The lecture “Strategy: sustainability through DQE” involves all aspects of strategy including strategy definition, elements of strategy formulation and implementation as well as issues of strategic options. The lecture goes beyond a classic lecture of strategy as it addresses DQE issues and enhances the integration of DQE as necessary for an organization’s sustainability and competitiveness. By doing so the lecture presents the DQE as a strategic approach and provides an answer to the questions “What is DQE?”, “Why DQE is important?” The lecture may be used by company managers, consultants and students at all levels, and should be supplemented by the suggested readings and the suggested case study. It should be noted that the lecture is designed to provide readers with the necessary knowledge concerning strategy and its relation to DQE and it is by no means a guide of “what to do” for companies, something that would require much more than a lecture.
Strategy is the company’s future direction, long-term goals and objectives, the basic principle driving action, the way a company competes. According to Porter (1996), strategy is the creation of a unique and valuable position, the way a firm chooses activities that differ from those of the competitors. For others strategy is a proposition for value creation, the business model (Barney, 2002). Strategy may also be seen as model emerging from the company’s action & choices. Design – Quality – Environment are elements of a company’s strategy. As it will be shown later they constitute a strategic tool aiming sustainability.
The main components of successful strategies are: clear goals, understanding the competitive environment, resource appraisal and effective implementation. Looking at examples of successful organizations or individuals we recognize that strategies that are conducive to success are characterized by these four common factors. (For more details please refer to R. Grant, Contemporary Strategy Analysis, 2002).
Literature and business practice have put on the map certain frameworks and numerous tools for the determination of an organization’s strategic direction. The diagram of the slide presents a strategic analysis framework. It involves two phases: strategy formulation and strategy implementation. The current lecture focuses mainly on the first phase, strategy formulation, which includes the following: diagnosis of the current situation of the firm, environmental analysis in order to identify potential opportunities and threats, appraisal of the firm’s resources and capabilities and evaluation of the expectations of stakeholders. Based on all that the company proceeds in the identification and evaluation of alternative strategic options for future direction. DQE is such a strategic option aiming at sustainability. In the next slides we’ll present some of the predominant strategic tools used.
The aim of the analysis of the external environment is to determine environmental trends and factors that have an impact on the sector and the company. The environment of a firm consists of all external influences that may influence a firm’s performance. Environmental influences may be classified e.g. by proximity where the micro-environment (industry, market) is distinguished from the wider influences that form the macro-environment.
The diagram of the slide intends to help us understand the levels of the environment. These are: The macro-environment referring to political, economical, social, technological, environmental and legal forces. The influence of these forces is complicated and often invisible. However among them there are important forces driving an organization’s evolution. For example, environmental legislation drives firms to adopt environmental strategies. Social changes related to aesthetic preferences enhances design as a strategic option, e.t.c. The industry environment involves competition and includes all structural forces shaping the competitive arena. It is direct and visible but often dynamic and changing. The market environment refers to specific competitive conditions concerning specific products/ services that a company offers. In the market the competitors serve the same needs of the same customers with products that may substitute each other. On the contrary, the industry is broader and contains groups of products that often serve differentiated needs.
When conducting a macro-environmental analysis using the PESTEL framework, the challenge is not to find the biggest number of factors but to: (1) identify those factors that have a great influence on the sector and the company, (2) evaluate the impact of these factors on the sector and the company and (3) predict the trends of the most important of these factors in the future. In this light factors such as climate change, energy issues, poverty and social exclusion, ageing society, biodiversity, natural resources, globalisation e.t.c. may have a different influential impact on companies, driving them to adopt different strategies for growth. However, in 2001 the Gothenburg summit introduced the 3-pillared development strategy stating that “sustainable development combines all three economic, societal and environmental aspects, and it should be assessed through integrated approaches”. Such an approach is the DQE – approach.
3 The PESTEL factors are of limited value if they are merely seen as a listing of influences. It is important to identify a number of key drivers of change, which are forces likely to affect the structure of an industry or market. It will be the combined effect of some of these factors that will be important rather than all of the factors separately (Johnson, Scoles and Whittington, 2005). Why conduct an industry analysis? To forecast industry profitability by identifying structural changes in industry and to formulate strategies to improve profitability.
7 A helpful framework for classifying and analysing the factors influencing an industry is the one developed by M. Porter of the Harvard Business School. Porter’s Five Forces of Competition views the profitability of an industry as determined by five sources of competitive pressure. These include three sources of “horizontal” competition: competition from established rivals, competition from entrants and competition from substitutes and two sources of “vertical” competition: the bargaining power of suppliers and buyers (R. Grant, 2000). The strength of each of these competitive forces is determined by a number of structural variables (see for example R. Grant, 2000). In the diagram of the slide apart from the five forces of Porter a sixth force concerning the supplementary products in an industry is inserted. (e.g. the influence of the software sector to the hardware sector). Supplementary products have often important effects.
In case of difficulty to quantify the forces of competition, a qualitative evaluation may be apppied. A helpful way to “understand and visualize” the Porter’s five forces framework is to think that in the industry there is a “profitability pie”. Every force participates in profit sharing. Everyone tries to gain a bigger share by using his bargaining power. Some have the biggest parts of profit margins while others just survive. Examples of the “profitability pie” are presented in the slide.
17 Some examples: - customers want to do things more easily, comfortably and efficiently than before. This should drive a company to enhance products/services Design . - competitors increase their reputation by showing environmental posture and social responsibility. This might influence a company to also consider Environmental strategy. - Customer satisfaction is the main objective of companies. Quality helps towards that aim.
The aim of internal analysis is to identify an organization’s strengths and weaknesses. Strategy is concerned with matching resources and capabilities to opportunities that arise in the external environment. The importance of resources and capabilities as the principal basis for strategy formulation and as primary determinants of profitability has especially increased during the 1990s. “ The greater the rate of change in a firm’s external environment, the more likely internal resources and capabilities are to provide a secure foundation of long-term strategy” (R. Grant, 2000) The integration of DQE may provide a company with unique capabilities, which may constitute a secure basis to build its strategy.
The resources of a company may be viewed as capital that increases or decreases as time goes on. A firm’s capital contains tangible and intangible elements as presented in the slide.
Not all resources are important for a company’s competitiveness. Most of them do not provide the basis to build competitive advantage. Those are the threshold resources. The unique resources can not be easily acquired by the competitors and may constitute the basis for competitive advantage. The same holds for the capabilities, which are build over time through resources and knowledge accumulation and combination. DQE is directed at unique resources and unique capabilities. These may create the bases of competitive advantage and sustainability as it is further explained in the lecture concerning competitive advantage.
6 6 Porter’s value chain constitute a framework that helps to identify a company’s capabilities. Capabilities are looked at the main activities involved in producing and distributing a product/ service and the support activities as well as in the linkages between them.
Apart from capabilities residing in the firm’s activities as presented in the value chain, we should search the linkages between a company’s activities and external actors, such as suppliers, customers, partners, e.t.c. These linkages may provide important capabilities of coordination, quality, e.t.c.
Examples of linkages capabilities are presented in this slide.
Strategy formulation on the basis of resources and capabilities is presented in the diagram of this slide. According to this approach strategy starts with an appraisal of resources and capabilities, which may constitute an organization’s competitive advantage, which in turn is the foundation of strategy.
The main conclusion of the internal and the external analysis are often summarized using the SWOT analysis. SWOT includes only the factors of the external and internal environment that will have an impact on strategy. SWOT involves subjective interpretation.
The analysis of stakeholders expectations is important because some stakeholders may often play an important role in strategy. Taken stakeholders expectations into account can lead to sustainable advantage. It goes beyond requirements of good governance.
Sometimes different groups of stakeholders have opposite expectations. In such cases a company must manage stakeholders expectations by taking into consideration stakeholders power. Sources of power of the stakeholders may be found: - Within the firm: e.g. hierarchy, control of strategic resources, knowledge and capabilities - External to the firm: e.g. control of strategic resources, participation in strategy implementation (eg. suppliers, distributors, customers, community), knowledge ( eg. subcontractors ) , influence through atypical linkages, e.t.c. Some examples of conflicts of expectation are presented in the slide.
Strategic fit can be evaluated after the completion of strategic analysis. Main questions that should be answered are: Is strategy suitable to the external environment? Does strategy exploit the unique resources and capabilities? Is strategy consistent with values and expectations? Has strategy internal consistency and coherence down the organisation? Does strategy take into consideration the integration of DQE? Those questions constitute the criteria for evaluating a company’s present strategy. In parallel, they may create ideas for new alternative strategic options which may help the formulation of the company’s “new DQE-responsive strategy”.
The creation of alternative strategic options is among the most important phases in strategy development. The diagram of the slides presents a framework that helps the creation of alternative strategic options. This includes: Porter’s competitive strategies Ansoff’s alternative growth strategies (in the product-market framework) Alternative ways of development There may be numerous strategic options and combinations of them. The evaluation of these strategic options can be qualitative or quantitative (e.g. by using cash flow analysis). DQE is mainly a way of differentiation, suited for regions of Europe for which low cost strategy is not feasible. DQE also can permeate product-market options selected by a firm. It can be unifying line across options.
The integration of DQE constitutes a strategic direction which is incorporated in all choices: - DQE may be the base of a successful competitive strategy. - DQE may constitute the base of growth strategy by enhancing especially product and market development. - DQE may have an impact on the selection of the method of development.
Companies which search for DQE may at the same time improve their position in the market and increase their profitability. Through DQE companies can build reputation and long-term sustainability.
Design strategy Some explanations of why To enhance social responsibility Because users have sophisticated aesthetic criteria Because users quest for easiness, comfort and efficiency Some company benefits Innovation which may lead to - Sustainable growth and - Increased reputation
Quality strategy Some explanations of why Because the market and the partners require it Because of company’s values As a result of company’s knowledge Some company’s benefits Increased reputation Sustainable growth?
Environmental strategy Some explanations of why To enhance social responsibility Because it provides reputation Because of stakeholders pressures Some company’s benefits Improved corporate governance Sustainable growth Increased reputation Environmental strategies may be proactive or reactive to regulation and/or markets.
Environmental strategies may be proactive or reactive to regulation and/or markets. Responses of companies vary as presented in slide.
Other Useful References which are not directly used within the Presentation: F.R David F.R “Strategic Management: Concepts and Cases”, Pearson Education International, 10th eds, 2005 Suggested Case Study for the Lecture ANASTASOPOULOS & SON C.O. KRINOS Internet links http://www.dqeproject.org
Strategy: Sustainability through DQE Prof. Spyros Lioukas, Dr Irini Voudouris Athens University of Economics and Business
understand the contribution of strategy to successful performance
identify the framework for strategic analysis
understand how to control for successful strategies
identify alternative strategic options
identify how the DQE approach leads to strategies for sustainability
What is Strategy? “ Strategy is the direction and scope of an organization over the long term , which achieves competitive advantage for the organization through its configuration of resources within a changing environment and to fulfill stakeholders expectations ”. Johnson & Scholes, “Exploring Corporate Strategy”, 2002 .
Elements of successful strategy Successful implementation Well defined long-term goals Appraisal of the environment Knowledge of own resources & capabilities Successful Strategy R. Grant “Contemporary Strategy Analysis”, 2000
Government and industry spending on research and development
Health and safety
From macro-environment to industry analysis The macro-environment affects the industry environment which affects the firm R. Grant, Contemporary Strategy Analysis, 2000 National/ International Economy Technology Government Natural environment Social & demographical structure Firm Industry environment
Bargaining Power Porter 5 forces framework +supplements Threat Threat of Entrance Suppliers Potential entrants Substitutes Buyers Industry competition Existing competitors Bargaining Power Bargaining Power Supplements
The value network: Profitability High Power of Buyers High Power of suppliers Profit Margin for suppliers SUPPLIERS - TITORS BUYERS - - COMPE - TITORS BUYERS NEW ENTRANTS SUBSTITUTES NEW ENTRANTS SUBSTITUTES Profit margin for buyers SUPPLIERS COMPE
Knowledge residing in technical & scientific employees & teams
Brands, company reputation, social responsibility, environmental proactiveness, quality
Human resources, eg
Education, training, experience, adaptability
Unique resources & capabilities: The base of competitive advantage DQE Threshold resources Resources Like competitors or easy to imitate Capabilities Unique resources Threshold capabilities Core competences Better than competitors, difficult to imitate
Evaluating capabilities: The functional approach Sales responsiveness, efficiency & speed of distribution, customer service Sales & distribution Design, brand management, promotion, environmental marketing Marketing Flexibility, quality, design, efficiency, eco-efficiency Manufacturing Development of new products, design, innovation R&D Rapid information transfer MIS Financial management, strategic control, coordination of business units, social responsibility Corporate Management Examples of Capabilities Function
Firm Infrastructure Human resources management Technology development Procurement Main activities Support activities Marketing & Sales Services Operations Outbound Logistics Inbound Logistics Margin The value chain Porter
The value system Suppliers Direct suppliers Company & competitors Direct customers Final customers Χ Υ Ζ Ε Α Β Γ Δ
“ Linkages” capabilities: base of competitive advantage Combination of technology, design, quality, environment Internal and/or external Integration … suppliers. Distributors … with suppliers & distributors … delete activities Specifications & control TQM Change of the value chain external Departments’ coordination Production information systems Innovation, quality through employees Main-main Main-support Support-support internal Example Activities Linkages
Strategy based on resources & capabilities 2. Evaluate resources and capabilities regarding profit generation possibilities 1. Ident i fy and classify unique resources & capabilities Strategy Resources & Capabilities Evaluation of Resources & Capabilities Competitive advantage 3. Select resources & capabilities with most attractive advantage. Evaluate the sustainability of advantage 4. Formulate strategy based on most attractive resources & capabilities
Improve resources & capabilities that constitute the base of strategy
“ Stakeholders are those individuals or groups who depend on the organisation to fulfil their own goals and on whom the organisation depends”
..people or groups (internal and external) which have expectations and potential influence
Johnson and Scholes, “Exploring Corporate Strategy”, 2005
Government: - Ministers - Politicians - Regional International Organizations : - EU -others Other organizations and bodies : - Unions - Firms associations - environmental groups Managers Shareholders Employees Investors Customers Partners Suppliers Media : - Newspapers -ΤV - Internet Stakeholders: An example Society