STANFORD EXECUTIVE PROGRAMME ON STRATEGY AND ORGANISATION EPSO '98

STANDFORD EXECUTIVE PROGRAMME
ON STRATEGY AND ORGANISATION
EPSO ‘98

EPSO ‘98 : TTAABBLLEE OOFF CCOONNTTEENNTTSS
STRATEGY & MANAGEMENT
THINKING vs PLANNING
LEADERSHIP & INTENT
BUSINESS STRATEGY
TO COMPETE
TO ORGANISE
ADVANTAGE & CHANGE
STRATEGIC POSITION
GLOBALISATION
TO MANAGE
INFLUENCE & POWER
WWRRAAPP--UUPP
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EPSO ‘98
STRATEGY
&
MANAGEMENT

STANFORD - EPSO 98 STRATEGY
4 Ksenia WASCHKUHN
The Role of Strategy
 How can my organisation and I succeed?
 Today and tomorrow
 In a changing - but always complex and tough environment
 Create value
 Get to keep some of it
 Others are trying to do the same, and their success often means your
failure.
 Others will try to claim shares of the value you create
Strategy is about finding a way to succeed and then doing it.
The Issue
The Answer
The Difficulty

 A statement of how we intend to succeed
 Business unit and corporate
 Market and non-market
 Organisational Scope
 Basis for competitive advantage
 Basis for profitability
 (Functional)
 (Performance measures)
 (Goal)
 What (business/customer/technological) opportunities we will pursue
 Equally important, what we are not going to do.
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What is strategy
Elements of
Competitive
Strategy
Scope

 Creating value means doing something different or better than the next
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best.
 Differentiation and cost
 “What we will not do” is at least as important as “what we will do”
 You cannot be all things to all people
 Moving to the frontier (“operational excellence”) versus taking a position
(“strategic choice”)
 Resources: tangible and intangible
 Capabilities: ability to acquire and deploy resources to solve classes of
problems and create value
 Position: attractiveness (cost/differentiation) relative to others
 Applies resources
 Utilises capabilities
Value Creation
Strategy as Choice
Resources,
Capabilities &
Position

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STANFORD - EPSO 98
“Frontier”
Lower Cost
Differentiate
STRATEGY
Moving [A] to the
frontier
(“operational
excellence”)
vs
taking[B] a position
(“strategic choice”)
[A]
[B]

 You succeed only if you get to keep some of the value created
 potential industry earnings (PIE)
 competitors, current and potential
 supplier power
 customer power
 government and other non-market forces
 Demand level and price-responsiveness
 Market growth
 Cost of inputs
 Technology of production and distribution
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Keeping Value
Created
Ingredients
in the PIE

 A major element of strategy is in how you get a bigger slice
 But there is a danger that in trying for a bigger piece, you reduce the size
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of the total pie.
 The size of the PIE and your ability to capture and hold some of it depend
crucially on actors operating outside the normal market context and thus
on your ability to operate effectively there.
 This means your strategy has to account for and incorporate non-market
considerations.
 Issues
 Institutions
 Interests
 Information
Cutting up the PIE
Non-Market Issues
The Non-market
Environment:
4 I’s

 Affect the size of the PIE v. Affect its division?
 Complements, independent or substitutes?
 Integrated
 A strategy implies certain activities that need to be carried out to realise
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the strategy
 Value chain and support
 How will these be handled?
 People
 Features
 Architecture
 Processes and procedures
 Culture (set of beliefs that we share about why we are doing this),
values and assumptions
Market and
Non-market
Elements of
Strategy
Activities
Organisation
We need a lot of
everything to move
the boat

 Complements: doing (more of) one makes doing (more of) the others more
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valuable or effective
 Fit: coherence among complements
 Success requires finding or creating fit within and between your strategy
and your organisation, and between each and the environment.
 What business we are in
 How being in these together is going to create value above what they
create individually
Complementarities
and Fit
Corporate Strategy

PERFORMANCE
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STANFORD - EPSO 98
Determinants of Performance
Strategy
Resources
Capabilities
Position
Environment
PIE
Competitors
Customers
Suppliers
Complementors
Government
Social
...
Organisation
People
Features
Activities
PERFORMANCE

STANFORD - EPSO 98 PERFORMANCE
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General Management
 Understand the basis for current performance
 Identify external (market and non-market) and internal developments that
present threats and opportunities
 Develop/select a (market, non-market and organisational) strategy to meet
these goals
 Implement it successfully
 Adapt the strategy and organisation to changes in the internal and external
environments
 anticipation and forecasting
 emergent strategies and selection
 Develop new capabilities
 Shape the environments

STANFORD - EPSO 98 MANAGEMENT
14 Ksenia WASCHKUHN
Context
 Some firms dominate their market while others prosper by concentrating
on a small market segment.
 Strategic management is about developing a set of tools which is essential
to the array of choices firms face, ranging from:
 which products and services to pursue
 what human resource management policies to implement
 whether to alter the organisational structure, etc.
 The decisions must be implemented by employees in different functional
areas and geographies.
 Developing and implementing a “broad plan of action” to enhance the
performance of the organisation is the objective of strategic management.
 Performance is the result of the fit between the actions that the firm
takes and the strategic context in which they are taken.

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Choices
 The choices a firm makes about how it acquires and deploys its assets are
the main way in which it influences its performance. This is what the firm
ultimately controls.
 The actions that were appropriate in the old context are no longer effective
in countering the potential loss of competitive advantage.
 The extent to which the acquisition and deployment of assets dictated by a
firm’s strategy will achieve the organisation’s objectives is affected by the
context in which the strategy is undertaken.
 The firm’s context consists of:
 its external environment: industry and non-market characteristics
 its internal context: here, a broad action plan frequently depends
upon some constellation of specific key assets.
You have the same when
you modify your asset
intensity, the way you
finance it or you apply new
management rules.
This is certainly the
greatest danger resulting
from the lack of awareness
and flexibility

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Environment
 What works in one context may fail in another
 Strategy is dynamic. Globalisation, for instance, may change the nature of
competition in a previously domestic industry as foreign firms enter the
market.
 The firm’s strategic and environmental context can also change as a result
of actions taken by the firm itself. Firms sometimes deliberately act to
change their context.
 There are many measures of firm performance: market share, reputation,
innovation, brand image, profitability, employee satisfaction, etc. It is
important to be clear about which of these different kinds of performance
we have in mind.
 The question of objectives is important: e.g. one of the stated goals of
General Electric under the leadership of Jack Welch is to be “number one
or number two”.

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Goals
 Typically being “number one or number two” is not the ultimate goal of a
firm. The explicit or implicit overarching objective is the maximisation of
the owners’ wealth.
 In practice there are two main sets of reasons why behaviour may deviate
from the pursuit of this goal:
 a firm may have been established with a social goal - for instance its
devotion to the environment may well make it a less profitable
enterprise.
 The second reason is the goals of managers are not necessarily
aligned with those of the owners. The ability of management
to pursue its personal agenda at the shareholders’ expense is
constrained by the ability of shareholders to replace
management.

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Goals
 To the extent firms can and do define their overarching goals differently
from profit-making maximisation, those differences must be recognised in
formulating and implementing strategy.
 To the extent that firms define their overarching goal in terms of actors
within the firm, strategy formulation and implementation must be sensitive
to issues of politics, influence, and incentives inside the firm.
 The general manager’s role is not simply to oversee those functional areas,
but rather to set the strategic direction and goals for the business that serve
as a guide for the development of functional area policies.
 The general manager fulfils a variety of roles including performance of
ceremonial duties, acting as a company spokesman, allocating resources,
dealing with day-to-day crisis, etc.

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Role
 It is incorrect to equate “senior” and “general”. There are often managers
quite low in the hierarchy who do have general manager responsibilities.
 The image of the general manager as the “captain of the ship” is open to
two broad criticisms: One centres on the extent to which strategy is “top
down” and the second concerns whether strategy within organisations is
really planned at all, or evolves in a somewhat haphazard fashion.
 In small firms, even where the process is more participatory and hardly
resembles the “captain of the ship”, ultimate responsibility for strategy
typically rests with the senior general management.
 The “top down” view can be of only limited applicability to a multi-business
enterprise. The top managers cannot play the strategic
decision-making role we have ascribed to the general manager.

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Evolution
 In a stable environment, an industry is populated by firms with routinised
behaviour that is well-adapted to their environment.
 Quinn argues that “the processes used to arrive at the total strategy are
typically fragmented, evolutionary and largely intuitive” and describes this
as “logical incrementalism”. Firms can be seen as a collection of routines
that are largely tacit knowledge.
 Burgelman argues that reasonably complex organisations are subject to
both evolutionary and planned processes. At any point in time senior
management is responsible for articulating a strategy that is consistent
with the strategic context the firm faces.

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Perspectives
A perspective on strategy:
 Limits to control: Luck matters!
 Adaptation is a double-edged sword: a firm that is the best at some
narrowly defined task may find itself suddenly at a competitive
disadvantage when the environment is no longer favourable for the task.
 Change is difficult: a declaration by top management that the firm will
change does not make change happen.
 “Lower” management matters: There are many examples in which the
unauthorised and unanticipated actions of lower management and/or
operational personnel have profoundly affected the performance of the
firm.
 Strategy process is complex.

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Small business or business unit
 Some special issues are more prominent in new, small businesses:
 No internal capital market
 Differential access to external capital markets
 Fewer inertial forces: companies do not have strong organisational
routines that keep the firm moving in a given direction. A well-articulated
and communicated strategy can serve the purpose
of forcing the company to be self-conscious about its strategic
direction.
 The “top down” view of strategy is clearly most applicable: the
“captain of the ship” metaphor applies much better here than
elsewhere.
 Private non-profit organisations are in some sense owned by their
customers and/or the larger community and the objectives of the
organisation must reflect those broader interests.

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Conclusion
 An exceptional rate of return cannot be earned by the average firm.
 With many firms chasing the same opportunities, the competitive
interaction of those firms quickly dissipates any profits.
 Many firms will use all the tools we will discuss and still earn only a
normal return because earning even a normal return is not easy. Because in
final analysis, people make the difference.
 In strategic management, we seek to understand how to recognise a
twenty-dollar bill when its lying there and how to build long term
advantage from transitory opportunity.

EPSO ‘98
THINKING
vs
PLANNING

STANFORD - EPSO 98 THINKING VS PLANNING
25 Ksenia WASCHKUHN
Introduction
 A general manager must have a cognitive map of the relationship between
actions, context and performance.
 The vast majority of mature companies have a systematic, formal strategic
planning routine as their strategy process.
 The strategic plan is as much a part of the political process of resource
allocation within the firm as it is an attempt to think creatively about
business unit strategy.
 Strategic thinking is the general managers’ ability to develop and maintain
a conceptual map of their businesses that ties together the elements and
that provides them with the ability to think through, “on their feet”, the
impact of changes in their internal and external environment.
 Increasingly, general managers will be expected to have a mental strategic
model of the business that they run that consists of a comprehensive
understanding of the forces at work.

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The Fall and Rise of Strategic Planning
 Strategic planning, when it arrived on the scene in the mid-60s, involved
separating thinking from doing and created a new function staffed by
specialists: strategic planners.
 Strategic planning, however, is not strategic thinking.
 The strategy making process should consist of capturing what the manager
learns from all sources and then synthesising that learning into a vision of
the direction that the business should pursue.
 Planners should make their contribution around the strategy-making
process rather than inside it.
 By redefining the planner’s job, companies will acknowledge the
difference between planning and strategic thinking.
 Strategic thinking is about synthesis.

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The Fall & Rise of Strategic Planning
 Life is larger than our categories. Real strategic change requires inventing
new categories, not rearranging old ones.
 Strategic planning has not only never amounted to strategic thinking but
has, in fact, often impeded it.
 The problem is that planning represents a calculating style of management,
not a committing style. Strategies take on value only as committed people
infuse them with energy.
 If an organisation is managed by intuitive geniuses there is no need for
formal strategic planning.
 For strategic planning, the grand fallacy is this: because analysis
encompasses synthesis, strategic planning is strategy making. In addition,
this rests on 3 fallacious assumptions:
 prediction is possible
 strategist can be detached from the subjects of their analysis
 strategy making process can be formalised

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 Many practitioners and theorists have wrongly assumed that strategic
planning, strategic thinking and strategy making are all synonymous, at
least in best practice.
 The failure of strategic planning is the failure of systems to do better than,
or even nearly as well as, human beings. Planning could not learn.
 Strategies cannot be created by analysis, but their development can be
helped by it.
 Planners should work in the spirit of what could be called a “soft analyst”,
whose intent is to pose the right questions rather than find the right
answers.

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 Planning cannot generate strategies.
 Strategic programming involves three steps: codification, elaboration, and
conversion of strategies.
 This requires a good deal of interpretation and careful attention to what
might be lost in articulation: nuance, subtlety, qualification.
 Some of the most important strategies in organisations emerge without the
intention or sometimes even the awareness of top managers.
 “The real purpose of effective planning is not to make plans but to change
the mental models that decision makers carry in their heads”.
 Systems do not think and when they are used for more than the facilitation
of human thinking, they can prevent thinking.

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What is strategy?
 Positioning - once the heart of strategy - is rejected as too static for today’s
dynamic markets and changing technologies.
 In many industries, however, what some call hyper-competition is a self-inflicted
wound, not the inevitable outcome of a changing paradigm of
competition.
 Bit by bit, almost imperceptibly, management tools have taken the place of
strategy. As managers push to improve on all fronts, they move farther
away from viable competitive positions.
 Operational effectiveness and strategy are both essential to superior
performance. But they work in very different ways.

THINKING VS PLANNING
31 Ksenia WASCHKUHN
STANFORD - EPSO 98
Operational Effectiveness
 Operational effectiveness (OE) means performing similar activities better
than rivals perform them.
 Operational effectiveness includes but is not limited to efficiency. It refers
to any number of practices that allow a company to better utilise its inputs
by, for example, reducing defects in products or developing better
products faster.
 In contrast, strategic positioning means performing different activities
from rivals or performing similar activities in different ways.
 Differences in operational effectiveness among companies are pervasive.
Some companies are able to get more out of their inputs than others
because they eliminate wasted effort, employ more advanced technology,
motivate employees better, or have greater insight into managing
particular activities or sets of activities.

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What is strategy?
 Improving operational effectiveness is a necessary part of management, but
it is not strategy. Both are essential but the two agendas are different.
 The operational agenda involves continual improvement everywhere there
are no tradeoffs. Failure to do this creates vulnerability even for companies
with a good strategy.
 The operational agenda is the proper place for constant change, flexibility
and relentless efforts to achieve best practice.
 The strategic agenda is the right place for defining a unique
position, making clear trade-offs, and tightening fit. It involves
the continual search for ways to reinforce and extend the
company’s position. It demands discipline and continuity; its
enemies are distraction and compromise.

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Benchmarking
 The more benchmarking companies do, the more they look alike.
 Gradually, managers have let operational effectiveness supplant strategy.
The result is zero-sum competition, static or declining prices, and
pressures on costs that compromise companies ability to invest in the
business in the long term.
 Competitive strategy is about being different, about choosing a
different set of activities to deliver a unique mix of value; about
choosing to perform activities differently or to perform different
activities than rivals.
 Strategy is the creation of a unique and valuable position, involving a
different set of activities.
 The essence of strategic positioning is to choose activities that are
different from those of rivals. If the same set of activities were best to
produce all varieties, meet all needs, and access all customers, companies
could easily shift among them and operational effectiveness would
determine performance.

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Tradeoffs
 A sustainable strategic position requires tradeoffs
 Simply put, a tradeoff means that more of one thing necessitates less of
another
 Positioning tradeoffs are pervasive in competition and essential to strategy
 False tradeoffs between cost and quality occur primarily when there
is redundant or wasted effort, poor control or accuracy, or weak co-ordination.
 Strategy is making tradeoffs in competing. The essence of strategy is
choosing what not to do.
 Without tradeoffs, there would be no need for choice and thus no
need for strategy. Any good idea could and would be quickly
imitated. Again, performance would once again depend wholly on
operational effectiveness.

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Fits
 Fit drives both competitive advantage and sustainability
 While operational effectiveness is about achieving excellence in individual
activities, or functions, strategy is about combining activities.
 Fit locks out imitators by creating a chain that is as strong as its strongest
link.
 Fit is a far more central component of competitive advantage than most
realise.
 The more a company’s positioning rests on activity systems with second-and
third-order fit, the more sustainable its advantage will be.
 Fit means that poor performance in one activity will degrade the
performance in others, so that weaknesses are exposed and more prone to
get attention.

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Fit & Choices
 Strategy is creating fit among a company’s activities. The success of a
strategy depends on doing many things well and integrating among them.
If there is no fit among activities, there is no distinctive strategy and little
sustainability.
 Finding a new strategic position is often preferable to being the second or
third imitator of an occupied position.
 Tailoring organisation to strategy, in turn, makes complementarities more
achievable and contributes to sustainability.
 Continuity fosters improvements in individual activities and the fit across
activities, allowing an organisation to build unique capabilities and skills
tailored to its strategy.
 Frequent shifts in positioning are costly.
 The inevitable result of frequent shifts in strategy, or of failure to choose a
distinct position in the first place, is “me-too” or hedged activity
configurations, inconsistencies across functions, and organisational
dissonance.

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Choice
 A sound strategy is undermined by a misguided view of competition,
by organisational failures, and, especially, by the desire to grow.
 Managers have become confused about the necessity of making choices.
 The pursuit of operational effectiveness is seductive because it is concrete
and actionable.
 Caught up in the race for operational effectiveness, many managers simply
do not understand the need to have a strategy.
 Some managers mistake “customer focus” to mean they must serve all
customer needs or respond to every request from distribution channels.
Others cite the desire to preserve flexibility.
 Tradeoffs are frightening, and making no choice is sometimes
preferred to risking blame for a bad choice.

38 Ksenia WASCHKUHN
Choice
 A company may have to change its strategy if there are major structural
changes in its industry.
 A company’s choice of a new position must be driven by the ability
to find new tradeoffs and leverage a new system of complementary
activities into a sustainable advantage.
 Newly empowered employees, who are urged to seek every possible
source of improvement, often lack a vision of the whole and the
perspective to recognise tradeoffs. The failure to choose sometimes
comes down to the reluctance to disappoint valued managers or
employees.
 Compromises and inconsistencies in the pursuit of growth will erode the
competitive advantage a company had with its original varieties or target
customers.

EPSO ‘98
LEADERSHIP
&
INTENT

STANFORD - EPSO 98 LEADERSHIP
40 Ksenia WASCHKUHN
Role
The Role of leadership:
 Strong leaders willing to make choices are essential.
 In many companies, leadership has degenerated into orchestrating
operational improvements and making deals.
 General management’s core is strategy: defining and communicating the
company’s unique position, making tradeoffs, and forging fit among
activities. The leader must provide the discipline to decide which industry
changes and customer needs the company will respond to, while avoiding
organisational distractions and maintaining the company’s distinctiveness.
 One of the leader’s jobs is to teach others in the organisation about
strategy - and to say no.
 One of the most important factors of an explicit, communicated strategy is
to guide employees in making choices that arise because of tradeoffs in
their individual activities and in day-to-day decisions.

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Strategic Intent
 Strategic intent, on the one hand, envisions a desired leadership position
and establishes the criterion the organisation will use to chart its progress.
 Strategic intent is more than simply unfettered ambition. The concept also
encompasses an active management process that includes:
 focusing the organisation’s attention on the essence of winning;
 motivating people by communicating the value of the target;
 leaving room for individual and team contributions;
 sustaining enthusiasm by providing new operational
definitions as circumstances change;
 and using intent consistently to guide resource allocations.
 Strategic intent captures the essence of winning.
 Strategic intent is stable over time.

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Strategic Intent
 On studying the strategies of senior managers in America, Europe and
Japan, two contrasting models of strategy emerge: one which Western
managers will recognise, centres on the problem of maintaining strategic
fit. The other centres on the problem of leveraging resources.
 Both models recognise the problem of competing in a hostile environment
with limited resources.
 Both models recognise that relative competitive advantage determines
relative profitability. The first emphasises the search for advantages that
are inherently sustainable, the second emphasises the need to accelerate
organisational learning to outpace competitors in building new
advantages.
 The first leads to a search for niches, the second produces a quest for
new rules that can devalue the incumbent’s advantages.

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Strategic intent
 The first seeks to reduce financial risk by building a balanced portfolio of
cash-generating and cash-consuming businesses. The second seeks to
reduce competitive risk by ensuring a well-balanced and sufficiently broad
portfolio of advantages.
 In the first model, resources are allocated to product-market units. In the
second, investments are made in core competencies as well as in product-market
units. Top management works to assure that the plans of
individual strategic units don’t undermine future developments by default.
 Both models recognise the need for consistency in action across
organisational levels. The first, consistency between corporate business
levels is a matter of conforming to financial objectives. The second
model, business-corporate consistency comes from allegiance to a
particular strategic intent. Business-functional consistency comes from
intermediate-term goals.

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Strategic intent
 Many companies are more familiar with strategic planning than they are with
strategic intent.
 Strategic intent sets a target that deserves personal effort and commitment.
 Strategic intent gives employees the only goal that is worthy of commitment.
 The important question is not “How will next year be different from this
year?” but “What must we do differently next year to get closer to our
strategic intent?”
 We don’t believe that global leadership comes from an undirected process of
intrapreneurship. Behind such programs lies a nihilistic assumption: the
organisation is so hidebound, so orthodox ridden that the only way to
innovate is to put a few bright people in a dark room, pour in some money,
and hope that something wonderful will happen.
 Here the value added of the top management is low indeed.

45 Ksenia WASCHKUHN
Strategic intent
 Middle managers must do more than deliver on promised financial targets,
they must also deliver on the broad direction implicit in their
organisation’s strategic intent.
 Whereas the traditional view of strategy focuses on the degree of fit
between existing resources and current opportunities, strategic intent
creates an extreme misfit between resources and ambitions.
 No one knows what the terrain will look like at mile 26, so the role of top
management is to focus the organisation’s attention on the ground to be
covered in the next 400 metres.
 As with strategic intent, top management is specific about the ends, but
less prescriptive about the means.
 Corporate challenges come from analysing competitors as well as
from the foreseeable pattern of industry evolution.

46 Ksenia WASCHKUHN
Strategic intent
 Companies that set corporate challenges to create new competitive
advantages quickly discover that engaging the entire organisation requires
top management to create a sense of urgency
 Develop a competitor focus at every level through widespread use of
competitive intelligence
 Provide employees with the skills they need to work effectively
 Give the organisation time to digest one challenge before launching
another. The “wait and see if they’re serious this time” attitude
ultimately destroys the credibility of corporate challenges.
 Establish clear milestones and review mechanisms to track progress
and ensure that internal recognition and rewards reinforce desired
behaviour.
 It is important to distinguish between the process of managing
corporate challenges and the advantages that the process creates.

47 Ksenia WASCHKUHN
Strategic intent
 The essence of strategy lies in creating tomorrow’s competitive
advantages faster than competitors mimic the ones you possess today.
 An organisation’s capacity to improve existing skills and learn new ones is
the most defensible competitive advantage of all.
 The wider a company’s portfolio of advantages, the less risk it faces in
competitive battles.
 For instance the Japanese TV manufacturers in the 1970s and 1980s
thought of the various sources of competitive advantage as mutually
desirable layers, not as mutually exclusive choices.
 What some call competitive suicide - pursuing both cost and
differentiation - is exactly what many competitors strive for.

STANFORD - EPSO 98 INTENT
48 Ksenia WASCHKUHN
Strategic intent
 The route to competitive revitalisation implies a new view of strategy:
 Strategic intent assures consistency in resource allocation over the
long term.
 Clearly articulated corporate challenges focus the efforts of
individuals in the medium term.
 Competitive innovation helps reduce competitive risk
 Few companies recognise the value of documenting failure. Fewer still
search their own managerial orthodoxy for the seeds for competitive
surrender.

49 Ksenia WASCHKUHN
Strategic intent
 Playing by the leader’s rules is usually competitive suicide.
 The strategist’s goal is not to find a niche within the existing industry space
but to create new space that is uniquely suited to the company’s own
strengths, space that is off the map.
 In such cases, it is not the industry that is mature, but the executives’
conception of the industry.
 A narrow concept of maturity can foreclose a company from a broad stream
of future opportunities.
 Companies can be over-committed to organisational recipes, such as
strategic business units and the decentralisation an SBU structure implies.
 Few companies with a strong SBU orientation have built successful
global distribution and brand positions.
 Economies of scope may be as important as economies of scale in entering
global markets. But capturing economies of scope demands inter-business
co-ordination that only top management can provide.

50 Ksenia WASCHKUHN
Strategic intent
 Rewarding business unit managers solely on the basis of their
performance against return on investment targets often leads to
denominator management because executives soon discover that
reductions in investment and headcount - the denominator -
“improve” the financial ratios by which they are measured more
easily than growth in the numerator - revenues.
 The concept of the general manager as a movable peg reinforces the
problem of denominator management.
 Honesty and humility on the part of top management may be the
first prerequisite of revitalisation.
 Where strategy formulation is an elitist activity it is also difficult to
produce truly creative strategies.
 The challenge will be to enfranchise employees to invent the means to
accomplish ambitious ends. Senior managers lack the courage to commit
their companies to heroic goals.

EPSO ‘98
BUSINESS
STRATEGY

52 Ksenia WASCHKUHN
Framework
 Strategic thinking is about understanding the relationships among
the business’ external environment, its strategic assets, its action
plan, and its performance.
 Strategy is the framework that acts as a bridge between the managers’
analysis of the business’ external and strategic environments and the
specific actions the firm should take to enhance its performance given that
environment.
 It defines a framework for guiding the choice of actions.
 A strategy is the starting point for developing a detailed action plan.
 In defining strategy we also want to distinguish it from other terms that are
often mentioned in relation to strategy, such as vision, mission, values,
and purpose - often useful complements to strategy but generally different
from, and very imperfect substitutes for strategy.
STANFORD - EPSO 98
The role of
business strategy
BUSINESS STRATEGY

53 Ksenia WASCHKUHN
Framework
 Strategy is not in itself a list of tactics.
 Strategic assets are used to describe the attributes of a firm which are key
determinants of its performance.
 Strategic actions used to describe the major resource commitments.
Strategic actions are strategic because they importantly affect strategic
assets.
 Strategy can be best described in terms of the following four components:
 A clear set of long-term goals
 The scope of the business
 Competitive advantage, and
 Logic
STANFORD - EPSO 98
Defining
business strategy
BUSINESS STRATEGY

54 Ksenia WASCHKUHN
Building blocks
 The first element of a coherent strategy is a clear set of long-term goals
such as “dominate the market”, be “technology leader”, or be the
“premium quality firm”.
 These goals must be enduring.
 To be directional, these goals must be more specific than the
overarching edict of “profit maximisation”. A long-term goal such
as this is so broad that it has very little strategic content.
 Long-term goals are part of strategy insofar as they provide guidance as to
what plan of action should be adopted.
 By clearly staking out a desired competitive position the firm may be
able to persuade rivals to focus their efforts elsewhere.
STANFORD - EPSO 98
A clear set of
long term goals
BUSINESS STRATEGY

 The scope also defines (implicitly) the activities the firm will not undertake.
 The statement of scope defines the firm’s position with respect to these
broad and controversial strategic issues.
 Competitive advantage is the how of strategy.
 A high performance firm must achieve advantage over the relevant
55 Ksenia WASCHKUHN
competitors.
 A firm does not need to have an advantage over all its competitors.
 A firm will do better if its source of competitive advantage is unique to it.
 There are many sources of competitive advantage including: lower costs,
higher quality products, more brand equity, the capacity to innovate more
quickly, a superior service capability, a better business location.
 The fact that firm is better must be linked to its ability to achieve its long-term
goals within the scope of the firm’s strategy.
STANFORD - EPSO 98
Building blocks
Scope
Competitive
advantage
BUSINESS STRATEGY

 The most important element of a strategy is the logic by which the firm
intends to achieve its strategic goals.
 The “why” is the logic of the strategy.
 Strategy contains the core argument for why and how the firm will
succeed. Until one is able to articulate how the above components of
strategy come together to provide a coherent and convincing case for why
the firm may succeed, one has only a list of elements and not a strategy.
56 Ksenia WASCHKUHN
STANFORD - EPSO 98
Building blocks
Logic
BUSINESS STRATEGY

 Firms often commit their major goals and corporate philosophy in a
“Mission Statement” or “Statement of Purpose”.
 A cynical view is that they are largely public relations statements, but in
fact they can serve several positive functions, among them that if there is a
goal conflict among members of an organisation, the mission statement
can serve to clarify the firm’s goals.
 A mission statement can help
promote consistency between the
views of the company’s leaders and
the company’s strategy.
 However, whatever value these
statements have, they should not be
confused with a statement of the
firm’s strategy
57 Ksenia WASCHKUHN
STANFORD - EPSO 98
Building blocks
Relationship of
strategy to
mission, purpose,
and values
BUSINESS STRATEGY

 The general manager must have some sense about technological
trajectories, competitors’ likely actions and developing market
opportunities.
 The term “vision” is often used to describe the strategist’s plan for
closing the gap between current reality and a potential future.
 Coming up with an articulation of long-term goals is easier if one has a
clear vision of where the strategy is intended to take the firm.
 Developing and communicating an envisioned future for a firm in a
rapidly changing and uncertain world is a leadership function of general
managers.
 A firm involved in fundamentally changing its strategic direction, a
clear (and clearly articulated) vision of where the strategy is
intended to take the company and why it has a chance for success is
important to attract and motivate employees and investors.
58 Ksenia WASCHKUHN
STANFORD - EPSO 98
Building blocks
Vision
BUSINESS STRATEGY

 It is important to be clear that a vision is not always necessary for strategy
and it is never sufficient.
 A great vision without supporting strategy is unlikely to succeed. Some
companies have failed because there was no action plan that guided the
firm to the acquisition and deployment of strategic assets that might yield
competitive advantage given the vision. Vision provides a guide to
strategy formulation, but it is not a substitute for strategy.
59 Ksenia WASCHKUHN
STANFORD - EPSO 98
Building blocks
BUSINESS STRATEGY

 A firm’s strategy, although clear, may never be publicly articulated. The
absence of a public, explicit strategy statement is in sharp contrast to the
Mission Statement, which a firm often goes to pains to disseminate
widely. There are three main reasons why firms refrain from
publishing their strategy:
 The most common reason is that senior general management has a
mutual understanding of what the strategy is and simply does not bother
to formulate an explicit strategy statement.
 A firm may be pursuing its strategy quite unselfconsciously.
 A firm may be confused as to what its strategy is or the components
of the strategy do not hang together particularly well. Since the
process of being precise about the strategy reveals these
inconsistencies, often accompanied by disagreement and conflict
among senior management, such firms often prefer to focus on the
details of the next year’s business plan than to confront the
fundamentals of their strategy.
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STANFORD - EPSO 98
The strategy
statement
BUSINESS STRATEGY

STANFORD - EPSO 98 BUSINESS STRATEGY
61 Ksenia WASCHKUHN
Benefits
 A Top management may believe that its strategy is so “unique” that
every competitor would copy it, if only they knew it!
 There are several benefits that come from articulating and communicating a
strategy for the business:
 Clarity
 Co-ordination- an explicit strategy serves as a co-ordinating mechanism.
 Incentives
 Efficiency - day to day decisions can be evaluated in terms of whether
they “fit” the existing strategy.
 Evaluation/Adaptation - this is useful in tracking how well the strategy is
performing.
 Change - a significant change in the firm’s strategy almost always
requires a clear articulation of the proposed new strategy so that it can be
implemented by all relevant parts of the firm.
 However, being explicit about strategy can reinforce rigidity and inertia.

62 Ksenia WASCHKUHN
Benefits
 In most practical situations the firm will not be able to boil its strategy
down to a single sentence.
 The statement needs to be detailed enough to do justice to its components.
 The strategy statement can be seen as an “elevator pitch”, a statement of
the firm’s strategy that is sufficiently detailed to be useful, yet concise
enough to be delivered in an elevator ride from the lobby.

63 Ksenia WASCHKUHN
Adapt & Focus
 If the firm’s external environment has changed in significant ways, the
managers may have responded by taking appropriate actions. If these
actions are inconsistent with the old strategy, the strategy has de facto
been changed, perhaps without the managers recognising how it has
changed.
 Identifying the existing strategy is necessary to crafting an accurate and
useful strategy statement.
 Outsiders who are analysing the firm either for competitive or investment
reasons or with an eye to a merger or acquisition are also interested in
identifying the firm’s strategy.
 Financial statements contained in annual reports, web page, investor
information kits, etc are rarely coherent and comprehensive
statements of strategy.
STANFORD - EPSO 98
Strategy
identification
BUSINESS STRATEGY

64 Ksenia WASCHKUHN
Dynamic process
 To identify a firm’s strategy it is necessary to look at what the firm’s
actual policies are and what the firm actually does: its pattern of
decisions. More often, what the firm does provides additional information
about its strategy.
 Thus the starting point for strategy identification is an examination of the
firm’s approach to business in each of its key areas of operation: finance,
sales and marketing, manufacturing, procurement, R&D, marketing,
formal and informal organisation structure, human resources management
policies, etc.
 Strategy formulation is a dynamic process.
 The criteria that are typically used for strategy evaluation are
internal and external consistency.
STANFORD - EPSO 98
Strategy
evaluation
BUSINESS STRATEGY

65 Ksenia WASCHKUHN
Consistency
 Three are three main tests for internal consistency of a strategy:
 Appropriate and mutually consistent policies: One would, for
instance, expect a firm that has a strategy predicated in part on
exceptional levels of service to have recruitment and training policies
designed to deliver this. Moreover, the policies in different parts
of the organisation should be mutually reinforcing and consistent
with the strategy.
 A tightly coupled organisation: the formal and informal elements of
the firm’s organisation should be mutually reinforcing and support the
strategy.
 Fit with the firm’s strategic assets: the firm must have the necessary
strategic assets - resources, capabilities and position - to successfully
implement the strategy or else it must have a credible plan for
developing or acquiring them.

66 Ksenia WASCHKUHN
Consistency
 The criteria used in evaluating the strategy are closely linked to the logic
of the strategy statement.
 The internal and external consistency criteria are related to a tool
that is often used for strategy evaluation known as SWOT Analysis,
an acronym for business unit’s Strengths, Weaknesses, Opportunities, and
Threats.
 Thus a firm’s strengths and weaknesses are relevant to the firm’s strategy
since it must build on the firm’s strategic strengths and mitigate its
weaknesses.
 The firm must take strategic actions to overcome its weaknesses and
improve the strategic context of the firm going forward.

67 Ksenia WASCHKUHN
Consistency
 While SWOT Analysis can only serve as a preliminary data organisation
component of those exercises, the use of the work “analysis in the term
“SWOT Analysis” is something of an overstatement since this tool
amounts to only an inventory and sorting of the major factors relevant to
the firm’s strategic situation.
 This, however, is not enough. The strengths and weaknesses of the
business unit must be appraised in relation to its strategy and, in particular,
the logic of the strategy.
 Strategy evaluation cannot proceed without a well thought out strategy,
preferably embodied in a strategy statement. Internal consistency
involves an audit of the firm’s policies to ensure that they are
consistent with, and support, the logic of the strategy.

68 Ksenia WASCHKUHN
Evolution
 Strategy identification and evaluation are the initial steps in formulating
and implementing a new strategy. The remaining steps are:
 Developing strategic options: A strategic option should be a coherent,
self contained strategy with the four elements of long-term goals,
scope, competitive advantage and logic.
 Evaluating strategic options: The chosen strategy should exploit
opportunities presented by the external environment that the firm’s
strategic assets position it well to do. If a strategic option represents a
departure from the past strategy, a change in policies and organisation will
likely have to be made.
 Strategy implementation: The starting conditions for developing and
evaluating strategy are formed by prior implementation actions. It is
therefore misleading to think of implementation as merely the mechanical
carrying out of a plan of action. Within a larger organisation, the co-operation
and buy-in of managers in other business units as well as senior
management is typically required => Strategy communication.
STANFORD - EPSO 98
The strategy
process and
strategic
change
BUSINESS STRATEGY

69 Ksenia WASCHKUHN
The evaluation of business strategy
 For many executives strategy evaluation is simply an appraisal of
how well a business performs. This line of reasoning misses the
whole point of strategy - that the critical factors determining the
quality of current results are often not directly observable or simply
measured.
 Business strategy evaluation requires a reasonable store of situation-based
knowledge.
 A strategy need not be wrong or right in any absolute sense.
 Many people find it easier to set or try to achieve goals than to
evaluate them. This arises out of a tendency to confuse values, which
are fundamental expressions of human personality, with objectives,
which are devices for lending coherence to action.

70 Ksenia WASCHKUHN
 For our purposes a strategy is a set of objectives, policies, and plans that,
taken together, define the scope of the enterprise and its approach to survival
and success.
 Four broad criteria for evaluating strategy are:
 Consistency
 Consonance
 Advantage
 Feasibility
 A strategy that fails to meet one or more of these criteria is strongly
suspect.
STANFORD - EPSO 98
The principles of
strategy
evaluation
BUSINESS STRATEGY

71 Ksenia WASCHKUHN
 Even strategies that are the result of formal procedures may easily contain
compromise arrangements between opposing power groups.
 A key function of strategy is to provide coherence to organisational action.
 Organisational conflict is often a symptom of managerial disorder but may
also indicate problems of strategic inconsistency.
 A final type of consistency that must be sought in strategy is between
organisational objectives and the values of the management group.
 The key to evaluating consonance is an understanding of why the
business, as it currently stands, exists at all and how it assumed its current
pattern.
STANFORD - EPSO 98
Consistency
Consonance
BUSINESS STRATEGY

72 Ksenia WASCHKUHN
 Competitive strategy is the art of creating or exploiting those advantages
that are most telling, enduring, and most difficult to duplicate.
 The idea that certain arrangements of one’s resources can enhance their
combined effectiveness, and perhaps even put rival forces in a state of
disarray, is at the heart of the traditional notion of strategy.
 A strategy’s purpose is to provide structure to the general issue of the
business’ goals and approaches to coping with its environment. The issue
of feasibility arises with regard to whether the organisation has
demonstrated that it possesses the problem-solving ability required by the
strategy.
 The purpose of strategy is to effectively deploy the unique and distinctive
resources of an enterprise.
STANFORD - EPSO 98
Advantage
Feasibility
BUSINESS STRATEGY

73 Ksenia WASCHKUHN
 The issues involved are too closely associated with the distribution of
power and authority for either strategy formulation or evaluation to take
place in an ivory tower environment.
 Ultimately, a firm’s ability to maintain its competitive position in a world
of rivalry and change may be best served by managers who can maintain a
dual view of strategy and strategy evaluation.

STANFORD - EPSO 98 TO COMPETE
Customer Intimacy and Other Value Disciplines
 How did Nike, a start-up company with not reputation behind it, manage
to run past Adidas, a long-time solid performer in the sport-shoe market?
 The answer is that Nike redefined value for customers in their respective
markets. They built powerful, cohesive business systems that could
deliver more of that value than competitors. They raised customers’
expectations beyond the competition’s reach.
 Today’s customers have an expanded concept of value that includes
convenience of purchase, after-sale service, dependability, etc.
 Companies that have taken leadership positions in their industries in
the last decade typically have done so by narrowing their business
focus, not broadening it. They have become champions in one of the
following disciplines: operational excellence, customer intimacy or
product leadership.
75 Ksenia WASCHKUHN

 Dell Computer, for instance, is a master of operational excellence.
Customer intimacy, the second value discipline, means segmenting and
targeting markets precisely and then tailoring offerings to match exactly
the demands of those niches. Companies combine detailed customer
knowledge with operational flexibility. Product leadership means offering
customers leading-edge products. Nike excels in product leadership.
 Companies that push the boundaries of one value discipline while
meeting industry standards in the other two gain such a lead that
competitors find it hard to catch up.
 Less focused companies must do far more than simply tweak existing
processes to gain this advantage.
 Companies that pursue the same value discipline have remarkable
similarities, regardless of their industry. But across two disciplines, the
similarities end.
76 Ksenia WASCHKUHN

 An example of operational excellence is GE’s white goods business. In
the 1980s, in order to transform itself in a low-cost, no-hassle supplier to
dealers, GE designed its so-called Direct Connect programme which
meant reinventing the business to embody its operational excellence
discipline. With Direct Connect, GE manufactures in response to
customer demand - not inventory.
 In doing this, GE has captured a valuable commodity from its dealers:
data on the actual movement of its products. With Direct Connect, GE
knows that vendors’ orders are, in fact actual sales to customers.
 The system has reduced and simplified a complex and expensive
warehousing and distribution system down to ten strategically located
warehouses.
 GE has reengineered the process that begins with order entry and
ends with product or service delivery in a way that emphasises
efficiency and reliability.
77 Ksenia WASCHKUHN
STANFORD - EPSO 98
Operational
Excellence
TO COMPETE

 Customer intimacy entails tailoring and shaping products and services to
fit an increasingly fine definition of the customer. This can be expensive,
but customer-intimate companies are willing to spend now to build
customer loyalty for the long term.
 One principle that companies adopting this policy understand well is the
difference between profit or loss on a single transaction and profit over the
lifetime of their relationship with a single customer.
 A leading financial brokerage firm, for instance, recently installed a
telephone-computer system capable of recognising individual clients by
their telephone numbers when they call. The system routes investors with
large accounts and frequent transactions to their own senior account
representative.
 To pursue a strategy of customer intimacy, an company has to create
the organisation, build the information systems and educate and
motivate the people required to pursue the strategy.
78 Ksenia WASCHKUHN
STANFORD - EPSO 98
Customer
Intimacy
TO COMPETE

 To pursue a policy of product leadership, all a company’s businesses
and management processes have to be engineered for speed.
 Product leaders do not stop for self-congratulation, they are too busy
79 Ksenia WASCHKUHN
raising the bar.
 It is not enough to come up with a new product; you have to come up with
a new way to go to market as well.
 Product leaders create and maintain an environment that encourages
employees to bring ideas into the company and they listen to and consider
these ideas. Moreover, product leaders continually scan the landscape for
new product or service possibilities.
 The strength of product leaders lies in reacting to situations as they occur.
 Product leaders are their own fiercest competitors
STANFORD - EPSO 98
Product
Leadership
TO COMPETE

 Innovators are willing to take the long view of profitability, recognising
that whether they extract the full profit potential from an existing product
or service is less important to the company’s future than maintaining its
product leadership edge and momentum. Such companies are never
blinded by their own success.
 Product leaders also possess the infrastructure and management
systems needed to manage risk well.
 Once a company has become an industry leader, the greater challenge is to
sustain the required focus, to drive the strategy relentlessly through the
organisation, to develop the internal consistency and to confront radical
change.
 Many companies falter simply because they lose sight of their value
discipline. Reacting to market-place and competitive pressures, they
pursue initiatives that have merit on their own but are inconsistent with the
company’s value discipline.
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STANFORD - EPSO 98
Sustaining the
lead
TO COMPETE

 The key to gaining and sustaining value leadership is focus, but the
management of a company that is a value leader must stay alert.
 Companies that sustain value leadership within their industries will be run
by executives who do not only understand the importance of focusing the
business on its value discipline but also push relentlessly to advance the
organisation’s operating model. They will personally lead the
company’s drive to develop new capabilities and to change the
imbedded work habits, processes, and attitudes that prevent them
from achieving excellence in the discipline they have chosen.
 By leading the effort to transform their organisations, these individuals
will be preparing their companies to set new industry standards, to
redefine what is possible, and to forever change the terms of competition.
81 Ksenia WASCHKUHN

Competing on Capabilities: The New Rules of Corporate Strategy
82 Ksenia WASCHKUHN
`
 As globalisation breaks down barriers between national and regional
markets, competitors are multiplying and reducing the value of national
market share.
 In this more dynamic business environment, strategy has to become
correspondingly more dynamic. In such an environment, the essence of
strategy is not the structure of a company’s products and markets
but the dynamics of its behaviour.
 There are four basic principles of capabilities-based competition:
 The building blocks of corporate strategy are not products and
markets but business processes.
 Competitive success depends on transforming a company’s key
processes into strategic capabilities that consistently provide
superior value to the customer.
STANFORD - EPSO 98
Four basic
principles of
capabilities-based
competition
TO COMPETE

 Companies create capabilities by making strategic investments in a
support infrastructure that links and transcends traditional SBUs and
functions.
 The champion of a capabilities-based strategy is the CEO.
 A capability is a set of business processes strategically understood.
 A capability is strategic only when it begins and ends with the
83 Ksenia WASCHKUHN
customer.
 Capabilities-driven companies conceive the organisation as a gigantic loop
that begins with identifying the needs of the customer and ends with
satisfying them.
 Because a capability is “everywhere and nowhere”, no one executive
controls it entirely. Leveraging capabilities requires a panoply of strategic
investments across SBUs and functions and beyond what traditional cost-benefit
metrics can justify.

 Building strategic capabilities cannot be treated as an operating matter and
left to operating managers, to corporate staff, or still less to SBU heads. It
is the primary agenda of the CEO. Only the CEO can focus the entire
company’s attention on creating capabilities that serve customers.
Only the CEO can identify and authorise the infrastructure
investments on which strategic capabilities depend. Only the CEO can
insulate individual managers from any short-term penalties to the P&Ls of
their operating units that such investments might bring about.
 A CEO’s success in building and managing capabilities will be the chief
test of management skill in the 1990s. The prize will be to outperform
competition along five dimensions:
 Speed
 Consistency
 Acuity
 Agility
 Innovativeness
84 Ksenia WASCHKUHN

 The starting point is for senior managers to undergo a fundamental
shift of perception that allows them to see their business in terms of
strategic capabilities.
 They then need to identify and link together essential business processes to
85 Ksenia WASCHKUHN
serve customer needs.
 Finally they can reshape the organisation to encourage the new kind of
required behaviour.
 There are four steps by which any company can transform itself into a
capabilities-based competitor:
 Shift the strategic framework to achieve aggressive goals
 Organise around the chosen capability and make sure employees
have the necessary skills and resources to achieve it.
STANFORD - EPSO 98
Becoming a
capabilities-based
company
TO COMPETE

 Make progress visible and bring measurements and reward into
86 Ksenia WASCHKUHN
alignment.
 Do not delegate the leadership of the transformation.
 This top-down change process has the paradoxical result of driving
business decision making down to those directly participating in key
processes. This leads to a high measure of operational flexibility and an
almost reflex-like responsiveness to external change.
 A company that focuses on strategic capabilities can compete in a
remarkable diversity of regions products and businesses.
 Strategic advantages built on capabilities are easier to transfer
geographically than more traditional competitive advantages.
STANFORD - EPSO 98
A new logic of
growth: the
capabilities
predator
TO COMPETE

 For the moment, capabilities-based companies have the advantage of
competing against rivals still locked into the old way of seeing the
competitive environment. This will not last forever.
 The future of capabilities-based competition might be found in two
fast-growing regional banks: Wachovia Corporation and Bank One.
Both banks compete on capabilities, but in a different way.
 Wachovia competes on its ability to understand and serve the needs of
individual customers, a skill that manifests itself in probably the highest
“cross-sell ratio” of any bank in the country.
 Where Wachovia focuses on meeting the needs of individual customers,
Bank One’s distinctive ability is to understand and respond to the needs of
entire communities.
 The central organisational role in the Bank One business system is played
not be front-line employees but by the presidents of the 51 affiliate banks
in the Bank One network.
87 Ksenia WASCHKUHN
STANFORD - EPSO 98
A new logic of
growth: the
capabilities
predator
TO COMPETE

 These presidents select products, establish prices and marketing strategy,
make credit decisions and set internal management policies. They have
the authority to mould bank products and services to local conditions, but
they are also expected to learn from best practice.
 Both Wachovia and Bank One are decentralised but focused, single-minded
but flexible. But there the similarities end - both banks focus on
different business processes: Wachovia on transfer of customer specific
information across numerous points of customer contact; Bank One on the
transfer of best practices across affiliate banks.
 Wachovia’s capability is embedded in the training of personal bankers so
the bank has made few acquisitions and can only integrate them slowly.
Bank One’s capabilities by contrast, are especially easy to transfer to new
acquisitions. All the company needs is to install its corporate MIS and
intensively train the acquired bank’s senior officers, a process that can be
done in a few months.
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 Wachovia’s capability to serve individual customers by cross-selling a
wide range of banking products will in the long term probably allow the
company to extract more profit per customer than Bank One.
 These differences can be deep-seated. Capabilities are often mutually
exclusive. Choosing the right ones is the essence of strategy.
89 Ksenia WASCHKUHN

 Time is just one piece of a more far-reaching transformation in the logic of
90 Ksenia WASCHKUHN
competition.
 For a glimpse of the new world of capabilities-based competition,
consider the reversal of fortunes represented by Kmart and Wal-
Mart. In 1979 Kmart was king of discount retailing. Today Wal-
Mart. Today Wal-Mart is the largest and highest profit retailer in
the world.
 The real secret of Wal-Mart’s success lies in a set of strategic business
decisions that transformed the company into a capabilities-based
competitor.
 Wal-Mart’s goals were simple: to provide customers access to quality
goods, to make these goods available when and where customers want
them, to develop a cost structure that enables competitive pricing, and to
build and maintain a reputation for absolute trustworthiness.

 This strategic vision reached its fullest expression in a logistics technique
known as “cross-docking”.
 Cross-docking enables Wal-Mart to achieve the economies that come from
purchasing full truckloads of goods while avoiding the usual inventory
and handling cost.
 Another key component of Wal-Mart’s logistics infrastructure is the
company’s fast and responsive transportation system.
 The cross-docking approach places a premium on frequent, informal co-operation
among stores, distribution centres, and suppliers - with far less
centralised control. The job of senior manager of Wal-Mart, then, is not to
tell individual store managers what to do but to create an environment
where they can learn from the market - and from each other.
91 Ksenia WASCHKUHN

 The final piece of the capabilities mosaic is Wal-Mart’s human resources
system. The company has set out to enhance its organisational capability
with programmes like stock ownership and profit sharing geared towards
making its personnel more responsive to customers.
 Kmart did not see its business this way. It managed its business by
focusing on a few product-centred strategic business units, each a profit
centre under strong, centralised line management.
 The difference is that Wal-Mart emphasises behaviour - the organisational
practices and business processes in which capabilities are rooted - as the
primary object of strategy and therefore focuses its managerial attention
on the infrastructure that supports capabilities.
 In industry after industry, established competitors are being out-manoeuvred
and overtaken by more dynamic rivals.
92 Ksenia WASCHKUHN

93 Ksenia WASCHKUHN
Marks & Spencer Ltd.: Summary
 Creating value for customers is the ultimate foundation of a
successful business strategy.
 Successful business strategies combine concerns for differentiation and
cost in unique ways.
 Distinctive competencies in relationship building with key parties
(customers, suppliers, employees) are a powerful potential source of
competitive advantage.
 The core values that top management associates with the survival and
success of the firm can be a strong driver of business strategy. In reality,
culture and strategy are inherently intertwined.
 Implementing a business strategy requires relentless attention and
continuous alertness to deviations from core values and to opportunities to
leverage them.

TO COMPETE
 Strategy as an organisational learning process is driven by the
development of distinctive competencies and capabilities:
 Competitive advantages rooted in organisational learning may be more
sustainable (because harder to imitate), but less easy to transfer (because
harder to fully comprehend).
94 Ksenia WASCHKUHN
STANFORD - EPSO 98
Marks & Spencer Ltd.: Summary
CAPABILITIES OPPORTUNITIES STRATEGY

96 Ksenia WASCHKUHN
What is organisation design?
 Organisations are collections of people with some common purposes
whose activities are co-ordinated and motivated through various
means within the contest of certain organisation features.
 Organisational features can be classified into three types:
 Architecture
 Processes
 Culture
 The architecture of the organisation includes its scope and boundaries, the
internal structure of authority relations and sub-units, the design of jobs,
the allocation of decision power, the corporate governance system, the
financial structure and other features that are formally defined and often
regulated by contracts. Terms such as organisational change or re-organisation
are often used to refer to change in these architectural
features but this alone is unlikely to be very effective if the processes and
culture are left unaltered.
STANFORD - EPSO 98
Architecture
TO ORGANISE

 Processes refers to the ways in which the organisation’s work actually
gets done. Processes include both the formal and the informal
mechanisms for gathering and transmitting information, setting objectives
and plans, obtaining and allocating resources and monitoring and
rewarding performance.
 The more formal ones might be easily changed; the informal ones
are no less important, but are harder to change.
 The organisational culture includes the beliefs, special language, and
mental maps that distinguish the organisation. The beliefs concern the
organisation’s fundamental values and purposes, how people are to
interact with one another and with outsiders. These features powerfully
shape behaviour. They are also persistent, very hard to manage and
to change deliberately.
97 Ksenia WASCHKUHN
STANFORD - EPSO 98
Processes
Culture
TO ORGANISE

STANFORD - EPSO 98
TO ORGANISE
 Organisation design involves selecting the people and the features of the
98 Ksenia WASCHKUHN
organisation.
 Good design means selecting these to maximise performance.
 Strategy and the environment obviously affect performance too.
 To these we add the design of the organisation.
 There are direct links between the organisation and the strategy. People
may be the key resources that the firm has and may be the repositories of
its capabilities. Thus the choice of strategy and organisation are
interconnected and should be done together.

99 Ksenia WASCHKUHN
Organising for Performance and Growth
 Use all aspects to affect behaviour: People - Architecture - Processes -
Culture
 Seek both initiative and co-operation
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Organisational
design
TO ORGANISE
 Common brand versus division-specific
 Level at which P&L responsibility lies
 Extent and funding of shared services
 Design of pay system
 The boundaries (internal and external) of the firm and the nature and
intensity of incentives (explicit and implicit, objective and subjective,
financial and intrinsic) are major determinants of the location on the
frontier.
Examples of
Trade-off:
Initiative vs.
Co-operation

TO ORGANISE
100 Ksenia WASCHKUHN
STANFORD - EPSO 98
Trade-off
Initiative
Co-operation
More entrepreneurial
More co-operative

 Strong boundaries and incentives lead to strong initiative
 decentralise/disaggregate
 individual performance-based rewards
 Weak boundaries and incentives facilitate co-operation
 common identity and fate through the organisation
 rewards not contingent on individual performance
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Initiative vs.
Co-operation
TO ORGANISE

TO ORGANISE
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Disaggregated Firm
Initiative
Co-operation
Market/entrepreneurial
Firm
Classic
Bureaucracy

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I
Organisational
Investment and
Innovation: Move
out the frontier
C
 IT facilitates both co-operation (better information sharing) and initiative
(better performance measurement.
 Adding “linkage managers” may facilitate co-operation while not hurting
initiative.
Examples:
Shifting the
Frontier
TO ORGANISE

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Organisational Learning
Behavioural Objectives of
Design
Architecture
Processes/Routines
Culture
(Capability-based)
Sustainable
Competitive Advantage
Initiative
Co-operation
Learning
TO ORGANISE

TO ORGANISE
STANFORD - EPSO 98
Behavioural Objectives of Design: Dynamics
IDENTIFY THE STRATEGY
Scope
(Capability- based) Sustainable
Competitive Advantage
Goals & Basis for Profitability
IMPLEMENT A STRATEGY
Architecture
Processes / Routines
Culture
IINNIITTIIAATTIIVVEE
CCOO--OOPPEERRAATTIIOONN
LLEEAARRNNIINNGG
DRIVES
DRIVES
Implies
&
Drives
Implies
&
Drives
RREESSOOUURRCCEESS
CCAAPPAABBIILLIITTIIEESS
PPOOSSIITTIIOONN

 Organisational learning occurs through three stages
 variation/experimentation stage
 necessarily a decentralised process requiring a de-coupling of
organisational units (lack of standardisation/inter-dependence
across units)
 selection among alternatives
 selection procedures can vary in terms of their centralisation
 retention of “best practices”
 knowledge transfer implies coupling of organisational units
STANFORD - EPSO 98
Variation/
Selection/
Retention Model
TO ORGANISE

 Reasons 1: Organisations are unwilling to experiment
 Strong incentives tend to undercut because hard to design incentives
for exploratory activity.
 Most cultures punish failure
 Reason 2: Learning requires “slack” in organisation, and there is
generally a lack of tolerance for slack
 Variation requires resources devoted to “deviant” activities
 Example: “bootlegging” at 3M, RISC at Intel
 Selection/transfer cannot occur without organisational resources
dedicated to transfer
 Example: peer assists at BP
STANFORD - EPSO 98
Two reasons why
organisations are
typically poor
learners
TO ORGANISE

 These reasons why organisations are poor learners can be understood in
terms of a single learning dilemma:
 There exists a trade-off between devoting resources to long
term learning benefits and short-term operating efficiency
benefits.
 Challenge of organisational learning:
 variation requires de-coupling of organisational units
 Efficient knowledge transfer requires tight coupling of organisational
units
 There is thus a tension between
 organisational design that facilitates the emergence of new
ideas.
 organisational design that allows the effective dissemination
and refinement of the best ideas.
STANFORD - EPSO 98
Learning
Dilemma
TO ORGANISE

 Culture
 Trust to facilitate information transfer about failure as well as success
 Spirit of “generalised reciprocity”
 Processes/routines
 coalitional, grass-roots basis for decision making
STANFORD - EPSO 98
Cultural and
procedural
support for
loosely coupled
architecture
TO ORGANISE

 Balancing strong culture of co-operation with strong individual incentives
 Deciding on the right amount of slack to be devoted to learning
 Beware of tightly coupled imitators! A fast, tightly-coupled second
mover can overwhelm a (slack) learning organisation.
 Trying to systemise complex tacit knowledge
 A real danger that systemisation of complex, tacit knowledge
removes essential content
 Less systematic knowledge requires stronger reliance on strong
personal ties and less reliance on more formal means of information.
STANFORD - EPSO 98
Challenges of
loosely-coupled
organisation
TO ORGANISE

EPSO ‘98
ADVANTAGE
&
CHANGE

STANFORD - EPSO 98
Defending Positional Advantage
EXTERNAL
CHANGE
Life cycle changes
Demand changes
Supply changes
CONTEXT:
Internal and
External
ACTION:
Internal and
External
PERFORMANCE
Sources and Effects of Change
ADVANTAGE & CHANGE

 Outside the organisation
 industry changes
 supply chain changes
 outside the supply chain
 Inside the organisation
 technical innovation
 behavioural innovation
 strategic and non-strategic
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Sources of
Change
ADVANTAGE & CHANGE

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Hardware/
Software
Suppliers
C
Example: IT Outstanding
 Technological change
 Vertical horizontal
 Forward integration
IT
Outsource
Firms
Enterprise
IT
Consumers
 Application change
 Process change
 Needs change
C
ADVANTAGE & CHANGE

Defending Positional
 Evolution of industries
 Competition among incumbents
 positional advantage
 capabilities advantage
 Entry
STANFORD - EPSO 98
Effects of change
ADVANTAGE & CHANGE
 Effects on industrial “stages”
 Vertical-to-horizontal
Evolution of
industries

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Evolution: industry stages
Emerging Growth Maturity Decline
ADVANTAGE & CHANGE

 Evolution: vertical and horizontal industries (the complements problem):
 Computers
 Telecommunications
 Automobiles
 “Vertical” industries
 Co-ordination by firm
 Competition at endpoint only
 Dominance of chain
STANFORD - EPSO 98
Evolution of
industries
ADVANTAGE & CHANGE

STANFORD - EPSO 98 ADVANTAGE & CHANGE
 “Horizontal” Industries
 Co-ordination by market
 Competition at each layer
 Dominance of segment
 Vertical to horizontal
 Competition in components
 Higher quality
 more competitive pricing
 Slower standard formation
 Integration more difficult for user

 Competition among incumbent firms
 Fragility of first-mover advantage
 outdated resources
 lost leverage
 Position vs. Capability
 Competition: re-creating advantage
 Leveraging existing capabilities
 Creating new first mover advantage
 Example: “Value added contracting”
 Risk sharing
 Measuring effects
 Opportunism

 Responding to Entry
 Accommodate or attach
 anticipate reactions
 think more than one move ahead
 goals and signposts
 Communicate intent
 signalling vs. cheap talk
 commitment
 internal and external
 Pro-active vs. Reactive
 investing in entry barriers
 shaping rivals’ strategies

Strategic Dissonance
 Aligning corporate strategy and strategic action is a key top
management responsibility. Such alignment is driven by the strategic
intent of the CEO who relentlessly develops the firm’s capabilities and
transforms the basis of competition in the industry to the firm’s advantage.
 In extremely dynamic industries, alignment between a firm’s strategic intent
and strategic action is not likely to last. Inevitably, strategic actions will
begin to lead or lag strategic intent. Such divergences between intent and
action cause “strategic dissonance” in the organisation. New strategic intent
must be based on top management’s capacity to take advantage of the
conflicting information generated by strategic dissonance.
 Not all dissonance is strategic. Companies experience some level of
dissonance as a result of routine disagreements and conflicts. Companies
need managers precisely to mediate and resolve these sorts of frictions.
Dissonance is strategic when it signals impending industry or
corporate transformation.

 Strategic dissonance signals a strategic inflection point.
 This term is used to describe the giving way of one type of industry
dynamics to another; the change of one winning strategy to another; the
replacement of an existing technological regime by a new one. These
changes create a “valley of death” for the incumbents because they
materially affect their profitable growth trajectories.
 It is very difficult to clearly perceive the new industry equilibrium or
winning strategy that loom beyond a strategic inflection point.
 How to tell signal from noise? Voices sounding danger ahead will
emerge from people that know more because they spend time outdoors
where the storm clouds - unaffected by company beliefs, dogmas, and
rhetoric - start blowing in their face.
 It is wise to keep in mind that when spring comes, snow melts first at
the periphery: that is where it is most exposed.
STANFORD - EPSO 98
Strategic
inflection
point
ADVANTAGE & CHANGE

 Top management’s strategic recognition of an SIP happens in three stages:
 recognising the growing divergence between what the company
currently puts forth as its strategy and the actions taken by its
managers
 Asking “is it one - a SIP?”
 Trying to discern the newly emerging strategic picture and
providing a framework in which a new strategic intent can be
formulated.

 Five dynamic forces
 The basis of competitive advantage
 Distinctive competence
 Top management corporate strategy
 Strategic action
 Internal selection environment that comprises administrative
elements and cultural elements.
 During some periods, these five forces are in harmony.
 Over time, however, the dynamic forces tend to diverge and their
harmonious relationships are broken, thereby creating strategic
dissonance in the organisation.

 The most fundamental and least readily visible source of strategic
dissonance derives from the divergence between the changing basis of
competition in the industry and the firm’s distinctive competencies,
the latter becoming less relevant for competitive advantage.
 Companies often experience an inertial aftermath of success. They
continue to rely on their distinctive competencies, even when the
competition changes. Companies usually organise themselves in such a
way that the employees representing these competencies are likely to have
the greatest influence in the strategic decision-making process.
 In sum, firm-level competencies and the basis of competition in the industry
often evolve along independent paths. Dynamically matching firm-level
distinctive competencies and the basis of competition in the industry is
a tough top management challenge. It requires top management to watch
closely the evolution of the industry structure as well as to be alert to the
strategic implications of unanticipated new developments in the company’s
competencies.
STANFORD - EPSO 98
Sources of
strategic
dissonance
ADVANTAGE & CHANGE

 One driver of this divergence is inertia in corporate strategy. Corporate
strategy reflects top management’s beliefs about the basis of success
of the firm. Top managers are deeply influenced by their perception of
what made the company successful.
 Intertwined with these inertial self-perceptions is emotional attachment
on the part of top management to the business that made the company
successful.
 Top management hesitates to change the strategy because the
consequences are not completely clear.
 If inertia in corporate strategy leads to change that is too slow, top
managers can also change the corporate strategy too fast - in ways that
stretch beyond what the company is capable of doing.
 The other driver of this divergence are the independent strategic actions
taken by middle-level managers.
STANFORD - EPSO 98
Divergence
between stated
strategy and
strategic action
ADVANTAGE & CHANGE

 While some actions may turn out to be helpful, there is also potential
danger associated with strategic actions of middle-level managers that
diverge from the official strategy.
 If the basis of competition in the industry changes the company’s
distinctive competencies, the firm’s official strategy and the strategic
actions of middle-level managers all start diverging from each other.
 How can a company possibly survive?
 In the face of a SIP, a company’s internal selection environment may be
more important for survival than its stated strategy. The role of the
internal selection environment is to regulate the allocation of the
company’s scarce resources - cash, competencies and capabilities, and
senior management attention - to strategic action while the official strategy
is in flux and new strategic intent has not yet been formulated and
articulated.
STANFORD - EPSO 98
Role of internal
selection
environment
ADVANTAGE & CHANGE

 A company can continue to be successful for some time if its internal
selection environment selects actions that are consistent with competitive
reality even while becoming de-coupled from the official corporate
strategy. The continued success provides then a time cushion for bringing
corporate strategy back in line with strategic action.
 The internal selection processes leading up to the formulation of new
strategic goals critically depends on top management’s strategic
recognition capacity. One type of strategic recognition involves top
management’s ability to recognise the strategic importance of actions by
middle-level managers who try to tie a new business initiative to the
corporate strategy - providing legitimacy for the new business.
 A second type of strategic recognition involves top management’s ability
to recognise the strategic importance of actions of middle-level managers
that diminish the legitimacy of an existing business and decouple it from
the corporate strategy.

 Strategic dissonance, strategic inflection points, and strategic
recognition are tools for managing the major transformations that
companies must bring about in the face of discontinuous change.
Through the valley of death, the old and the new basis of competition, the
old and the new distinctive competence, the old and the new strategy, and
the old and new strategic action are all in play together.
 Top management must help ensure that the firm’s internal selection
environment continues to reflect the real competitive pressures in the
external environment. A necessary condition is that the company has
a management information system that reflects how its businesses
are really doing in the competitive environment. This allows top
management to ask sharp questions, on a regular basis, about why the
company’s businesses are performing the way they are.
STANFORD - EPSO 98
Managing
strategic
dissonance
Help internal
selection reflect
external reality;
allow dissent
ADVANTAGE & CHANGE

 Constantly watching competitors - old and new - is mandatory behaviour
for top management. Why are they strong competitors? What do they do
that we cannot do better?
 It is also important that the firm’s internal selection environment values
dissent and controversy surrounding the interpretation of the data. This is
difficult, because organisations are uncomfortable with internal dissent.
 Debating tough issues is only possible where people will speak their
minds without fear of punishment.
 A key role of top management is to provide an umbrella against such
fears. Top management may not be competent to judge personally the
issues but it is up to them to create a fear-free internal selection
environment.
 First, don’t shut people up and, second, if they disagreed and were
right, congratulate them!

 How the top management reacts, emotionally, to strategic dissonance is an
important issue when dealing with a SIP.
 When the business gets into serious difficulties or key managerial
assumptions are challenged, objective analysis takes second seat to
personal/emotional reactions:
Denial  Escape or Diversion  Acceptance  Pertinent Action
 Frequent public speeches on vague subjects given by CEO’s of companies
facing difficult times or the move of corporate headquarters away from the
centre of business action are signs of attempted escape.
 Diversion often involves major acquisitions unrelated to the core
business that faces a SIP.
STANFORD - EPSO 98
Don’t dismiss
strategic
dissonance
ADVANTAGE & CHANGE

 Effective top managers go through these first two stages as well, but
they are able to move on to the acceptance and pertinent action
stages before it is too late. Ineffective top managers are unable to do
so and have to be removed.
 Replacement of corporate leaders in the face of SIP is far more motivated
by the need to put distance between the present and the past than by
getting someone better.
 Top management must try to surmise what the new equilibrium of forces
in the industry will look like and what the new winning strategy will be,
knowing that they cannot get it completely right.
 Top management must use the information that is generated by
strategic dissonance when trying to discern the true new shape of the
company on the other side of the valley. It must be a realistic picture
grounded in the company’s distinctive competencies.
STANFORD - EPSO 98
Formulate new
strategic intent
based on strategic
recognition
ADVANTAGE & CHANGE

 Coming out of a difficult period, top management is more likely to have a
sense of what they don’t want the company to become before they know
what they do want it to become.
 Leadership here implies changing with the environment and the
organisation. Reality must lead top management rather than the other way
around. This is difficult because top management is expected to have
vision.
 Getting through the period of immense change requires reinventing -
or perhaps rediscovering - the company’s identity. Since companies
and their leaders are shaped by their past, this is truly hard.

 Seeing, imagining, sensing the new shape of the company is only one step.
Getting there requires more wrenching actions. These moves we have
called strategic actions and they involve (re)assigning resources in
order to pursue the new strategic intent. Corporate strategy is realised
by performing a series of such strategic actions, and not via strategic
planning.
 The wisdom necessary to guide a company through transformational
changes cannot, as a practical matter, reside only in the head of the
CEO.
 Middle managers have the hands-on exposure, but, by necessity their
experience is specialised, not company-wide.
 What is needed is real-time mining of the middle managers’ insights,
exposing all that information to searing intellectual debate, and letting this
ferment take place until the shape of the other side of the valley is
sufficiently clear that a dedicated march in its direction is feasible.
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Move from
strategic intent
to strategic
action
ADVANTAGE & CHANGE

 There is an inverted-U type of relationship between the intensity and
duration of constructive intellectual debate in a company and its
long-term ability to manage through SIPs.
 Too little intellectual debate means that middle managers do not
challenge one another as long as the favour is reciprocated.
 Too much intellectual debate paralyses the company because most
energy is used up seeking to win the debate for the sake of winning rather
than for the sake of the company.
 During strategic dissonance, top management must let go some whole they
are not sure. (This is not easy: top management is paid for being sure!)
But then they must pull strategic action and strategy back in line and direct
the march.
 Strategic leadership means encouraging debate and bringing debate
to a conclusion.

STANFORD EXECUTIVE PROGRAMME ON STRATEGY AND ORGANISATION EPSO '98

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STANFORD EXECUTIVE PROGRAMME ON STRATEGY AND ORGANISATION EPSO '98