Stanford Strategy & Organization


Published on

ESOP course 1998

Published in: Business, Education
  • Be the first to comment

No Downloads
Total views
On SlideShare
From Embeds
Number of Embeds
Embeds 0
No embeds

No notes for slide
  • 1 1 1
  • Stanford Strategy & Organization

    4. 4. The Role of Strategy <ul><li>How can my organisation and I succeed? </li></ul><ul><ul><li>Today and tomorrow </li></ul></ul><ul><ul><li>In a changing - but always complex and tough environment </li></ul></ul><ul><li>Create value </li></ul><ul><li>Get to keep some of it </li></ul><ul><li>Others are trying to do the same, and their success often means your failure. </li></ul><ul><li>Others will try to claim shares of the value you create </li></ul><ul><li>Strategy is about finding a way to succeed and then doing it. </li></ul>STANFORD - EPSO 98 STRATEGY The Answer The Difficulty The Issue
    5. 5. <ul><li>A statement of how we intend to succeed </li></ul><ul><ul><li>Business unit and corporate </li></ul></ul><ul><ul><li>Market and non-market </li></ul></ul><ul><ul><li>Organisational Scope </li></ul></ul><ul><li>Basis for competitive advantage </li></ul><ul><li>Basis for profitability </li></ul><ul><li>(Functional) </li></ul><ul><li>(Performance measures) </li></ul><ul><li>(Goal) </li></ul><ul><li>What (business/customer/technological) opportunities we will pursue </li></ul><ul><li>Equally important, what we are not going to do. </li></ul>The Role of Strategy STANFORD - EPSO 98 STRATEGY Elements of Competitive Strategy What is strategy Scope
    6. 6. <ul><li>Creating value means doing something different or better than the next best. </li></ul><ul><li>Differentiation and cost </li></ul><ul><li>“What we will not do” is at least as important as “what we will do” </li></ul><ul><li>You cannot be all things to all people </li></ul><ul><li>Moving to the frontier (“operational excellence”) versus taking a position (“strategic choice”) </li></ul><ul><li>Resources: tangible and intangible </li></ul><ul><li>Capabilities: ability to acquire and deploy resources to solve classes of problems and create value </li></ul><ul><li>Position: attractiveness (cost/differentiation) relative to others </li></ul><ul><ul><li>Applies resources </li></ul></ul><ul><ul><li>Utilises capabilities </li></ul></ul>STANFORD - EPSO 98 STRATEGY The Role of Strategy Value Creation Strategy as Choice Resources, Capabilities & Position
    7. 7. STANFORD - EPSO 98 “ Frontier” Lower Cost Differentiate STRATEGY Moving [A] to the frontier (“operational excellence”) vs taking[B] a position (“strategic choice”) [A] [B]
    8. 8. <ul><li>You succeed only if you get to keep some of the value created </li></ul><ul><ul><li>potential industry earnings (PIE) </li></ul></ul><ul><ul><li>competitors, current and potential </li></ul></ul><ul><ul><li>supplier power </li></ul></ul><ul><ul><li>customer power </li></ul></ul><ul><ul><li>government and other non-market forces </li></ul></ul><ul><li>Demand level and price-responsiveness </li></ul><ul><li>Market growth </li></ul><ul><li>Cost of inputs </li></ul><ul><li>Technology of production and distribution </li></ul>STANFORD - EPSO 98 STRATEGY The Role of Strategy Keeping Value Created Ingredients in the PIE
    9. 9. <ul><li>A major element of strategy is in how you get a bigger slice </li></ul><ul><li>But there is a danger that in trying for a bigger piece, you reduce the size of the total pie. </li></ul><ul><li>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. </li></ul><ul><li>This means your strategy has to account for and incorporate non-market considerations. </li></ul><ul><li>Issues </li></ul><ul><li>Institutions </li></ul><ul><li>Interests </li></ul><ul><li>Information </li></ul>STANFORD - EPSO 98 STRATEGY Cutting up the PIE The Role of Strategy Non-Market Issues The Non-market Environment: 4 I’s
    10. 10. <ul><li>Affect the size of the PIE v. Affect its division? </li></ul><ul><li>Complements, independent or substitutes? </li></ul><ul><li>Integrated </li></ul><ul><li>A strategy implies certain activities that need to be carried out to realise the strategy </li></ul><ul><li>Value chain and support </li></ul><ul><li>How will these be handled? </li></ul><ul><li>People </li></ul><ul><li>Features </li></ul><ul><ul><li>Architecture </li></ul></ul><ul><ul><li>Processes and procedures </li></ul></ul><ul><ul><li>Culture (set of beliefs that we share about why we are doing this), values and assumptions </li></ul></ul>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
    11. 11. <ul><li>Complements: doing (more of) one makes doing (more of) the others more valuable or effective </li></ul><ul><li>Fit: coherence among complements </li></ul><ul><li>Success requires finding or creating fit within and between your strategy and your organisation, and between each and the environment. </li></ul><ul><li>What business we are in </li></ul><ul><li>How being in these together is going to create value above what they create individually </li></ul>STANFORD - EPSO 98 STRATEGY Corporate Strategy Complementarities and Fit The Role of Strategy
    12. 12. Determinants of Performance STANFORD - EPSO 98 PERFORMANCE Strategy Resources Capabilities Position Environment PIE Competitors Customers Suppliers Complementors Government Social ... Organisation People Features Activities PERFORMANCE
    13. 13. General Management <ul><li>Understand the basis for current performance </li></ul><ul><li>Identify external (market and non-market) and internal developments that present threats and opportunities </li></ul><ul><li>Develop/select a (market, non-market and organisational) strategy to meet these goals </li></ul><ul><li>Implement it successfully </li></ul><ul><li>Adapt the strategy and organisation to changes in the internal and external environments </li></ul><ul><ul><li>anticipation and forecasting </li></ul></ul><ul><ul><li>emergent strategies and selection </li></ul></ul><ul><li>Develop new capabilities </li></ul><ul><li>Shape the environments </li></ul>STANFORD - EPSO 98 PERFORMANCE
    14. 14. Context <ul><li>Some firms dominate their market while others prosper by concentrating on a small market segment. </li></ul><ul><li>Strategic management is about developing a set of tools which is essential to the array of choices firms face, ranging from: </li></ul><ul><ul><li>which products and services to pursue </li></ul></ul><ul><ul><li>what human resource management policies to implement </li></ul></ul><ul><ul><li>whether to alter the organisational structure, etc. </li></ul></ul><ul><li>The decisions must be implemented by employees in different functional areas and geographies. </li></ul><ul><li>Developing and implementing a “broad plan of action” to enhance the performance of the organisation is the objective of strategic management. </li></ul><ul><li>Performance is the result of the fit between the actions that the firm takes and the strategic context in which they are taken. </li></ul>STANFORD - EPSO 98 MANAGEMENT
    15. 15. Choices <ul><li>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. </li></ul><ul><li>The actions that were appropriate in the old context are no longer effective in countering the potential loss of competitive advantage. </li></ul><ul><li>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. </li></ul><ul><li>The firm’s context consists of: </li></ul><ul><ul><li>its external environment: industry and non-market characteristics </li></ul></ul><ul><ul><li>its internal context: here, a broad action plan frequently depends upon some constellation of specific key assets. </li></ul></ul>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
    16. 16. Environment <ul><li>What works in one context may fail in another </li></ul><ul><li>Strategy is dynamic. Globalisation, for instance, may change the nature of competition in a previously domestic industry as foreign firms enter the market. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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”. </li></ul>STANFORD - EPSO 98 MANAGEMENT
    17. 17. Goals <ul><li>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. </li></ul><ul><li>In practice there are two main sets of reasons why behaviour may deviate from the pursuit of this goal: </li></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>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. </li></ul></ul>STANFORD - EPSO 98 MANAGEMENT
    18. 18. Goals <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 MANAGEMENT
    19. 19. Role <ul><li>It is incorrect to equate “senior” and “general”. There are often managers quite low in the hierarchy who do have general manager responsibilities. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 MANAGEMENT
    20. 20. Evolution <ul><li>In a stable environment, an industry is populated by firms with routinised behaviour that is well-adapted to their environment. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 MANAGEMENT
    21. 21. Perspectives <ul><li>A perspective on strategy: </li></ul><ul><ul><li>Limits to control: Luck matters! </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Change is difficult: a declaration by top management that the firm will change does not make change happen. </li></ul></ul><ul><ul><li>“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. </li></ul></ul><ul><ul><li>Strategy process is complex. </li></ul></ul>STANFORD - EPSO 98 MANAGEMENT
    22. 22. Small business or business unit <ul><li>Some special issues are more prominent in new, small businesses: </li></ul><ul><ul><li>No internal capital market </li></ul></ul><ul><ul><li>Differential access to external capital markets </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>The “top down” view of strategy is clearly most applicable: the “captain of the ship” metaphor applies much better here than elsewhere. </li></ul></ul><ul><ul><li>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. </li></ul></ul>STANFORD - EPSO 98 MANAGEMENT
    23. 23. Conclusion <ul><li>An exceptional rate of return cannot be earned by the average firm. </li></ul><ul><li>With many firms chasing the same opportunities, the competitive interaction of those firms quickly dissipates any profits. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 MANAGEMENT
    24. 24. EPSO ‘98 T HINKING vs P LANNING
    25. 25. Introduction <ul><li>A general manager must have a cognitive map of the relationship between actions, context and performance. </li></ul><ul><li>The vast majority of mature companies have a systematic, formal strategic planning routine as their strategy process. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    26. 26. The Fall and Rise of Strategic Planning <ul><li>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. </li></ul><ul><li>Strategic planning, however, is not strategic thinking. </li></ul><ul><li>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. </li></ul><ul><li>Planners should make their contribution around the strategy-making process rather than inside it. </li></ul><ul><li>By redefining the planner’s job, companies will acknowledge the difference between planning and strategic thinking. </li></ul><ul><li>Strategic thinking is about synthesis. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    27. 27. The Fall & Rise of Strategic Planning <ul><li>Life is larger than our categories. Real strategic change requires inventing new categories, not rearranging old ones. </li></ul><ul><li>Strategic planning has not only never amounted to strategic thinking but has, in fact, often impeded it. </li></ul><ul><li>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. </li></ul><ul><li>If an organisation is managed by intuitive geniuses there is no need for formal strategic planning. </li></ul><ul><li>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 : </li></ul><ul><ul><li>prediction is possible </li></ul></ul><ul><ul><li>strategist can be detached from the subjects of their analysis </li></ul></ul><ul><ul><li>strategy making process can be formalised </li></ul></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    28. 28. The Fall and Rise of Strategic Planning <ul><li>Many practitioners and theorists have wrongly assumed that strategic planning, strategic thinking and strategy making are all synonymous, at least in best practice. </li></ul><ul><li>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. </li></ul><ul><li>Strategies cannot be created by analysis, but their development can be helped by it. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    29. 29. The Fall and Rise of Strategic Planning <ul><li>Planning cannot generate strategies. </li></ul><ul><li>Strategic programming involves three steps: codification, elaboration, and conversion of strategies. </li></ul><ul><li>This requires a good deal of interpretation and careful attention to what might be lost in articulation: nuance, subtlety, qualification. </li></ul><ul><li>Some of the most important strategies in organisations emerge without the intention or sometimes even the awareness of top managers. </li></ul><ul><li>“The real purpose of effective planning is not to make plans but to change the mental models that decision makers carry in their heads”. </li></ul><ul><li>Systems do not think and when they are used for more than the facilitation of human thinking, they can prevent thinking. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    30. 30. What is strategy? <ul><li>Positioning - once the heart of strategy - is rejected as too static for today’s dynamic markets and changing technologies. </li></ul><ul><li>In many industries, however, what some call hyper-competition is a self-inflicted wound, not the inevitable outcome of a changing paradigm of competition. </li></ul><ul><li>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. </li></ul><ul><li>Operational effectiveness and strategy are both essential to superior performance. But they work in very different ways. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    31. 31. Operational Effectiveness <ul><li>Operational effectiveness (OE) means performing similar activities better than rivals perform them. </li></ul><ul><li>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. </li></ul><ul><li>In contrast, strategic positioning means performing different activities from rivals or performing similar activities in different ways. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    32. 32. What is strategy? <ul><li>Improving operational effectiveness is a necessary part of management, but it is not strategy. Both are essential but the two agendas are different. </li></ul><ul><li>The operational agenda involves continual improvement everywhere there are no tradeoffs. Failure to do this creates vulnerability even for companies with a good strategy. </li></ul><ul><li>The operational agenda is the proper place for constant change, flexibility and relentless efforts to achieve best practice. </li></ul><ul><ul><li>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. </li></ul></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    33. 33. Benchmarking <ul><li>The more benchmarking companies do, the more they look alike. </li></ul><ul><li>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. </li></ul><ul><li>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 . </li></ul><ul><li>Strategy is the creation of a unique and valuable position, involving a different set of activities. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    34. 34. Tradeoffs <ul><li>A sustainable strategic position requires tradeoffs </li></ul><ul><li>Simply put, a tradeoff means that more of one thing necessitates less of another </li></ul><ul><li>Positioning tradeoffs are pervasive in competition and essential to strategy </li></ul><ul><li>False tradeoffs between cost and quality occur primarily when there is redundant or wasted effort, poor control or accuracy, or weak co-ordination . </li></ul><ul><li>Strategy is making tradeoffs in competing. The essence of strategy is choosing what not to do. </li></ul><ul><li>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 . </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    35. 35. Fits <ul><li>Fit drives both competitive advantage and sustainability </li></ul><ul><li>While operational effectiveness is about achieving excellence in individual activities, or functions, strategy is about combining activities. </li></ul><ul><li>Fit locks out imitators by creating a chain that is as strong as its strongest link. </li></ul><ul><li>Fit is a far more central component of competitive advantage than most realise. </li></ul><ul><li>The more a company’s positioning rests on activity systems with second- and third-order fit, the more sustainable its advantage will be. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    36. 36. Fit & Choices <ul><li>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. </li></ul><ul><li>Finding a new strategic position is often preferable to being the second or third imitator of an occupied position. </li></ul><ul><li>Tailoring organisation to strategy, in turn, makes complementarities more achievable and contributes to sustainability. </li></ul><ul><li>Continuity fosters improvements in individual activities and the fit across activities, allowing an organisation to build unique capabilities and skills tailored to its strategy. </li></ul><ul><li>Frequent shifts in positioning are costly. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    37. 37. Choice <ul><li>A sound strategy is undermined by a misguided view of competition, by organisational failures, and, especially, by the desire to grow. </li></ul><ul><li>Managers have become confused about the necessity of making choices. </li></ul><ul><li>The pursuit of operational effectiveness is seductive because it is concrete and actionable. </li></ul><ul><li>Caught up in the race for operational effectiveness, many managers simply do not understand the need to have a strategy. </li></ul><ul><li>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. </li></ul><ul><li>Tradeoffs are frightening, and making no choice is sometimes preferred to risking blame for a bad choice. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    38. 38. Choice <ul><li>A company may have to change its strategy if there are major structural changes in its industry. </li></ul><ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>Compromises and inconsistencies in the pursuit of growth will erode the competitive advantage a company had with its original varieties or target customers. </li></ul>STANFORD - EPSO 98 THINKING VS PLANNING
    39. 39. EPSO ‘98 L EADERSHIP & I NTENT
    40. 40. Role <ul><li>The Role of leadership : </li></ul><ul><li>Strong leaders willing to make choices are essential. </li></ul><ul><li>In many companies, leadership has degenerated into orchestrating operational improvements and making deals. </li></ul><ul><li>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. </li></ul><ul><li>One of the leader’s jobs is to teach others in the organisation about strategy - and to say no . </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    41. 41. Strategic Intent <ul><li>Strategic intent, on the one hand, envisions a desired leadership position and establishes the criterion the organisation will use to chart its progress. </li></ul><ul><li>Strategic intent is more than simply unfettered ambition. The concept also encompasses an active management process that includes: </li></ul><ul><ul><li>focusing the organisation’s attention on the essence of winning; </li></ul></ul><ul><ul><li>motivating people by communicating the value of the target; </li></ul></ul><ul><ul><li>leaving room for individual and team contributions; </li></ul></ul><ul><ul><li>sustaining enthusiasm by providing new operational definitions as circumstances change; </li></ul></ul><ul><ul><li>and using intent consistently to guide resource allocations . </li></ul></ul><ul><li>Strategic intent captures the essence of winning. </li></ul><ul><li>Strategic intent is stable over time. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    42. 42. Strategic Intent <ul><li>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. </li></ul><ul><li>Both models recognise the problem of competing in a hostile environment with limited resources. </li></ul><ul><li>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. </li></ul><ul><li>The first leads to a search for niches, the second produces a quest for new rules that can devalue the incumbent’s advantages. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    43. 43. Strategic intent <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    44. 44. Strategic intent <ul><li>Many companies are more familiar with strategic planning than they are with strategic intent. </li></ul><ul><li>Strategic intent sets a target that deserves personal effort and commitment. </li></ul><ul><li>Strategic intent gives employees the only goal that is worthy of commitment. </li></ul><ul><li>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?” </li></ul><ul><li>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. </li></ul><ul><li>Here the value added of the top management is low indeed. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    45. 45. Strategic intent <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>As with strategic intent, top management is specific about the ends, but less prescriptive about the means. </li></ul><ul><li>Corporate challenges come from analysing competitors as well as from the foreseeable pattern of industry evolution. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    46. 46. Strategic intent <ul><li>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 </li></ul><ul><ul><li>Develop a competitor focus at every level through widespread use of competitive intelligence </li></ul></ul><ul><ul><li>Provide employees with the skills they need to work effectively </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>Establish clear milestones and review mechanisms to track progress and ensure that internal recognition and rewards reinforce desired behaviour. </li></ul></ul><ul><ul><li>It is important to distinguish between the process of managing corporate challenges and the advantages that the process creates. </li></ul></ul>STANFORD - EPSO 98 LEADERSHIP
    47. 47. Strategic intent <ul><li>The essence of strategy lies in creating tomorrow’s competitive advantages faster than competitors mimic the ones you possess today. </li></ul><ul><li>An organisation’s capacity to improve existing skills and learn new ones is the most defensible competitive advantage of all. </li></ul><ul><li>The wider a company’s portfolio of advantages, the less risk it faces in competitive battles. </li></ul><ul><li>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. </li></ul><ul><li>What some call competitive suicide - pursuing both cost and differentiation - is exactly what many competitors strive for. </li></ul>STANFORD - EPSO 98 LEADERSHIP
    48. 48. Strategic intent <ul><li>The route to competitive revitalisation implies a new view of strategy: </li></ul><ul><ul><li>Strategic intent assures consistency in resource allocation over the long term. </li></ul></ul><ul><ul><li>Clearly articulated corporate challenges focus the efforts of individuals in the medium term. </li></ul></ul><ul><ul><li>Competitive innovation helps reduce competitive risk </li></ul></ul><ul><li>Few companies recognise the value of documenting failure. Fewer still search their own managerial orthodoxy for the seeds for competitive surrender. </li></ul>STANFORD - EPSO 98 INTENT
    49. 49. Strategic intent <ul><li>Playing by the leader’s rules is usually competitive suicide. </li></ul><ul><li>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. </li></ul><ul><li>In such cases, it is not the industry that is mature, but the executives’ conception of the industry. </li></ul><ul><li>A narrow concept of maturity can foreclose a company from a broad stream of future opportunities. </li></ul><ul><li>Companies can be over-committed to organisational recipes, such as strategic business units and the decentralisation an SBU structure implies. </li></ul><ul><li>Few companies with a strong SBU orientation have built successful global distribution and brand positions. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 INTENT
    50. 50. Strategic intent <ul><li>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. </li></ul><ul><li>The concept of the general manager as a movable peg reinforces the problem of denominator management. </li></ul><ul><li>Honesty and humility on the part of top management may be the first prerequisite of revitalisation. </li></ul><ul><li>Where strategy formulation is an elitist activity it is also difficult to produce truly creative strategies. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 INTENT
    51. 51. EPSO ‘98 B USINESS S TRATEGY
    52. 52. Framework <ul><li>Strategic thinking is about understanding the relationships among the business’ external environment, its strategic assets, its action plan, and its performance . </li></ul><ul><li>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. </li></ul><ul><li>It defines a framework for guiding the choice of actions. </li></ul><ul><li>A strategy is the starting point for developing a detailed action plan. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 The role of business strategy BUSINESS STRATEGY
    53. 53. Framework <ul><li>Strategy is not in itself a list of tactics. </li></ul><ul><li>Strategic assets are used to describe the attributes of a firm which are key determinants of its performance. </li></ul><ul><li>Strategic actions used to describe the major resource commitments. Strategic actions are strategic because they importantly affect strategic assets. </li></ul><ul><li>Strategy can be best described in terms of the following four components: </li></ul><ul><ul><li>A clear set of long-term goals </li></ul></ul><ul><ul><li>The scope of the business </li></ul></ul><ul><ul><li>Competitive advantage, and </li></ul></ul><ul><ul><li>Logic </li></ul></ul>STANFORD - EPSO 98 Defining business strategy BUSINESS STRATEGY
    54. 54. Building blocks <ul><li>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”. </li></ul><ul><li>These goals must be enduring. </li></ul><ul><li>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. </li></ul><ul><li>Long-term goals are part of strategy insofar as they provide guidance as to what plan of action should be adopted. </li></ul><ul><li>By clearly staking out a desired competitive position the firm may be able to persuade rivals to focus their efforts elsewhere. </li></ul>STANFORD - EPSO 98 A clear set of long term goals BUSINESS STRATEGY
    55. 55. <ul><li>The scope also defines ( implicitly ) the activities the firm will not undertake. </li></ul><ul><li>The statement of scope defines the firm’s position with respect to these broad and controversial strategic issues. </li></ul><ul><li>Competitive advantage is the how of strategy . </li></ul><ul><li>A high performance firm must achieve advantage over the relevant competitors. </li></ul><ul><li>A firm does not need to have an advantage over all its competitors. </li></ul><ul><li>A firm will do better if its source of competitive advantage is unique to it. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>Building blocks STANFORD - EPSO 98 Scope Competitive advantage BUSINESS STRATEGY
    56. 56. <ul><li>The most important element of a strategy is the logic by which the firm intends to achieve its strategic goals. </li></ul><ul><li>The “why” is the logic of the strategy . </li></ul><ul><li>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. </li></ul>Building blocks STANFORD - EPSO 98 Logic BUSINESS STRATEGY
    57. 57. <ul><li>Firms often commit their major goals and corporate philosophy in a “Mission Statement” or “Statement of Purpose”. </li></ul><ul><li>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. </li></ul><ul><ul><ul><ul><ul><li>A mission statement can help promote consistency between the views of the company’s leaders and the company’s strategy. </li></ul></ul></ul></ul></ul><ul><ul><ul><ul><ul><li>However, whatever value these statements have, they should not be confused with a statement of the firm’s strategy </li></ul></ul></ul></ul></ul>Building blocks STANFORD - EPSO 98 Relationship of strategy to mission, purpose, and values BUSINESS STRATEGY
    58. 58. <ul><li>The general manager must have some sense about technological trajectories, competitors’ likely actions and developing market opportunities. </li></ul><ul><li>The term “vision” is often used to describe the strategist’s plan for closing the gap between current reality and a potential future. </li></ul><ul><li>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. </li></ul><ul><li>Developing and communicating an envisioned future for a firm in a rapidly changing and uncertain world is a leadership function of general managers. </li></ul><ul><li>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 . </li></ul>Building blocks STANFORD - EPSO 98 Vision BUSINESS STRATEGY
    59. 59. <ul><li>It is important to be clear that a vision is not always necessary for strategy and it is never sufficient. </li></ul><ul><li>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. </li></ul>Building blocks STANFORD - EPSO 98 BUSINESS STRATEGY
    60. 60. <ul><li>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 : </li></ul><ul><li>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 . </li></ul><ul><li>A firm may be pursuing its strategy quite unselfconsciously . </li></ul><ul><ul><li>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. </li></ul></ul>STANFORD - EPSO 98 The strategy statement BUSINESS STRATEGY
    61. 61. Benefits <ul><li>A Top management may believe that its strategy is so “unique” that every competitor would copy it, if only they knew it! </li></ul><ul><li>There are several benefits that come from articulating and communicating a strategy for the business: </li></ul><ul><ul><li>Clarity </li></ul></ul><ul><ul><li>Co-ordination- an explicit strategy serves as a co-ordinating mechanism . </li></ul></ul><ul><ul><li>Incentives </li></ul></ul><ul><ul><li>Efficiency - day to day decisions can be evaluated in terms of whether they “fit” the existing strategy. </li></ul></ul><ul><ul><li>Evaluation/Adaptation - this is useful in tracking how well the strategy is performing. </li></ul></ul><ul><ul><li>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. </li></ul></ul><ul><ul><li>However, being explicit about strategy can reinforce rigidity and inertia. </li></ul></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    62. 62. Benefits <ul><li>In most practical situations the firm will not be able to boil its strategy down to a single sentence. </li></ul><ul><li>The statement needs to be detailed enough to do justice to its components. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    63. 63. Adapt & Focus <ul><li>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. </li></ul><ul><li>Identifying the existing strategy is necessary to crafting an accurate and useful strategy statement. </li></ul><ul><li>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. </li></ul><ul><li>Financial statements contained in annual reports, web page, investor information kits, etc are rarely coherent and comprehensive statements of strategy . </li></ul>STANFORD - EPSO 98 Strategy identification BUSINESS STRATEGY
    64. 64. Dynamic process <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>Strategy formulation is a dynamic process. </li></ul><ul><li>The criteria that are typically used for strategy evaluation are internal and external consistency. </li></ul>STANFORD - EPSO 98 Strategy evaluation BUSINESS STRATEGY
    65. 65. Consistency <ul><li>Three are three main tests for internal consistency of a strategy : </li></ul><ul><ul><li>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 . </li></ul></ul><ul><ul><li>A tightly coupled organisation : the formal and informal elements of the firm’s organisation should be mutually reinforcing and support the strategy. </li></ul></ul><ul><ul><li>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. </li></ul></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    66. 66. Consistency <ul><li>The criteria used in evaluating the strategy are closely linked to the logic of the strategy statement. </li></ul><ul><li>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. </li></ul><ul><li>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 . </li></ul><ul><li>The firm must take strategic actions to overcome its weaknesses and improve the strategic context of the firm going forward. </li></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    67. 67. Consistency <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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 . </li></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    68. 68. Evolution <ul><li>Strategy identification and evaluation are the initial steps in formulating and implementing a new strategy. The remaining steps are : </li></ul><ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 The strategy process and strategic change BUSINESS STRATEGY
    69. 69. The evaluation of business strategy <ul><li>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. </li></ul><ul><li>Business strategy evaluation requires a reasonable store of situation-based knowledge. </li></ul><ul><li>A strategy need not be wrong or right in any absolute sense. </li></ul><ul><li>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 . </li></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    70. 70. The evaluation of business strategy <ul><li>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. </li></ul><ul><li>Four broad criteria for evaluating strategy are: </li></ul><ul><ul><li>Consistency </li></ul></ul><ul><ul><li>Consonance </li></ul></ul><ul><ul><li>Advantage </li></ul></ul><ul><ul><li>Feasibility </li></ul></ul><ul><li>A strategy that fails to meet one or more of these criteria is strongly suspect. </li></ul>STANFORD - EPSO 98 The principles of strategy evaluation BUSINESS STRATEGY
    71. 71. The evaluation of business strategy <ul><li>Even strategies that are the result of formal procedures may easily contain compromise arrangements between opposing power groups. </li></ul><ul><li>A key function of strategy is to provide coherence to organisational action. </li></ul><ul><li>Organisational conflict is often a symptom of managerial disorder but may also indicate problems of strategic inconsistency. </li></ul><ul><li>A final type of consistency that must be sought in strategy is between organisational objectives and the values of the management group. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Consistency Consonance BUSINESS STRATEGY
    72. 72. The evaluation of business strategy <ul><li>Competitive strategy is the art of creating or exploiting those advantages that are most telling, enduring, and most difficult to duplicate. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>The purpose of strategy is to effectively deploy the unique and distinctive resources of an enterprise. </li></ul>STANFORD - EPSO 98 Advantage Feasibility BUSINESS STRATEGY
    73. 73. The evaluation of business strategy <ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 BUSINESS STRATEGY
    74. 74. EPSO ‘98 T O C OMPETE!
    75. 75. Customer Intimacy and Other Value Disciplines <ul><li>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? </li></ul><ul><li>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. </li></ul><ul><li>Today’s customers have an expanded concept of value that includes convenience of purchase, after-sale service, dependability, etc. </li></ul><ul><li>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 . </li></ul>STANFORD - EPSO 98 TO COMPETE
    76. 76. Customer Intimacy and Other Value Disciplines <ul><li>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. </li></ul><ul><li>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 . </li></ul><ul><li>Less focused companies must do far more than simply tweak existing processes to gain this advantage. </li></ul><ul><li>Companies that pursue the same value discipline have remarkable similarities, regardless of their industry. But across two disciplines, the similarities end. </li></ul>STANFORD - EPSO 98 TO COMPETE
    77. 77. Customer Intimacy and Other Value Disciplines <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>The system has reduced and simplified a complex and expensive warehousing and distribution system down to ten strategically located warehouses. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Operational Excellence TO COMPETE
    78. 78. Customer Intimacy and Other Value Disciplines <ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Customer Intimacy TO COMPETE
    79. 79. Customer Intimacy and Other Value Disciplines <ul><li>To pursue a policy of product leadership, all a company’s businesses and management processes have to be engineered for speed. </li></ul><ul><li>Product leaders do not stop for self-congratulation, they are too busy raising the bar . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>The strength of product leaders lies in reacting to situations as they occur. </li></ul><ul><li>Product leaders are their own fiercest competitors </li></ul>STANFORD - EPSO 98 Product Leadership TO COMPETE
    80. 80. Customer Intimacy and Other Value Disciplines <ul><li>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. </li></ul><ul><li>Product leaders also possess the infrastructure and management systems needed to manage risk well . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Sustaining the lead TO COMPETE
    81. 81. Customer Intimacy and Other Value Disciplines <ul><li>The key to gaining and sustaining value leadership is focus, but the management of a company that is a value leader must stay alert . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 TO COMPETE
    82. 82. ` <ul><li>As globalisation breaks down barriers between national and regional markets, competitors are multiplying and reducing the value of national market share. </li></ul><ul><li>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 . </li></ul><ul><li>There are four basic principles of capabilities-based competition: </li></ul><ul><ul><li>The building blocks of corporate strategy are not products and markets but business processes. </li></ul></ul><ul><ul><li>Competitive success depends on transforming a company’s key processes into strategic capabilities that consistently provide superior value to the customer. </li></ul></ul>STANFORD - EPSO 98 Four basic principles of capabilities- based competition Competing on Capabilities: The New Rules of Corporate Strategy TO COMPETE
    83. 83. Competing on Capabilities: The New Rules of Corporate Strategy <ul><ul><li>Companies create capabilities by making strategic investments in a support infrastructure that links and transcends traditional SBUs and functions. </li></ul></ul><ul><ul><li>The champion of a capabilities-based strategy is the CEO. </li></ul></ul><ul><li>A capability is a set of business processes strategically understood. </li></ul><ul><li>A capability is strategic only when it begins and ends with the customer . </li></ul><ul><li>Capabilities-driven companies conceive the organisation as a gigantic loop that begins with identifying the needs of the customer and ends with satisfying them. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 TO COMPETE
    84. 84. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>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. </li></ul><ul><li>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: </li></ul><ul><ul><li>Speed </li></ul></ul><ul><ul><li>Consistency </li></ul></ul><ul><ul><li>Acuity </li></ul></ul><ul><ul><li>Agility </li></ul></ul><ul><ul><li>Innovativeness </li></ul></ul>STANFORD - EPSO 98 TO COMPETE
    85. 85. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>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 . </li></ul><ul><li>They then need to identify and link together essential business processes to serve customer needs. </li></ul><ul><li>Finally they can reshape the organisation to encourage the new kind of required behaviour. </li></ul><ul><li>There are four steps by which any company can transform itself into a capabilities-based competitor: </li></ul><ul><ul><li>Shift the strategic framework to achieve aggressive goals </li></ul></ul><ul><ul><li>Organise around the chosen capability and make sure employees have the necessary skills and resources to achieve it. </li></ul></ul>STANFORD - EPSO 98 Becoming a capabilities-based company TO COMPETE
    86. 86. Competing on Capabilities: The New Rules of Corporate Strategy <ul><ul><li>Make progress visible and bring measurements and reward into alignment. </li></ul></ul><ul><ul><li>Do not delegate the leadership of the transformation . </li></ul></ul><ul><li>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. </li></ul><ul><li>A company that focuses on strategic capabilities can compete in a remarkable diversity of regions products and businesses. </li></ul><ul><li>Strategic advantages built on capabilities are easier to transfer geographically than more traditional competitive advantages . </li></ul>STANFORD - EPSO 98 A new logic of growth: the capabilities predator TO COMPETE
    87. 87. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>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. </li></ul><ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 A new logic of growth: the capabilities predator TO COMPETE
    88. 88. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 TO COMPETE
    89. 89. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>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. </li></ul><ul><li>These differences can be deep-seated. Capabilities are often mutually exclusive. Choosing the right ones is the essence of strategy. </li></ul>STANFORD - EPSO 98 TO COMPETE
    90. 90. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>Time is just one piece of a more far-reaching transformation in the logic of competition. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 TO COMPETE
    91. 91. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>This strategic vision reached its fullest expression in a logistics technique known as “cross-docking”. </li></ul><ul><li>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. </li></ul><ul><li>Another key component of Wal-Mart’s logistics infrastructure is the company’s fast and responsive transportation system. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 TO COMPETE
    92. 92. Competing on Capabilities: The New Rules of Corporate Strategy <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>In industry after industry, established competitors are being out-manoeuvred and overtaken by more dynamic rivals. </li></ul>STANFORD - EPSO 98 TO COMPETE
    93. 93. Marks & Spencer Ltd.: Summary <ul><li>Creating value for customers is the ultimate foundation of a successful business strategy. </li></ul><ul><li>Successful business strategies combine concerns for differentiation and cost in unique ways. </li></ul><ul><li>Distinctive competencies in relationship building with key parties (customers, suppliers, employees) are a powerful potential source of competitive advantage. </li></ul><ul><li>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. </li></ul><ul><li>Implementing a business strategy requires relentless attention and continuous alertness to deviations from core values and to opportunities to leverage them. </li></ul>STANFORD - EPSO 98 TO COMPETE
    94. 94. <ul><li>Strategy as an organisational learning process is driven by the development of distinctive competencies and capabilities: </li></ul><ul><li>Competitive advantages rooted in organisational learning may be more sustainable (because harder to imitate), but less easy to transfer (because harder to fully comprehend). </li></ul>Marks & Spencer Ltd.: Summary STANFORD - EPSO 98 CAPABILITIES OPPORTUNITIES STRATEGY TO COMPETE
    95. 95. EPSO ‘98 T O O RGANISE
    96. 96. What is organisation design? <ul><li>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 . </li></ul><ul><li>Organisational features can be classified into three types: </li></ul><ul><ul><li>Architecture </li></ul></ul><ul><ul><li>Processes </li></ul></ul><ul><ul><li>Culture </li></ul></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Architecture TO ORGANISE
    97. 97. <ul><li>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. </li></ul><ul><li>The more formal ones might be easily changed; the informal ones are no less important, but are harder to change . </li></ul><ul><li>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 . </li></ul>What is organisation design? STANFORD - EPSO 98 Processes Culture TO ORGANISE
    98. 98. <ul><li>Organisation design involves selecting the people and the features of the organisation. </li></ul><ul><li>Good design means selecting these to maximise performance. </li></ul><ul><li>Strategy and the environment obviously affect performance too. </li></ul><ul><li>To these we add the design of the organisation. </li></ul><ul><li>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. </li></ul>What is organisation design? STANFORD - EPSO 98 TO ORGANISE
    99. 99. Organising for Performance and Growth <ul><li>Use all aspects to affect behaviour: People - Architecture - Processes - Culture </li></ul><ul><li>Seek both initiative and co-operation </li></ul>STANFORD - EPSO 98 Organisational design TO ORGANISE <ul><li>Common brand versus division-specific </li></ul><ul><li>Level at which P&L responsibility lies </li></ul><ul><li>Extent and funding of shared services </li></ul><ul><li>Design of pay system </li></ul><ul><li>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. </li></ul>Examples of Trade-off: Initiative vs. Co-operation
    100. 100. Organising for Performance and Growth STANFORD - EPSO 98 Trade-off Initiative Co-operation More entrepreneurial More co-operative TO ORGANISE
    101. 101. Organising for Performance and Growth <ul><li>Strong boundaries and incentives lead to strong initiative </li></ul><ul><ul><li>decentralise/disaggregate </li></ul></ul><ul><ul><li>individual performance-based rewards </li></ul></ul><ul><li>Weak boundaries and incentives facilitate co-operation </li></ul><ul><ul><li>common identity and fate through the organisation </li></ul></ul><ul><ul><li>rewards not contingent on individual performance </li></ul></ul>STANFORD - EPSO 98 Initiative vs. Co-operation TO ORGANISE
    102. 102. Organising for Performance and Growth STANFORD - EPSO 98 Disaggregated Firm Initiative Co-operation Market/entrepreneurial Firm Classic Bureaucracy TO ORGANISE
    103. 103. Organising for Performance and Growth <ul><li>IT facilitates both co-operation (better information sharing) and initiative (better performance measurement. </li></ul><ul><li>Adding “linkage managers” may facilitate co-operation while not hurting initiative. </li></ul>STANFORD - EPSO 98 I Organisational Investment and Innovation: Move out the frontier Examples: Shifting the Frontier TO ORGANISE C
    104. 104. Organisational Learning STANFORD - EPSO 98 Behavioural Objectives of Design Architecture Processes/Routines Culture (Capability-based) Sustainable Competitive Advantage Initiative Co-operation Learning TO ORGANISE
    105. 105. Behavioural Objectives of Design: Dynamics <ul><li>I DENTIFY THE S TRATEGY </li></ul>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
    106. 106. Organisational Learning <ul><li>Organisational learning occurs through three stages </li></ul><ul><ul><li>variation/experimentation stage </li></ul></ul><ul><ul><ul><li>necessarily a decentralised process requiring a de-coupling of organisational units (lack of standardisation/inter-dependence across units) </li></ul></ul></ul><ul><ul><li>selection among alternatives </li></ul></ul><ul><ul><ul><li>selection procedures can vary in terms of their centralisation </li></ul></ul></ul><ul><ul><li>retention of “best practices” </li></ul></ul><ul><ul><ul><li>knowledge transfer implies coupling of organisational units </li></ul></ul></ul>STANFORD - EPSO 98 Variation/ Selection/ Retention Model TO ORGANISE
    107. 107. Organisational Learning <ul><li>Reasons 1 : Organisations are unwilling to experiment </li></ul><ul><ul><li>Strong incentives tend to undercut because hard to design incentives for exploratory activity. </li></ul></ul><ul><ul><li>Most cultures punish failure </li></ul></ul><ul><li>Reason 2 : Learning requires “slack” in organisation, and there is generally a lack of tolerance for slack </li></ul><ul><ul><li>Variation requires resources devoted to “deviant” activities </li></ul></ul><ul><ul><ul><li>Example: “bootlegging” at 3M, RISC at Intel </li></ul></ul></ul><ul><ul><li>Selection/transfer cannot occur without organisational resources dedicated to transfer </li></ul></ul><ul><ul><ul><li>Example: peer assists at BP </li></ul></ul></ul>STANFORD - EPSO 98 Two reasons why organisations are typically poor learners TO ORGANISE
    108. 108. Organisational Learning <ul><li>These reasons why organisations are poor learners can be understood in terms of a single learning dilemma: </li></ul><ul><ul><li>There exists a trade-off between devoting resources to long term learning benefits and short-term operating efficiency benefits . </li></ul></ul><ul><ul><li>Challenge of organisational learning: </li></ul></ul><ul><ul><ul><li>variation requires de-coupling of organisational units </li></ul></ul></ul><ul><ul><li>Efficient knowledge transfer requires tight coupling of organisational units </li></ul></ul><ul><ul><li>There is thus a tension between </li></ul></ul><ul><ul><ul><li>organisational design that facilitates the emergence of new ideas. </li></ul></ul></ul><ul><ul><ul><li>organisational design that allows the effective dissemination and refinement of the best ideas. </li></ul></ul></ul>STANFORD - EPSO 98 Learning Dilemma TO ORGANISE
    109. 109. Organisational Learning <ul><li>Culture </li></ul><ul><ul><li>Trust to facilitate information transfer about failure as well as success </li></ul></ul><ul><ul><li>Spirit of “generalised reciprocity” </li></ul></ul><ul><li>Processes/routines </li></ul><ul><ul><li>coalitional, grass-roots basis for decision making </li></ul></ul>STANFORD - EPSO 98 Cultural and procedural support for loosely coupled architecture TO ORGANISE
    110. 110. Organisational Learning <ul><li>Balancing strong culture of co-operation with strong individual incentives </li></ul><ul><li>Deciding on the right amount of slack to be devoted to learning </li></ul><ul><ul><li>Beware of tightly coupled imitators! A fast, tightly-coupled second mover can overwhelm a (slack) learning organisation. </li></ul></ul><ul><li>Trying to systemise complex tacit knowledge </li></ul><ul><ul><li>A real danger that systemisation of complex, tacit knowledge removes essential content </li></ul></ul><ul><ul><li>Less systematic knowledge requires stronger reliance on strong personal ties and less reliance on more formal means of information. </li></ul></ul>STANFORD - EPSO 98 Challenges of loosely-coupled organisation TO ORGANISE
    111. 111. EPSO ‘98 A DVANTAGE & C HANGE
    112. 112. Defending Positional Advantage <ul><li>EXTERNAL </li></ul><ul><li>CHANGE </li></ul><ul><li>Life cycle changes </li></ul><ul><li>Demand changes </li></ul><ul><li>Supply changes </li></ul>STANFORD - EPSO 98 CONTEXT : Internal and External ACTION : Internal and External PERFORMANCE Sources and Effects of Change ADVANTAGE & CHANGE
    113. 113. Defending Positional Advantage <ul><li>Outside the organisation </li></ul><ul><ul><li>industry changes </li></ul></ul><ul><ul><li>supply chain changes </li></ul></ul><ul><ul><li>outside the supply chain </li></ul></ul><ul><li>Inside the organisation </li></ul><ul><ul><li>technical innovation </li></ul></ul><ul><ul><li>behavioural innovation </li></ul></ul><ul><ul><li>strategic and non-strategic </li></ul></ul>STANFORD - EPSO 98 Sources of Change ADVANTAGE & CHANGE
    114. 114. Defending Positional Advantage <ul><li>Hardware/ </li></ul><ul><li>Software </li></ul><ul><li>Suppliers </li></ul>STANFORD - EPSO 98 C Example: IT Outstanding <ul><li>Technological change </li></ul><ul><li>Vertical  horizontal </li></ul><ul><li>Forward integration </li></ul>IT Outsource Firms Enterprise IT Consumers <ul><li>Application change </li></ul><ul><li>Process change </li></ul><ul><li>Needs change </li></ul>C ADVANTAGE & CHANGE
    115. 115. Defending Positional <ul><li>Evolution of industries </li></ul><ul><li>Competition among incumbents </li></ul><ul><ul><li>positional advantage </li></ul></ul><ul><ul><li>capabilities advantage </li></ul></ul><ul><li>Entry </li></ul>STANFORD - EPSO 98 Effects of change ADVANTAGE & CHANGE <ul><li>Effects on industrial “stages” </li></ul><ul><li>Vertical-to-horizontal </li></ul>Evolution of industries
    116. 116. Defending Positional Advantage STANFORD - EPSO 98 Evolution: industry stages Emerging Growth Maturity Decline ADVANTAGE & CHANGE
    117. 117. Defending Positional <ul><li>Evolution: vertical and horizontal industries (the complements problem): </li></ul><ul><ul><li>Computers </li></ul></ul><ul><ul><li>Telecommunications </li></ul></ul><ul><ul><li>Automobiles </li></ul></ul><ul><li>“Vertical” industries </li></ul><ul><ul><li>Co-ordination by firm </li></ul></ul><ul><ul><li>Competition at endpoint only </li></ul></ul><ul><ul><li>Dominance of chain </li></ul></ul>STANFORD - EPSO 98 Evolution of industries ADVANTAGE & CHANGE
    118. 118. Defending Positional <ul><li>“Horizontal” Industries </li></ul><ul><ul><li>Co-ordination by market </li></ul></ul><ul><ul><li>Competition at each layer </li></ul></ul><ul><ul><li>Dominance of segment </li></ul></ul><ul><li>Vertical to horizontal </li></ul><ul><ul><li>Competition in components </li></ul></ul><ul><ul><ul><li>Higher quality </li></ul></ul></ul><ul><ul><ul><li>more competitive pricing </li></ul></ul></ul><ul><ul><li>Slower standard formation </li></ul></ul><ul><ul><li>Integration more difficult for user </li></ul></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    119. 119. Defending Positional <ul><li>Competition among incumbent firms </li></ul><ul><ul><li>Fragility of first-mover advantage </li></ul></ul><ul><ul><ul><li>outdated resources </li></ul></ul></ul><ul><ul><ul><li>lost leverage </li></ul></ul></ul><ul><ul><li>Position vs. Capability </li></ul></ul><ul><li>Competition: re-creating advantage </li></ul><ul><ul><li>Leveraging existing capabilities </li></ul></ul><ul><ul><li>Creating new first mover advantage </li></ul></ul><ul><ul><li>Example: “Value added contracting” </li></ul></ul><ul><ul><ul><li>Risk sharing </li></ul></ul></ul><ul><ul><ul><li>Measuring effects </li></ul></ul></ul><ul><ul><ul><li>Opportunism </li></ul></ul></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    120. 120. Defending Positional <ul><li>Responding to Entry </li></ul><ul><ul><li>Accommodate or attach </li></ul></ul><ul><ul><ul><li>anticipate reactions </li></ul></ul></ul><ul><ul><ul><li>think more than one move ahead </li></ul></ul></ul><ul><ul><ul><li>goals and signposts </li></ul></ul></ul><ul><ul><li>Communicate intent </li></ul></ul><ul><ul><ul><li>signalling vs. cheap talk </li></ul></ul></ul><ul><ul><ul><li>commitment </li></ul></ul></ul><ul><ul><ul><li>internal and external </li></ul></ul></ul><ul><ul><li>Pro-active vs. Reactive </li></ul></ul><ul><ul><ul><li>investing in entry barriers </li></ul></ul></ul><ul><ul><ul><li>shaping rivals’ strategies </li></ul></ul></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    121. 121. Strategic Dissonance <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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 . </li></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    122. 122. Strategic Dissonance <ul><li>Strategic dissonance signals a strategic inflection point . </li></ul><ul><li>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 . </li></ul><ul><li>It is very difficult to clearly perceive the new industry equilibrium or winning strategy that loom beyond a strategic inflection point. </li></ul><ul><li>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. </li></ul><ul><li>It is wise to keep in mind that when spring comes, snow melts first at the periphery : that is where it is most exposed. </li></ul>STANFORD - EPSO 98 Strategic inflection point ADVANTAGE & CHANGE
    123. 123. Strategic Dissonance <ul><li>Top management’s strategic recognition of an SIP happens in three stages: </li></ul><ul><ul><li>recognising the growing divergence between what the company currently puts forth as its strategy and the actions taken by its managers </li></ul></ul><ul><ul><li>Asking “is it one - a SIP?” </li></ul></ul><ul><ul><li>Trying to discern the newly emerging strategic picture and providing a framework in which a new strategic intent can be formulated. </li></ul></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    124. 124. Strategic Dissonance <ul><li>Five dynamic forces </li></ul><ul><ul><li>The basis of competitive advantage </li></ul></ul><ul><ul><li>Distinctive competence </li></ul></ul><ul><ul><li>Top management corporate strategy </li></ul></ul><ul><ul><li>Strategic action </li></ul></ul><ul><ul><li>Internal selection environment that comprises administrative elements and cultural elements. </li></ul></ul><ul><li>During some periods, these five forces are in harmony. </li></ul><ul><li>Over time , however, the dynamic forces tend to diverge and their harmonious relationships are broken , thereby creating strategic dissonance in the organisation. </li></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    125. 125. Strategic Dissonance <ul><li>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 . </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Sources of strategic dissonance ADVANTAGE & CHANGE
    126. 126. Strategic Dissonance <ul><li>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. </li></ul><ul><li>Intertwined with these inertial self-perceptions is emotional attachment on the part of top management to the business that made the company successful. </li></ul><ul><li>Top management hesitates to change the strategy because the consequences are not completely clear. </li></ul><ul><li>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. </li></ul><ul><li>The other driver of this divergence are the independent strategic actions taken by middle-level managers. </li></ul>STANFORD - EPSO 98 Divergence between stated strategy and strategic action ADVANTAGE & CHANGE
    127. 127. Strategic Dissonance <ul><li>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. </li></ul><ul><li>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 . </li></ul><ul><li>How can a company possibly survive? </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Role of internal selection environment ADVANTAGE & CHANGE
    128. 128. Strategic Dissonance <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    129. 129. Strategic Dissonance <ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Managing strategic dissonance Help internal selection reflect external reality; allow dissent ADVANTAGE & CHANGE
    130. 130. Strategic Dissonance <ul><li>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? </li></ul><ul><li>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. </li></ul><ul><li>Debating tough issues is only possible where people will speak their minds without fear of punishment . </li></ul><ul><li>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. </li></ul><ul><li>First, don’t shut people up and, second, if they disagreed and were right, congratulate them! </li></ul>STANFORD - EPSO 98 ADVANTAGE & CHANGE
    131. 131. Strategic Dissonance <ul><li>How the top management reacts, emotionally, to strategic dissonance is an important issue when dealing with a SIP. </li></ul><ul><li>When the business gets into serious difficulties or key managerial assumptions are challenged, objective analysis takes second seat to personal/emotional reactions: </li></ul><ul><li>Denial  Escape or Diversion  Acceptance  Pertinent Action </li></ul><ul><li>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. </li></ul><ul><li>Diversion often involves major acquisitions unrelated to the core business that faces a SIP . </li></ul>STANFORD - EPSO 98 Don’t dismiss strategic dissonance ADVANTAGE & CHANGE
    132. 132. Strategic Dissonance <ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul><ul><li>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. </li></ul>STANFORD - EPSO 98 Formulate new strategic intent based on strategic recognition ADVANTAGE & CHANGE
    133. 133. Strategic Dissonance <ul><li>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. </li></ul><ul><li>Leadership here implies changing with the environment and the org