business strategy

Johnson, Whittington and Scholes, Exploring Strategy, 9th Edition, © Pearson Education Limited 2011

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26177 Business Strategy for Accountants


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Learning outcomes

• Summarise the strategy of an organisation in a ‘strategy statement’.

• Identify key issues for an organisation’s strategy according to the Exploring Strategy model.

• Distinguish between corporate, business and operational strategies.

• Understand how different people contribute to strategy at work.

• Appreciate the contributions of different academic disciplines and theoretical lenses to practical strategy analysis.


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Definitions of strategy (1)

• ‘..the determination of the long-run goals and objectives of an enterprise and the adoption of courses of action and the allocation of resource necessary for carrying out these goals’Alfred Chandler

• ‘Competitive strategy is about being different. It means deliberately choosing a different set of activities to deliver a unique mix of value’Michael Porter

Sources:A.D. Chandler, Strategy and Structure: Chapters in the History of American Enterprise, MIT Press, 1963, p. 13M.E. Porter, ‘What is strategy?’, Harvard Business Review, 1996, November–December,p. 60


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Definitions of strategy (2)

• ‘..a pattern in a stream of decisions’Henry Mintzberg

• ‘..the long-term direction of an organisation’Exploring Strategy

Sources:H. Mintzberg, Tracking Strategy: Toward a General Theory, Oxford University Press, 2007, p. 3


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Strategic decisions


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Three horizons for strategy (1)

• Horizon 1 :

Extend and defend core business.

• Horizon 2 :

Build emerging businesses.

• Horizon 3 :

Create viable options.


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Three horizons for strategy (2)

Figure 1.2 Three horizons for strategySource: M. Baghai, S. Coley and D. While, The Alchemy of Growth, 2000, Texere Publishers: Figure 1.1, p. 5


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Stakeholders

Stakeholders are those individuals or groups that depend on an organisation to fulfil their own goals and on whom, in turn, the organisation depends.


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Levels of strategy (1)

Operational strategy

Business-level strategy

Corporate-level

strategy

News Corporation diversifying from print journalism into social networking.

Website and marketing improvements at My Space to attract more users.

MySpace engineers increasing processingCapacity.


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Levels of strategy (2)

• Corporate Level Strategy is concerned with the overall purpose and scope of an organisation and how to add value to business units.

• Business Level Strategy is concerned with the way a business seeks to compete successfully in its particular market.

• Operational Level Strategy is concerned with how different parts of the organisation deliver the strategy in terms of managing resources, processes and people.


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Strategy statements

Strategy statements should have three main themes:

• the fundamental goals that the organisation seeks, which draw on the stated mission, vision and objectives

• the scope or domain of the organisation’s activities

• and the particular advantages or capabilities it has to deliver all these.


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Working with strategy (1)

All managers are concerned with strategy:• Top managers frequently formulate and

control strategy but may also involve others in the process.

• Middle and lower level managers have to meet strategic objectives and deal with constraints.

• All managers have to communicate strategy to their teams.

• All managers can contribute to the formation of strategy through ideas and feedback.


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Working with strategy (2)

Organisations may also use strategy specialists:

• Many large organisations have in-house strategic planning or analyst roles.

• Strategy consultants can be engaged from one of many general management consulting firms (e.g. Accenture, IBM Consulting, PwC).

• There are a growing number of specialist strategy consulting firms (e.g. McKinsey &Co, The Boston Consulting Group).


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Strategy’s three branches

Figure 1.3 Strategy’s three branches


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The exploring strategy model

Figure 1.4 The Exploring Strategy Model


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Strategic position

The Strategic Position

Environment

Culture

Goals, Objectives or

PurposeCapability


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Strategic position (2)

Fundamental questions for Strategic Position:

• What are the environmental opportunities and threats?

• What are the organisation’s strengths and weaknesses?

• What is the basic purpose of the organisation?• How does culture shape strategy?


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Strategic choices (1)

Strategic choices involve the options for strategy in terms of both the directions in which strategy might move and the methods by which strategy might be pursued.


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Strategic Choices

Business-level

Innovation

InternationalCorporate-

level

Acquisitions & Alliances


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Fundamental questions for Strategic Choice:

• How should business units compete?• Which businesses to include in the portfolio?• Where should the organisation compete

internationally?• Is the organisation innovating appropriately?• Should the organisation buy other companies,

form alliances or go it alone?


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Strategy in action (1)

Strategy in action is about how strategies are formed and how they are implemented.

The emphasis is on the practicalities of managing.


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Strategy in Action

Processes

Changing

EvaluatingOrganising

Practice


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Fundamental questions for Strategy in Action

• Which strategies are suitable, acceptable and feasible?

• What kind of strategy-making process is needed?

• What are the required organisation structures and systems?

• How should the organisation manage necessary changes?

• Who should do what in the strategy process?


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Exploring strategy in different contexts

The Exploring Strategy Model can be applied in many contexts.In each context the balance of strategic issues differs:• Small Businesses (e.g. Purpose and Growth

issues)• Multinational Corporations (e.g. Geographical

Scope and Structure/Control issues)• Public Sector Organisations (e.g. Service/Quality

and Managing Change issues)• Not For Profit Organisations (e.g. Purpose and

Funding issues)


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The strategy lenses (1)

The strategy lenses are ways of looking at strategy issues differently in order to generate many insights. Looking at problems in different ways will raise new issues and new solutions.


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The strategy lenses (2)

Strategy can be seen as:

• Design

• Experience

• Variety (Ideas)

• Discourse


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The strategy lenses summary

Table C.ii A summary of the strategy lenses


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Chapter summary (1)

• Strategy is the long-term direction of an organisation. A ‘strategy statement’ should cover the goals of an organisation, the scope of the organisation’s activities and the advantages or capabilities the organisation brings to these goals and activities.

• Corporate-level strategy is concerned with an organisation’s overall scope; business-level strategy is concerned with how to compete; and operational strategy is concerned with how resources, processes and people deliver corporate- and business-level strategy.

• Strategy work is done by managers throughout an organisation, as well as specialist strategic planners and strategy consultants.


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Chapter summary (2)

• Research on strategy context, content and process shows how the analytical perspectives of economics, sociology and psychology can all provide practical insights for approaching strategy issues

• The Exploring Strategy Model has three major elements: understanding the strategic position, making strategic choices for the future and managing strategy-in-action.

• Strategic issues are best seen from a variety of perspectives, as exemplified by the four strategy lenses of design, experience, variety and discourse.


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The Strategic PositionThe Environment


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The strategic position

• How to analyse an organisation’s position in the external environment.

• How to analyse the determinants of strategic capability – resources, competences and the linkages between them.

• How to understand an organisation’s purposes, taking into account corporate governance, stakeholder expectations and business ethics.

• How to address the role of history and culture in determining an organisation’s position.

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Learning outcomes (1)

• Analyse the broad macro-environment of organisations in terms of political, economic, social, technological, environmental (‘green’) and legal factors (PESTEL).

• Identify key drivers in this macro-environment and use these key drivers to construct alternative scenarios with regard to environmental change.


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Learning outcomes (2)

• Use Porter’s five forces analysis in order to define the attractiveness of industries and sectors and to identify their potential for change.

• Identify successful strategic groups, valuable market segments and attractive ‘Blue Oceans’ within industries.

• Use these various concepts and techniques in order to recognise threats and opportunities in the marketplace.


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Layers of the business environment

Figure 2.1 Layers of the business environment


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The PESTEL framework (1)

The PESTEL framework categorises environmental influences into six main types:

political, economic,

social, technological,

environmental legal

Thus PESTEL provides a comprehensive list of influences on the possible success or failure of particular strategies.


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The PESTEL framework (2)

• Political Factors: For example, Government policies, taxation changes, foreign trade regulations, political risk in foreign markets, changes in trade blocks (EU).

• Economic Factors: For example, business cycles, interest rates, personal disposable income, exchange rates, unemployment rates, GDP trends.

• Socio-cultural Factors: For example, population changes, income distribution, lifestyle changes, consumerism, changes in culture and fashion.


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The PESTEL framework (3)• Technological Factors: For example, new

discoveries and technology developments, ICT innovations, rates of obsolescence, increased spending on R&D.

• Environmental (‘Green’) Factors: For example, environmental protection regulations, energy consumption, global warming, waste disposal and re-cycling.

• Legal Factors: For example, competition laws, health and safety laws, employment laws, licensing laws, IPR laws.


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Key drivers of change

Key drivers for change:

• The environmental factors likely to have a high impact on the success or failure of strategy.

• For example, the birth rate is a key driver for those planning nursery education provision in the public sector.

• Typically key drivers vary by industry or sector.


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Using the PESTEL framework

• Apply selectively –identify specific factors which impact on the industry, market and organisation in question.

• Identify factors which are important currently but also consider which will become more important in the next few years.

• Use data to support the points and analyse trends using up to date information

• Identify opportunities and threats – the main point of the exercise!


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Scenarios

Scenarios are detailed and plausible views of how the environment of an organisation might develop in the future based on key drivers of change about which there is a high level of uncertainty.

• Build on PESTEL analysis .• Do not offer a single forecast of how the environment will change.• An organisation should develop a few alternative scenarios (2–4) to analyse future strategic options.


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Carrying out scenario analysis (1)

• Identify the most relevant scope of the study – the relevant product/market and time span.

• Identify key drivers of change – PESTEL factors that have the most impact in the future but have uncertain outcomes.

• For each key driver select opposing outcomes where each leads to very different consequences.


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Carrying out scenario analysis (2)

• Develop scenario ‘stories’ - That is, coherent and plausible descriptions of the environment that result from opposing outcomes

• Identify the impact of each scenario on the organisation and evaluate future strategies in the light of the anticipated scenarios.

• Scenario analysis is used in industries with long planning horizons for example, the oil industry or airlines.


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Scenarios for the global financial system, 2020

Illustration 2.2


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Industries, markets and sectors

An industry is a group of firms producing products and services that are essentially the same. For example, automobile industry and airline industry.

A market is a group of customers for specific products or services that are essentially the same (e.g. the market for luxury cars in Germany).

A sector is a broad industry group (or a group of markets) especially in the public sector (e.g. the health sector)


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Porter’s five forces framework

Porter’s five forces framework helps identify the attractiveness of an industry in terms of five competitive forces: • the threat of entry, • the threat of substitutes, • the bargaining power of buyers,• the bargaining power of suppliers and• the extent of rivalry between competitors.

The five forces constitute an industry’s ‘structure’.


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Source: Adapted with the permission of The Free Press, a Division of Simon & Schuster Adult Publishing Group, from Competitive Strategy: Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright © 1980, 1998 by The Free Press. All rights reserved

The five forces framework (1)

Figure 2.2 The five forces framework


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The five forces framework (2)The Threat of Entry & Barriers to Entry

• The threat of entry is low when the barriers to entry are high and vice versa.

• The main barriers to entry are: Economies of scale/high fixed costs Experience and learning Access to supply and distribution channels Differentiation and market penetration costs Government restrictions (e.g. licensing)

• New Entrants must consider retaliation from organisations already in the market


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The five forces framework (3)Threat of Substitutes

Substitutes are products or services that offer a similar benefit, but by a different process. Customers will switch to alternatives (the threat increases) if the price or performance of the substitute is superior (e.g. aluminium maybe more expensive than steel but it is more cost efficient for some car parts). The substitute may benefit from an innovation that improves customer satisfaction (e.g. high speed trains quicker than airlines between city centres)


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The five forces framework (4)The bargaining power of buyers

Buyers are the organisation’s immediate customers, not necessarily the ultimate consumers. If buyers are powerful, then they can demand cheap prices or product / service improvements to reduce profits .

Buyer power is likely to be high when:Buyers are concentratedBuyers have low switching costsBuyers can supply their own inputs (backward

vertical integration)


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The five forces framework (5)The bargaining power of suppliers

Suppliers supply what organisations need to produce the product or service. Powerful suppliers can eat into an organisation’s profits. Supplier power is high when:The suppliers are concentrated (few of them).Suppliers provide a specialist or rare input.Switching costs are high (it is disruptive or

expensive to change suppliers).Suppliers can integrate forwards (e.g. low cost

airlines have cut out the use of travel agents).


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The five forces framework (6)Rivalry between competitors

Competitive rivals have similar products and services aimed at the same customer group and are direct competitors in the same industry/market (distinct from substitutes). The degree of rivalry is increased when :Competitors are of roughly equal sizeCompetitors are aggressive in seeking leadershipThe market is mature or decliningThere are high fixed costsThe exit barriers are highLow level of differentiation


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Implications of five forces analysis

• Identifies the attractiveness of industries – which industries/markets to enter or leave.

• Identifies strategies to influence the impact of the forces, for example, building barriers to entry by becoming more vertically integrated.

• The forces may have a different impact on different organisations e.g. large firms can deal with barriers to entry more easily than small firms.


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Issues in five forces analysis

• Apply at the most appropriate level – not necessarily the whole industry. E.g. the European low cost airline industry rather than airlines globally.

• Note the convergence of industries – particularly in the high tech sectors (e.g. digital industries - mobile phones/cameras/mp3 players).

• Note the importance of complementary products and services (e.g. Microsoft windows and McAfee computer security systems are complements). This can almost be considered as a sixth force.


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The value net

Figure 2.3 The value netReprinted by permission of Harvard Business Review. From ‘The Right Game’ by A. Brandenburger and B. Nalebuff, July–August 1996, pp. 57–64. Copyright © 1996 by the Harvard Business School Publishing Corporation. All rights reserved


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Types of industry (1)

• Monopolistic industries - an industry with one firm and therefore no competitive rivalry. A firm has ‘monopoly power’ if it has a dominant position in the market. For example, BT in the UK fixed line telephone market.

• Oligopolistic industries - an industry dominated by a few firms with limited rivalry and in which firms have power over buyers and suppliers.

• Perfectly competitive industries - where barriers to entry are low, there are many equal rivals each with very similar products, and information about competitors is freely available. Few (if any) markets are ‘perfect’ but may have features of highly competitive markets, for example, mini-cabs in London.


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Types of industry (2)

• Hypercompetitive industries - where the frequency, boldness and aggression of competitor interactions accelerate to create a condition of constant disequilibrium and change.

• Hypercompetition often breaks out in otherwise oligopolistic industries (e.g. mobile phones).

• Organisations interact in a series of competitive moves in hypercompetition which often becomes extremely rapid and aggressive as firms vie for market leadership.


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Cycles of competition

Figure 2.6 Cycles of competitionSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Hypercompetitive Rivalries: Competing in Highly Dynamic Environments by Richard A. D’Aveni with Robert Gunther. Copyright © 1994, 1995 by Richard A. D’Aveni. All rights reserved


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The industry life cycle

Figure 2.4 The industry life cycle


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Strategic GroupsStrategic groups are organisations within an industry or sector with similar strategic characteristics, following similar strategies or competing on similar bases.

• These characteristics are different from those in other strategic groups in the same industry or sector.

• There are many different characteristics that distinguish between strategic groups.

• Strategic groups can be mapped on to two dimensional charts - useful tools of analysis.


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Characteristics for identifying strategic groups

Figure 2.7 Some characteristics for identifying strategic groups


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Strategic groups in the Indian pharmaceutical industry

Figure 2.8 Strategic groups in the Indian pharmaceutical industrySource: Developed from R. Chittoor and S. Ray, ‘Internationalisation paths of Indian pharmaceutical firms: a strategic group analysis’, Journal of International Management, vol. 13 (2009), pp. 338–55


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Uses of strategic group analysis• Understanding competition - enables focus on

direct competitors in a strategic group rather than the whole industry (e.g. Tesco on Sainsburys and Asda)

• Analysis of strategic opportunities - helps identify attractive ‘strategic spaces’ within an industry.

• Analysis of ‘mobility barriers’ Obstacles to movement from one strategic group to another. Barriers can be overcome to enter more attractive groups. Barriers can be built to defend an attractive position.


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Market segments

A market segment is a group of customers who have similar needs that are different from customer needs in other parts of the market.• Where these customer groups are relatively small, such

market segments are called ‘niches’.• Customer needs vary. Focusing on customer needs that

are highly distinctive is one means of building a secure segment strategy.

• Customer needs vary for a variety of reasons -these factors can be used to identify distinct market segments.

• Not all segments are attractive or viable market opportunities – evaluation is essential.


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Bases of market segmentation (1)

Table 2.1 Some bases of market segmentation


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Who are the strategic customers?

A strategic customer is the person(s) at whom the strategy is primarily addressed because they have the most influence over which goods or services are purchased.

• For a food manufacturer it is the multiple retailers (e.g. Tesco) that are the strategic customers not the ultimate consumer.

• For a pharmaceutical manufacturer it is the health authorities and hospitals not the final patient.


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Critical success factors (CSFs)• Critical success factors are those factors that

are either particularly valued by customers or which provide a significant advantage in terms of cost.

• Critical success factors are likely to be an important source of competitive advantage if organisation has them (or disadvantage if an organisation lacks them).

• Different industries and markets will have different critical success factors (e.g. in low cost airlines the CSFs will be punctuality and value for money whereas in full service airlines it is all about quality of service).


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Blue ocean thinking

• ‘Blue oceans’ are new market spaces where competition is minimised.

• ‘Red Oceans’ are where industries are already well defined and rivalry is intense.

• Blue Ocean thinking encourages entrepreneurs and managers to be different by finding or creating market spaces that are not currently being served.

• A ‘strategy canvas’ compares competitors according to their performance on key success factors in order to develop strategies based on creating new market spaces.


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Chapter summary (1)

• Environmental influences can be thought of as layers around an organisation, with the outer layer making up the macro-environment, the middle layer making up the industry or sector and the inner layer strategic groups and market segments.

• The macro-environment can be analysed in terms of the PESTEL factors, from which key drivers of change can be identified. Alternative scenarios about the future can be constructed according to how the key drivers develop.

• Industries and sectors can be analysed in terms of Porter’s five forces – barriers to entry, substitutes, buyer power, supplier power and rivalry. Together, these determine industry or sector attractiveness.


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Chapter summary (2)

• Industries and sectors are dynamic, and their changes can be analysed in terms of the industry life cycle, comparative five forces radar plots and hypercompetitive cycles of competition.

• In the inner layer of the environment, strategic group analysis, market segment analysis and the strategy canvas can help identify strategic gaps or opportunities.

• Blue Ocean strategies characterised by low rivalry are likely to be better opportunities than Red Ocean strategies with many rivals.

• The most important reason for environmental analysis is to identify OPPORTUNITIES AND THREATS


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The Strategic PositionStrategic Capabilities


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Learning outcomes

• Identify what comprises strategic capabilities in terms of

organisational resources and competences and how these

relate to the strategies of organisations.• Analyse how strategic capabilities might provide

sustainable competitive advantage on the basis of their value, rarity, inimitability and non-substitutability (VRIN).

• Diagnose strategic capability by means of benchmarking, value chain analysis, activity mapping and SWOT analysis.

• Consider how managers can develop strategic capabilities for their organisations.


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Strategic capabilities: the key issues

Figure 3.1 Strategic capabilities: the key issues


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Resource-based strategy

The resource-based view (RBV) of strategy asserts that the competitive advantage and superior performance of an organisation is explained by the distinctiveness of its capabilities.


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Resources and competences

• Resources are the assets that organisations have or can call upon (e.g. from partners or suppliers),that is, ‘what we have’ .

• Competences are the ways those assets are used or deployed effectively, that is, what we do well’.


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Components of strategic capabilities

Table 3.1 Components of strategic capabilities


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Redundant capabilities

• Capabilities, however effective in the past, can become less relevant as industries evolve and change.

• Such ‘capabilities’ can become ‘rigidities’ that inhibit change and become a weakness.


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Dynamic capabilities

Dynamic capability is the ability of an organisation to renew and recreate its strategic capabilities to meet the needs of changing environments.


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Threshold and distinctivecapabilities (1)

• Threshold capabilities are those needed for an organisation to meet the necessary requirements to compete in a given market and achieve parity with competitors in that market – ‘qualifiers’.

• Distinctive capabilities are those that critically underpin competitive advantage and that others cannot imitate or obtain – ‘winners’.


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Core competences

Core competences1 are the linked set of skills, activities and resources that, together:

• deliver customer value

• differentiate a business from its competitors

• potentially, can be extended and developed as markets change or new opportunities arise.

1G. Hamel and C.K. Prahalad, ‘The core competence of the corporation’, Harvard Business Review, vol. 68, no. 3 (1990),

pp. 79–91.


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Strategic capabilities andcompetitive advantage

The four key criteria by which capabilities can be assessed in terms of providing a basis for achieving sustainable competitive advantage are: •value, •rarity, •inimitability and •non-substitutability

1 Jay Barney: ‘Firm resources and sustained competitive advantage’, Journal of Management, vol. 17 (1991), no. 1, pp. 99–120.

VRIN1


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V – Value of strategic capabilitiesStrategic capabilities are of value when they: • take advantage of opportunities and neutralise threats,• provide value to customers• provide potential competitive advantage• at a cost that allows an organisation to realise

acceptable levels of return


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R – Rarity• Rare capabilities are those possessed uniquely

by one organisation or by a few others only. (E.g. a company may have patented products, have supremely talented people or a powerful brand.)

• Rarity could be temporary.

(Eg: Patents expire, key individuals can leave or brands can be de-valued by adverse publicity.)


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I – InimitabilityInimitable capabilities are those that competitors find difficult to imitate or obtain.• Competitive advantage can be built on unique resources (a key individual or IT system) but these may not be sustainable (key people leave or others acquire the same systems).• Sustainable advantage is more often found in competences (the way resources are managed, developed and deployed) and the way competences are linked together and integrated.


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Criteria for the inimitability of strategic capabilities

Figure 3.2 Criteria for the inimitability of strategic capabilities


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N - Non-substitutability

Competitive advantage may not be sustainable if there is a threat of substitution.

• Product or service substitution from a different industry/market. For example, postal services partly substituted by e-mail.

• Competence substitution. For example, a skill substituted by expert systems or IT solutions


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Criteria for the inimitability of strategic capabilities

Figure 3.3 VRIN


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Organisational knowledge

Organisational knowledge is the collective intelligence, specific to an organisation, accumulated through both formal systems and the shared experience of people in that organisation.

Some of this knowledge is ‘Tacit’ knowledge that is, more personal, context-specific and hard to formalise and communicate – so it is difficult to imitate, for example, the knowledge and relationships in a top R&D team.


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Benchmarking

Benchmarking is a means of understanding how an organisation compares with others – typically competitors.Two approaches to benchmarking:

• Industry/sector benchmarking - comparing performance against other organisations in the same industry/sector against a set of performance indicators.

• Best-in-class benchmarking - comparing an organisation’s performance or capabilities against ‘best-in-class’ performance – wherever that is found even in a very different industry. (E.g. BA benchmarked its refuelling operations against Formula 1).


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The value chain

• The value chain describes the categories of activities within an organisation which, together, create a product or service.

• The value chain invites the strategist to think of an organisation in terms of sets of activities – sources of competitive advantage can be analysed in any or all of these activities.


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VRIN summary

Figure 3.4 The value chain within an organisationSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performanceby Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved


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The value network

• The value network comprises the set of inter-organisational links and relationships that are necessary to create a product or service.

• Competitive advantage can be derived from linkages within the value network.


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The value network

Figure 3.5 The value networkSource: Adapted with the permission of The Free Press, a Division of Simon & Schuster, Inc., from Competitive Advantage: Creating and Sustaining Superior Performanceby Michael E. Porter. Copyright © 1985, 1998 by Michael E. Porter. All rights reserved


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Uses of the value chain• A generic description of activities –

understanding the discrete activities and how they both contribute to consumer benefit and how they add to cost.

• Identifying activities where the organisation has particular strengths or weaknesses

• Analysing the competitive position of the organisation using the VRIN criteria – thus identifying sources of sustainable advantage.

• Looking for ways to enhance value or decrease cost in value activities (e.g. outsourcing)


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Uses of the value network• Understanding cost/price structures across

the value network – analysing the best area of focus and the best business model .

• Identifying ‘profit pools’ within the value network and seek to exploit these.

• The ‘make or buy’ decision: deciding which activities to do ‘in-house’ and which to outsource.

• Partnering and relationships – deciding who to work with and the nature of these relationships.


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Mapping activity systems (1)

• Identify ‘higher order strategic themes’ that is, how the organisation meets the critical success factors in the market.

• Identify the clusters of activities that underpin these themes and how they fit together.

• Map this in terms of how activity systems are interrelated.


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SWOT analysis

SWOT summarises the strengths, weaknesses, opportunities and threats likely to impact on strategy development.

INTERNALSTRENGTHS WEAKNESSES HISTORIC

EXTERNAL OPPORTUNITIES THREATS

FUTURE


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Uses of SWOT analysis

• Key environmental impacts are identified using the analytical tools explained in Chapter 2.

• Major strengths and weaknesses are identified using the analytic tools explained in Chapter 3.

• Scoring (e.g. + 5 to - 5) can be used to assess the interrelationship between environmental impacts and the strengths and weaknesses.

• SWOT can be used to examine strengths, weaknesses, opportunities and threats in relation to competitors.

• SWOT can be used to generate strategic options– using a TOWS matrix.


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The TOWS matrix

Figure 3.6 The TOWS matrix


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Dangers in a SWOT analysis

• Long lists with no attempt at prioritisation.

• Over generalisation – sweeping statements often based on biased and unsupported opinions.

• SWOT is used as a substitute for analysis – it should result from detailed analysis using the frameworks in Chapters 2 and 3.

• SWOT is not used to guide strategy – it is seen as an end in itself.


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Developing strategic capabilities (1)

Internal capability development:

• Leveraging capabilities – identifying capabilities in one part of the organisation and transferring them to other parts (sharing best practice).

• Stretching capabilities - building new products or services out of existing capabilities.


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Developing strategic capabilities (2)

• External capability development – adding capabilities through mergers, acquisitions or alliances.

• Ceasing activities – non-core activities can be stopped, outsourced or reduced in cost.

• Monitor outputs and benefits – to understand sources of consumer benefit and enhance anything that contributes to this.

• Managing the capabilities of people – training, development and organisation learning.


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Chapter summary (1)

• Strategic capabilities comprise both resources and competences.

• The concept of dynamic capabilities highlights that strategic capabilities need to change as the market and environmental context of an organisation changes.

• Sustainability of competitive advantage is likely to depend on an organisation’s capabilities being of at least threshold value in a market but also being valuable, relatively rare, intimable and non-substitutable.


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Chapter summary (2)

Ways of diagnosing organisational capabilities include:• Benchmarking as a means of understanding the relative performance of organisations.• Analysing an organisation’s value chain and value

network as a basis for understanding how value to a customer is created and can be developed.

• Activity mapping as a means of identifying more detailed activities which underpin strategic capabilities.• SWOT analysis as a way of drawing together an understanding of strengths, weaknesses, opportunities and threats an organisation faces.

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