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CONTEMPORARY STRATEGY ANALYSIS

CONTEMPORARY STRATEGY ANALYSIS

T E N T H E D I T I O N

R O B E R T M . G R A N T

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BRIEF CONTENTS

Author Biography xiv Preface to Tenth Edition xv

PART I INTRODUCTION 1

1 The Concept of Strategy 3

PART II THE TOOLS OF STRATEGY ANALYSIS 31

2 Goals, Values, and Performance 33

3 Industry Analysis: The Fundamentals 59

4 Further Topics in Industry and Competitive Analysis 83

5 Analyzing Resources and Capabilities 107

6 Organization Structure and Management Systems: The Fundamentals of Strategy Implementation 131

PART III BUSINESS STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE 153

7 The Sources and Dimensions of Competitive Advantage 155

8 Industry Evolution and Strategic Change 189

9 Technology-Based Industries and the Management of Innovation 219

PART IV CORPORATE STRATEGY 249

10 Vertical Integration and the Scope of the Firm 251

11 Global Strategy and the Multinational Corporation 269

12 Diversification Strategy 297

viii BRIEF CONTENTS

13 Implementing Corporate Strategy: Managing the Multibusiness Firm 315

14 External Growth Strategies: Mergers, Acquisitions, and Alliances 340

15 Current Trends in Strategic Management 360

CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS, TENTH EDITION

Glossary 637 Index 643

Author Biography xiv Preface to Tenth Edition xv

PART I INTRODUCTION 1

1 The Concept of Strategy 3

Introduction and Objectives 4 The Role of Strategy in Success 4 The Basic Framework for Strategy Analysis 9 A Brief History of Business Strategy 11 Strategy Today 14 How is Strategy Made? The Strategy Process 20 Strategic Management of Not-For-Profit Organizations 24 Summary 26 Self-Study Questions 28 Notes 28

PART II THE TOOLS OF STRATEGY ANALYSIS 31

2 Goals, Values, and Performance 33

Introduction and Objectives 34 Strategy as a Quest for Value 35 Profit, Cash Flow, and Enterprise Value 39 Putting Performance Analysis into Practice 42 Beyond Profit: Values and Corporate Social Responsibility 49 Beyond Profit: Strategy and Real Options 53 Summary 56 Self-Study Questions 57 Notes 57

3 Industry Analysis: The Fundamentals 59

Introduction and Objectives 60 From Environmental Analysis to Industry Analysis 60 Analyzing Industry Attractiveness 62 Applying Industry Analysis to Forecasting Industry Profitability 71 Using Industry Analysis to Develop Strategy 74 Defining Industries: Where to Draw the Boundaries 75 From Industry Attractiveness to Competitive Advantage:

Identifying Key Success Factors 77

CONTENTS

x CONTENTS

Summary 80 Self-Study Questions 81 Notes 81

4 Further Topics in Industry and Competitive Analysis 83

Introduction and Objectives 84 The Limits of Industry Analysis 84 Beyond the Five Forces: Complements, Ecosystems, and Business Models 86 Competitive Interaction: Game Theory and Competitor Analysis 91 Segmentation and Strategic Groups 98 Summary 103 Self-Study Questions 103 Notes 104

5 Analyzing Resources and Capabilities 107

Introduction and Objectives 108 The Role of Resources and Capabilities in Strategy Formulation 108 Identifying Resources and Capabilities 112 Appraising Resources and Capabilities 119 Developing Strategy Implications 123 Summary 128 Self-Study Questions 129 Notes 130

6 Organization Structure and Management Systems: The Fundamentals of Strategy Implementation 131

Introduction and Objectives 132 Strategy Formulation and Strategy Implementation 133 The Fundamentals of Organizing: Specialization,

Cooperation, and Coordination 136 Developing Organizational Capability 139 Organization Design 142 Summary 150 Self-Study Questions 150 Notes 151

PART III BUSINESS STRATEGY AND THE QUEST FOR COMPETITIVE ADVANTAGE 153

7 The Sources and Dimensions of Competitive Advantage 155

Introduction and Objectives 156 How Is Competitive Advantage Established? 156 How Is Competitive Advantage Sustained? 162 Cost Advantage 166 Differentiation Advantage 173 Can Firms Pursue Both Cost and Differentiation Advantage? 184

CONTENTS xi

Summary 185 Self-Study Questions 186 Notes 186

8 Industry Evolution and Strategic Change 189

Introduction and Objectives 190 The Industry Life Cycle 191 The Challenge of Organizational Adaptation and Strategic Change 198 Managing Strategic Change 204 Summary 215 Self-Study Questions 215 Notes 216

9 Technology-Based Industries and the Management of Innovation 219

Introduction and Objectives 220 Competitive Advantage in Technology-Intensive Industries 221 Strategies to Exploit Innovation: How and When to Enter 227 Standards, Platforms, and Network Externalities 232 Implementing Technology Strategies: Internal and External

Sources of Innovation 238 Implementing Technology Strategies: Organizing for Innovation 242 Summary 245 Self-Study Questions 246 Notes 246

PART IV CORPORATE STRATEGY 249

10 Vertical Integration and the Scope of the Firm 251

Introduction and Objectives 252 Transaction Costs and the Scope of the Firm 252 The Benefits and Costs of Vertical Integration 256 Designing Vertical Relationships 263 Summary 266 Self-Study Questions 266 Notes 267

11 Global Strategy and the Multinational Corporation 269

Introduction and Objectives 270 Implications of International Competition for Industry Analysis 271 Analyzing Competitive Advantage in an International Context 273 Internationalization Decisions: Locating Production 276 Internationalization Decisions: Entering a Foreign Market 278 Multinational Strategies: Global Integration versus

National Differentiation 281 Implementing International Strategy: Organizing the

Multinational Corporation 287

xii CONTENTS

Summary 293 Self-Study Questions 294 Notes 295

12 Diversification Strategy 297

Introduction and Objectives 298 Motives for Diversification 299 Competitive Advantage from Diversification 303 Diversification and Performance 307 The Meaning of Relatedness in Diversification 309 Summary 311 Self-Study Questions 312 Notes 312

13 Implementing Corporate Strategy: Managing the Multibusiness Firm 315

Introduction and Objectives 316 The Role of Corporate Management 316 Managing the Corporate Portfolio 317 Managing Linkages Across Businesses 319 Managing Individual Businesses 323 Managing Change in the Multibusiness Corporation 329 Governance of Multibusiness Corporations 333 Summary 337 Self-Study Questions 338 Notes 338

14 External Growth Strategies: Mergers, Acquisitions, and Alliances 340

Introduction and Objectives 341 Mergers and Acquisitions 342 Strategic Alliances 351 Summary 357 Self-Study Questions 357 Notes 358

15 Current Trends in Strategic Management 360

Introduction 361 The New Environment of Business 361 New Directions in Strategic Thinking 365 Redesigning Organizations 369 The Changing Role of Managers 371 Summary 372 Notes 373

CONTENTS xiii

CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS, TENTH EDITION

1 Tough Mudder Inc.: Building Leadership in Mud Runs 375

2 Kering SA: Probing the Performance Gap with LVMH 384

3 Pot of Gold? The US Legal Marijuana Industry 393

4 The US Airline Industry in 2018 403

5 The Lithium-Ion Battery Industry 415

6 Walmart Inc. in 2018: The World’s Biggest Retailer Faces New Challenges 428

7 Harley-Davidson, Inc. in 2018 442

8 BP: Organizational Structure and Management Systems 455

9 Starbucks Corporation, March 2018 462

10 Eastman Kodak’s Quest for a Digital Future 475

11 The New York Times: Adapting to the Digital Revolution 492

12 Tesla: Disrupting the Auto Industry 503

13 Video Game Console Industry in 2018 515

14 Eni SpA: The Corporate Strategy of an International Energy Major 527

15 Zara: Super-Fast Fashion 546

16 Manchester City: Building a Multinational Soccer Enterprise 554

17 Haier Group: Internationalization Strategy 566

18 The Virgin Group in 2018 577

19 Google Is Now Alphabet—But What’s the Corporate Strategy? 587

20 Restructuring General Electric 600

21 Walt Disney, 21st Century Fox, and the Challenge of New Media 617

22 W. L. Gore & Associates: Rethinking Management 629

Glossary 637 Index 643

AUTHOR BIOGRAPHY

Robert M. Grant is Professor of Strategic Management at Bocconi University, Milan, Italy and a Visiting Professor at Cass Business School, London. He was born in Bristol, England and has taught at Georgetown University, London Business School, Univer- sity of British Columbia, California Polytechnic, UCLA, Insead, and University of South Africa. His business experience includes making tires (Firestone) and meat pies (Kraft Foods) and strategy consulting at American Express, Eni, BP, and other companies.

Contemporary Strategy Analysis equips managers and students of management with the concepts and frameworks needed to make better strategic decisions. My goal is a strategy text that reflects the dynamism and intellectual rigor of this fast-developing field of management and takes account of the strategy issues that companies face today.

Contemporary Strategy Analysis endeavors to be both rigorous and relevant. While embodying the latest thinking in the strategy field, it aims to be accessible to students from different backgrounds and with varying levels of experience. I achieve this acces- sibility by combining clarity of exposition, concentration on the fundamentals of value creation, and an emphasis on practicality.

This tenth edition maintains the book’s focus on the essential tasks of strategy: iden- tifying the sources of superior business performance and formulating and implement- ing a strategy that exploits these sources of superior performance. At the same time, the content of the book has been revised to reflect recent developments in the business environment and in strategy research.

Distinctive features of the tenth edition include:

● More explicit guidance on how to apply the tools of strategy to analyze strategic situations and develop strategy recommendations. See, in particular: “Applying Strategy Analysis” in Chapter 1, “Putting Performance Analysis into Practice” in Chapter 2, “Using Industry Analysis to Develop Strategy” in Chapter 3, and “Developing Strategy Implications” [from the analysis of resources and capabil- ities] in Chapter 5.

● Increased emphasis on strategy making under conditions of technological change—especially in digital markets where strategy analysis must take account of complements, network externalities, platform-based competition, and the application of innovative business models to complex business ecosystems (see Chapters 4, 8, and 9).

● Integration of stakeholder interests and corporate social responsibility within a view of the firm as an institution for creating value (Chapter 2).

● An updated approach to strategy implementation. While maintaining an integrated approach to strategy formulation and strategy implementation, Chapters 6, 8, and 13 offers a systematic approach to strategy execution that the role of organizational capabilities and capability development in guid- ing resource allocation, and the design of organizational structures and management systems.

My thanks to my editorial and production team at Wiley, especially to Lise Johnson, Judy Howarth, and S. Indirakumari; and to Mary Fogarty and Nitish Mohan for their

PREFACE TO TENTH EDITION

xvi PREFACE TO TENTH EDITION

assistance. This tenth edition of Contemporary Strategy Analysis has benefitted hugely from feedback and suggestions from users—both instructors and students. I thank you and look forward to continuing my engagement with you. Please feel free to contact me at grant@unibocconi.com.

Robert M. Grant

I INTRODUCTION

1 The Concept of Strategy

1

Strategy is the great work of the organization. In situations of life or death, it is the Tao of survival or extinction. Its study cannot be neglected.

—SUN TZU, THE ART OF WAR

To shoot a great score you need a clever strategy.

—RORY MCILROY, GOLF MONTHLY, MAY 19, 2011

Everybody has a plan until they get punched in the mouth.

—MIKE TYSON, FORMER WORLD HEAVYWEIGHT BOXING CHAMPION

The Concept of Strategy

◆ Introduction and Objectives

◆ The Role of Strategy in Success

◆ The Basic Framework for Strategy Analysis

● Strategic Fit

◆ A Brief History of Business Strategy

● Origins and Military Antecedents

● From Corporate Planning to Strategic Management

◆ Strategy Today

● What Is Strategy?

● Why Do Firms Need Strategy?

● Where Do We Find Strategy?

● Corporate and Business Strategy

● Describing Strategy

◆ How Is Strategy Made? The Strategy Process

● Design versus Emergence

● Applying Strategy Analysis

◆ Strategic Management of Not-For-Profit Organizations

◆ Summary

◆ Self-Study Questions

◆ Notes

O U T L I N E

4 PART I INTRODUCTION

The Role of Strategy in Success

Strategy Capsules 1.1 and 1.2 describe the careers of two individuals, Queen Elizabeth II and Lady Gaga, who have been outstandingly successful in leading their organiza- tions. Although these two remarkable women operate within vastly different arenas, can their success be attributed to any common factors?

For neither of them can success be attributed to overwhelmingly superior resources. For all of Queen Elizabeth’s formal status as head of state, she has very little real power and, in most respects, is a servant of the democratically elected British government. Lady Gaga is clearly a creative and capable entertainer, but few would claim that she entered the music business with outstanding talents as a vocalist, musician, or songwriter.

Introduction and Objectives

Strategy is about achieving success. This chapter explains what strategy is and why it is important to success, for both organizations and individuals. We will distinguish strategy from planning. Strategy is not a detailed plan or program of instructions; it is a unifying theme that gives coherence and direction to the actions and decisions of an individual or an organization.

The principal task of this chapter will be to introduce the basic framework for strategy analysis that underlies this book. This framework comprises two components of strategy analysis: analysis of the external environment of the firm (mainly industry analysis) and analysis of the internal environment (primarily analysis of the firm’s resources and capabilities). We shall then examine what strategy is, how it has developed over time, how to describe the strategy of a business enterprise, and how organizations go about making strategy.

Since the purpose of strategy is to help us to win, we start by looking at the role of strategy in success.

By the time you have completed this chapter, you will be able to:

◆ Appreciate the contribution that strategy can make to successful performance and rec- ognize the essential components of an effective strategy.

◆ Comprehend the basic framework of strategy analysis that underlies this book.

◆ Recognize how strategic management has evolved over the past 60 years.

◆ Identify and describe the strategy of a business enterprise.

◆ Understand how strategy is made within organizations.

◆ Recognize the distinctive features of strategic management among not-for-profit orga- nizations.

CHAPTER 1 THE CONCEPT Of STRATEgy 5

Nor can their success be attributed either exclusively or primarily to luck. Both have experienced difficulties and setbacks at different stages of their careers. Central to their success, however, has been their ability to respond to events—whether positive or neg- ative—with flexibility and clarity of direction.

My contention is that, common to both the 60-year successful reign of Queen Eliza- beth II and the short but stellar career of Lady Gaga, is the presence of a soundly for- mulated and effectively implemented strategy. While these strategies did not exist as explicit plans, for both Queen Elizabeth and Lady Gaga we can discern a consistency of direction based upon clear goals and an ability to bend circumstances toward their desired outcomes.

Elizabeth Windsor’s strategy as queen of the UK and the Commonwealth countries is apparent in the relationship she has created between herself and her people. As queen she is figurehead for the nation, an embodiment of its stability and continuity, a symbol of British family and cultural life, and an exemplar of service and professional dedication.

Lady Gaga’s remarkable success during 2008–18 reflects a career strategy that uses music as a gateway to celebrity status, which she has built by combining the generic tools of star creation—shock value, fashion leadership, and media presence—with a uniquely differentiated image that has captured the attention and loyalty of teenagers and young adults throughout the world.

What do these two examples tell us about the characteristics of a strategy that are conducive to success? In both stories, four common factors stand out (Figure 1.1):

● Goals that are consistent and long term: Both Queen Elizabeth and Lady Gaga display a focused commitment to career goals that they have pursued steadfastly.

● Profound understanding of the competitive environment: The ways in which both Elizabeth II and Lady Gaga define their roles and pursue their careers reveal a deep and insightful appreciation of the external environ- ments in which they operate. Queen Elizabeth has been alert both to the changing political environment in which the monarchy is situated and to the mood and needs of the British people. Lady Gaga’s business model and stra- tegic positioning show a keen awareness of the changing economics of the music business, the marketing potential of social networking, and the needs of Generation Y.

● Objective appraisal of resources: Both Queen Elizabeth and Lady Gaga have been adept at recognizing and deploying the resources at their disposal, and also building those resources—for the Queen, this has included her family, the royal household, and the recipients of royal patronage; for Lady Gaga, it com- prises the creative talents of her Haus of Gaga.

● Effective implementation: Without effective implementation, the best-laid strat- egies are of little use. Critical to the success of Queen Elizabeth and Lady Gaga has been their effectiveness coordinating and leading “ecosystems” of sup- portive individuals and organizations.

These observations about the role of strategy in success can be made in relation to most fields of human endeavor. Whether we look at warfare, chess, politics, sport, or business, the success of individuals and organizations is seldom the outcome of a

6 PART I INTRODUCTION

purely random process. Nor is superiority in initial endowments of skills and resources typically the determining factor. Strategies that build on these four elements almost always play an influential role.

Look at the “high achievers” in any competitive area. Whether we review the world’s political leaders, the CEOs of the Fortune 500, or our own circles of friends and acquaintances, those who have achieved outstanding success in their careers are seldom those who possessed the greatest innate abilities. Success has gone to those who managed their careers most effectively, typically by combining these four strategic factors. They are goal focused; their career goals have taken pri- macy over the multitude of life’s other goals—friendship, love, leisure, knowledge, spiritual fulfillment—which the majority of us spend most of our lives juggling and reconciling. They know the environments within which they play and tend to be fast learners in terms of recognizing the paths to advancement. They know them- selves well in terms of both strengths and weaknesses. Finally, they implement

STRATEGY CAPSULE 1.1

Queen Elizabeth II and the House of Windsor

By late 2018, Elizabeth Windsor had been queen for 66

years—longer than any of her predecessors.

At her birth on April 21, 1926, 45 other countries were

hereditary monarchies. By 2018, the forces of democracy,

modernity, and reform had reduced these to 26—mostly

small autocracies such as Bahrain, Qatar, Oman, Kuwait,

Bhutan, and Lesotho. Monarchies had also survived in

Denmark, Sweden, Norway, the Netherlands, and Bel-

gium, but these royal families had lost most of their

wealth and privileges.

By contrast, the British royal family retains con-

siderable wealth—the Queen’s personal net worth

is about $500 million—not including the $10 billion

worth of palaces and other real estate owned by the

nation but used by her and her family. Queen Eliza-

beth’s formal status is head of state of the UK and 15

other Commonwealth countries (including Canada and

Australia), head of the Church of England, and head of

the British armed forces. Yet none of these positions

confers any decision-making power—her influence

comes from the informal role she has established for

herself. According to her website, she “has a less formal

role as Head of Nation” where she “acts as a focus for

national identity, unity and pride; gives a sense of sta-

bility and continuity; officially recognises success and

excellence; and supports the ideal of voluntary service”

(www.royal.gov.uk).

How has Queen Elizabeth been able to retain not

just the formal position of the monarchy but also its

status, influence, and wealth despite so many chal-

lenges? These include wrenching social and political

changes and the trials of leading such a famously

dysfunctional family—including the failed marriages

of most of her children and the controversy that sur-

rounded the life and death of her daughter-in-law,

Diana, Princess of Wales.

At the heart of Elizabeth’s sustaining of the British

monarchy has been her single-minded devotion to what

she regards as her duties to the monarchy and to the

nation. In cultivating her role as leader of her nation, she

has preserved her political neutrality—even when she

has disagreed with her prime ministers (notably with

CHAPTER 1 THE CONCEPT Of STRATEgy 7

their career strategies with commitment, consistency, and determination. As the management guru Peter Drucker observed: “we must learn how to be the CEO of our own career.”1

There is a downside, however. Focusing on a single goal may lead to outstanding success but may be matched by dismal failure in other areas of life. Many people who have reached the pinnacles of their careers have led lives scarred by poor relationships with friends and families and stunted personal development. These include Howard Hughes and Jean Paul Getty in business, Richard Nixon and Joseph Stalin in politics, Elvis Presley and Marilyn Monroe in entertainment, Tiger Woods and Boris Becker in sport, and Bobby Fischer in chess. For most of us, personal fulfillment is likely to require broad-based rather than narrowly focused goals.2

These same ingredients of successful strategies—clear goals, understanding the competitive environment, resource appraisal, and effective implementation—form the key components of our analysis of business strategy.

Margaret Thatcher’s “socially divisive” policies and Tony

Blair’s sending troops to Iraq and Afghanistan).

Through her outreach activities she promotes British

influence, British culture, and British values within the

wider world. She has made multiple visits to each of the

54 Commonwealth nations, including 27 to Canada and

16 to Australia.

The growing unacceptability of hereditary privilege

and the traditional British class system has required her

to reposition the royal family from being the leader of

the ruling class to embodying the nation as a whole. To

make her and her family more inclusive and less socially

stereotyped she has cultivated involvement with

popular culture, with ordinary people engaged in social

service and charitable work, and she has endorsed the

marriage of her grandsons William and Harry—the first

members of the royal family to marry outside the ranks

of the aristocracy.

Elizabeth has been adept at exploiting new media

for communicating both with her subjects and with a

wider global audience: initially through television, more

recently using the web, Twitter, and Facebook. Her press

and public relations staff comprises top professionals

who report to her private secretary.

While respecting tradition and protocol, she adapts

in the face of pressing circumstances. The death of her

daughter-in-law, Diana, created difficult tensions bet-

ween her responsibilities as mother and grandmother

and her need to show leadership to a grieving nation.

In responding to this crisis she recognized the need to

depart from established traditions.

Elizabeth has made effective use of the resources

available to her—especially the underlying desire of

the British people for continuity and their inherent

distrust of their political leaders. By positioning

herself above the political fray and emphasizing her

lineage—including the prominent public roles of her

mother and her children and grandchildren—she

reinforces the legitimacy of herself, her family, and the

institution they represent. She has also exploited her

powers of patronage, using her formal position to cul-

tivate informal relationships with both political and

cultural leaders.

The success of Elizabeth’s 66-year reign is indicated

by the popular support for her personally and for the

institution of the monarchy. Outside of Northern Ireland

and Quebec, republicanism is weak throughout the

British Commonwealth.

8 PART I INTRODUCTION

STRATEGY CAPSULE 1.2

Lady gaga and the Haus of gaga

Stefani Joanne Angelina Germanotta, better known as

Lady Gaga, is one of the most successful popular enter-

tainers of the 21st century. Since her first album, The

Fame, in 2008, all four of her albums have topped the Bill-

board charts; she has also topped Forbes Celebrity 100 list,

and generated $560 million in ticket sales from her five

concert tours between 2009 and 2017.

Since dropping out of NYU’s Tisch School of the Arts

in 2005, Germanotta has shown total commitment to

advancing her musical career, first as a songwriter, and

then developing her Lady Gaga persona.

Gaga’s music is a catchy mix of pop and dance, well

suited to dance clubs and radio airplay. It features good

melodies, Gaga’s capable vocals, and her reflections on

society and life, but it is hardly exceptional or innovative:

music critic Simon Reynolds described it as: “ruthlessly

catchy, naughties pop glazed with Auto-Tune and under-

girded with R&B-ish beats.”

However, music is only one element in the Lady Gaga

phenomenon—her achievement is not so much as a

singer or songwriter as in establishing a persona which

transcends pop music. Like David Bowie and Madonna

before her, Lady Gaga is famous for being Lady Gaga.

To do this she has created a multimedia, multifaceted

offering that comprises multiple components including

music, visual appearance, newsworthy events, a distinc-

tive attitude and personality, and a set of values with

which fans can identify.

Key among these is visual impact and theatricality.

Her hit records are promoted by visually stunning music

videos that have won Grammy awards and broken

records for numbers of YouTube downloads. Most striking

of all has been Lady Gaga’s dress and overall appearance,

which have set new standards in eccentricity, innovation,

and impact. Individual outfits—her plastic bubble dress,

meat dress, and “decapitated-corpse dress”—together

with weird hair-dos, extravagant hats, and extreme foot-

wear—are as well-known as her hit songs. The range of

visual images she projects means that her every appear-

ance creates a buzz of anticipation.

Lady Gaga has developed a business model adapted

to the post-digital world of entertainment. Like Web 2.0

pioneers such as Facebook and Twitter, Gaga has fol-

lowed the model: first build market presence, and then

think about monetizing that presence. By 2012, her

YouTube views, Facebook likes, and Twitter followers

had made her the “most popular living musician online.”

Her networking with fans includes Gagaville, an interac-

tive game developed by Zynga, and The Backplane, a

music-based social network.

Her emphasis on visual imagery takes account of the

means through which media popularity is converted

into revenues. While music royalties are important, con-

certs are her primary revenue source. Other revenue

sources—endorsements, product placement in videos

and concerts, merchandizing deals, and media appear-

ances—also link closely with her visual presence.

A distinctive feature of Gaga’s market positioning

is her relationship with her fans. The devotion of her

fans—her “Little Monsters”—is based less on their desire

to emulate her look as upon empathy with her values

and attitudes: Gaga’s images are social statements of

non-conformity rather than fashion statements. In com-

municating her experiences of alienation and bullying at

school and her values of individuality, sexual freedom,

and acceptance of differences, she has built a global fan

base of unusual loyalty and commitment. The sense of

belonging is reinforced by gestures and symbols such as

the “Monster Claw” greeting and the “Manifesto of Little

Monsters.” As “Mother Monster,” Gaga is spokesperson

and guru for this community.

Lady Gaga’s showmanship and theatricality are sup-

ported by The Haus of Gaga, a creative workshop modeled

on Andy Warhol’s “Factory.” It comprises a creative director

who coordinates a team of choreographers, fashion

designers, hair stylists, photographers, set designers, song-

writers, musicians, and marketing professionals.

Sources: M. Sala, “The Strategy of Lady Gaga,” BSc thesis Boc- coni University, Milan, June 2011; http://www.biography.com/ people/lady-gaga-481598, accessed August 24, 2017.

http://www.biography.com/people/lady-gaga-481598
CHAPTER 1 THE CONCEPT Of STRATEgy 9

The Basic Framework for Strategy Analysis

Figure 1.2 shows the basic framework for strategy analysis that we shall use throughout the book. The four elements of a successful strategy shown in Figure 1.1 are recast into two groups—the firm and the industry environment—with strategy forming a link between the two. The firm embodies three of these elements: goals and values (“simple, consistent, long-term goals”), resources and capabilities (“objective appraisal of resources”), and structure and systems (“effective implementation”). The industry environment embodies the fourth (“profound understanding of the competitive envi- ronment”) and is defined by the firm’s relationships with competitors, customers, and suppliers.

This view of strategy as a link between the firm and its industry environment has close similarities with the widely used SWOT framework. However, as I explain in Strategy Capsule 1.3, a two-way classification of internal and external forces is superior to the four-way SWOT framework.

The task of business strategy, then, is to determine how the firm will deploy its resources within its environment and so satisfy its long-term goals and how it will orga- nize itself to implement that strategy.

Profound understanding of the

competitive environment

Objective appraisal

of resources

EFFECTIVE IMPLEMENTATION

Clear, consistent, long-term

goals

Successful strategy

FIGURE 1.1 Common elements in successful strategies

STRATEGY

THE FIRM

• Goals and Values • Resources and Capabilities • Structure and Systems

THE INDUSTRY ENVIRONMENT

• Competitors • Customers • Suppliers

FIGURE 1.2 The basic framework: Strategy as a link between the firm and its environment

10 PART I INTRODUCTION

Strategic Fit

Fundamental to this view of strategy as a link between the firm and its external envi- ronment is the notion of strategic fit. This refers to the consistency of a firm’s strategy, first, with the firm’s external environment and, second, with its internal environment, especially with its goals and values and resources and capabilities. A major reason for companies’ decline and failure is a strategy that lacks consistency with either the internal or the external environment. The woes of the Italian airline, Alitalia, may be attributed to a strategy that failed to respond to competition from budget airlines such as Ryanair and EasyJet. Other companies struggle to align their strategies to their internal resources and capabilities. A critical issue for Nintendo will be whether it possesses the financial and technological resources to continue to compete head-to-head with Sony and Microsoft in the market for video game consoles.

The concept of strategic fit also relates to the internal consistency among the differ- ent elements of a firm’s strategy. An effective strategy is one in which all the decisions and actions that make up the strategy are aligned with one another to create a con- sistent strategic position and direction of development. This notion of internal fit is central to Michael Porter’s conceptualization of the firm as an activity system. Porter

STRATEGY CAPSULE 1.3

What’s Wrong with SWOT?

Distinguishing between the external and the internal

environment of the firm is common to most approaches

to strategy analysis. The best-known and most widely

used of these is the “SWOT” framework, which classifies

the various influences on a firm’s strategy into four cat-

egories: Strengths, Weaknesses, Opportunities, and

Threats. The first two—strengths and weaknesses—

relate to the internal environment of the firm, primarily its

resources and capabilities; the last two—opportunities

and threats—relate to the external environment.

Which is better, a two-way distinction between

internal and external influences or the four-way SWOT

taxonomy? The key issue is whether it is sensible and

worthwhile to classify internal factors into strengths

and weaknesses and external factors into opportu-

nities and threats. In practice, these distinctions are

problematic.

Was Zlatan Ibrahimovic a strength or a weakness for

Manchester United? As the team’s top scorer during the

2016–17 season and ranking among the world’s top-10

players, he was a strength. But as a player whose best

days were behind him and whose dominant presence

intimidated his younger team-mates, he was a weakness.

Is global warming a threat or an opportunity for the

world’s automobile producers? By encouraging higher

taxes on motor fuels and restrictions on car use, it is a threat.

By encouraging consumers to switch to fuel-efficient and

electric cars, it offers an opportunity for new sales.

The lesson here is that classifying external factors

into opportunities and threats, and internal factors into

strengths and weaknesses, is arbitrary. What is important

is to carefully identify the external and internal forces that

impact the firm, and then analyze their implications.

In this book, I will follow a simple two-way classification

of internal and external factors and avoid any premature

categorization into strengths or weaknesses, and oppor-

tunities or threats.

Note: For more on SWOT see: T. Hill and R. Westbrook, “SWOT Analysis: It’s Time for a Product Recall,” Long Range Planning, 30 (February 1997): 46–52; and M. Venzin, “SWOT Analysis: Such a Waste of Time?” (February 2015) http://ideas.sdabocconi.it/ strategy/archives/3405.

http://ideas.sdabocconi.it/strategy/archives/3405
CHAPTER 1 THE CONCEPT Of STRATEgy 11

states that “Strategy is the creation of a unique and differentiated position involving a different set of activities.”3 The key is how these activities fit together to form a consis- tent, mutually reinforcing system. Ryanair’s strategic position is as Europe’s lowest-cost airline providing no-frills flights to budget-conscious travelers. This is achieved by a set of activities that fit together to support that positioning (Figure 1.3).

The concept of strategic fit is one component of a set of ideas known as contingency theory. Contingency theory postulates that there is no single best way of organizing or managing. The best way to design, manage, and lead an orga- nization depends upon circumstances—in particular, the characteristics of that orga- nization’s environment.4

A Brief History of Business Strategy

Origins and Military Antecedents

Enterprises need business strategies for much the same reason that armies need mili- tary strategies—to give direction and purpose, to deploy resources in the most effec- tive manner, and to coordinate the decisions made by different individuals. Many of the concepts and theories of business strategy have their antecedents in military strategy. The term strategy derives from the Greek word strategia, meaning “general- ship.” However, the concept of strategy predates the Greeks: Sun Tzu’s classic, The Art of War, from about 500 BC is regarded as the first treatise on strategy.5

Military strategy and business strategy share a number of common concepts and principles, the most basic being the distinction between strategy and tactics. Strategy is the overall plan for deploying resources to establish a favorable position; a tactic is a scheme for a specific action. Whereas tactics are concerned with the maneu- vers necessary to win battles, strategy is concerned with winning the war. Strategic decisions, whether in military or business spheres, share three common characteristics:

● They are important.

● They involve a significant commitment of resources.

● They are not easily reversible.

Low operating costs

Secondary airports

Point-to-point routes

25-min turnaround

High aircraft utilization

No-frills product offering

High labor productivity

Low prices; separate charging

for additional services

Single class; no reserved seating

No baggage transfer

Internet-only check-in

Job f lexibility

Direct sales only

Boeing 737s only

FIGURE 1.3 Ryanair’s activity system

12 PART I INTRODUCTION

Many of the principles of military strategy have been applied to business situations. These include the relative strengths of offensive and defensive strategies; the merits of outflanking over frontal assault; the roles of graduated responses to aggressive initia- tives; the benefits of surprise; and the benefits of deception, envelopment, escalation, and attrition.6 At the same time, there are major differences between business compe- tition and military conflict. The objective of war is (usually) to defeat the enemy. The purpose of business rivalry is seldom so aggressive: most business enterprises seek to coexist with their rivals rather than to destroy them.

Despite parallels between military and business strategy, we lack a general theory of strategy. The publication of Von Neumann and Morgenstern’s Theory of Games in 1944 gave rise to the hope that a general theory of competitive behavior would emerge. Since then, game theory has revolutionized the study of competitive interaction, not just in business but in politics, military studies, and international relations as well. Yet, as we shall see in Chapter 4, game theory has achieved only limited success as a broadly applicable general theory of strategy.7

From Corporate Planning to Strategic Management

The evolution of business strategy has been driven more by the practical needs of business than by the development of theory. During the 1950s and 1960s, senior exec- utives experienced increasing difficulty in coordinating decisions and maintaining con- trol in companies that were growing in size and complexity. While new techniques of discounted cash flow analysis allowed more rational choices over individual investment projects, firms lacked systematic approaches to their long-term development. Corpo- rate planning (also known as long-term planning) was developed during the late- 1950s to serve this purpose. Macroeconomic forecasts provided the foundation for the new corporate planning. The typical format was a five-year corporate planning document that set goals and objectives, forecasted key economic trends (including market demand, the company’s market share, revenue, costs, and margins), established priorities for different products and business areas of the firm, and allocated capital expenditures. The new techniques of corporate planning proved particularly useful for guiding the diversification strategies that many large companies pursued during the 1960s.8 By the mid-1960s, most large US and European companies had set up corpo- rate planning departments. Strategy Capsule 1.4 provides an example of this formalized corporate planning.

By the early 1980s, confidence in corporate planning had been severely shaken. Not only did diversification fail to deliver the anticipated synergies, but the oil shocks of 1974 and 1979 ushered in a new era of macroeconomic instability, while Western com- panies came under increasing pressure from Japanese, Korean, and Southeast Asian competitors. Companies could no longer plan their investments and actions five years ahead—they couldn’t forecast that far.

The result was a shift in emphasis from planning a company’s growth path to positioning the company so that it could best exploit available opportunities for profit. This transition from corporate planning to what became called strategic management involved a focus on competition as the central characteristic of the business environment and on performance maximization as the primary goal of strategy.

This emphasis on strategy as a quest for performance directed attention to the sources of profitability. At the end of the 1970s, Michael Porter pioneered the applica- tion of industrial organization economics to analyzing the profit potential of different

CHAPTER 1 THE CONCEPT Of STRATEgy 13

industries and markets.9 Other studies examined how strategic variables—notably market share—determined how profits were distributed between the firms within an industry.10

During the 1990s, the focus of strategy analysis shifted from the sources of profit in the external environment to the sources of profit within the firm. The resource-based view of the firm identified the resources and capabilities of the firm as its main source of competitive advantage and the primary basis for formulating strategy.11 This emphasis on internal resources and capabilities has encouraged firms to identify how they are different from their competitors and to design strategies that exploit these differences.

During the 21st century, new challenges have continued to shape the princi- ples and practice of strategy. Digital technologies have had a massive impact on the competitive dynamics of many industries, creating winner-take-all markets and standards wars.12 Disruptive technologies13 and accelerating rates of change have meant that strategy has become less and less about plans and more about creating options of the future,14 fostering strategic innovation,15 and seeking the “blue oceans” of uncontested market space.16 The complexity of these challenges has meant that being self-sufficient is no longer viable for most firms—alliances and other forms of collaboration are an increasingly common feature of firms’ strategies.

The 2008–2009 financial crisis triggered closer scrutiny of purpose of business. Dis- illusion with the excesses and unfairness of market capitalism has renewed interest in corporate social responsibility, ethics, sustainability, and the legitimacy of profit as the dominant goal of business.17

Figure 1.4 summarizes the main developments in strategic management since the mid-20th century.

STRATEGY CAPSULE 1.4

Corporate Planning in a Large US Steel Company, 1965

The first step in developing long-range plans was to

forecast the product demand for future years. After cal-

culating the tonnage needed in each sales district to pro-

vide the “target” fraction of the total forecast demand, the

optimal production level for each area was determined.

A computer program that incorporated the projected

demand, existing production capacity, freight costs, etc.

was used for this purpose.

When the optimum production rate in each area was

found, the additional facilities needed to produce the

desired tonnage were specified. Then, the capital costs

for the necessary equipment, buildings, and layout were

estimated by the chief engineer of the corporation and

various district engineers. Alternative plans for achiev-

ing company goals were also developed for some areas,

and investment proposals were formulated after consid-

ering the amount of available capital and the company

debt policy. The vice president who was responsible for

long-range planning recommended certain plans to the

president, and, after the top executives and the board

of directors reviewed alternative plans, they made the

necessary decisions about future activities.

Source: H. W. Henry, Long Range Planning Processes in 45 Industrial Companies (Englewood Cliffs, NJ: Prentice-Hall, 1967): 65.

14 PART I INTRODUCTION

1950 1960

• Operational budgeting • DCF capital budgeting

Financial Budgeting:

1970

Corporate Planning: • Corporate plans based on medium-term economic forecasts

1980 Emergence of Strategic Management:

• Industry analysis and competitive positioning 1990

The Quest for Competitive Advantage: • Emphasis on resources and capabilities • Shareholder value maximization

2000 2018

• Refocusing, outsourcing, delayering, cost cutting

Adapting to Turbulence: • Adapting to and exploiting digital technology • The quest for flexibility and strategic innovation • Strategic alliances • Social and environmental responsibility

FIGURE 1.4 Evolution of strategic management

Strategy Today

What Is Strategy?

In its broadest sense, strategy is the means by which individuals or organizations achieve their objectives. Table 1.1 presents a number of definitions of the term strategy. Common to most definitions is the notion that strategy involves setting goals, allocating resources, and establishing consistency and coherence among decisions and actions.

Yet, as we have seen, the conception of firm strategy has changed greatly over the past half-century. As the business environment has become more unstable and unpredictable, so strategy has become less concerned with detailed plans and more about guidelines for success. This is consistent with the introductory examples to this chapter. Neither Queen Elizabeth nor Lady Gaga appears to have articulated any explicit strategic plan, but the consistency we discern in their actions suggests both possessed clear ideas of what they wanted to achieve and how they would achieve it. This shift in emphasis from strategy as plan to strategy as direction does not imply any downgrading of the role of strategy. The more turbulent the environment, the more strategy must embrace flexibility and responsiveness. But it is precisely under these conditions that strategy becomes more, rather than less, important. When the firm is buffeted by unforeseen threats and where new opportunities are constantly appearing, then strategy becomes the compass that can navigate the firm through stormy seas.

CHAPTER 1 THE CONCEPT Of STRATEgy 15

Why Do Firms Need Strategy?

This transition from strategy as plan to strategy as direction raises the question of why firms (or other types of organization) need strategy. Strategy assists the effective management of organizations, first, by enhancing the quality of decision-making, sec- ond, by facilitating coordination, and, third, by focusing organizations on the pursuit of long-term goals.

Strategy as Decision Support Strategy is a pattern or theme that gives coher- ence to the decisions of an individual or organization. But why can’t individuals or organizations make optimal decisions in the absence of such a unifying theme? Consider the 1997 “man versus machine” chess epic in which Garry Kasparov was defeated by IBM’s “Deep Blue” computer. Deep Blue did not need strategy. Its phe- nomenal memory and computing power allowed it to identify its optimal moves based on a huge decision tree.18 Kasparov—although the world’s greatest chess player—was subject to bounded rationality: his decision analysis was subject to the cognitive limitations that constrain all human beings.19 For him, a strategy offered guidance that assisted positioning and helped create opportunities. Strategy improves decision-making in several ways:

● It simplifies decision-making by constraining the range of decision alternatives considered and acting as a heuristic—a rule of thumb that reduces the search required to find an acceptable solution to a decision problem.

● The strategy-making process permits the knowledge of different individuals to be pooled and integrated.

● It facilitates the use of analytic tools—the frameworks and techniques that we will encounter in the ensuing chapters of this book.

Strategy as a Coordinating Device The central challenge of management is coordinating the actions of multiple organizational members. Strategy acts as a com- munication device to promote coordination. Statements of strategy are a means by

TABLE 1.1 Some definitions of strategy

● Strategy: a plan, method, or series of actions designed to achieve a specific goal or effect. —Wordsmyth Dictionary (www.wordsmyth.net)

● The determination of the long-run goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.

—Alfred Chandler, Strategy and Structure (Cambridge, MA: MIT Press, 1962)

● Strategy: “a cohesive response to an important challenge.” —Richard Rumelt, Good Strategy/Bad Strategy

(New York: Crown Business, 2011): 6.

● Lost Boy: “Injuns! Let’s go get ’em!” John Darling: “Hold on a minute. First we must have a strategy.” Lost Boy: “Uhh? What’s a strategy?” John Darling: “It’s, er ... it’s a plan of attack.”

—Walt Disney’s Peter Pan

16 PART I INTRODUCTION

which the CEO can communicate the identity, goals, and positioning of the company to all organizational members. The strategic planning process provides a forum in which views are exchanged and consensus developed; once formulated, strategy can be translated into goals, commitments, and performance targets that ensure that the organization moves forward in a consistent direction.

Strategy as Target Strategy is forward looking. It is concerned not only with how the firm will compete now, but also with what the firm will become in the future. A forward-looking strategy establishes direction for the firm’s development and sets aspirations that can motivate and inspire members of the organization. Gary Hamel and C. K. Prahalad use the term strategic intent to describe this desired strategic position: “strategic intent creates an extreme misfit between resources and ambitions. Top management then challenges the organization to close the gap by building new competitive advantages.”20 The implication is that strategy should embrace stretch and resource leverage and not be overly constrained by considerations of strategic fit.21 Jim Collins and Jerry Porras make a similar point: US companies that have been sector leaders for 50 years or more have all generated commitment and drive through setting “Big, Hairy, Ambitious Goals.”22 Striving, inspirational goals are found in most organiza- tions’ statements of vision and mission. One of the best known is that set by President Kennedy for NASA’s space program: “before this decade is out, to land a man on the moon and return him safely to earth.” However, goals on their own do not constitute a strategy. Unless an organization’s goals are backed by guidelines for their attainment, they are likely to be either meaningless or delusional.23