrated across countries. Global strategy should not be equated with any one element - standardised products or world-wide market coverage or a global manufacturing network. Global strategy should, instead, be a flexible combination of many elements . STANFORD - EPSO 98 GLOBALISATION

Being able to develop and implement an effective global strategy is the acid test of a well managed company .

Companies also need to globalise, integrating their world-wide strategy. This global integration contrasts with the multinational approach in which companies set up country subsidiaries that design, produce, and market products or services tailored to local needs. This multinational model is now in question and may be considered a “multilocal strategy” in contrast to a truly global strategy.

The question managers should ask is : How global is their industry and how global should their business strategy be ?

An industry is global to the extent that there are inter-country connections. A strategy is global to the extent that it is integrated across countries. Global strategy should not be equated with any one element - standardised products or world-wide market coverage or a global manufacturing network. Global strategy should, instead, be a flexible combination of many elements .

Understanding Global Strategy Maturity in domestic markets is driving companies to seek international expansion. A global strategy has three separate components : Developing the core strategy which is the basis of sustainable strategic advantage. This is usually done for the home country first. Internationalising the core strategy : Companies need to have mastered the basics of international business before they can attempt a global strategy. Globalising the international strategy , by integrating the strategy across countries. STANFORD - EPSO 98 GLOBALISATION

Maturity in domestic markets is driving companies to seek international expansion.

A global strategy has three separate components :

Developing the core strategy which is the basis of sustainable strategic advantage. This is usually done for the home country first.

Internationalising the core strategy : Companies need to have mastered the basics of international business before they can attempt a global strategy.

Globalising the international strategy , by integrating the strategy across countries.

Understanding Global Strategy Each separable business in a company needs its own core strategy for which the major parameters include the types of customers served and the types of products and services offered . A core business strategy includes several key elements: Type of products or services that the business offers Types of customers that the business serves Geographic markets served Major sources of sustainable competitive advantage Functional strategy for each of the most important value-adding activities Competitive posture, including the selection of competitors to target Investment strategy STANFORD - EPSO 98 Developing a core business strategy GLOBALISATION

Each separable business in a company needs its own core strategy for which the major parameters include the types of customers served and the types of products and services offered .

A core business strategy includes several key elements:

Type of products or services that the business offers

Types of customers that the business serves

Geographic markets served

Major sources of sustainable competitive advantage

Functional strategy for each of the most important value-adding activities

Competitive posture, including the selection of competitors to target

Investment strategy

Understanding Global Strategy The breadth or narrowness of a business definition is a key element of strategic choice and directly affects sustainable strategic advantage . When a business expands outside its home market, it needs to internationalise its core business strategy. The first and most important step is to select the geographic markets in which to compete . This requires identifying market attractiveness, potential competition and ways in which to adapt to local conditions, and ways in which to manage the business across a larger geographic area . Companies need a globalisation strategy that integrates and manages for world-wide business leverage and competitive advantage by systematically analysing industry conditions or “industry globalisation drivers”, by evaluating the benefits and costs of globalisation and by understanding the different ways in which a globalisation strategy can be used through “global strategy levers”. STANFORD - EPSO 98 Developing an international strategy Developing a globalisation strategy GLOBALISATION

The breadth or narrowness of a business definition is a key element of strategic choice and directly affects sustainable strategic advantage .

When a business expands outside its home market, it needs to internationalise its core business strategy. The first and most important step is to select the geographic markets in which to compete .

This requires identifying market attractiveness, potential competition and ways in which to adapt to local conditions, and ways in which to manage the business across a larger geographic area .

Companies need a globalisation strategy that integrates and manages for world-wide business leverage and competitive advantage by systematically analysing industry conditions or “industry globalisation drivers”, by evaluating the benefits and costs of globalisation and by understanding the different ways in which a globalisation strategy can be used through “global strategy levers”.

Understanding Global Strategy STANFORD - EPSO 98 Benefits and Costs of Globalisation Global Organisation Factors Industry Globalisation Drivers Global Strategy Levers The Globalisation Triangle GLOBALISATION

Understanding Global Strategy Briefly, a multilocal strategy treats competition in each country or region on a stand alone basis, while a global strategy takes an integrated approach across countries and regions. Four groups of “industry globalisation drivers” - market, cost, government and competitive - represent the industry conditions that determine the potential and need for competing with a global strategy. STANFORD - EPSO 98 Definitions and Distinctions Industry Globalisation Drivers GLOBALISATION Some dimensions determine whether a strategy lies towards the multilocal end of the continuum or the global end. There are five such dimensions : Market participation - Products/services - Location of value adding activities - Marketing - Competitive moves A business that has a fully globalised strategy would make maximum use of each of the five global strategy levers. Global strategy levers

Briefly, a multilocal strategy treats competition in each country or region on a stand alone basis, while a global strategy takes an integrated approach across countries and regions.

Four groups of “industry globalisation drivers” - market, cost, government and competitive - represent the industry conditions that determine the potential and need for competing with a global strategy.

Some dimensions determine whether a strategy lies towards the multilocal end of the continuum or the global end.

There are five such dimensions :

Market participation - Products/services - Location of value adding activities - Marketing - Competitive moves

A business that has a fully globalised strategy would make maximum use of each of the five global strategy levers.

Understanding Global Strategy STANFORD - EPSO 98 The Globalisation Forces GOVERNMENT DRIVERS INDUSTRY GLOBALISATION POTENTIAL COST DRIVERS COMPETITIVE DRIVERS MARKET DRIVERS GLOBALISATION

Understanding Global Strategy In multilocal market participation strategy, countries are selected on the basis of their stand-alone potential in terms of revenues and profits . In a global market participation strategy, countries need to be selected in terms of their potential contribution to globalisation benefits also . It may mean concentrating resources on building share in a limited number of key markets rather than more widespread coverage. In a multilocal products strategy, the products and services offered in each country are tailored to local needs . In a global product strategy, the ideal is a standardised core product that requires a minimum of local adaptation. In a multilocal activity strategy, all or most of the value chain is reproduced in every country . In another type of international strategy - exporting - most of the value chain is kept in one country. In a global activity strategy, the value chain is broken up, and each activity may be conducted in a different country. STANFORD - EPSO 98 Market participation Products and services Activity location GLOBALISATION

In multilocal market participation strategy, countries are selected on the basis of their stand-alone potential in terms of revenues and profits . In a global market participation strategy, countries need to be selected in terms of their potential contribution to globalisation benefits also . It may mean concentrating resources on building share in a limited number of key markets rather than more widespread coverage.

In a multilocal products strategy, the products and services offered in each country are tailored to local needs . In a global product strategy, the ideal is a standardised core product that requires a minimum of local adaptation.

In a multilocal activity strategy, all or most of the value chain is reproduced in every country . In another type of international strategy - exporting - most of the value chain is kept in one country. In a global activity strategy, the value chain is broken up, and each activity may be conducted in a different country.

Understanding Global Strategy In a global marketing strategy, a uniform marketing approach is applied around the world, although not all elements of the marketing mix need be identical. In a multilocal competitive strategy, a multinational company fights its competitors one country at a time in separate contests . In a global competitive strategy, competitive moves are integrated across countries . Potential globalisation benefits: Cost reduction Improved quality of products and programmes Enhanced customer preference Increased competitive leverage STANFORD - EPSO 98 Benefits of Global Strategy Competitive moves Marketing GLOBALISATION

In a global marketing strategy, a uniform marketing approach is applied around the world, although not all elements of the marketing mix need be identical.

In a multilocal competitive strategy, a multinational company fights its competitors one country at a time in separate contests . In a global competitive strategy, competitive moves are integrated across countries .

Potential globalisation benefits:

Cost reduction

Improved quality of products and programmes

Enhanced customer preference

Increased competitive leverage

Understanding Global Strategy Financial services, such as credit cards, have to provide global presence because of the travel-related nature of their service. A global strategy provides more points to attack and counter-attack against competitors. No industry scores high on every one of the many globalisation drivers. Global effects are incremental. The appropriate use of global strategy levers provides additional competitive advantage that is incremental to other sources of competitive advantage . Differences in organisation among companies in the same industry will constrain the extent to which the companies can, or should, pursue the same global strategy. STANFORD - EPSO 98 GLOBALISATION

Financial services, such as credit cards, have to provide global presence because of the travel-related nature of their service.

A global strategy provides more points to attack and counter-attack against competitors.

No industry scores high on every one of the many globalisation drivers.

Global effects are incremental. The appropriate use of global strategy levers provides additional competitive advantage that is incremental to other sources of competitive advantage .

Differences in organisation among companies in the same industry will constrain the extent to which the companies can, or should, pursue the same global strategy.

Understanding Global Strategy Four key organisation and management factors determine a business’ ability to develop and implement a global strategy STANFORD - EPSO 98 GLOBALISATION ABILITY TO DEVELOP AND IMPLEMENT GLOBAL STRATEGY ORGANISATION STRUCTURE PEOPLE MANAGEMENT PROCESSES Management and Organisation Factors Affecting Global Strategy CULTURE

Four key organisation and management factors determine a business’ ability to develop and implement a global strategy

Sources of Competitive Advantage in the Global Economy The Strategic side involved the firm’s Resources, Capabilities and Position. The assets and other resources that the firm commands are a source of competitive advantage to the extent that they are capable of creating value and others cannot replicate them easily . The environment largely determines how much money can potentially be made in an industry. The standard strategic analysis framework looks at Resources, Capabilities and Position. To these we might add Organisation and Implementation, even in a domestic context. Organisation is more than the architectural features that show up on an organisational chart . It also includes the formal and informal processes for information, transmission, performance and project evaluation, resource allocation and control, as well as the networks through which communication occurs and decisions are made. STANFORD - EPSO 98 GLOBALISATION

The Strategic side involved the firm’s Resources, Capabilities and Position. The assets and other resources that the firm commands are a source of competitive advantage to the extent that they are capable of creating value and others cannot replicate them easily .

The environment largely determines how much money can potentially be made in an industry.

The standard strategic analysis framework looks at Resources, Capabilities and Position. To these we might add Organisation and Implementation, even in a domestic context. Organisation is more than the architectural features that show up on an organisational chart . It also includes the formal and informal processes for information, transmission, performance and project evaluation, resource allocation and control, as well as the networks through which communication occurs and decisions are made.

Organisation involves the fundamental assumptions and values of the corporation and the other elements of corporate culture . Implementation is how the firm goes about using the resources, exploiting the capabilities and executing the strategy and how well these things are done. In the multi-market international arena, they become so important that it is worthwhile highlighting them separately. The resources that a firm commands can be a source of lasting competitive advantage only if they are not easily matched by others . There is the issue of mobilising these resources in one location to meet needs, threats or opportunities arising elsewhere. The ability to bring resources to bear where they have the greatest value is a prime capability in a firm operating internationally . So are other managerial capabilities: to co-ordinate across boundaries and cultures, to spread learning across national and divisional borders, to handle greatly increased complexity. Sources of Competitive Advantage in the Global Economy STANFORD - EPSO 98 Resources Capabilities GLOBALISATION

Organisation involves the fundamental assumptions and values of the corporation and the other elements of corporate culture . Implementation is how the firm goes about using the resources, exploiting the capabilities and executing the strategy and how well these things are done.

In the multi-market international arena, they become so important that it is worthwhile highlighting them separately.

The resources that a firm commands can be a source of lasting competitive advantage only if they are not easily matched by others . There is the issue of mobilising these resources in one location to meet needs, threats or opportunities arising elsewhere.

The ability to bring resources to bear where they have the greatest value is a prime capability in a firm operating internationally . So are other managerial capabilities: to co-ordinate across boundaries and cultures, to spread learning across national and divisional borders, to handle greatly increased complexity.

Position relates to the desirability of a firm’s offerings relative to its rivals. This raises the global-versus-multinational (or multilocal) issue in strategy which is a major theme in international strategy. Realising the potential benefits of a strategy necessitates an organisation that is adapted to it and the nature of a firm’s organisation determines what strategies will work. In international strategic management, the setting of the organisation is frequently the key factor in success. Carrying out the plans, adapting to unforeseen circumstances, recognising new threats and opportunities, getting people to work together towards the goal - all these are crucial to success. Sources of Competitive Advantage in the Global Economy STANFORD - EPSO 98 Position Organisation Implementation GLOBALISATION

Position relates to the desirability of a firm’s offerings relative to its rivals. This raises the global-versus-multinational (or multilocal) issue in strategy which is a major theme in international strategy.

Realising the potential benefits of a strategy necessitates an organisation that is adapted to it and the nature of a firm’s organisation determines what strategies will work. In international strategic management, the setting of the organisation is frequently the key factor in success.

Carrying out the plans, adapting to unforeseen circumstances, recognising new threats and opportunities, getting people to work together towards the goal - all these are crucial to success.

Global Organisation Matrix organisation would seem to represent an attempt to be simultaneously : Global and local tightly and loosely coupled Examples: ABB (until August 1998) - Unilever STANFORD - EPSO 98 Global Matrix Organisation GLOBALISATION However, matrix organisation fosters considerable opportunities for conflict and negotiation: cultural differences will generally impede successful resolution of conflict. Dominant culture(s) will generally be favoured in situation of conflict. ABB highlights attention that must be given at level of process and culture if matrix is to work.

Matrix organisation would seem to represent an attempt to be simultaneously :

Global and local

tightly and loosely coupled

Examples: ABB (until August 1998) - Unilever

However, matrix organisation fosters considerable opportunities for conflict and negotiation:

cultural differences will generally impede successful resolution of conflict.

Dominant culture(s) will generally be favoured in situation of conflict.

ABB highlights attention that must be given at level of process and culture if matrix is to work.

Global Organisation We have observed that loosely-coupled organisation is central to meeting simultaneous challenges of: global efficiency responsiveness learning Loose coupling can either be across firm boundaries (e.g., relational contracting), or within firm boundaries. STANFORD - EPSO 98 Loosely Coupled Organisation GLOBALISATION Loose linkages within firm boundaries create difficulties in managing loose linkages across firm boundaries. Loose linkages across firm boundaries make it difficult to manage loose linkages within firm boundaries. Alliances/joint ventures create pressures for centralising internal operations.

We have observed that loosely-coupled organisation is central to meeting simultaneous challenges of:

global efficiency

responsiveness

learning

Loose coupling can either be

across firm boundaries (e.g., relational contracting), or

within firm boundaries.

Loose linkages within firm boundaries create difficulties in managing loose linkages across firm boundaries.

Loose linkages across firm boundaries make it difficult to manage loose linkages within firm boundaries.

Alliances/joint ventures create pressures for centralising internal operations.

Global Organisation Organisations must therefore choose to be: loosely-coupled within organisational boundaries (and de-emphasise importance of alliances, etc.) or loosely-coupled across organisational boundaries (and more centralised within organisational boundaries). Factors affecting type of loosely-coupled organisation: legal embeddedness of market relations cultural values STANFORD - EPSO 98 Loosely Coupled Organisation GLOBALISATION

Organisations must therefore choose to be:

loosely-coupled within organisational boundaries (and de-emphasise importance of alliances, etc.)

or

loosely-coupled across organisational boundaries (and more centralised within organisational boundaries).

Factors affecting type of loosely-coupled organisation:

legal

embeddedness of market relations

cultural values

Global Organisation Legal restrictions on foreign ownership favour reliance on alliances, joint ventures, etc. Example: China Embedded market transactions If market transactions take place in a context where market actors are all aware of each other’s reputation as a partner, then it is easier to obtain co-operation in alliances. National culture There are numerous dimensions along which national cultures can be distinguished. We will focus on two: collectivism/individualism high power distance vs. low power distance STANFORD - EPSO 98 Factors affecting boundaries around loosely coupled organisation GLOBALISATION

Legal restrictions on foreign ownership favour reliance on alliances, joint ventures, etc.

Example: China

Embedded market transactions

If market transactions take place in a context where market actors are all aware of each other’s reputation as a partner, then it is easier to obtain co-operation in alliances.

National culture

There are numerous dimensions along which national cultures can be distinguished. We will focus on two:

collectivism/individualism

high power distance vs. low power distance

Global Organisation Cultural Dimension (I): Individualism-Collectivism Individualist persons are regarded as de-coupled from groups participation in a group is calculative Collectivist strong in-group/out-group distinctions people are categorised as “one of us” vs. “one of them” participation in group is moral obligation group membership carries both rights and obligations lack of group identity becomes source of distrust. STANFORD - EPSO 98 Dimensions of national culture GLOBALISATION

Cultural Dimension (I): Individualism-Collectivism

Individualist

persons are regarded as de-coupled from groups

participation in a group is calculative

Collectivist

strong in-group/out-group distinctions

people are categorised as “one of us” vs. “one of them”

participation in group is moral obligation

group membership carries both rights and obligations

lack of group identity becomes source of distrust.

Global Organisation Cultural Dimension (II): Power Distance high power distance = hierarchical culture widespread tolerance/acceptance of inequality subordinates have little faith, trust in abilities of other subordinates relative to faith, trust in abilities of superiors. Subordinates relatively unlikely to question superiors’ judgement. Low power distance = egalitarian culture belief that inequality should be minimised. Inequality must be functionally justified (never an end in itself) subordinates are willing to question superiors’ judgement. STANFORD - EPSO 98 Dimensions of national culture GLOBALISATION

Cultural Dimension (II): Power Distance

high power distance = hierarchical culture

widespread tolerance/acceptance of inequality

subordinates have little faith, trust in abilities of other subordinates relative to faith, trust in abilities of superiors.

Subordinates relatively unlikely to question superiors’ judgement.

Low power distance = egalitarian culture

belief that inequality should be minimised.

Inequality must be functionally justified (never an end in itself)

subordinates are willing to question superiors’ judgement.

Global Organisation STANFORD - EPSO 98 Egalitarian Hierarchical Collectivist Individualist Source: Hofstede (1980); Hofstede & Bond (1984); others. Positions plotted are abstracted from several analyses. * Costa Rica China * * Venezuela * Hong Kong * India * Mexico * Argentina * Brazil * Japan * South Africa * France * Israel * Germany * Canada * Sweden * UK * USA * Australia GLOBALISATION

Global Organisation Design implications of national culture Collectivism/hierarchy will tend to foster greater within organisation solidarity conducive to loosely coupled design across organisational boundaries Individualism/egalitarianism will tend to foster greater autonomous action within organisations conducive to loosely coupled design within organisational boundaries STANFORD - EPSO 98 National Culture and Organisation GLOBALISATION

Design implications of national culture

Collectivism/hierarchy will tend to foster greater within organisation solidarity

conducive to loosely coupled design across organisational boundaries

Individualism/egalitarianism will tend to foster greater autonomous action within organisations

conducive to loosely coupled design within organisational boundaries

Global Organisation As move into global context, culture becomes increasingly salient determinant of organisational and strategic choices. STANFORD - EPSO 98 Environmental Determinants of Organisation & Strategy Strategy Performance Organisation Environment cultural legal GLOBALISATION

As move into global context, culture becomes increasingly salient determinant of organisational and strategic choices.

Environment

cultural

legal

Global Organisation As shift loosely coupled system to global context, new skill requirements for managers include: greater cultural sensitivity broader spirit of co-operation (“the enlightened entrepreneur”) greater time and effort in managing linkages. STANFORD - EPSO 98 Skill requirements for Global Manager Matrix Choosing between loose coupling within vs. across firm boundaries Effect of globalisation on necessary management skills. Summary GLOBALISATION

As shift loosely coupled system to global context, new skill requirements for managers include:

greater cultural sensitivity

broader spirit of co-operation (“the enlightened entrepreneur”)

greater time and effort in managing linkages.

Matrix

Choosing between loose coupling within vs. across firm boundaries

Effect of globalisation on necessary management skills.

EPSO ‘98 T O M ANAGE

Matrix Management: Not a structure, a frame of mind Many companies remain caught in the structural complexity trap that paralyses their ability to respond quickly or flexibly to the new strategic imperatives . Companies that adopted the matrix structure correctly recognised the need for a multidimensional organisation to respond to growing external complexity. The problem was that they defined their organisational objectives in purely structural terms. Companies must also concern themselves with the systems and relationships that allow the lifeblood of information to flow through the organisation. They need to develop a healthy organisational psychology - the shared norms, values, and beliefs that shape the way individual managers think and act . STANFORD - EPSO 98 Building an organisation TO MANAGE

Many companies remain caught in the structural complexity trap that paralyses their ability to respond quickly or flexibly to the new strategic imperatives .

Companies that adopted the matrix structure correctly recognised the need for a multidimensional organisation to respond to growing external complexity. The problem was that they defined their organisational objectives in purely structural terms.

Companies must also concern themselves with the systems and relationships that allow the lifeblood of information to flow through the organisation. They need to develop a healthy organisational psychology - the shared norms, values, and beliefs that shape the way individual managers think and act .

Matrix Management: Not a structure, a frame of mind The companies that fell into the organisational trap assumed that changing their formal structure (anatomy) would force changes in interpersonal relationships and decision processes (physiology), which in turn would reshape the individual attitudes and actions of managers (psychology). Because the new job requirements will frustrate, alienate, or simply overwhelm so many managers, changes in individual attitudes and behaviour will likely take even longer. Good managers gradually stop searching for the ideal structural template to impose on the company from the top down. Instead, they focus on the challenge of building up an appropriate se t of employee attitudes and skills and linking them together with carefully developed processes and relationships . They begin to focus on building the organisation rather than simply on installing a new structure. STANFORD - EPSO 98 TO MANAGE

The companies that fell into the organisational trap assumed that changing their formal structure (anatomy) would force changes in interpersonal relationships and decision processes (physiology), which in turn would reshape the individual attitudes and actions of managers (psychology).

Because the new job requirements will frustrate, alienate, or simply overwhelm so many managers, changes in individual attitudes and behaviour will likely take even longer.

Good managers gradually stop searching for the ideal structural template to impose on the company from the top down. Instead, they focus on the challenge of building up an appropriate se t of employee attitudes and skills and linking them together with carefully developed processes and relationships . They begin to focus on building the organisation rather than simply on installing a new structure.

Matrix Management: Not a structure, a frame of mind Their first objective is to alter the organisational psychology . By enriching and clarifying communication and decision processes, companies then reinforce these psychological changes with improvements in organisational physiology. Finally they consolidate and confirm their progress by realigning organisational anatomy through changes in the formal structure . There are three principle characteristics common to those who manage this task most effectively : They develop and communicate a clear and consistent corporate vision They effectively manage human resource tools to broaden individual perspectives and to develop identification with corporate goals. They integrate individual thinking and activities into the broad corporate agenda by a process we can call co-option. STANFORD - EPSO 98 TO MANAGE

Their first objective is to alter the organisational psychology .

By enriching and clarifying communication and decision processes, companies then reinforce these psychological changes with improvements in organisational physiology.

Finally they consolidate and confirm their progress by realigning organisational anatomy through changes in the formal structure .

There are three principle characteristics common to those who manage this task most effectively :

They develop and communicate a clear and consistent corporate vision

They effectively manage human resource tools to broaden individual perspectives and to develop identification with corporate goals.

They integrate individual thinking and activities into the broad corporate agenda by a process we can call co-option.

Matrix Management: Not a structure, a frame of mind We are not talking about a slogan, however catchy. We are talking about a company vision, which must be crafted and articulated with clarity, continuity and consistency. About clarity of expression that makes company objectives understandable and meaningful; continuity of purpose that underscores their enduring importance; and consistency of application across business units and geographical boundaries that ensures uniformity throughout the organisation. The keys to clarity are simplicity, relevance and reinforcement . Relevance means linking broad objectives to concrete agendas. Top management’s continual reinforcement, elaboration, and interpretation of the core vision to keep it from becoming obsolete or abstract is also important to clarity. STANFORD - EPSO 98 Building a shared vision Clarity TO MANAGE

We are not talking about a slogan, however catchy. We are talking about a company vision, which must be crafted and articulated with clarity, continuity and consistency. About clarity of expression that makes company objectives understandable and meaningful; continuity of purpose that underscores their enduring importance; and consistency of application across business units and geographical boundaries that ensures uniformity throughout the organisation.

The keys to clarity are simplicity, relevance and reinforcement . Relevance means linking broad objectives to concrete agendas. Top management’s continual reinforcement, elaboration, and interpretation of the core vision to keep it from becoming obsolete or abstract is also important to clarity.

Matrix Management: Not a structure, a frame of mind Companies must remain committed to the same core set of strategic objectives and organisational values. In communicating strategic purpose, the task of top management is to ensure that everyone in the company shares the same vision. The cost of inconsistency can be horrendous . It always produces confusion and can lead to total chaos, with different units of the organisation pursuing agendas that are mutually debilitating . Most inconsistencies involve differences between what managers of different operating units see as the company’s key objectives. Formulating and communicating a vision - no matter how clear, enduring and consistent - cannot succeed unless individual employees understand and accept the company’s stated goals and objectives. STANFORD - EPSO 98 Continuity Consistency TO MANAGE

Companies must remain committed to the same core set of strategic objectives and organisational values.

In communicating strategic purpose, the task of top management is to ensure that everyone in the company shares the same vision. The cost of inconsistency can be horrendous . It always produces confusion and can lead to total chaos, with different units of the organisation pursuing agendas that are mutually debilitating .

Most inconsistencies involve differences between what managers of different operating units see as the company’s key objectives.

Formulating and communicating a vision - no matter how clear, enduring and consistent - cannot succeed unless individual employees understand and accept the company’s stated goals and objectives.

Matrix Management: Not a structure, a frame of mind Top managers focus on finance and technology often overshadows the task of developing the scarcest resource of all - capable managers . If there is one key to regaining control of companies that operate in fast-changing environments, it is the ability of top management to turn the perceptions, capabilities and relationships of individual managers into the building blocks of the organisation. Growing external complexity and strategic sophistication have accelerated the growth of a cadre of specialists who are physically and organisationally isolated from each other, and the task of dealing with their consequent parochialism should not be delegated to the clerical staff. One acronym summarises the characteristics needed by a top level candidate: SMILE - speciality ( the needed skill, capability or knowledge ); management ability; international flexibility; language facility; and endeavour ( vitality, perseverance ). STANFORD - EPSO 98 Developing Human Resources TO MANAGE

Top managers focus on finance and technology often overshadows the task of developing the scarcest resource of all - capable managers . If there is one key to regaining control of companies that operate in fast-changing environments, it is the ability of top management to turn the perceptions, capabilities and relationships of individual managers into the building blocks of the organisation.

Growing external complexity and strategic sophistication have accelerated the growth of a cadre of specialists who are physically and organisationally isolated from each other, and the task of dealing with their consequent parochialism should not be delegated to the clerical staff.

One acronym summarises the characteristics needed by a top level candidate: SMILE - speciality ( the needed skill, capability or knowledge ); management ability; international flexibility; language facility; and endeavour ( vitality, perseverance ).

Matrix Management: Not a structure, a frame of mind Once the appropriate top-level candidates have been identified, the next step is to develop their potential ; to inculcate a common vision and shared values; to broaden management perspectives and capabilities; and to develop contacts and shape management relationships. By moving selected mangers across functions, businesses, and geographic units, a company encourages cross-fertilisation of ideas as well as the flexibility and breadth of experience that enable managers to grapple with complexity and come out on top . Unilever, for instance, carefully transfers most of the high-potential individuals through a variety of different functional, product, and geographic positions, often rotating every two or three years. Top management tracks about 1,000 of these people who, as they move through the company, forge an informal network of contacts and relationships that is central to the company’s decision-making and information exchange processes. STANFORD - EPSO 98 Training and development Career path management TO MANAGE

Once the appropriate top-level candidates have been identified, the next step is to develop their potential ; to inculcate a common vision and shared values; to broaden management perspectives and capabilities; and to develop contacts and shape management relationships.

By moving selected mangers across functions, businesses, and geographic units, a company encourages cross-fertilisation of ideas as well as the flexibility and breadth of experience that enable managers to grapple with complexity and come out on top .

Unilever, for instance, carefully transfers most of the high-potential individuals through a variety of different functional, product, and geographic positions, often rotating every two or three years. Top management tracks about 1,000 of these people who, as they move through the company, forge an informal network of contacts and relationships that is central to the company’s decision-making and information exchange processes.

Matrix Management: Not a structure, a frame of mind To maintain control of its global strategies, a company must secure a strong and lasting individual commitment to corporate visions and objectives. Co-option can transform the defensive, territorial attitude of managers into a more collaborative set of mind and encourage them to make important contributions to global corporate strategy instead of looking for ways to subvert it. Corporations now commonly design strategies that seem impossible to implement for the simple reason that no one can effectively implement third-generation strategies through second-generation organisations run by first-generation managers. Change succeeds only when those assigned to the new transnational and interdependent tasks understand the overall goals and are dedicated to achieving them. STANFORD - EPSO 98 Co-opting management’s efforts The matrix in the manager’s mind TO MANAGE

To maintain control of its global strategies, a company must secure a strong and lasting individual commitment to corporate visions and objectives.

Co-option can transform the defensive, territorial attitude of managers into a more collaborative set of mind and encourage them to make important contributions to global corporate strategy instead of looking for ways to subvert it.

Corporations now commonly design strategies that seem impossible to implement for the simple reason that no one can effectively implement third-generation strategies through second-generation organisations run by first-generation managers.

Change succeeds only when those assigned to the new transnational and interdependent tasks understand the overall goals and are dedicated to achieving them.

Matrix Management: Not a structure, a frame of mind The challenge is not so much to build a matrix structure as it is to create a matrix in the minds of the managers. Developing a matrix of flexible perspectives and relationships within each manager’s mind achieves an entirely different result. It lets individuals make judgements and negotiate the tradeoffs that drive the organisation towards a shared strategic objective. STANFORD - EPSO 98 TO MANAGE

The challenge is not so much to build a matrix structure as it is to create a matrix in the minds of the managers.

Developing a matrix of flexible perspectives and relationships within each manager’s mind achieves an entirely different result. It lets individuals make judgements and negotiate the tradeoffs that drive the organisation towards a shared strategic objective.

Managing Turnaround We have discussed how, in gaining strategic position, large firms lose the discipline that keeps firms competitive . Ultimately, this can get a large firm in trouble financially, so that it needs to the “turned around”. Managing the turnaround can be difficult and wrenching, and not all turnarounds succeed. Several themes help to structure our thinking about this process. Research shows that turnarounds are more successful if they proceed in roughly two phases, retrenchment and recovery . Retrenchment usually includes improving efficiency and changing the organisation’s structure , and often includes the need to reduce the organisation’s workforce. Enduring performance requires that the organisational then move into a recovery phase , where profitable growth can be restores. This requires that the organisation define the basis of competitive advantage in the new regime, and build the organisation around that source of advantage . This often requires very different managerial skills than those needed in the retrenchment phase. STANFORD - EPSO 98 Retrenchment vs Recovery TO MANAGE

We have discussed how, in gaining strategic position, large firms lose the discipline that keeps firms competitive . Ultimately, this can get a large firm in trouble financially, so that it needs to the “turned around”. Managing the turnaround can be difficult and wrenching, and not all turnarounds succeed. Several themes help to structure our thinking about this process.

Research shows that turnarounds are more successful if they proceed in roughly two phases, retrenchment and recovery . Retrenchment usually includes improving efficiency and changing the organisation’s structure , and often includes the need to reduce the organisation’s workforce. Enduring performance requires that the organisational then move into a recovery phase , where profitable growth can be restores. This requires that the organisation define the basis of competitive advantage in the new regime, and build the organisation around that source of advantage . This often requires very different managerial skills than those needed in the retrenchment phase.

Managing Turnaround All constituencies of the organisation will require the downsizing decision to be justified. Shareholders and existing management often are not aware of the problems that have developed in the organisation. Rank-and file employees - and their unions - are especially likely to be sceptical. This requires the management of perceptions about why downsizing is taking place. The facts supporting the decision usually require interpretation. Evidence is usually ambiguous, and so allows for subjective perception . Among management’s primary roles is that of interpretation - the management of the meaning of events. Dramatic symbolic behaviour such as immediate structural changes or top-management team succession often facilitates this process. The management of employee attributions is key. STANFORD - EPSO 98 Why retrenchment? TO MANAGE

All constituencies of the organisation will require the downsizing decision to be justified. Shareholders and existing management often are not aware of the problems that have developed in the organisation. Rank-and file employees - and their unions - are especially likely to be sceptical. This requires the management of perceptions about why downsizing is taking place.

The facts supporting the decision usually require interpretation. Evidence is usually ambiguous, and so allows for subjective perception . Among management’s primary roles is that of interpretation - the management of the meaning of events. Dramatic symbolic behaviour such as immediate structural changes or top-management team succession often facilitates this process. The management of employee attributions is key.

Managing Turnaround The organisation’s “tainted image” can lead to problems of motivation and commitment if management is blamed for the decline. These problems may be avoided if attributions for decline are made to competitors or outside consultants rather than management. Administrative intensity tends to increase during downsizing . The politics of decision cause this, and centralised implementation can be a cure in some cases. Ultimately, downsizing must increase organisational efficiency if the organisation is to remain competitive . The nature of administrative intensity should be managed. Staff intensity can enhance productivity. Managerial intensity should be reduced, since this tends to increase over time if left unmanaged . Rank-and-file layoffs should retain firm-specific human capital. Here our concern is not merely with merit, but with the cost of replacement. STANFORD - EPSO 98 Composition of layoffs TO MANAGE

The organisation’s “tainted image” can lead to problems of motivation and commitment if management is blamed for the decline. These problems may be avoided if attributions for decline are made to competitors or outside consultants rather than management.

Administrative intensity tends to increase during downsizing . The politics of decision cause this, and centralised implementation can be a cure in some cases. Ultimately, downsizing must increase organisational efficiency if the organisation is to remain competitive .

The nature of administrative intensity should be managed. Staff intensity can enhance productivity. Managerial intensity should be reduced, since this tends to increase over time if left unmanaged .

Rank-and-file layoffs should retain firm-specific human capital. Here our concern is not merely with merit, but with the cost of replacement.

Managing Turnaround Gradual downsizing, such as through attrition , is more humane but relies on demographic patterns to determine workforce composition. Gradual downsizing also allows the organisation to adapt to new strategic realities as they become clearer. Rapid downsizing may help to eliminate resistance to change . Rapid downsizing aids in attribution management, limiting the amount of time that “lame duck” and survivors must work side-by-side. This period is a major source of dissonance among survivors* . Rapid downsizing isolates survivors, and helps them to come to see their continuing employment as evidence of merit. Rapid downsizing also opens opportunities for other discrete changes that would otherwise be opposed by forces of inertia. * " layoff survivor sickness " A term coined by psychiatrist, Manfred Kets de Vries - a syndrome characterized by anger, guilt, depression, fear, risk aversion, distrust, vulnerability, powerlessness and loss of motivation. He sees the syndrome as developing as a result of high rates of corporate downsizing (especially in the 1990's) and the consequent job insecurity. STANFORD - EPSO 98 Speed of change TO MANAGE

Gradual downsizing, such as through attrition , is more humane but relies on demographic patterns to determine workforce composition. Gradual downsizing also allows the organisation to adapt to new strategic realities as they become clearer.

Rapid downsizing may help to eliminate resistance to change . Rapid downsizing aids in attribution management, limiting the amount of time that “lame duck” and survivors must work side-by-side. This period is a major source of dissonance among survivors* . Rapid downsizing isolates survivors, and helps them to come to see their continuing employment as evidence of merit. Rapid downsizing also opens opportunities for other discrete changes that would otherwise be opposed by forces of inertia.

* " layoff survivor sickness " A term coined by psychiatrist, Manfred Kets de Vries -

a syndrome characterized by anger, guilt, depression, fear, risk aversion, distrust, vulnerability, powerlessness and loss of motivation. He sees the syndrome as developing as a result of high rates of corporate downsizing (especially in the 1990's) and the consequent job insecurity.

Managing Turnaround Note that organisations usually decline because their strategies no longer fit their environment. However, downsizing is often pursued under the idea that internal organisational “x-inefficiency” is the problem. Attempts to “manage out” or “manage up” are thus seen to be the solution. If this diagnosis is not correct, however, then the downsizing move will not solve the organisation’s decline problem. This can lead to serious longer-run problems, including organisational failure. To really end up a “turnaround”, the strategic change must fix the root causes of the problem. STANFORD - EPSO 98 Why did decline occur? TO MANAGE

Note that organisations usually decline because their strategies no longer fit their environment.

However, downsizing is often pursued under the idea that internal organisational “x-inefficiency” is the problem. Attempts to “manage out” or “manage up” are thus seen to be the solution.

If this diagnosis is not correct, however, then the downsizing move will not solve the organisation’s decline problem. This can lead to serious longer-run problems, including organisational failure.

To really end up a “turnaround”, the strategic change must fix the root causes of the problem.

Designs for Corporate Entrepreneurship in Established Firms As firms grow large, their capacity to maintain a certain growth rate, based on pursuing opportunities in their mainstream areas of business, eventually diminishes . Diversification is both difficult and risky . Various authors have argued that firms should maintain the “common thread” and “stick to the knitting”. This does assume away the fundamental problem and offers little in terms of how firms could improve their capacity to engage in corporate entrepreneurship : extending the firm’s domain of competence and corresponding opportunity set through internally generated new resource combinations. The concept of strategy induces strategic activity in the firm. The current concept of strategy corresponds to a structural concept aimed at keeping strategic behaviour at operational levels in line with current concept of strategy . STANFORD - EPSO 98 Induced strategic behaviour loop TO MANAGE

As firms grow large, their capacity to maintain a certain growth rate, based on pursuing opportunities in their mainstream areas of business, eventually diminishes .

Diversification is both difficult and risky . Various authors have argued that firms should maintain the “common thread” and “stick to the knitting”. This does assume away the fundamental problem and offers little in terms of how firms could improve their capacity to engage in corporate entrepreneurship : extending the firm’s domain of competence and corresponding opportunity set through internally generated new resource combinations.

The concept of strategy induces strategic activity in the firm.

The current concept of strategy corresponds to a structural concept aimed at keeping strategic behaviour at operational levels in line with current concept of strategy .

Designs for Corporate Entrepreneurship in Established Firms The so-called “excellent companies” all seem to have found their way of making the induced strategic behaviour loop work exceedingly well. Operational and middle level managers in these firms understand what strategic actions are required in view of the corporate development needs, even though there may be very little explicit attention given to formal “strategy ”. Large, resource-rich firms are likely to possess a reservoir of entrepreneurial potential at operational levels that will express itself in autonomous strategic initiatives. Entrepreneurial participants, at the product/market level, conceive new business opportunities, engage in project championing efforts to mobilise corporate resources for these new opportunities, and perform strategic forcing efforts to create momentum for their further development. Middle level managers attempt to formulate broader strategies for areas of new business activity and try to convince top management to support them. STANFORD - EPSO 98 Induced strategic behaviour loop TO MANAGE

The so-called “excellent companies” all seem to have found their way of making the induced strategic behaviour loop work exceedingly well. Operational and middle level managers in these firms understand what strategic actions are required in view of the corporate development needs, even though there may be very little explicit attention given to formal “strategy ”.

Large, resource-rich firms are likely to possess a reservoir of entrepreneurial potential at operational levels that will express itself in autonomous strategic initiatives. Entrepreneurial participants, at the product/market level, conceive new business opportunities, engage in project championing efforts to mobilise corporate resources for these new opportunities, and perform strategic forcing efforts to create momentum for their further development. Middle level managers attempt to formulate broader strategies for areas of new business activity and try to convince top management to support them.

Designs for Corporate Entrepreneurship in Established Firms Such autonomous strategic initiatives make the current concept of corporate strategy problematical . They lead to a redefinition of the corporation’s relevant environment and broaden the scope of its business portfolio. Autonomous strategic behaviour, to be successful, needs eventually to be accepted by the organisation and to be integrated into its concept of strategy . The process through which this can be achieved has been identified as the process of strategic context determination. The model thus suggests that corporate entrepreneurship is typically constituted by the interlocking strategic activities of managers at multiple levels in the firm’s organisation . It subsumes 2 important findings: Different processes are involved in generating and implementing innovation. There may be a conflict between being excellent at incremental innovation and the capacity for more radical innovation. STANFORD - EPSO 98 TO MANAGE

Such autonomous strategic initiatives make the current concept of corporate strategy problematical . They lead to a redefinition of the corporation’s relevant environment and broaden the scope of its business portfolio.

Autonomous strategic behaviour, to be successful, needs eventually to be accepted by the organisation and to be integrated into its concept of strategy . The process through which this can be achieved has been identified as the process of strategic context determination.

The model thus suggests that corporate entrepreneurship is typically constituted by the interlocking strategic activities of managers at multiple levels in the firm’s organisation . It subsumes 2 important findings:

Different processes are involved in generating and implementing innovation.

There may be a conflict between being excellent at incremental innovation and the capacity for more radical innovation.

Designs for Corporate Entrepreneurship in Established Firms Excellent companies seem to have both an extraordinarily strong CEO whose influence pervades the entire organisation and independent mavericks who engage in activities outside the regular channels of hierarchical decision-making . The managerial challenge posed by autonomous strategic behaviour is, from a strategic management perspective, how could corporate management improve its capacity to deal with autonomous strategic behaviour, given that, by definition, it does not fit with current corporate strategy. A framework for assessing internal proposals focuses on two key dimensions of strategic decision making: Assessing strategic importance Assessing operational relatedness STANFORD - EPSO 98 A framework for assessing internal entrepreneurial proposals TO MANAGE

Excellent companies seem to have both an extraordinarily strong CEO whose influence pervades the entire organisation and independent mavericks who engage in activities outside the regular channels of hierarchical decision-making .

The managerial challenge posed by autonomous strategic behaviour is, from a strategic management perspective, how could corporate management improve its capacity to deal with autonomous strategic behaviour, given that, by definition, it does not fit with current corporate strategy.

A framework for assessing internal proposals focuses on two key dimensions of strategic decision making:

Assessing strategic importance

Assessing operational relatedness

Designs for Corporate Entrepreneurship in Established Firms Top management should work on a checklist of critical issues and questions in these substantive interactions: How does this initiative maintain our capacity to move in areas where current or potential competitors might move? How does this help us to find out where not to go? How does it help us create new defensible niches? How does it help mobilise the organisation? To what extent could it put the firm at risk? When should we get out of it if it does not seem to work? What is missing in our analysis? Key to the usefulness of the analysis is that such assessments are based on specific, substantive factors. STANFORD - EPSO 98 Assessing strategic importance TO MANAGE

Top management should work on a checklist of critical issues and questions in these substantive interactions:

How does this initiative maintain our capacity to move in areas where current or potential competitors might move?

How does this help us to find out where not to go?

How does it help us create new defensible niches?

How does it help mobilise the organisation?

To what extent could it put the firm at risk?

When should we get out of it if it does not seem to work?

What is missing in our analysis?

Key to the usefulness of the analysis is that such assessments are based on specific, substantive factors.

Designs for Corporate Entrepreneurship in Established Firms New business proposals may either be driven by newly developed capabilities and skills or they may drive the development of new capabilities and skills. Entrepreneurial proposals typically are based on new combinations of corporate capabilities, and this may reveal potential opportunities for positive synergies. Here again, corporate management needs a checklist of critical issues and questions in these substantive interactions: What are the key capabilities required to make this project successful? Where, how and when are we going to get them if we don’t have them yet, and at what cost? Who else might be able to do this, perhaps better? STANFORD - EPSO 98 Assessing Operational Relatedness TO MANAGE

New business proposals may either be driven by newly developed capabilities and skills or they may drive the development of new capabilities and skills.

Entrepreneurial proposals typically are based on new combinations of corporate capabilities, and this may reveal potential opportunities for positive synergies.

Here again, corporate management needs a checklist of critical issues and questions in these substantive interactions:

What are the key capabilities required to make this project successful?

Where, how and when are we going to get them if we don’t have them yet, and at what cost?

Who else might be able to do this, perhaps better?

Designs for Corporate Entrepreneurship in Established Firms How will these new capabilities affect the capacities currently employed in our mainstream business? What other areas may possibly require successful innovative efforts if we move forward with this project? What is missing in our analysis? A useful help to corporate management is to develop an accurate inventory of current capabilities and skills in various functional areas and to spell out in detail how each area of business activity uses these capabilities and skills. STANFORD - EPSO 98 TO MANAGE

How will these new capabilities affect the capacities currently employed in our mainstream business?

What other areas may possibly require successful innovative efforts if we move forward with this project?

What is missing in our analysis?

A useful help to corporate management is to develop an accurate inventory of current capabilities and skills in various functional areas and to spell out in detail how each area of business activity uses these capabilities and skills.

Designs for Corporate Entrepreneurship in Established Firms Determining administrative linkages - the assessment of strategic importance has implications for the degree of control corporate management needs to maintain over the new business development. If strategic importance is high, strong administrative linkages will be in order. This means, basically, that the new business must be folded into the existing structural context of the firm. Corporate management will want substantive involvement in planning and involvement in tradeoffs between strategic concerns of the new and existing businesses . Determining operational linkages - If operational relatedness is judged to be high, corporate management should ensure that both new and existing capabilities and skills are used well through integration of work flows, adequate mutual adjustment between resource users and free flows of information and know-how through regular contacts between professionals in the new and existing businesses. STANFORD - EPSO 98 Design alternatives for corporate entrepreneurship TO MANAGE

Determining administrative linkages - the assessment of strategic importance has implications for the degree of control corporate management needs to maintain over the new business development.

If strategic importance is high, strong administrative linkages will be in order. This means, basically, that the new business must be folded into the existing structural context of the firm. Corporate management will want substantive involvement in planning and involvement in tradeoffs between strategic concerns of the new and existing businesses .

Determining operational linkages - If operational relatedness is judged to be high, corporate management should ensure that both new and existing capabilities and skills are used well through integration of work flows, adequate mutual adjustment between resource users and free flows of information and know-how through regular contacts between professionals in the new and existing businesses.

Designs for Corporate Entrepreneurship in Established Firms In situations where operational relatedness is partial and not completely clear, loose coupling seems most adequate. Choosing design alternatives: Direct Integration: such integration must anticipate internal resistance. The role of “champions” - those who know the workings of the current system very well - are likely to be important in such situations. New Product/Business Department: high strategic importance and partial operational relatedness require a combination of strong administrative and medium-strong operational linkages . Corporate management should monitor the strategic development of the project in substantive terms and not allow it to be folded into the overall strategic planning of that division or group. STANFORD - EPSO 98 TO MANAGE

In situations where operational relatedness is partial and not completely clear, loose coupling seems most adequate.

Choosing design alternatives:

Direct Integration: such integration must anticipate internal resistance. The role of “champions” - those who know the workings of the current system very well - are likely to be important in such situations.

New Product/Business Department: high strategic importance and partial operational relatedness require a combination of strong administrative and medium-strong operational linkages . Corporate management should monitor the strategic development of the project in substantive terms and not allow it to be folded into the overall strategic planning of that division or group.

Designs for Corporate Entrepreneurship in Established Firms Special Business Units: high strategic importance and partial operational relatedness may require the creation of specially dedicated new business units. Strong administrative linkages are necessary to ensure the attainment of explicit strategic objectives within specified time horizons throughout the development process. Micro New Ventures Department New Venture Division (NVD) Independent Business Units Nurturing Plus Contracting Contracting Complete Spin Off STANFORD - EPSO 98 TO MANAGE

Special Business Units: high strategic importance and partial operational relatedness may require the creation of specially dedicated new business units. Strong administrative linkages are necessary to ensure the attainment of explicit strategic objectives within specified time horizons throughout the development process.

Micro New Ventures Department

New Venture Division (NVD)

Independent Business Units

Nurturing Plus Contracting

Contracting

Complete Spin Off

Designs for Corporate Entrepreneurship in Established Firms Implementing Design Alternatives : First, corporate management and the internal entrepreneur should view the assessment framework to clarify their community interests. Second, corporate management must establish measurement and reward systems. Corporate management must recognise internal entrepreneurs as “strategists” and perhaps even encourage them to think and act as such . On the part of management, this implies attempts to appropriate benefits from entrepreneurial endeavour, but only to the extent that they can provide the entrepreneur with the opportunity to be more successful than if he or she were to go it alone. STANFORD - EPSO 98 TO MANAGE

Implementing Design Alternatives :

First, corporate management and the internal entrepreneur should view the assessment framework to clarify their community interests.

Second, corporate management must establish measurement and reward systems.

Corporate management must recognise internal entrepreneurs as “strategists” and perhaps even encourage them to think and act as such . On the part of management, this implies attempts to appropriate benefits from entrepreneurial endeavour, but only to the extent that they can provide the entrepreneur with the opportunity to be more successful than if he or she were to go it alone.

Designs for Corporate Entrepreneurship in Established Firms Large, established corporations are confronted with the problem of maintaining their growth, if not their existence, by exploiting to the fullest the unique resource combinations they have assembled. There is an increased awareness that internal entrepreneurs are necessary for firms to achieve growth. They enact new opportunities and drive the development of new resource combinations or re-combinations . A better understanding of the process of corporate entrepreneurship will facilitate the collaboration between firms and their internal entrepreneurs . STANFORD - EPSO 98 Conclusion TO MANAGE

Large, established corporations are confronted with the problem of maintaining their growth, if not their existence, by exploiting to the fullest the unique resource combinations they have assembled.

There is an increased awareness that internal entrepreneurs are necessary for firms to achieve growth. They enact new opportunities and drive the development of new resource combinations or re-combinations .

A better understanding of the process of corporate entrepreneurship will facilitate the collaboration between firms and their internal entrepreneurs .

EPSO ‘98 I NFLUENCE & P OWER

Influence and Power within organisations Power perspective presumes: conflict of interest that individuals are very self-aware of what outcomes are in their interest, that is they don’t need to learn what actions are in their interest. The more these assumptions do not hold, the less necessary /beneficial is the use of power. STANFORD - EPSO 98 Power perspective on strategic change INFLUENCE & POWER

Power perspective presumes:

conflict of interest

that individuals are very self-aware of what outcomes are in their interest, that is they don’t need to learn what actions are in their interest.

The more these assumptions do not hold, the less necessary /beneficial is the use of power.

Influence and Power within organisations We simultaneously respect and disdain those who use power in organisations well. We acknowledge that the use of power is often necessary to individual success and yet we do not like to be known as someone who uses power. However, regardless of our feelings about power, power is often important to what does and does not get done in organisations we would like to think that those with the “best ideas” will be rewarded, but invariably there is not objective reference in organisations for determining the “best ideas”. Those who are powerful have considerable (though not complete) discretion to decide: what the best ideas are who is the source of the best ideas which good ideas and bad ideas will be remembered STANFORD - EPSO 98 Ambivalence regarding the use of power INFLUENCE & POWER

We simultaneously respect and disdain those who use power in organisations well.

We acknowledge that the use of power is often necessary to individual success and yet we do not like to be known as someone who uses power.

However, regardless of our feelings about power, power is often important to what does and does not get done in organisations

we would like to think that those with the “best ideas” will be rewarded, but invariably there is not objective reference in organisations for determining the “best ideas”.

Those who are powerful have considerable (though not complete) discretion to decide:

what the best ideas are

who is the source of the best ideas

which good ideas and bad ideas will be remembered

Influence and Power within organisations One way to confront ambivalence regarding power is to regard power as second-best alternative. Often clear articulation and infusion of mission can reduce the likelihood that one needs to go to the second best. We often want to assume that “charisma” is a source of power Charisma usually refers to some combination of: physical attractiveness personal confidence an ability to win “followers” However, quite often, the causality is the reverse: charisma follows from power rather than causes power. STANFORD - EPSO 98 Use of power as second best Charisma and power INFLUENCE & POWER

One way to confront ambivalence regarding power is to regard power as second-best alternative.

Often clear articulation and infusion of mission can reduce the likelihood that one needs to go to the second best.

We often want to assume that “charisma” is a source of power

Charisma usually refers to some combination of:

physical attractiveness

personal confidence

an ability to win “followers”

However, quite often, the causality is the reverse: charisma follows from power rather than causes power.

Influence and Power within organisations This observation regarding the causal relationship between charisma and power leads to the more general observation: Power is often a cause of a number of personal attributes, rather than the consequence, e.g. Confidence Commanding presence Humour We, therefore, need to be very careful when we ascribe power to personal characteristics or even to the “fit” between personal characteristics and situation. STANFORD - EPSO 98 Power as a cause rather than a consequence of personal behaviour INFLUENCE & POWER

This observation regarding the causal relationship between charisma and power leads to the more general observation:

Power is often a cause of a number of personal attributes, rather than the consequence, e.g.

Confidence

Commanding presence

Humour

We, therefore, need to be very careful when we ascribe power to personal characteristics or even to the “fit” between personal characteristics and situation.

Influence and Power within organisations The image of top management in an isolated corner office moving boxes and lines on an organisation chart becomes increasingly anachronistic. As strategies and organisations become more complex and sophisticated, to-level general managers are beginning to replace their historical concentration on the grand issues of strategy and structure with a focus on the details of managing people and processes . The key organisational task is to capture individual capabilities and motivate the entire organisation to respond co-operatively to a complicated and dynamic environment . STANFORD - EPSO 98 INFLUENCE & POWER

The image of top management in an isolated corner office moving boxes and lines on an organisation chart becomes increasingly anachronistic.

As strategies and organisations become more complex and sophisticated, to-level general managers are beginning to replace their historical concentration on the grand issues of strategy and structure with a focus on the details of managing people and processes .

The key organisational task is to capture individual capabilities and motivate the entire organisation to respond co-operatively to a complicated and dynamic environment .

Influence and Power within organisations Individual determinants of power use of language and “props” to Foster commitment break down overarching act of commitment into numerous smaller acts of commitment encourage small initial acts that are consistent with the final acts one desires Frame data and decisions Send roles recognition of how formal role in organisation constrains possibility for action. Entrepreneur vs. Bureaucrat STANFORD - EPSO 98 Where does power come from? INFLUENCE & POWER

Individual determinants of power

use of language and “props” to

Foster commitment

break down overarching act of commitment into numerous smaller acts of commitment

encourage small initial acts that are consistent with the final acts one desires

Frame data and decisions

Send roles

recognition of how formal role in organisation constrains possibility for action.

Entrepreneur vs. Bureaucrat

Influence and Power within organisations Situation Resources that control information formal authority Examples of other resources control of physical setting control of agenda control of timing of interactions Structural position being connected to numerous disconnected others (network rich in “structural holes”). STANFORD - EPSO 98 Where does power come from? INFLUENCE & POWER

Situation

Resources that control

information

formal authority

Examples of other resources

control of physical setting

control of agenda

control of timing of interactions

Structural position

being connected to numerous disconnected others (network rich in “structural holes”).

STANFORD - EPSO 98 Wrap-Up

A Retrospective Look Strategy is concerned with two questions: How does a firm create value? How can a firm maximise the retention of the value that it creates? Strategy answers these questions by providing analytical tools to assist a manager in the following four stage process: Stage 1: Analyse environment Stage 2: Identify strategy Stage 3: Evaluate fit of organisation, strategy and environment Stage 4: Respond to the need for change when there is a lack of fit. STANFORD - EPSO 98 What is strategy? EXIBITS

Strategy is concerned with two questions:

How does a firm create value?

How can a firm maximise the retention of the value that it creates?

Strategy answers these questions by providing analytical tools to assist a manager in the following four stage process:

Stage 1: Analyse environment

Stage 2: Identify strategy

Stage 3: Evaluate fit of organisation, strategy and

environment

Stage 4: Respond to the need for change when there is a lack

of fit.

A Retrospective Look STANFORD - EPSO 98 POTENTIAL INDUSTRY EARNINGS SUPPLIERS INDUSTRY INCUMBENTS INDUSTRY INCUMBENTS Analyse Environment EXIBITS

A Retrospective Look STANFORD - EPSO 98 SUPPLIERS INDUSTRY INCUMBENTS INDUSTRY INCUMBENTS Value taken by Gov’ts & NGOs? Taken by Suppliers? Reduced by Rivalry? Taken by Buyers? Consumed by Entry? NEW ENTRY GOV’T & NGOs Analyse Environment Who gets the value? EXIBITS

A Retrospective Look Non-market environment and the 4 Is Issues Institutions Interests Information STANFORD - EPSO 98 Analyse Environment EXIBITS

Non-market environment and the 4 Is

Issues

Institutions

Interests

Information

Generality: frameworks and multiple views of topics Issues, interests, institutions, information -- CAFÉ, Toys R Us Culture - Shell, Toys R Us Activist/interest groups - Shell, CAFÉ Non-market competition from market rivals - Cemex, Kodak Political strategies - CAFÉ, Cemex, Kodak Coalition building - CAFÉ, Cemex News media - Shell, Toys R Us in Sweden Protectionism - Cemex, Toys R Us in Japan Market opening - Toys R Us, Kodak Power in distribution systems (antitrust) - Cemex, Fujifilm Strategic retaliation and profit sanctuaries - Cemex, Kodak STANFORD - EPSO 98 EXIBITS

Issues, interests, institutions, information -- CAFÉ, Toys R Us

Culture - Shell, Toys R Us

Activist/interest groups - Shell, CAFÉ

Non-market competition from market rivals - Cemex, Kodak

Political strategies - CAFÉ, Cemex, Kodak

Coalition building - CAFÉ, Cemex

News media - Shell, Toys R Us in Sweden

Protectionism - Cemex, Toys R Us in Japan

Market opening - Toys R Us, Kodak

Power in distribution systems (antitrust) - Cemex, Fujifilm

Strategic retaliation and profit sanctuaries - Cemex, Kodak

Generality: frameworks and multiple views of topics Organisational factors - Shell, Toys R Us in Sweden Integrated market and non-market strategies - Cemex, Toys R Us, Kodak Globalisation strategies - Cemex, Toys R Us Political economy of countries - Germany, Japan, Mexico, Sweden, United Kingdom, United States STANFORD - EPSO 98 EXIBITS

Organisational factors - Shell, Toys R Us in Sweden

Integrated market and non-market strategies - Cemex, Toys R Us, Kodak

Globalisation strategies - Cemex, Toys R Us

Political economy of countries - Germany, Japan, Mexico, Sweden, United Kingdom, United States

Non-market aspects of market entry Analyse the non-market environment as you do the market environment - issues associated with entry, interests behind them, supporting institutions, and culture; Seek local advice - but be prepared to evaluate it critically The less you understand, the more important local managers are The right local partner can make both market and non-market contributions An entry strategy should have integrated market and non-market components. STANFORD - EPSO 98 EXIBITS

Analyse the non-market environment as you do the market environment - issues associated with entry, interests behind them, supporting institutions, and culture;

Seek local advice - but be prepared to evaluate it critically

The less you understand, the more important local managers are

The right local partner can make both market and non-market contributions

An entry strategy should have integrated market and non-market components.

A Retrospective Look Competition = absence of differentiation and absence of collusion. Differentiation is of two types horizontal - appealing to consumers with distinct tastes sports car vs. mini van vertical - commonly accepted differences in perceived quality Ferrari vs. Porsche vs. Mazda Miata STANFORD - EPSO 98 Analyse Environment EXIBITS

Competition = absence of differentiation and absence of collusion.

Differentiation is of two types

horizontal - appealing to consumers with distinct tastes

sports car vs. mini van

vertical - commonly accepted differences in perceived quality

Ferrari vs. Porsche vs. Mazda Miata

A Retrospective Look STANFORD - EPSO 98 Cost/Quality Trade-off Plane Analyse Environment EXIBITS Efficiency Frontier Lower Cost High Quality/Differentiation Ferrari Lamborghini Porsche Mazda Jaguar

A Retrospective Look Market strategy Scope (what markets serve) Competitive Advantage (with consumers) (Goals) (Basis for Profitability) Non-market strategy Scope (what non-market actors are relevant) Competitive advantage (with Gov’ts & NGOs) (Goals) (Basis for Influence) STANFORD - EPSO 98 Stage 2: Identify the strategy EXIBITS

Market strategy

Scope (what markets serve)

Competitive Advantage (with consumers)

(Goals)

(Basis for Profitability)

Non-market strategy

Scope (what non-market actors are relevant)

Competitive advantage (with Gov’ts & NGOs)

(Goals)

(Basis for Influence)

A Retrospective Look Sources of Competitive Advantage Resources Least enduring and rents typically go to resource Capabilities Most explicitly dependent on organisational design (M&S, BP) Position Based on established, external linkages to market or non-market actors (Newell, Apple/Microsoft) STANFORD - EPSO 98 Stage 2: Identify the strategy EXIBITS

Sources of Competitive Advantage

Resources

Least enduring and rents typically go to resource

Capabilities

Most explicitly dependent on organisational design (M&S, BP)

Position

Based on established, external linkages to market or non-market actors (Newell, Apple/Microsoft)

A Retrospective Look Performance follows from the alignment of organisation, strategy and environment. STANFORD - EPSO 98 Strategy Performance Organisation Environment Stage 3: Fit of Strategy, Organisation and Environment EXIBITS

Performance follows from the alignment of organisation, strategy and environment.

A Retrospective Look Transaction costs and firm boundaries Relational contracting decision at Johnson Controls Vertical integration at BP Strategy is to be the guide to the resource allocation decisions within the organisation . Specifies what organisation does and equally importantly what the organisation does not do. Example: Crow Cork & Seal customer service  R&D policy, inventories, etc. STANFORD - EPSO 98 Organisation/ Environment Fit Strategy/ Organisation Fit EXIBITS

Transaction costs and firm boundaries

Relational contracting decision at Johnson Controls

Vertical integration at BP

Strategy is to be the guide to the resource allocation decisions within the organisation .

Specifies what organisation does and equally importantly what the organisation does not do.

Example: Crow Cork & Seal

customer service  R&D policy, inventories, etc.

A Retrospective Look STANFORD - EPSO 98 Strategy/Organisation Fit Architecture Processes/Routines Culture (Capability-based) Competitive Advantage Initiative Co-operation Learning = implies = drives EXIBITS

A Retrospective Look If learning is important to competitive advantage, then need design that fosters (VSR) learning : “loosely coupled organisation Relational contracting model can be understood as one example of loosely coupled organisation. Johnson Controls Learning through alliances requires common processes and routines. Apple and Sonny Challenges in achieving fit between strategy and organisation (1) Achieving fit not only at the level of architecture, but also at the level of processes and routines. Marks & Spencer, BP, AT&T Institutionalisation of processes and routines is hard! STANFORD - EPSO 98 Strategy/ Organisation Fit EXIBITS

If learning is important to competitive advantage, then need design that fosters (VSR) learning :

“loosely coupled organisation

Relational contracting model can be understood as one example of loosely coupled organisation.

Johnson Controls

Learning through alliances requires common processes and routines.

Apple and Sonny

Challenges in achieving fit between strategy and organisation (1)

Achieving fit not only at the level of architecture, but also at the level of processes and routines.

Marks & Spencer, BP, AT&T

Institutionalisation of processes and routines is hard!

Challenges in achieving fit between strategy and organisation (2) Trade-off between co-operation and initiative STANFORD - EPSO 98 A Retrospective Look Strategy/ Organisation Fit Weak boundaries Weak incentives Co-operation Hard boundaries around small units Strong incentives Initiative EXIBITS

Challenges in achieving fit between strategy and organisation (2)

Trade-off between co-operation and initiative

A Retrospective Look Challenges in achieving fit between strategy and organisation (3) Trade-off between learning and operating efficiency STANFORD - EPSO 98 Strategy/ Organisation Fit Low Cost Slack necessary for learning takes an organisation off of the efficiency frontier High Quality EXIBITS

Challenges in achieving fit between strategy and organisation (3)

Trade-off between learning and operating efficiency

A Retrospective Look Metal Container Industry High buyer power High competition from lack of differentiation and low entry barriers. STANFORD - EPSO 98 Strategy/Environment Fit Crown Cork & Seal Strategy Select geographical scope where buyer is not monopsonist Select product scope allowing for quality-based differentiation build capability-based advantage to support differentiation. Example: Crown Cork & Seal EXIBITS

Metal Container Industry

High buyer power

High competition from lack of differentiation and low entry barriers.

Crown Cork & Seal Strategy

Select geographical scope where buyer is not monopsonist

Select product scope allowing for quality-based differentiation

build capability-based advantage to support differentiation.

A Retrospective Look Assess fit in both market and non market environment Competitive advantage in market may be disadvantage in non-market. Examples: Shell, Nike, Microsoft Important that market and non-market strategies do not undercut one another Example: Silicon Valley vs. Microsoft Sustainability A strategy provides a sustainable source of competitive advantage only to the degree that others cannot imitate STANFORD - EPSO 98 Strategy/ Environment Fit EXIBITS

Assess fit in both market and non market environment

Competitive advantage in market may be disadvantage in non-market.

Examples: Shell, Nike, Microsoft

Important that market and non-market strategies do not undercut one another

Example: Silicon Valley vs. Microsoft

Sustainability

A strategy provides a sustainable source of competitive advantage only to the degree that others cannot imitate

A Retrospective Look Need for change manifests itself in lack of fit between organisation, strategy, environment. Burgelman model of “strategic dissonance” Intel’s exit from DRAM’s BP and social responsibility? One way to respond to adverse circumstances in market or non-market environment is to try to shift domain of competition from one arena to the other. Example: Cemex In evaluating change possibilities, key criteria that should be applied are: Fit Sustainability STANFORD - EPSO 98 Stage 4: Responding to Need for Change EXIBITS

Need for change manifests itself in lack of fit between organisation, strategy, environment.

Burgelman model of “strategic dissonance”

Intel’s exit from DRAM’s

BP and social responsibility?

One way to respond to adverse circumstances in market or non-market environment is to try to shift domain of competition from one arena to the other.

Example: Cemex

In evaluating change possibilities, key criteria that should be applied are:

Fit

Sustainability

A Retrospective Look Once need for change is identified, vision/mission become critical as drivers of that change especially at the level of processes and culture. To the extent that vision/mission are not fully internalised, then influence tactics become critical to driving through change. STANFORD - EPSO 98 Stage 4: Responding to Need for Change Global strategy and organisation Corporate strategy and design Strategic challenges faced by the “manager in the middle” Where do we go from here? EXIBITS

Once need for change is identified, vision/mission become critical as drivers of that change especially at the level of processes and culture.

To the extent that vision/mission are not fully internalised, then influence tactics become critical to driving through change.

Global strategy and organisation

Corporate strategy and design

Strategic challenges faced by the “manager in the middle”

ABB Asea Brown Boveri - Organisation and Strategy Percy Barnevik , the head of ASEA, was the driving force behind the merger. His vision underlay the bold strategy and unique organisation that were adopted by the new firm. Below are some of his comments: “ We want to be global and local, big and small, radically decentralised with centralised reporting and control. If we resolve those contradictions, we create real organisational advantage .” “ You can practically never shake up a big company too much at one time. We human beings are driven by habit, history and the rear-view mirror. If you want to break direction, you have to shake people up, not by threatening them, not by offering a bonus, but by illustrating in a similar situation what can be accomplished .” “ You can’t postpone tough decisions by studying them to death. You can’t permit a ‘honeymoon’ of small changes over a year or two. A long series of small changes just prolongs the pain … you have to accept a fair share of mistakes, but I’d rather be roughly right and fast than exactly right and slow.” STANFORD - EPSO 98 EXIBITS

Percy Barnevik , the head of ASEA, was the driving force behind the merger. His vision underlay the bold strategy and unique organisation that were adopted by the new firm. Below are some of his comments:

“ We want to be global and local, big and small, radically decentralised with centralised reporting and control. If we resolve those contradictions, we create real organisational advantage .”

“ You can practically never shake up a big company too much at one time. We human beings are driven by habit, history and the rear-view mirror. If you want to break direction, you have to shake people up, not by threatening them, not by offering a bonus, but by illustrating in a similar situation what can be accomplished .”

“ You can’t postpone tough decisions by studying them to death. You can’t permit a ‘honeymoon’ of small changes over a year or two. A long series of small changes just prolongs the pain … you have to accept a fair share of mistakes, but I’d rather be roughly right and fast than exactly right and slow.”

ABB Asea Brown Boveri - Organisation and Strategy “ You want to be able to maximise a business globally - to specialise in the production of components, to drive economies of scale as far as you can, to rotate managers and technologists around the world to share expertise and solve problems. But you also want to have deep local roots everywhere you operate - building products in countries where you sell them, recruiting the best local talent from universities, working with the local government to increase exports. If you build such an organisation, you create a business advantage that is damn difficult to copy.” “ Some people resist the matrix. They say the matrix is too rigid, too simplistic. But what choice do you have? To say you don’t like a matrix is like saying you don’t like factories or you don’t like breathing. It is a fact of life. If you deny the formal matrix, you wind up with an informal one - and that is much harder to reckon with. As we learn to master the matrix, we get a truly multidomestic organisation.” STANFORD - EPSO 98 EXIBITS

“ You want to be able to maximise a business globally - to specialise in the production of components, to drive economies of scale as far as you can, to rotate managers and technologists around the world to share expertise and solve problems. But you also want to have deep local roots everywhere you operate - building products in countries where you sell them, recruiting the best local talent from universities, working with the local government to increase exports. If you build such an organisation, you create a business advantage that is damn difficult to copy.”

“ Some people resist the matrix. They say the matrix is too rigid, too simplistic. But what choice do you have? To say you don’t like a matrix is like saying you don’t like factories or you don’t like breathing. It is a fact of life. If you deny the formal matrix, you wind up with an informal one - and that is much harder to reckon with. As we learn to master the matrix, we get a truly multidomestic organisation.”

ABB Asea Brown Boveri - Organisation and Strategy In ABB, each type of manager had to respect the objectives of the other. As Barnevik saw it: “Business Area managers, country managers, and presidents of the local companies have very different jobs. They must understand their roles and appreciate that they are complementing each other, not competing.” There was little tolerance for Business Area managers who could not co-operate effectively within the matrix. If a Business Area manager and a country manager could not work out a conflict, they could push the dispute up to the Executive Committee for resolution. However, if a given pair pushed disputes to the EC a third time, then at least one of the two would be most likely to be replaced. STANFORD - EPSO 98 EXIBITS

In ABB, each type of manager had to respect the objectives of the other. As Barnevik saw it: “Business Area managers, country managers, and presidents of the local companies have very different jobs. They must understand their roles and appreciate that they are complementing each other, not competing.”

There was little tolerance for Business Area managers who could not co-operate effectively within the matrix. If a Business Area manager and a country manager could not work out a conflict, they could push the dispute up to the Executive Committee for resolution. However, if a given pair pushed disputes to the EC a third time, then at least one of the two would be most likely to be replaced.

Corporate Strategy - The Case of General Electric General Electric is a classic business school case on corporate strategy. Executive leadership and development, the need to match strategy with organisational structure, the challenges involved in changing strategies over time, and the dangers that accompany the growth of bureaucracy are all topics raised by this company’s history . Let’s emphasise a distinction that can help to make sense out of corporate strategy at GE and in companies more generally. On the one hand many of the issues in the GE case involve the content of GE’s strategy. Questions of strategy content include: What markets should the firm be in? What is the source of competitive advantage in its markets? How does belonging to a larger corporation help each business unit to gain a strategic advantage and add value? On the other hand, other issues in the GE case concern the process of making and developing strategy. These issues focus our attention on the structures and organisational dynamics that operate in the corporate planning process itself. It is worthwhile to attend to both strategy content and strategy process when reviewing the case of General Electric. STANFORD - EPSO 98 EXIBITS

General Electric is a classic business school case on corporate strategy. Executive leadership and development, the need to match strategy with organisational structure, the challenges involved in changing strategies over time, and the dangers that accompany the growth of bureaucracy are all topics raised by this company’s history . Let’s emphasise a distinction that can help to make sense out of corporate strategy at GE and in companies more generally. On the one hand many of the issues in the GE case involve the content of GE’s strategy. Questions of strategy content include: What markets should the firm be in? What is the source of competitive advantage in its markets? How does belonging to a larger corporation help each business unit to gain a strategic advantage and add value?

On the other hand, other issues in the GE case concern the process of making and developing strategy. These issues focus our attention on the structures and organisational dynamics that operate in the corporate planning process itself. It is worthwhile to attend to both strategy content and strategy process when reviewing the case of General Electric.

Corporate Strategy - The Case of General Electric In the past few decades, we have become more sensitive to the rationale given for corporate diversification. GE illustrates that mixed rationale may be given for setting the content of strategy, and strategic intent changes over time. GE gives us a chance to see a firm that initially diversified into unrelated businesses under the strategic intent of growth for growth’s sake (Cordiner), then attempted to rationalise its portfolio using a BCG-type analysis (Borch), and then attempted to exploit synergies among strategic resources and capabilities (Jones). Thus, up through Jones, GE corporate strategy content changed to be more defensible by the criteria of “adding value”. However, Welch appears to be bent on growth and expansion and not necessarily guided by interdependencies, but rather into any areas where GE can be No. 1 or No. 2 - an implicit reversion to the portfolio approach used under Borch. Welch also sees the merit of exploiting synergies, however. STANFORD - EPSO 98 Strategy content EXIBITS

In the past few decades, we have become more sensitive to the rationale given for corporate diversification. GE illustrates that mixed rationale may be given for setting the content of strategy, and strategic intent changes over time.

GE gives us a chance to see a firm that initially diversified into unrelated businesses under the strategic intent of growth for growth’s sake (Cordiner), then attempted to rationalise its portfolio using a BCG-type analysis (Borch), and then attempted to exploit synergies among strategic resources and capabilities (Jones).

Thus, up through Jones, GE corporate strategy content changed to be more defensible by the criteria of “adding value”. However, Welch appears to be bent on growth and expansion and not necessarily guided by interdependencies, but rather into any areas where GE can be No. 1 or No. 2 - an implicit reversion to the portfolio approach used under Borch. Welch also sees the merit of exploiting synergies, however.

Corporate Strategy - The Case of General Electric Perhaps more important in the GE case are the lessons we learn about the strategy making process in a large corporation. A primary lesson comes from seeing the difference between the planning process per se versus planning as means for ongoing involvement in setting objectives and evaluating performance. As time went on at GE, planning took on a life of its own under Jones - with bureaucratised staff and new levels of top-management structure standing between the CEO and the SBUs. More generally, it is often the case that strategic planning comes to take on a life of its own as companies grow. When this happens, you will notice that the planning process per se comes to be valued for its own performance. It is this costly transformation that sometimes gives “strategic planning” a bad name. STANFORD - EPSO 98 Strategy content EXIBITS

Perhaps more important in the GE case are the lessons we learn about the strategy making process in a large corporation. A primary lesson comes from seeing the difference between the planning process per se versus planning as means for ongoing involvement in setting objectives and evaluating performance. As time went on at GE, planning took on a life of its own under Jones - with bureaucratised staff and new levels of top-management structure standing between the CEO and the SBUs.

More generally, it is often the case that strategic planning comes to take on a life of its own as companies grow. When this happens, you will notice that the planning process per se comes to be valued for its own performance. It is this costly transformation that sometimes gives “strategic planning” a bad name.

Corporate Strategy - The Case of General Electric This is where leadership comes in . The most effective way to break an entrenched planning bureaucracy is through decisive action taken from the top. Some of Jack Welch’s greatest gains came from eliminating the more wasteful parts of the planning process. Also, Welch made clear that strategic planning was a means, not an end it itself . With this lesson in mind, it is clear that good corporate strategy requires not only a thorough planning process, but also the clear-headed leadership that can prevent strategy making from becoming an end in itself . With the importance of leadership in mind, another benefit of strategic planning is the role it can play in executive development. Potential top executives can be farmed from within a large, diversified organisation. However, this talent must be selected and groomed. The evaluation processes involved in strategic planning can help to identify good talent, and can help make sure that the careers of potential top managers cycle through key parts of the organisation. In these ways, strategic planning is not only tempered by good leadership, but it may also help to grow tomorrow’s good leaders. STANFORD - EPSO 98 EXIBITS

This is where leadership comes in . The most effective way to break an entrenched planning bureaucracy is through decisive action taken from the top. Some of Jack Welch’s greatest gains came from eliminating the more wasteful parts of the planning process. Also, Welch made clear that strategic planning was a means, not an end it itself . With this lesson in mind, it is clear that good corporate strategy requires not only a thorough planning process, but also the clear-headed leadership that can prevent strategy making from becoming an end in itself .

With the importance of leadership in mind, another benefit of strategic planning is the role it can play in executive development. Potential top executives can be farmed from within a large, diversified organisation. However, this talent must be selected and groomed. The evaluation processes involved in strategic planning can help to identify good talent, and can help make sure that the careers of potential top managers cycle through key parts of the organisation. In these ways, strategic planning is not only tempered by good leadership, but it may also help to grow tomorrow’s good leaders.

A business strategy has objectives, a scope, sources of competitive advantage and an underlying logic. Relationship to vision and mission Key features of a good strategy: Internal consistency including fit with capabilities and resources External consistency : fit with the environment and competition Strategy may be explicit or implicit Is strategy planned or evolutionary? Is strategy “top down” or “bottom up”? Diversification that leverages the firm’s underlying capabilities and resources will typically be more profitable than unrelated diversification. A question for later consideration: why do “smart” firms make “silly” mistakes STANFORD - EPSO 98 BIC Wrap-Up EXIBITS

A business strategy has objectives, a scope, sources of competitive advantage and an underlying logic.

Relationship to vision and mission

Key features of a good strategy:

Internal consistency including fit with capabilities and resources

External consistency : fit with the environment and competition

Strategy may be explicit or implicit

Is strategy planned or evolutionary?

Is strategy “top down” or “bottom up”?

Diversification that leverages the firm’s underlying capabilities and resources will typically be more profitable than unrelated diversification.

A question for later consideration: why do “smart” firms make “silly” mistakes

The evaluation of business strategy Strategic groups are an important element of industry structure. Mobility barriers serve to limit movement into a strategic group just as entry barriers limit movement into an industry. A well-crafted “industry map” is an extremely useful tool for analysing competitor positioning. Differentiation softens competition. Clear, concise strategy formulation can drive strategy implementation . Explicit strategy - and especially the underlying logic of the strategy - is as important for what it suggests you shouldn’t do as for what it suggest you should do. Communication is a key element of strategy implementation . The message needs to be communicated often and therefore needs to be relatively simple. “ Strategic Intent” can complement strategy . STANFORD - EPSO 98 Skil Wrap-Up EXIBITS

Strategic groups are an important element of industry structure. Mobility barriers serve to limit movement into a strategic group just as entry barriers limit movement into an industry.

A well-crafted “industry map” is an extremely useful tool for analysing competitor positioning.

Differentiation softens competition.

Clear, concise strategy formulation can drive strategy implementation .

Explicit strategy - and especially the underlying logic of the strategy - is as important for what it suggests you shouldn’t do as for what it suggest you should do.

Communication is a key element of strategy implementation . The message needs to be communicated often and therefore needs to be relatively simple. “ Strategic Intent” can complement strategy .

The evaluation of business strategy The strategy process, and in particular the time it takes to formulate and implement strategy, is situation dependent . A key advantage of the explicit strategy is that it makes evaluation of the business easier by defining strategic goals clearly and laying out a timetable for their accomplishment. STANFORD - EPSO 98 Skil Wrap-Up EXIBITS

The strategy process, and in particular the time it takes to formulate and implement strategy, is situation dependent .

A key advantage of the explicit strategy is that it makes evaluation of the business easier by defining strategic goals clearly and laying out a timetable for their accomplishment.

INTEL High-technology industries often evolve from a “fluid” state with emphasis on product innovation to a “specific” state with emphasis on process innovation. This causes a shift in the basis of competition and favours different types of competitors. In order to build a competitive advantage and capture the rents of a particular innovation, pioneering companies in high-technology industries must consider three major factors: Emergence of a “dominant design” Appropriability regime Importance of co-specialised assets In high-technology industries, the product life cycle is typically short . As a result, time-to-market is key . STANFORD - EPSO 98 EXIBITS

High-technology industries often evolve from a “fluid” state with emphasis on product innovation to a “specific” state with emphasis on process innovation. This causes a shift in the basis of competition and favours different types of competitors.

In order to build a competitive advantage and capture the rents of a particular innovation, pioneering companies in high-technology industries must consider three major factors:

Emergence of a “dominant design”

Appropriability regime

Importance of co-specialised assets

In high-technology industries, the product life cycle is typically short . As a result, time-to-market is key .

Companies often experience strong inertia in the deployment of their technological competencies. These inertial forces are associated with the perceived relative importance of different competencies in the light of the firm’s history and with the image that top management has about the firm’s identity. Strategic business exit is not just a product-market decision. It also involves decisions about the associated technical competencies. This may exacerbate organisational inertia in the face of environmental change. Technological competencies sometimes generate new, unanticipated business opportunities. Taking advantage of these is a major strategic management challenge . INTEL STANFORD - EPSO 98 EXIBITS

Companies often experience strong inertia in the deployment of their technological competencies. These inertial forces are associated with the perceived relative importance of different competencies in the light of the firm’s history and with the image that top management has about the firm’s identity.

Strategic business exit is not just a product-market decision. It also involves decisions about the associated technical competencies. This may exacerbate organisational inertia in the face of environmental change.

Technological competencies sometimes generate new, unanticipated business opportunities. Taking advantage of these is a major strategic management challenge .

In high-technology environments it is difficult to maintain alignment between stated strategy and strategic action. In such industries, a firm’s survival may depend more on the capacity of its internal selection environment to make strategic action respond to the reality of the competitive environment than on making strategic action consistent with stated strategy . Eventually, strategy and action must be brought in line. In this process, top management’s capacity for “strategic recognition” may be more important than strategic planning. INTEL STANFORD - EPSO 98 EXIBITS

In high-technology environments it is difficult to maintain alignment between stated strategy and strategic action.

In such industries, a firm’s survival may depend more on the capacity of its internal selection environment to make strategic action respond to the reality of the competitive environment than on making strategic action consistent with stated strategy .

Eventually, strategy and action must be brought in line. In this process, top management’s capacity for “strategic recognition” may be more important than strategic planning.