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Summary of “Contemporary Strategy”

Chapter 1: The Concept of Strategy

Quick Summary:
Strategic planning is important to an organization because it provides a sense of direction
and outlines measurable goals. Strategic planning is a tool that is useful for guiding day-to-
day decisions and also for evaluating progress and changing approaches when moving
forward

The Role of Strategy in Success

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

Lady Gaga 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 they have in common:

 Goals that are consistent and long term: focused commitment to career goals

 Profound understanding of the competitive environment: define their roles and pursue
their careers reveal a deep and insightful appreciation of the external environments in
which they operate

 Objective appraisal of resources: recognizing and deploying the resources at their

disposal, and also building those resources

 Effective implementation: effective implementation, the best-laid strategies are of

little use

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 primacy 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.

The Basic Framework for Strategy Analysis

the four elements of a successful strategy are divided into two groups where strategy as a
link between the firm and its industry environment.

1.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”).
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2.The industry environment embodies the fourth (“profound understanding of the competitive
environment”) and is defined by the firm’s relationships with competitors, customers, and
suppliers.

SWOT is a common approaches to strategy analysis to distinguish the external and internal
environment of a firm which classifies the influences on a firm’s strategy in 4 categories:
Strengths, Weaknesses, Opportunities, and Threats.

Strengths, Weaknesses are relate to the internal environment.

Opportunities, and Threats are relate to external environment.

What is important is to carefully identify the external and internal forces that impact the firm,
and then analyze their implications.

Strategic Fit
The concept of strategic fit also relates to the internal consistency among the different
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 consistent
strategic position and direction of development.

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 consistent, mutually
reinforcing system. The concept of strategic fit is one component of a set of ideas known as
contingency theory.
Contingency theory supposes that there is no single best way of organizing. The best way
to design, manage, and lead an organization depends upon circumstance in particular, the
characteristics of that organization’s environment.

Origins and Military Antecedents

Many of the concepts and theories of business strategy have their antecedents in military
strategy. 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. YOU
WIN THE WAR.
A tactic is a scheme for a specific action. YOU WIN THE BATTLES.
There are major differences between business competition and military conflict. The objective
of war is (usually) to defeat the enemy. The purpose of business rivalry is rarely 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. (1944) Game theory has revolutionized the study of competitive interaction, not just
in business but in politics, military studies, and international relations.

From Corporate Planning to Strategic Management

During the 1950s and 1960s, senior executives experienced increasing difficulty in
coordinating decisions and maintaining control 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=Corporate Planning. The new techniques of corporate planning proved
particularly useful for guiding the diversification strategies that many large companies
pursued during the 1960s. By the early 1980s, a new era of macroeconomic instability, so
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 take advantage of available opportunities for
profit. This transition was called strategic management. It involved a focus on competition
as the central characteristic of the business environment and on performance maximization
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as the primary goal of strategy. During the 90s, 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. 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 principles 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 . Different time
different strategy, being self-sufficient is no longer workable for most firms, so alliances and
other forms of collaboration are an increasingly common feature of firms’ strategies.

 What Is Strategy? strategy is the means by which individuals or organizations

achieve their objectives.
Strategy is a plan, method, or series of actions designed to achieve a specific goal or
effect. Strategy is a cohesive response to an important challenge.”

 The conception of firm strategy has changed greatly over the years. 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 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. it is under these conditions that
strategy becomes more important.

Why Do Firms Need Strategy?

Strategy assists the effective management of organizations.

1. IMPROVE THE QUALITY OF DECISION-MAKING

2. MAKING EASIER COORDINATION
3. FOCUSING ORGANIZATIONS ON THE PURSUIT OF LONG-TERM GOALS.

Strategy as Decision Support: strategy is a pattern or theme that gives coherence to the
decisions of an individual or organization. Strategy improves decision-making in several
ways:

 It simplifies decision-making
 The strategy-making process permits the knowledge of different individuals to be
pooled and integrated.
 It facilitates the use of analytic tools

Strategy as a Coordinating Device

Strategy acts as a communication device to promote coordination. Statements of strategy
are means where CEO can communicate the identity, goals, and positioning of the company
to all organizational members.

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.

Where Do We Find Strategy?

Strategy has its origins in the thought processes of organizational leaders. For the business
man, the starting point of strategy is the idea for a new business. Until the new business
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needs to raise finance, there is little need for any explicit statement of strategy. Statements of
strategy are found in board minutes and strategic planning documents. To identify a firm’s
strategy it is necessary to draw upon multiple sources of information in order to build an
overall picture of what the company says it is doing matches what it is actually doing.

Corporate and Business Strategy

Strategic choices can be distilled into two basic questions:
● Where to compete?
● How to compete?
The answers to these questions define the two major areas of a firm’s strategy: corporate
strategy and business strategy.

1. Corporate strategy defines the scope of the firm in terms of the industries and
markets in which it competes (WHERE)
2. Business strategy is concerned with how the firm competes within a particular
industry or market (HOW)

Corporate strategy is the responsibility of corporate top management.

Business strategy is primarily the responsibility of the senior managers of divisions and
subsidiaries.

Describing Strategy
Where? It relates to the products the firm supplies, the customers it serves, the countries and
localities where it operates, and the vertical range of activities it undertakes.
How? It relates to the nature of the firm’s competitive advantage

Strategy is not simply about “competing for today”; it is also concerned with “competing for
tomorrow.”

Present: Strategy as Positioning

• Where are we competing? -Product market scope -Geographical scope -Vertical scope

• How are we competing? -What is the basis of our competitive advantage?

Future: Strategy as Direction

• What do we want to become? - Vision statement

• What do we want to achieve? - Mission statement -Performance goals
• How will we get there?- Guidelines for development

-Priorities for capital expenditure,

-Growth modes: organic growth,

How is Strategy Made? The Strategy Process

STRATEGY DESIGN IS DIVIDED INTO:

Intended strategy is strategy as conceived of by the leader or top management team.

Realized strategy is the actual strategy that is implemented AND is only partly related to that
which was intended, Only 10–30% of intended strategy is realized.
Emergent strategy the decisions that emerge from the complex processes in which
individual managers interpret the intended strategy and adapt it to changing circumstances.
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Applying Strategy Analysis

Unlike many of the analytical techniques in accounting, finance, market research, or
production management, strategy analysis does not offer algorithms or formulae that tell us
the optimal strategy to adopt. The purpose of strategy analysis is not to provide answers but
to help us to examine the relevant issues by providing a framework. Strategy analysis places
us in a superior position to a manager who relies exclusively on experience and intuition.

Four main stages: tools of strategy analysis

1. Setting the strategic agenda. =Identifying the important issues that the strategy must
address.
Identify the current strategy= what the current strategy is.
Appraise performance= How well is the current strategy performing?

2. Analyzing the situation= Diagnose performance=Having determined the level and trend of
the firm’s performance, the next challenge is diagnosis: In the case of poor performance,
what are the sources of unsatisfactory performance? In the case of good performance, what
are the factors driving this?

Industry analysis= determine whether the current strategy needs to be changed, we need to
look not just at how it is currently performing, but how it will perform in the future.

Analysis of resources and capabilities=Having established likely external changes, what do

these mean for the firm’s competitive position?

3. Formulating strategy= Performance diagnosis, industry analysis, and resource and

capability analysis provide a basis for generating strategic options, the most promising of
which can be developed into a recommended strategy.

4. Implement strategy= Without action, a strategy is only an idea expressed

in words. Implementing strategy requires allocating resources and motivating people.

Strategic Management of Not-For-Profit Organizations

When strategic management meant top-down, long-range planning, there was little
distinction between business corporations and not-for-profit organizations: the techniques of
forecast-based planning applied equally to both.
Strategy is as important in not-for-profit organizations as it is in business firms. The benefits I
have attributed to strategic management in terms of improved decision-making, achieving
coordination, and setting performance targets may be even more important in the nonprofit
sector. The not-for-profit sector encompasses a vast range of organizations. Both the nature
of strategic planning and the appropriate tools for strategy analysis differ among these
organizations.
The basic distinction here is between those not-for-profits that operate in competitive
environments (most nongovernmental, nonprofit organizations) and those that do not (most
government departments and government agencies).

Organizations in competitive environments that charge users

Royal Opera House
Guggenheim Museum
Stanford University

Organizations in competitive environments that provide free services

Salvation Army
Habitat for Humanity
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Greenpeace
Linux

Organizations sheltered from competition

UK Ministry of Defence, European Central Bank, New York Police Department, World Health
Organization

Among the not-for-profits we may distinguish between, those that charge for the services
they provide and those that provide their services free—most charities and NGOs.

For businesses, profit is always a key goal since it ensures survival and fuels development.
But for not-for-profits, goals are typically complex.

The analysis of resources and capabilities is important to all organizations that inhabit
competitive environments and, hence, must deploy their resources and capabilities to
establish a competitive advantage. However, even for those organizations that are
monopolists—such as government departments and other public agencies— performance is
enhanced by aligning strategy with internal strengths in resources and capabilities.

Chapter 2: Goals, Values, and Performance

Quick Summary:
Strategy the creation of a unique and valuable position, involving a different set of activities.
If there were only one ideal position, there would be no need for strategy. The essence of
strategic positioning is to choose activities that are different from rivals.

Firms operate in the interests of its owners through maximizing their returns (profits) which
implies maximizing the value of the firm. To set performance targets financial analysis are
helpful to diagnose and set performance targets. It is useful to analyse past performance.
But - Strategy is also about creating purpose and committing revenues and principles.

Introduction:
Framework for strategy analysis comprises 4 components of the firms:
1. Goals and values
2. Resources and capabilities
3. Structure and management systems
4. Industry environment
Main goal is: maximization of the value of the firm (profit). But there are other goals, and
strategies, that make a company successful (ambition). The social, political and natural
environment makes a firm survive over the long run.

Purpose of business: 1. Create value for customer, 2. Extract some of that in form of profit
= value for firm. This can be done physically or by repositioning, by transforming products
that are less value into products that are more valued (physical). Or by trading them to
people who are ready to pay the most for the produced products (value through arbitrage
across time and space).

Value added:
= sales revenue from output – cost of material inputs
= wages/salaries + interest + rent + royalities/license fee + taxes + dividends + retained profit

Shareholder vs stakeholder goals

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Many shakesholders are included in the “value added term”. There are various (conflicting)
interests.
Shareholder capitalism: companies overriding duty to produce profits for owners (English-
speaking countries). They are forced to act in the interest of their shareholders. In other
European countries they have to take into account of all stakeholders (employees,
customers, supplier…). Nevertheless, most companies seek to maximize profits over the
long term and follow the owners’ interests because of competition, the market for corporate
control, convergence of stakeholder interests and simplicity.
- Competition: in order to survive, companies have the goal to pursue profit
maximization.
- Market for corporate control: management teams that fail will be replaced
- Convergence of stakeholder interests; survival of the firm, there are more common
interests than conflicts.
- Simplicity: easier just to focus on one goal, profit maximization
To resume: Companies success is not only driven by financial success. There are other
drivers, like being different from others that make a business successful.

Profit – cash flow – value

Profit: surplus of revenues over costs available for distribution to the owners of the firm.
Accounting profit is not the same as economic profit. Accounting profit is the normal return to
capital that rewards investors for the use of their capital. Whereas economic profit is a purer
and more reliable measure. Often economic profit is measured by economic value added
(EVA). It’s the net operating profit after tax (NOPAT) less cost of capital (capital employed x
weighted average cost of capital (WACC).

Economic vs accounting profit:

- Advantage 1: Capital intensive companies healthy profits disappear once capital is
taken into account
- Advantage 2: The real costs of more capital-intensive businesses are taken into
account

Enterprise value: The value of the firm is the net present value (NPV) of the returns that the
asset generates. Relevant returns are the cash flows to the firm. We use the discounted cash
flow methodology. The value of the firm is the following:
- V = value of the firm
- C= free cash flows in each year (t) = net operating rofit + depreciation – taxes –
investment in fixed and working capital
- R= cost of capital which is the weighted average cost of capital (re+d) (it averages the
cost of equity and the cost of debt!).

Value maximizing: Firm must maximize its future net cash flows and minimize its cost of
capital. The economic profit is the same as the net cash flow. The cash flow approach
deducts capital at the time when the capital expenditure is made and the EVA
approach follows when the capital is consumed.
The DCF approach is the most satisfactory approach for companies! But it’s difficult to
predict CF, what makes it difficult for companies. Negative CF are likely to have. Some
companies take EBIT and EBITA into account as indicator of profit. Mainly the difference btw
economic profit and free cash flow is, that FCF needs a financial forecast for many years
whereas economic profit shows the surplus in each year.

Enterprise vs Shareholder Value

- Shareholder value = DCF – debt + other non-equity financial claims

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- Stock market value = enterprise value – debts? If all information is given, yes,
otherwise not!
In terms of strategy analysis, we use maximization of enterprise value and shareholder value
as the same!

Applying Discounted Cash Flow (DCF):

It’s not that easy using DCF as forecasting cash flows is difficult. Assumptions are needed.
An example of a stable business could be the following equation used for calculating the
DCF, where company’s growth is constant:

Another approach:

Valuing Strategies: It is also possible to forecast different cash flows and select the one with
the highest NPV. Moreover, a key merit of value maximization is the consistency!
Problem: A strategy that is implemented today will influence a company’s cash flows long into
the future. Choosing a strategy does not predetermine cash flows.

A strategy is:
- A portfolio of options rather than a portfolio of investment projects,
- Qualitative approaches to strategy analysis may be more useful than quantitative
ones

Strategy and Real Options

Real option analysis = one of the most important developments in financial theory. Some
companies, as the oil and gas businesses invested in alternative energy investments
although their shareholder might not have shared the same interest. The reason therefore
has been option value. The world is uncertain, and investments are irreversible, therefore
you have to be flexible. Breaking a project into a number of phases could be helpful (phases
and gates approach).

We use principles of option valuation to create shareholder value.

1. Growth options: small investments in a number of future business opportunities
without committing them
2. Flexibility options: design of projects and plants that permit adaption to different
circumstances
Important: you do not always have to continue your plan! Sometimes you just start with your
initial investment (entry fee) which doesn’t obligate you to continue.
We focus on growth options as:
- Platform investments: Investment in core products / technologies that create a steam
of additional business opportunities
- Strategic alliances and joint ventures: limited investments which offer option for the
creation of whole new strategies
- Organizational capabilities: competitive advantage across multiple products /
businesses.

There are 2 challenges concerning discounted cash flow (DCF):

1. To estimate cash flow is difficult
2. Option values are not taken into account
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Diagnose the sources of a company’s performance problems

There are several problems a firm has to handle with. Therefore, it is important to have a little
plan how to handle with it:
1. Current and past performance: Formulation exercise to assess the current situation.
How well is the current strategy performing (financial performance). If there are
problems, we have to handle these.
2. Forward-Looking Performance --> Stock Market Value: Stream of profit over the rest
of its life. The stock market represents the best available estimate of expected CF into
the future. We look at the change in the market value of the firm relative to that of
competitors over the CEO’s period of tenure.
3. Backward-Looking Performance --> Accounting Ratios: we use financial reports
The DCF value of the firm:
o The return on the firm’s invested capital (ROIC)
o Its weighted average cost of capital
o Rate at which it grows its operating profit

There are various other indicators which could be taken into account but firstly the cost of
capital has to be compared and secondly the growth has to be taken into account. In order to
interpret probability ratios we need benchmarks.

4. Performance diagnosis: Du Pont Formula to disaggregate the return on invested

capita into sales margin and capital. This helps in order to find out “value drivers”.
These allow us to identify the sources of poor performance in terms of specific
activities. In the figure you see the ROCE.
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Linkages between financial analysis and strategic analysis

After diagnosing a firm’s recent performance, we can improve the action. They can be
strategic (long-term focus) or operational (short-term focus). When performing really bad,
then companies more often focus on short term. In case of bankruptcy, they tend to long-term
strategies.
To make future predictions of how the company will perform, financial analysis can’t fully
help. Firms have to understand the strategic factors that are the ultimate drivers of
profitability (competition customer’s demand). It is not possible to broadcast profit and cash
flows quantitatively, but qualitative indications are available.

Setting performance targets:

It is important to set performance targets. There should be one core goal for the CEO to
maximize enterprise value. Whereas each employee needs its own goal (CFO = financial
goals).

Balanced scorecard: Usually, performance goals are long term that take a long time to
implement. We use the balanced scorecard in order to integrate the framework for balancing
financial and strategic goals and cascading performance measures down the organization to
individual business units and departments.
In the end, the following four questions should be answered:
- How do we look to shareholders?
- How do customers see us?
- What must we excel at?
- Can we continue to improve and create value?
The goal of the balanced scorecard is to link the strategy of the business with the creation of
shareholder value while providing a set of measurable targets to guide this process.

Role of values, mission and vision in formulation and implementing strategy

Values and social responsibility:
Firms also have other goals than profit. They have to desire to create (e.g. Ford: to build
something that can be afforded by everyone). If firms have other goals which make them
“outstanding” they usually perform better in long-term (competitive advantage). Also their
motivation is fundamental (vision, mission and purpose) in order to succeed (Google’s
mission: “...to organize the world’s information and make it universally accessible and useful.”
Usually the mission/vision of a company is defined from the beginning. Nevertheless, it is
sometimes needed to be adapted from time to time.
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Values and business principles also have to be included (e.g. ethical precepts). Values are a
central component of organizational culture and often shared among organizational
members.

Corporate Social Responsibility (CSR):

There is a debate about what the obligation of companies to society as a whole. Some
people declare CSR as unethical (companies spend money on stuff, consumers have not
approved) and undesirable (involves corporate executives determining the interests of
society) (Milton Friedman).

Property conception:
Views firms as a set of assets owned by stockholders. Interests of shareholders have to be
considered.

Social entity conception:

Views the firm as the community of individuals that is sustained and supported its
relationships with its social, political, economic and natural environment. The whole network
has to be considered. Firms should be embedded within the ecosystem and are part of the
whole system.

The sociological concept of legitimacy:

Describes that thinking best, organizations that gain social legitimacy attract resources and
customers.

Moral imperative by Porter and Kramer: it’s about 3 ethical arguments:

- Sustainability argument (mutual interest): “emphasizes environmental and community
stewardship (responsibility).”
- Reputation argument: “to justify CSR initiatives on the grounds that they will improve
a company’s image, strengthen its brand, enliven morale, and even raise the value of
stock.”
- License-to-operate argument: support of constituencies upon which firms depend
“every company needs tacit or explicit permission from governments, communities,
and numerous other stakeholders to do business.”

 Strategic CSR: There are specific intersections between the interest of the firm and
those of the society (projects, activities) which create competitive advantage for the
firm and generate positive social outcomes.

Video Online Session 1

Definition strategy: it is not “to beat someone”, this is a goal. You need many pieces. A
strategy has to answer these questions!
1. Where do we compete? (high cost industry)
2. What unique value do we bring? (why do customers choose our products?)
3. What resources/capabilities do we utilize (reputation, toolbox)
4. How do we sustain unique value?
IKEA has a great strategy! It is extremely difficult to copy them.
- Strategy treats business as a whole. Strategies show businesses what to do but also
what not to do.

The 4 D: Describe, Diagnose, Develop and Deploy --> this should be circular!
1. Describe what a business is doing
2. Diagnose why things are going well/bad
3. Develop what could be done better
4. Deploy or implement in case we have resources & capacities
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Corporate vs Business Strategy

Business strategy: Single unit with a single business. They have their own business strategy
as they have their own customers
Corporate Strategy: when other business are reliable on other businesses (e.g. hotdog
restaurant that first has to buy hotdogs from the retailer). They have different business units.
It is another stage of the supplier chain.
When is it a corporate strategy, when a business strategy?
Which resources do we share, which do we not share? Should they work together or
separate? If two restaurants decide to “work together” (burger restaurant that works together
with a bar) then it depends on whether they share resources together or not.

The 5 P’S (Mintzberg)

It’s not only about SWOT and being the best. It’s about being unique!
Strategy needs time. It consists of 5 different viewpoints which makes it more robust.
1. Plan: developed purposely and in advance. PEST and SWOT is the tool to support
planning.
2. Ploy: To get better to avoid competitors. Only for short-term! Scenario Planning,
game theory and future wheels are tools for that.
3. Pattern: Output comes from action we take daily. It is about the behaviour pattern
which we think of wheter to continue or stop Tools: Core competencies model
4. Position: playing field relative to your competitors: PEST Analysis, value chain
analysis, porters diamond model
5. Perspective: It looks internally, shaping personality and culture of the organization
Tools: Core competencies model, Trompenaars cultural dimensions

Describing strategies: All companies have a strategy. But not all employees are aware of
that. There are different tools/approaches which can be useful to describe a strategy.
Example: IPhone was the first smartphone which covers functions which include software
(Spotify) and hardware (computer) functions.
Diagnosing strategies: Root causes should be identified! SWOT tool is the starting tool to
check out about a business. But there are also other analysis which identify external and
internal analysis. This let strategies diagnose in a much broader way. Not only is it to improve
in short-term, but also to focus on the long-term goal.