1. Organisational Strategy
Workshop, Oct 2012
Ross Thompson BA (Lancaster),
DPM, MBA (Manchester) ACIS ,
Chartered Secretary
ross.thompson@northampton.ac.uk
1

2. Contents
• Introductions
• Assignment!
• SESSION 1 – What is strategy?
• SESSION 2 – Internal Analysis
• SESSION 3 – Real Options in strategy
• SESSION 4 – Implementation issues
2

3. Your tutor
• Career
• 17 Years business experience to Director level in a variety
of marketing, finance and management roles.
• Many consulting assignment roles; former Director of a
consultancy.
• MBA from Manchester Business School.
• Chartered Secretary.
• Research interests in: strategy, graduate employability and
money laundering.
3

4. How we work
• Materials available on STRM002
website on Nile.
– Reading
– Exercises
– Links
– etc.
– And assignment details 4

5. Reading
• 2 key books:
 Johnson, G., Scholes,
K. and Whittington, R.
(2009) Exploring
Corporate Strategy,
8th ed., PH
 Grant, R., (2010)
Contemporary
Strategy Analysis, 7th 5
ed., Wiley

6. Reading
• Other key reading detailed in assignment
notes and workshop guide.
• The Blackwell Encyclopaedia of Strategic
Management is also useful as is the
website:
– Valuebasedmanagement.net
6

7. Session 1 – What is Strategy
• Reading:
– J and S, ch 1
– Grant ch 1
– Porter, M. (1996) What is strategy? ,
HBR, Nov-Dec (on web)
7

8. Session 1 - Exercise
• Look at the two contrasting viewpoints of
strategy by Porter and Barney (clips).
Now formulate your own view of strategy
8

9. Strategy
• My preferred approach is to consider it a process
comprising the steps of:
1. Objective setting.
2. Internal firm analysis.
3. Industry and competitor analysis.
4. Establishing a competitive position, e.g., price
leadership or differentiation.
5. Choosing some strategic options. Planning.
6. Operationalising strategy. nb strategy is the setting
operations is the doing
7. Evaluation and implementation. 9

10. Strategy
• Note differences between:
– Corporate Strategy – deciding which
businesses/product groups to launch,
divest, grow etc.
– Business Strategy – deciding how to
develop those business or strategic
business groups (SBUs).
10

11. Session 2 – Internal analysis
• Resource School suggests:
– Competitive Advantage (CA) accrues from developing
internal capabilities or competencies; in other words:
• “find what you are good at and maximise the
capability”
• Works in corporate and personal life
• Often known as the Inside Out approach compared to the
Outside in approach espoused by Porter et al who stress
importance of external/economic factors.
11

12. Session 2 – Internal analysis
• Reading
– J and S ch 3
– Grant chs 5/6
– Barney, J. (1991) Firm resources and sustained
competitive advantage, Journal of Management, 17
– Grant, R. (1991) The resource based theory of
competitive advantage, CMR, Spring
– Hamel. G. and Prahalad, C. (1990) Core Competences of
the organisation, HBR, 68 (on web)
– Kay, J. (1993) Foundations of Corporate Success, OUP
12
– Porter, M.E. (1996) What is Strategy?, HBR, Nov-Dec
(on web)

13. Session 2 – Internal analysis
• Linked to concept of economic profit and economic value
http://www.sternstewart.com/
• economic profit = accounting profit – the opportunity cost
of capital (debt + equity)
• or = PAT – (capital employed x WACC)
– where:
• pat = profit after tax (but before interest)
• wacc = weighted average cost of capital
13

14. Session 2 – Internal analysis
• So challenge is to find:
• those capabilities, deriving from resources at a
firm’s disposal that produce returns in excess of
the cost of capital. This is the concept of
economic rent.
14

15. Session 2 – Internal analysis
• Objective is to find rent generating
resources, assets and capabilities.
• Rent is associated with Ricardo the
economist who found that certain types of
land yielded above average agricultural
returns. Analogous to modern day premier
retail locations.
• Makes sense to hunt and cultivate
these resources as they offer
15
Competitive advantage (CA).

16. Session 2 – Internal analysis
Assets/*resources Competences CA
Tangible
intangible
* In accounting terms = assets
16

17. Strategic Capability/Resources
Terminology
Threshold Resources needed to meet customers’ minimum
requirements. Needed to continue to exist
resources
Threshold Activities and processes needed to meet
customers’ minimum requirements. Needed to
competences continue to exist
Unique Resources underpinning competitive
advantage. Difficult for competitors to imitate
resources or obtain.
Core Activities underpinning competitive
advantage. Difficult for competitors to imitate
competences or obtain
17

18. Core Competences (Hamel and Prahalad,
1990)
• (Related to Resource School/RBV)
• Derives from learning about what you (firm) can do well.
• Must be able to extend this knowledge though, e.g.,
beyond firm departments, into new products and SBUs.
• Trick again is configuring these resources or competences
which might be:
– skills
– routines
– assets
18
– alliances/relationships

19. • 3 tests of Core Competences
1. Must give access to markets - marketable
2. Must generate customer benefits – be worth something
3. Must hard to imitate – competitors should not be able to copy
• therefore need to be specific; marketing is not a CC! branding
19
might be

20. Note imitation reduction caused by:
VALUABLE
unique locations e.g. shops
RARE
path dependencies- intricacies in
NON IMITABLE operations
NOT SUBSTITUTABLE causal ambiguity – hard to u/stand
operating systems!
Social complexity – e.g. relies of
large and complex network of staff,
suppliers etc.
Barney’s VRIN€ MODEL
20

21. Implications
• Best not to outsource core competences/rent generating
resources
• can outsource non core areas
• core business (product grouping) is not the same as core
competence
• possible to stretch core competences over other
industries e.g. Universities to hotels which is dome by
several such as Manchester.
21

22. Criticisms of RBV
• Fails to take account of effect of knowledge management
techniques.
• Fails to account for role of managers.
• Insufficiently detailed.
• Fails to account for developing resources.
• Cannot act in exclusion to the outside in school.
• Fails to take account of economies of learning and the
effect of the experience curve in CA
22

23. Internal Analysis : Value Chain
– Identifies strategically
Firm infrastructure: systems, procedures, administration, relevant activities.
communication.
– if largely pursuing
MA
SUPPOR
HRM: recruitment and retention, training, skills, pay policy, differentiation
RG I
industrial relations, productivity. strategy, look to add
quality / USPs in each
Technology (including IT): patents, sophistication, choices,
N
area.
T
cost, technical skills.
– if pursuing cost
Procurement: bargaining power over suppliers. leadership, look to cut
costs in each area
Inbound Operating Outboun Marketing Service
logistics : d : : Can of course
P R I M A RY
: • processing logistics:
attempt to do both,
IN
•sales •customer
•sourcing •deliveries care as in JIT / TQM
RG
•manu- •promotion
raw facture •warranty systems.
materials •distribution •pricing
MA
•make or •dealers
•ware- buy
•lead times •advertising – Value is the amount
Y
housing buyers are willing to
•assembly •branding
•reputation pay for product or 23
•packaging service
NB Not all areas of the Value Chain will be equally profits occur when
important. value exceeds cost.

24. Activity System
(Porter, 1996)
Example
Porter conceived in similar theory to the RBV when he outlined the activity system.
It is a map of all the key operating procedures in a firm showing the relationships.
24
The more intricate these are, the more difficult it is to copy.

25. Session 2 - Exercise
1. Using the Manchester United case material use the
value chain to identify Manchester United’s core
competencies.
2. How might these strengthened?
25

26. Session 3 – Real Options
• Reading-
– Luehrman, T. (1998) Investment Opportunities as
Real options, HBR, 76 (4)
– Luehrman, T. (1998) Strategy as a portfolio of real
options, HBR, 76 (5) YOU MUST READ THIS
– BOTH AVAILABLE ON THE WEB
– There is also a short section in Grant and J and S.
26
– www.real-options.com/resources_links.htm

27. Introduction to real options
(also called management or
strategic options)
We all have options:
•Getting married?!!
•Having children
•Study or work?
And businesses have options:
•Delay/stall
•Expand
•Switch resources 27
•New products
•New markets etc

28. Introduction: Real options V Financial
options
Real Options Financial Options
Option (not requirement) to make a business choice/ option to buy
(call) or sell (put) a derivative or non-real asset e.g. invest in a project,
product etc. at a given time (European) or in a period (American)
Therefore views business a series of call options
SO REAL OPTIONS ARE OPTIONS WITHIN OPTIONS/STRATEGIES
28
EG ONE PARTICULAY INVESTMENT (OPTION) MAY
HAVE HIDDEN OPTIONS EG TO DELAY.

29. Introduction to real options
• Differ from financial options (derivatives) as they involve
real assets e.g. launching a new product/ pursuing a new
strategy.
• Becoming increasingly important in “choppy” and innovative
economic times e.g. internet and digitisation(now):
– strategies increasingly have to be altered;
– businesses need to be more adroit/responsive;
– and therefore need to constantly appraise ie,value, their
options.
• Business strategies with hidden – real – options maybe
therefore valuable as they reduce risk.
29

30. Types of Options in Business
STRATEGY
Acquire R and D
assets
NPD
Buy/merge
with
Competitors Change
inputs
Acquire new mix 30
technology
Cost savings

31. Types and uses of real options
1, Delay options
Conventional NPV/DCF techniques assume
a now or never and linear approach to investment. Frequently
though, investment can be delayed and this decision may
affect chances of success/profitability, e.g., as better
information comes on board.
31

32. Types and uses of real options
1, Delay options cond
•Most frequent in new product development situations where
the competition is locked out ,e.g., via entry barriers such
as patents and when the market is uncertain.
•Example:
– A drug firm has a patent on a new drug and delays
investment until the costs of borrowing come down thus
enhancing profitability.
32

33. Types and uses of real options
2, Abandonment options
•Again the npv approach assumes continuity throughout product life. But
in reality there may be the scope to abandon the project if say costs are
prohibitive. This will then impact project profitability.
•Example/Exercise
•A firm spends £50 000 on new project that yields cash flows of £15,000
per year for 5 years. If it is hit with a further, unplanned costs of £20
000 in year 1 the project is now unprofitable and it would make sense to
abandon the project – if possible – as less money will be lost.
•Demonstrate this advantage assuming a cost of capital of 10%.
33

34. Types and uses of real options
3, Flexibility options
•In many commercial organisations it may be possible to
alter:
– input mixes e.g. supplies (with new cost);
– customer/channel choices;
– Business location;
– Etc.
•All of which will impact profitability.
34

35. Valuing real options- Black Scholes
(Luehrman)
• The Black Scholes method is the way of calculating financial
option values (calls).
• Many academics have used variants of this approach to
value real options.
• This means using quite tricky mathematics – and this may
explain why many strategists shy away from studying real
options (Grant, 2010).
• FOR THIS MODULE DO NOT WORRY ABOUT
CALCULATIONS – INSTEAD UNDERSTAND WHAT
REAL OPTIONS ARE, WHY THEY MAY BE VALUBLE
AND HOW TO SPOT THEM.
35

36. Valuing real options- Black Scholes
(Luehrman)
Black Scholes elements Real Option equivalents
• Stock Price • Present Value of the project
(PV S) S
• Exercise Price
• Project cost (PV C) X
• Time to expiry
• Length of term(t) t
• Risk free rate
• Time Value of Money rf
• Variance of returns
• Project risk (SD) SD per year
These 5 variables can then be simplified further into:
36
Value to cost ratio: PV S/PV C or S/X
Volatility: SD x √ t .

37. Valuing real options- Black Scholes
• Calculating volatility tricky – how to:
– Make an estimate e.g. indexes have an SD of about
20%, manufacturing stocks are about 40%.
– Use historical data on investment returns.
– Use implied volatility based on volatility of financial
options in similar classes of businesses.
37

38. Once we have calculated value to cost and volatility we can plot
them on an Option Space Grid to give us indications of what we
should do(Luehrman). You can do this without calculations
38

39. Using the grid
Note option value increases as we move right and down:
Value to Cost
VALUE
Volatility
39

40. Real Options – the verdict
Advantages Disadvantages
• Richer than npv – factors • Complicated maths.
in more elements to • Some figures might be hard to
investment decisions. identify e.g. cost of capital.
• Hard to get precise figures e.g.
• In particular recognises the for volatility; therefore it is a
ability to delay projects. good idea to carryout sensitivity
analysis, e.g., change volatility
• Suitable in today’s choppy figures.
economic climate. • Proxies e.g. suitable financial
options may be hard to identify.
• Becoming more popular.
• Can be hard to spot embedded
• Many uses – see earlier options.
examples.
40

41. Session 3 -Exercise
For a company that you are familiar with, reflect upon
some of the strategies available to develop the corporate.
1.Assess whether or nor these strategies include: delay,
abandonment or flexibility options.
2.Use the options grid to assess when some of these
strategies should be enacted.
41

42. Session 4 – Implementation of strategy
• For this session we will focus upon implementing strategy
and preventing it from wandering off course (strategic
drift)
42

43. Session 4 - reading
• Grant ch 2 and 17
• J and S ch 10, 12
• Kaplan, R. and Norton, D. (1992) Balanced scorecard – Measures that drive
Performance, HBR, April-May (on the web; this is the first of five articles published
by the authors in the HBR)
• Rumelt, R (2011) Good Strategy, Bad Strategy, Random House
• http://www.mckinseyquarterly.com/Strategys_strategist_An_interview_with_Richard_Rume
(register first - excellent commentary on Rumelt)
• http://www.anderson.ucla.edu/faculty/dick.rumelt/Docs/Papers/EVAL2.pdf
– (Rumelt criteria)
• See also:
– 2gc.com
• For Balanced scorecard resources esp. for 3 rd generation
43
– scorecardshttp://www.balancedscorecard.org/BSCResources/AbouttheBalancedS
corecard/tabid/55/Default.aspx
o

44. Session 4 - Implementation
• This session focuses upon ensuring your
strategy – whatever it is – does not
wander of course. To do this we must
measure and evaluate it.
• We shall focus upon:
– The Balanced Scorecard (Kaplan
and Norton)
– Rumelt’s criteria 44

45. The BALANCED SCORECARD
How do we look to
Financial perspective shareholders?
How do customers
see us? GOALS MEASURES
Internal business
Customer perspective perspective
GOALS MEASURES GOALS MEASURES
Innovation and
learning perspective
GOALS MEASURES
What must we
excel at?
Can we continue to
improve and create
value?
45
Source: The Balanced Scorecard - Measures That Drive Performance.
Robert S. Kaplan and David P. Norton. Harvard Business Review.
Jan/Feb 1992. Pages 71 - 79.

46. Balanced Scorecard
• The key to the BSC is to:
• Select performance dimensions (originally
Kaplan and Norton envisaged 4 – but you can
add/amend)
• In each dimension you need 2-5 metrics or
measures to measure each dimension.
• Key is to design accurate, realistic and practical
measures that the firm can operationalise.
46

47. Balanced Scorecard
• Key is to balance the measures/metrics:
1. Qualitative and quantitative
2. Leading (forward looking) or lagging
(looking at the past – e.g. as in
accounting reports)
3. Internal (firm) or external (industry)
REMEMBER YOU TAILOR DIMENSIONS 47
AROUND THE FIRM AND CONTEXT

48. Balanced Scorecard
• It is important that:
• There are clear linkages between dimensions and
the metrics in each dimensions: it is normal to
establish goals in each dimensions and then find
matching metrics.
• The BSC cascades throughout the organisations:
corporate level; business/SBU level; department
level; personal level via appraisal systems.
• The BSC is united under an overarching aim or
mission. See the 2gc.com website and look at the
material under 3rd generation scorecards.
48

49. FOR EACH DIMENSION EG FINANACIAL
STIPULATE GOALS AND METRICS AND ENSURE LINKAGE
49

50. Learning & Growth Perspective:
Possible Measures
Revenues from new products
R&D resources & costs
Investment in training
Suggested improvements per employee
Employee age profile
Employee turnover rates
% full-time permanent employees
Staff flexibility / job coverage
Staff surveys 50

51. Financial Perspective:
Possible Measures
Revenues per employee
Cost ratios
Market value
Value added per employee
Return on net assets
Revenues / total assets
Profit margin
Contribution / revenue
Cash flow 51

52. Customer Perspective:
Possible Measures
Market share
# customers
Sales closed / sales contacts
Customer loyalty index
Average duration of customer relationship
Service expense per customer
Customers lost / churn ratio
Customer survey ratings
52

53. Internal Business Process Perspective:
Possible Measures
Administrative expense
On-time delivery %
Lead time (product development, order to delivery, suppliers)
Productivity improvement
Decision turnaround time
Service expense per customer IT capacity & expense
Error rates
53
Environmental impact of product use

54. Strategy Review, Evaluation,
& Control
Consistency
Rumelt’s Consonance
4 Criteria
Feasibility
Advantage
54

55. Strategy Review, Evaluation,
& Control
Consistency
• Strategy should not present inconsistent goals & policies
55

56. Strategy Review, Evaluation,
& Control
Consonance
• Need for strategies to examine sets of trends
56

57. Strategy Review, Evaluation,
& Control
Feasibility
• Neither overtax resources or create unsolvable sub-
problems
57

58. Strategy Review,
Evaluation, & Control
Advantage
• Creation or maintenance of competitive advantage
58

59. Session 4 - Exercise
Design a Balanced Scorecard for Manchester United;
use the original four dimensions and devise 2-3
metrics for each one. Be prepared to justify your
choices.
59