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Weeks 1/6 Article summary
Week 1
Lecture:
Sustained competitive advantage and its obtainability.
What is competitive strategy?
 It is relative to the competitors
 Different from corporate strategy, because here it is about one particular SBU. Corporate
strategy is about many different SBU’s and where the company should compete.
The economic profit distribution of firms is illustrated in a S-shaped chart.
 There is a big inequality between the “winners” (high profit) and “losers” (low profit).
 Failure is very informative, this is seen in the right part of the S-shape
 Regression is not appropriate here, because this focuses on the average. The losers are more
important here. We need to know how losers can move up.
Important: Why and how do some firms consistently outperform others?
In strategy we focus on profitability; we calculate this by-> Profit = Value – Cost
The costs that strategy focuses on are opportunity costs-> These are the cost of the alternative. What
you miss out on.
The value that they focus on here is the willingness to pay. This can be higher or lower than the actual
market price.
Strategy focuses on increasing the willingness to pay and reducing opportunity costs.
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Finding commonalities of being “unique”
The Neoclassical Benchmark: (theoretical)
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The large numbers assumption: A large number of buyers and sellers; both are price takers ->
Monopoly/ Monopsony
The homogeneity assumption: Demand is homogeneous; standardized product ->
Differentiation
The mobility assumption: Resources are perfectly; free entry and exit-> entry barriers
The rationality assumption: Buyers and sellers have full information to maximize their utility
(profit)-> Marketing/ cognitive biases (bandwagon effects)
The transaction assumption: Transactions are costless:
Lock-in: When you buy a printer, you have to buy cartridges from the same brand
Porter-> Industry matters
Barney-> Inside-out; focus on the firms
If all these assumptions are satisfied. All firms will converge. The winners’ economic profit will
become 0. No competitive advantage.
Convergence -> No sustained competitive advantage
The standard model:
SWOT, PESTEL, Five forces, Critical Success factors, External stakeholder expectation
If there is no market
Debate: to buy resources or to build them yourself
Example: Facebook created the social media industry. Not because there is no market for your
product, does it mean that there cannot be created one.
Summary
RBV= Resource Based view
Usually the focus is on the positioning school
Industry borders are not that clearly defined anymore.
Firm effect: The variation across different industries
The CEO effect (whether CEO’s matter in firm performance)
This was the case with apple during Steve Jobbs.
Industry effect is not homogenous with every industry. It is for example less important for the winners
and losers. It is more important if you want to move up.
Article 1: Stoelhorst J.W. (1999), Thinking about Strategy, Collegedictaat
Twente, 2e editie.
Universiteit
The ‘Standard Model’ Of Strategy
The typical textbook conception of strategic management is of a three-step process in which strategic
analysis is followed by strategic choice and strategy implementation
Three fases:
A typical way to develop strategy on the basis of the standard model would be to start with
formulating organizational objectives. In doing so, management should take into account the
expectations of the firm’s stakeholders.
1. The organizational objectives then direct the analytical phase, which consists of an internal
and an external analysis. The goal of the external analysis is to understand the critical success
factors in the firm’s industry and to identify the opportunities and threats that may affect the
firm’s ability to meet its objectives. The goal of the internal analysis is to understand the
firm’s distinctive competence and to identify the strengths and weaknesses that may affect the
firm’s ability to meet its objectives.
2. The next step is to generate strategic options, or in other words, possible strategies to deal with
the strategic issues. In choosing among these strategic options, the firm should consider their
suitability (does the strategy deal with the strategic issues?), acceptability (is the strategy
acceptable to the firm’s stakeholders?), and feasibility (will the firm be able to execute the
strategy?)
3. The last stage considers the implementation of the strategy. First, chosen strategy is broken
down into detailed plans, then responsibilities and budgets are assigned, and finally
performance measures to control the implementation of the strategy are agreed upon. The
strategy implementation phase may for instance take the form of breaking down a corporate
strategy into business unit strategies, or business unit strategies into functional strategies.
The prescriptive schools of thought:
1960s – The design school
1970s – The planning school
1980s – The positioning school
1990s – The resource-based school
The descriptive school of thought:
1980s and onwards – The process school
Together, these four prescriptive schools of thought have inspired the approach to strategy that is
typical of most textbooks.
The Design School: Strategy As A Conceptual Process
The design school was developed at Harvard Business School in the 1960s and is typically associated
with the work of Kenneth Andrews.
Essential elements are:
Environmental fit: At the core of this approach is the idea that the specific characteristics of the firm
should be confronted with the external situation it faces. This idea has of course been made
instrumental in the so- called SWOT analysis (strengths, weaknesses, opportunities, and threats).
The concept of a firm’s ‘distinctive competence’, which is the need to bring the internal situation of
the organization in line with external expectations
Mintzberg et al. (1998, p.29-32) distill seven assumptions about strategy from writings of the
proponents of this school:
1. Strategy formation should be a deliberate process of conscious thought
2. Responsibility for that control and consciousness must rest with the chief executive officer:
3. The model of strategy formation must be kept simple and informal
4. The main goal of a model for developing strategy is to support ‘acts of judgment’.
4. Strategies should be one of a kind:
5. The design process is complete when strategies appear fully formulated as perspective
6. These strategies should be explicit and simple
7. Only after strategies have been formulated can they be implemented
Mintzberg’s (1990a,b) critique of the design school is largely focused on the fact that this school
underplays the importance of hands-on learning.
The design school assumes that these strengths and weaknesses are generally known, but this is not
necessarily the case. Moreover, it could well be that strengths and weaknesses are situation specific
and that changes in external circumstances make specific competences more or less relevant. . Such
complications require a tight link between thinking and acting to learn about the strengths and
weaknesses of a firm as they evolve over time. But this link is severed by the separation of strategy
formulation from strategy implementation. If a strategy doesn’t work, top management will tend to
blame this on implementation failures, while lower level managers will tend to blame failure on the
strategy itself. If top management is only responsible for formulation and lower level management is
only responsible for implementation it is very unlikely that learning will take place.
We may conclude that while the approach of the design school has made an important contribution to
the strategy literature, it is not the only or necessarily the best way to approach strategy.
The Planning School: Strategy As A Formal Process
Like the design school, the foundations for the planning school were laid in 1965. This was the year
Igor Ansoff published his book Corporate Strategy.
The main difference is that the planning school advocates a formal and very elaborate system for the
development of strategy. This is in contrast to the informal and simple system advocated by the design
school. Another, more subtle difference is that given the elaborate nature of the strategic planning
approach, part of the responsibility for the firm’s strategy lies with the strategic planning staff.
On this latter point, the planning school does not differ from the design school in principle: the
assumption is still that the CEO is the architect of the strategy. However, in practice the involvement
of strategic planning specialists means that part of the responsibility shifts from the CEO to his
strategic planning staff.
Mintzberg et al. (1998. p.58) summarize the assumptions of the planning approach to strategy as
follows:
1. Strategies result from a controlled, conscious process of formal planning, decomposed into distinct
steps, each delineated by checklists and supported by techniques.
2. Responsibility for that overall process rests with the chief executive in principle; responsibility for
its execution rests with staff planners in practice.
3. Strategies appear from this process full blown, to be made explicit so that they can be implemented
through detailed attention to objectives, budgets, programs, and operating plans of various kinds.
Mintzberg (1990, 1994) argues that empirical research shows that the planning approach simply does
not work and that this is the result of the inflexibility and detached nature of a formal strategy process.
The most important contribution of the planning school has perhaps been that it was successful in
putting its ideas into practice, although only to find that the success of these ideas were limited
The Rise Of The Consultants: Selling Powerful Oversimplifications
Process: Its focus is mainly on the process by which strategies should be developed.
According to Ansoff’s model, the chances of successful growth diminish as a firm looks for growth in
activities that are farther away from its current products and markets. In other words, the chance of
success is highest for market penetration and lowest for diversification, especially if such
diversification is unrelated to the technologies that underlie the firm’s current activities.
Nevertheless, in the 1970s diversification was extremely popular and the use of portfolio tools to help
manage diversified firms was widespread. These portfolio tools were developed by strategy
consultancy firms such as the Boston Consulting Group (BCG) and McKinsey & Company.
The formula for good strategy derived from this 2x2 matrix turns on the need to balance the types of
activities in which a multi-business firm is active. A firm should have enough cash-cows and stars,
dogs need to be divested, and the cash flows generated by the cash cows need to be used to turn
question marks into stars and stars into cash-cows.
Upon closer scrutiny, this formula is based on three underlying ideas.
The first is the idea of the experience curve: if the costs incurred by the firm are strongly correlated
with cumulative output, then it is a logical consequence that relative market share is the main driver of
competitive advantage.
The second idea is the product life cycle: gaining market share in the growth phase requires
investments that can pay off when the firm is able to gain a dominant position when the market
matures.
The third idea is portfolio management: firms should balance the short term and long term ‘risk and
return’ of their activities. On the logic of the product life cycle, the market for any product will
eventually decline and all businesses will ultimately turn into dogs. Firms should therefore manage
their cash flows in ways that help them survive over time.
Although portfolio models are still part and parcel of the toolbox of strategists, today the thinking
about the content of strategy no longer puts such a strong emphasis on diversification, market share,
and cash flows.
The Positioning School: Strategy As Fit
Michael Porter’s book Competitive Strategy (1980) is largely responsible for the success of the
positioning school, which dominated the approach to strategy in the 1980s.
Porter made two fundamental contributions to the field of strategic management.
First, his work put the content of strategy center stage and thus complemented the ideas about the
process of strategy from the design school and the planning school.
Second, his work provided better theoretical foundations for thinking about strategy research because
it built on a well-established economic research tradition.
Industrial organization: The basic idea in this approach to IO is that industry structure determines
much of the performance of the firms within an industry, but that individual firms can do better or
worse than the industry average by choosing successful strategies.
Perfect competition is a situation where the following assumptions hold:
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The large numbers assumption:: Markets consist of a large number of buyers and suppliers
that are small in relation to the size of the market. As a result everybody is a price taker:
nobody has any power to affect the price in the market.
The homogeneity assumption: Demand is homogeneous. As a result, firms compete only on
price.
The mobility assumption: All the resources that are necessary to enter the market are widely
available. As a result entry to and exit from the market are simple and costless (except for the
price of acquiring the resources)
The rationality assumption: Buyers and supplier have complete information about the market
(they know demand, supply, and prices). Buyers maximize their utility and suppliers their
profit.
The central goal of IO research is therefore to (1) understand the relationship between industry
structure and profitability,4 and (2) to understand barriers to competition in order to advise
governments about policies to reduce these barriers in order to increase social welfare.
We may summarize the concept of strategy in the positioning school as follows:
1. Strategies as fit: The essence of strategy is to find an optimal fit between a firm and its environment
by taking favorable competitive positions in attractive industries.
2. There are barriers to competition Profit is the result of taking positions where the firm is
protected by barriers to competition from forces that would otherwise put pressure on the profit
margins of the firm.
3. Strategies are generic positions in the market: Favorable positions can be taken on the basis of a
limited number of generic strategies
4. The essence of strategy is analysis: Developing a strategy is largely a matter of analysis of the
external environment with the goal of identifying (1) attractive industries, (2) favorable positions
within these industries, and (3) generic strategies that allow the firm to occupy these positions.
AFMAKEN
Article 2: Buzzell, Robert D. and Bradley T. Gale (1987), ‘Are There Any General Strategy
Principles?’, Chapter 1 from The PIMS Principles: Linking Strategy to Performance, New York:
The Free Press, pp. 1- 16.
Lecture:
 The question is whether there are general strategy principles?
 According to the this article, the 6 standard strategy principles are valid
 In a way these principles are all redundant because everything depends on the industry itself
Summary:
The central theme is to relate business strategies to performance by studying past experience.
They believe that the general principles of strategy provide a foundation for the situation-specific
analysis that is necessary for good decision-making.
The Profit Impact of Market Strategy (PIMS) database "yields solid evidence in support of both
common sense and counter-intuitive principles for gaining and sustaining competitive advantage":
Tom Peters and Nancy Austin. It was developed with the intention of providing empirical evidence of
which business strategies lead to success, within particular industries. Data from the study is used to
craft strategies in strategic management and marketing strategy. The study identified several strategic
variables that typically influence profitability. Some of the most important strategic variables studied
were market share, product quality, investment intensity, and service quality, (all of which were found
to be highly correlated with profitability).
In this chapter they emphasize that they do not claim to have formulated strict laws for strategy, but
principles that can help managers understand and predict how strategic choices and market conditions
will affect business performance.
For each business they collected 3 kinds of information:
 A description of the market conditions
 The business unit’s competitive position in its market place
 The financial and operating performance
Similarities between PIMS and Portfolio planning:
Reasonable financial goals for a business are dependent on:
 The strategy
 The characteristics of the marketplace
Key differences between PIMS and Portfolio planning
 Portfolio tries to explain business performance in terms of just a few key factors (assigns
business only in terms of market growth rate and relative market share, other things are
ignored)
PIMS in contrast was designed to explore many possible dimensions of strategy and of the
market environment that might influence performance
 PIMS has assembled and used a database to determine how strategies affect results under
different circumstances
Strategic principles: some examples-> Important linkages between strategy and performances
1. In the long run, the most important single factor affecting a business unit’s performance is the
quality of its products and services relative to those of competitors.
2. Market share and profitability are strongly related; Primary reason for the market share
profitability linkage, apart from the connection with relative quality, is that the large-share
businesses benefit from scale economies.
3. High investment intensity acts as a powerful drag on profitability
4. Many so-called ‘dogs’ and ‘question mark’ businesses generate cash, while many ‘cash-cows’
are dry.
5. Vertical integration is a profitable strategy for some kinds of businesses, but not for others.
6. Most strategic factors that boost ROI also contribute to long-term value.
Article 3: Porter, Michael (1979), ‘How competitive forces shape strategy’, Harvard Business
Review, (March-April), pp. 137-145.
Lecture:
Porter’s Five forces model emphasizes critical strengths and weaknesses within a company.
It decides on the position of that respective company within the industry and the areas where strategic
change would have the highest results.
Porter’s model of competitive forces assumes that there are five competitive forces that identifies the
competitive power in a business situation. These five competitive forces identified by the Michael
Porter are:
1.
2.
3.
4.
5.
Threat of substitute products
Threat of new entrants
Intense rivalry among existing players
Bargaining power of suppliers
Bargaining power of Buyers
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Positioning the company in a way that the company is protected from competition
Influencing the balance of the forces with strategic actions, which will improve the company’s
position
Anticipation the movement of factors that influence the forces and react to that accordingly
with the goal to create a new strategy that fits the new balance before competition recognizes
it.
Is more external than internal (compared to PIMS)
The industry is also a deciding factor when it comes to profitability of the existing companies
through the 5 forces model
Strong competition leads to diminishing profitability
Branch-analysis should bring the relative attractiveness to light.
Try to maintain your position/ re-position in order to avoid competition
Article 4: Baden-Fuller and Stopford (1992), ‘The Firm Matters, Not the Industry’, Reprinted
in: Bob de Wit and Ron Meyer (1998), Strategy: Process, Content, Context, pp. 610-617.
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Parent refers to corporate strategy; the parent has to add value to the SBU’s.
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According to these percentages, it does not really have an effect on performance.
Random refers to rest of the determinants of profitability (luck, culture etc.)
Important: Market share is not a reward, but the cause of success
This article stresses 2 paradoxes:
1. Outside-in to Inside-out
2. Determinisic to Voluntaristic
The role of industry in determining profitability
difficult to sustain high profits. The environmental factors decide whether or not an industry is
profitable, not the companies in that industry
New views:
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There is little difference in the profitability of one industry versus another.
There is no such thing as a mature industry, only mature firms; industries inhabited by mature
firms often present great opportunities for the innovative
Profitable industries are those populated by imaginative and profitable firms; unprofitable
industries have unusually large numbers of uncreative firms.
Market share and profitability:
Old perspective: Large market shares are accompanied with low costs and high prices. This makes
for high profits. Companies with a small market share cannot compete with market leaders.
New perspective: Large marketshares are the reward for efficiency and effectivenesss. Companies
with small marketshares can compete with markeleaders if they perform better.
The dynamic of competition in traditional industries
Old perspective: Competition is based on companies that follow well-defined traditional (or generic)
approaches to the market
New perspective: The real battles are fought among firms taking different approaches, especially
those that counter yesterday’s ideas.
Article 5: Barney, Jay (1991), ‘Firm Resources and Sustained Competitive
Advantage’,Journal of Management, vol. 17(1), pp. 99-120.
This article researches the link between the firm’s resources and sustained competitive advantage. To
generate sustained competitive advantage, 4 empirical indicators are distinguished that describe the
potential resources for the company. These are:
History Dependence: When the company has an extensive history, it is difficult to imitate their
character. So there is a dependence on the historical links
Causal ambiguity: What have they done right or wrong in the past, that makes them who they are
today
Understanding sources of sustained competitive advantage has become a major area of research in
strategic management.
Four empirical indicators of the potential of firm resources to generate sustained competitive
advantage:
- value
- rareness
- imitability
- and substitutability, are discussed.
The framework in figure one suggests that firms obtain sustained competitive advantage by
implementing strategies that exploit their internal strengths, trough responding to environmental
opportunities, while neutralizing external threats and avoiding internal weaknesses.
The resource based view of the firm substitutes two alternate assumptions in analyzing sources of
competitive advantage.
1) the model assumes that firms in a industry/ group may be heterogeneous with respect to the
strategic resources they control.
2) The model assumes that this resources may not be perfectly mobile across firms, and
heterogeneity can be long lasting.
Defining key concepts
- firm resources
In the language of traditional strategic analysis, firm resources are strengths that firms can use to
conceive of and implement their strategies. These resources can be classified into three categories:
1) physical capital resources (psychical technology used in a firm/plant/ and equipment)
2) human capital resources (training, experience, judgement, intelligence, relationships, and insight of
individual managers and workers in a firm)
3) organizational capital resources (firms formal reporting structure, formal and informal planning,
controlling and coordinating systems, as well as informal relational groups)
.
- competitive advantage and sustained competitive advantage
A firm has that when it is implementing a value creating strategy not simultaneously being
implemented by any current or potential competitors and when these other firms are enable to
duplicate the benefits of this strategy.
Competition with homogeneous and perfectly mobile resources
It seems reasonable to expect that most industries will be characterized by at least some degree of
resource heterogeneity and immobility. The conclusion of this paragraph suggests that the search for
sources for sustained competitive advantage most focus on firm resource heterogeneity and
immobility.
- resource homogeneity and mobility and sustained competitive advantage
In this industry it is not possible for firms to enjoy a sustained competitive advantage.
- resource homogeneity and mobility and first- mover advantages
It is not being suggested that there can never be first mover advantages in industries. It is being
suggested that in order for there to be a first mover advantage, firms in a industry must be
heterogeneous in terms of the resources they control.
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resource homogeneity and mobility and entry/mobility barriers and when these resources are
not perfectly mobile.
it is not being suggested that entry or mobility barriers do not exist. However, it is being suggested
that these barriers only become sources of sustained competitive advantage when firm resources are
not homogeneously distributed across competing firms
Firm resources and sustained competitive advantage
to have potential for sustained competitive advantage, a firm resource must have four attributes:
1) it must be valuable in the sense that it exploit opportunities and/or neutralizes threats in a
firm’s environment.
2) It must be rare among a firm’s current and potential competition
3) It must be imperfectly imitable
4) There cannot be strategically equivalent substitutes for this resource that are valuable but
neither rare or imperfectly imitable.
- valuable resources
- rare resources
- imperfectly imitable resources
- unique historical conditions and imperfectly imitable resources
- causal ambiguity and imperfectly imitable resources
- social complexity
- substitutability
Applying the framework
Figure 2 shows the relationship between heterogeneity and immobility; value, rareness, imitability and
substitutability and can be applied in analyzing the potential of a broad range of firm resources to be
sources of sustained competitive advantage. There are three brief examples how this framework might
be applied:
- strategic planning and sustained competitive advantage
It seems reasonable to expect that formal strategic planning systems are unlikely by themselves to be a
source of sustained advantage. Such planning systems are not rare. Any firm interested in engaging
such formal planning can certainly learn how to do so, and thus formal planning seems likely to be
highly imitable. Apart from substitutability considerations, formal strategic planning by itself is not
likely to be a source of sustained competitive advantage. This does not mean that firms in formal
strategic planning will never obtain such sustain competitive advantages.
Some authors described informal processes by which firms choose their strategies.
Those who study these informal strategy making process tend to agree about their rareness and
imitability. Because these processes are socially complex, they are also likely to be perfectly imitable.
There is less agreement about concerning substitutes. The question of the substitutability of informal
strategy making in firms needs to be resolved empirically before the impact of these firms resources
on sustained competitive advantage can be fully understood.
- information processing systems and sustained competitive advantage
Whether or not information processing systems are a source of sustained competitive advantage
depends on the type of information processing system being analyzed. Machines can be purchased,
any strategy that exploits just machines themselves is likely to be imitable and thus not a source of
sustained competitive advantage. But researchers seems to suggest that relatively few firms have been
able to create this close manager computer interface, and thus this kind of info may be rare. This is
also a socially complex system, and thus will be imperfectly imitable.
A closely knit, highly experienced management team may be a substitute for an information
processing system emended in a firm’s informal and formal decision making process.
However the existence of substitutes by itself does not mean that a particular firm resource cannot be a
source of sustained competitive advantage, these substitutes have to be either not rare, or highly
imitable, or both.
- positive reputations and sustained competitive advantage
If only few competitive firms have such reputations, than they are rare. A particulars firm ‘s positive
reputation depends on historical incidents, may be imperfectly imitable.
Authors have suggested that rather than developing a positive reputation, firms may reassure their
customers or suppliers through the use of guarantees and longer term contracts. These guarantees
substitute for a firm’s reputation.
Reputation and guarantees are substitutes, why is it that some firms invest both in a positive reputation
and guarantees? When they are not substitutes, then a reputation may be a source of sustained
competitive advantage.
Discussion
The framework suggests the kinds of empirical questions that need to be addressed in order to
understand to understand whether or not a particular firm resource is a source of sustained competitive
advantage: is it valuable, imperfectly imitable, and are there substitutes for that resource?
- sustained competitive advantage and social welfare
As applied by strategy theorists focussing on environmental determents of firm performance, social
welfare concerns abandoned in favour of the creation of imperfectly industries within which a
particular firm could gain a competitive advantage.
- sustained competitive advantage organization theory and behaviour
The resource based model of strategic management suggest that organization theory and behaviour
may be a rich source of findings and theories concern rare, non- imitable and non-substitutable
resources in firms. A model of resource based model of sustained competitive advantage anticipates a
more intimate integration of the organizational and the economic as a way to study sustained
competitive advantage.
- firm endowments and sustained competitive advantage
Implicit in this model is the assumption that managers are limited in their ability to manipulate all the
attributes and characteristics of their firms. It is limitation that makes some firm resources imperfectly
imitable and thus potentially sources of sustained competitive advantage.
Managers are important for this model, they have to understand and describe the economic
performance potential of a firm’s endowments.
What becomes clear is that firms cannot expect to ‘purchase’ sustained competitive advantages on
open markets. These advantages must be found in the rare, imperfectly imitable and non- substitutable
resources already controlled by a firm.
Article 6: Grant, R.M. and C. Baden-Fuller (2004), A knowledge accessing theory of strategic
alliances, Journal of Management Studies, 41(1), pp. 61-84.
Previous theories and studies
The term strategic alliance has been used to refer to ‘agreements characterized by the commitment of
two or more firms to reach a common goal entailing the pooling of their resources and activities’.
Most approaches to the analysis of strategic alliance formations are knowledge-based, originating
from resource-based theories. The emergence of resource-based approaches to strategy, especially
those emphasizing the role of knowledge, has provided a broader basis upon which to build a theory of
interfirm cooperation.
The purpose of this paper is to present a theory of strategic alliances that focuses upon the role of
strategic alliances, not in acquiring, but in accessing the knowledge resources of other firms.
However, there is not one single motive for forming alliances, some may be motivated by market
power considerations, others may be formed to access resources other than knowledge, and (even
within the knowledge-view of alliances) some may be created with the primary intention of acquiring
rather than to accessing knowledge
Our contention is that knowledge accessing provides the predominant motive for alliance formation,
especially within the knowledge-based sectors where alliance activity has been especially prevalent
(e.g. pharmaceuticals, semiconductors, aerospace, telecommunications, and consumer electronics).
Several studies of strategic alliances have identified the sharing of knowledge (including technology,
know-how and organizational capability) as their dominant objective.
Knowledge management has two dimensions;
1. those activities that increase an organization’s stock of knowledge (refered to as
exploration/knowledge generation)
2. those activities that deploy existing knowledge to create value (refered to as
exploitation/knowledge application)
These two dimensions correspond to the ways knowledge is shared among alliance partners. With
knowledge generation (acquiring), each member uses the alliance to transfer and absorb the partner’s
knowledge base, while with knowledge application (accessing) each member acesses its partner’s
knowledge in order to exploit complementarities, but with the intention of maintaining its distinctive
base of specialized knowledge. Thus the last way is to concentrate upon a few core competences and
to collaborate with other firms in order to access additional capabilities.
Alliances and static efficiency in knowledge application;
Features of knowledge-based production
Basic assumptions concerning knowledge and its role in production:
(1) Knowledge is the overwhelmingly important productive resource in terms
of market value and the primary source of Ricardian rents
(2) Different types of knowledge vary in their transferability: explicit knowledge can be articulated
and easily communicated between individuals and organizations; tacit knowledge (skills, know-how,
and contextual knowledge) is manifest only in its application – transferring it from one individual to
another is costly and slow
(3) Knowledge is subject to economies of scale and scope. Since the costs of replicating knowledge
tend to be lower than the costs of the original discovery of creation of the knowledge, it is subject to
economies of scale. To the extent that knowledge is not specific to the production of a single product,
economies of scale imply economies of scope. The extent of economies of scale and scope vary
considerably between different types of knowledge. They are especially great for explicit knowledge,
information in particular, which is ‘costly to produce, but cheap to reproduce. Tacit knowledge tends
to be costly to replicate, but these costs are lower than those incurred in its original creation.
(4) Knowledge is created by individual human beings and to be efficient in knowledge creation and
storage, individuals need to specialize.
(5) Producing a good or service typically requires the application of many types of knowledge.
If production requires the combination of many different types of specialized knowledge (point 5),
each of which is subject to economies of scale and scope (point 3), then efficiency in knowledge
application depends upon, first, the ability to integrate many different types of knowledge and,
second, the ability to utilize knowledge to its full capacity.
Alliances and the efficiency of knowledge integration
We identify two primary mechanisms through which knowledge is integrated within
the firm: direction and routine;
1. Direction provides a ‘low-cost method of communicating between specialists and the large number
of persons who are either non-specialists or specialists in other fields (Demsetz, 1991, p. 172). Firms
convert sophisticated specialized knowledge into directives, rules, and operating procedures that can
be imposed through authority-based relationships.
2. Organizational routines are complex patterns of co-ordination that permit different
specialists to integrate their knowledge into the production of goods and services
while preserving the efficiencies of knowledge specialization (Nelson and Winter,
1982). Organizational routines require continuity of association and propinquity, conditions most
readily provided by firms.
Proposition 1 (a) In integrating knowledge, interfirm alliances are generally
superior to market contracts, but are generally inferior to individual firms. (b)
Increasing marginal costs of knowledge integration within the firm imply that,
where products require a broad range of different knowledge types, efficiency
of integration is maximized through separate firms specializing in different areas
of knowledge and linked by strategic alliances.
Alliances and the Efficiency of Knowledge Utilization
Given economies of scale and scope in knowledge, utilizing knowledge assets to
their full capacity represents a key challenge to the firm. These economies of scale
and scope are reinforced by the fact that, unlike most other resources, knowledge
expands rather than depreciates when it is used.
Conventionally, a firm is described by the products it supplies. The knowledge-based
view implies that a firm may also be described by the range of knowledge that it encompasses. The
two are closely related, and it is the closeness of this relationship
that is a critical determinant of the efficiency of knowledge utilization. Efficient utilization of
knowledge is achieved where the knowledge domain of the firm matches exactly the knowledge
requirements of the product domain of the firm with no overlap and, thus, no underutilization of
knowledge. The problem is that different types of knowledge are applicable to different sets of
products. This presents difficult choices for the firm over which types of knowledge to possess and
which products to produce.
Proposition 2: The greater the incongruity between the product domain of the
firm and its knowledge domain, the greater its propensity to form alliances with
other firms. The incongruity between product and knowledge domains is a
positive function of the breadth of knowledge required by the firm’s products
and the extent of economies of scope in that knowledge.
ALLIANCES AND DYNAMIC EFFICIENCY IN KNOWLEDGE APPLICATION
Uncertainty in Knowledge-Product Linkages
In reality, input-output relationships between knowledge and products are not
static but dynamic: knowledge is continually being created, refined, discarded, and reconfigured into
new products. If the firm is uncertain as to the future knowledge requirements of its current products,
and if acquiring and integrating new knowledge takes time, its knowledge investments are risky. In
these circumstances, interfirm alliances offer two additional benefits to those outlined above. The first
is pure risk spreading. The second is the option value of small initial investments in new areas of
knowledge
Proposition 3: The greater the uncertainty as to the future knowledge requirements
of a firm’s product range, the greater its propensity to engage in interfirm
collaborations as a means of accessing and integrating additional
knowledge.
In appropriating the returns to knowledge, we have noted that, in general, alliances
are superior to market contracts but inferior to internalization within the firm. However, where
knowledge is advancing rapidly, appropriating its returns often depends upon achieving early-mover
advantage. Such advantage derives less from the generation of new knowledge, as from recombining
knowledge into innovatory products. If early-mover advantage rests upon the ability to quickly
identify, access, and integrate across new knowledge combinations, strategic alliances can greatly
increase the speed with which a company can access the new combinations of knowledge needed to
bring new products to market.
Proposition 4: The greater the benefits of early-mover advantage in technologicallydynamic environments, the greater the propensity for firms to establish interfirm collaborative
arrangements in order to access new knowledge.
DISCUSSION AND CONCLUSION
We have presented a knowledge-based analysis of interfirm alliances that distinguishes between the
knowledge generation (exploration) and knowledge application (exploitation) goals of alliances. This
distinction corresponds to the difference between ‘knowledge acquisition’ and ‘knowledge accessing’
observed in previous studies of alliances. On the basis that knowledge accessing takes precedence over
knowledge acquisition in most strategic alliances, the paper establishes the circumstances in which
strategic alliances are more efficient than internalization within a single firm in integrating and
utilizing knowledge.
Although firms are generally superior to both alliances and markets in integrating knowledge to
produce goods and services, alliances can overcome the limits of firms in encompassing highly
differentiated knowledge integration processes, while offering efficiencies in knowledge utilization.
The advantages of alliances are especially apparent under conditions of uncertainty and early mover
advantages.
The alliance-as-learning (knowledge acquisition/generation) thesis predicts that the knowledge bases
of alliance partners will tend to converge as each partner learns from the other. The alliances-asknowledge-accessing (knowledge accessing/application) thesis predicts that alliance partners will
maintain, and possibly increase their knowledge specialization.
For an overview of differences of the two approaches; look at table 1, page 78!
Knowledge integration: Which is more efficient when you want to integrate knowledge? It is more
efficient within the firm because it is internal. With alliances you have to take external parties into
account, which will decrease efficiency.
However if you don’t have access to knowledge, you can form an alliance.
PD: Product domain (information you need to make the product-> product portfolio)
KD: Knowledge domain (overall knowledge with the company -> knowledge portfolio)
Assignment week 1(Assignments: Illustrate, demonstrate the theory, compare and contrast, use reallife examples)
Consider texts 2, 3, and 4. What are their main messages, and what are the main similarities and
differences between these messages
The articles are the importance of strategy from different viewpoints. The first two articles take a more
traditionalist view arguing that the industry, which the company is operating in, should be the key
factor in deciding on a strategy. The first article looks at using a tool they call PIMS to develop a
strategy based on the company’s past performance and many different factors such as investment
intensity, product and service quality, vertical integration etc. They place an emphasis on using data
and analyzing specific situations to develop specified strategies instead of a generalized approach. The
article links 6 factors between strategy and performance including quality of products and services and
market share.
The second article takes a more generalized approach and clearly places the industry as the focal point
to creating an effective strategy. The first article considers both internal and external factors; in
contrast Porter argues that external factors are more important and 5 forces found in industries should
dictate strategy. Porter rates industries on potential profits and argues that where the forces are the
strongest make the least desirable entry industries since these would place the company in a more
difficult position. In agreement with the first and third articles, a company should be able to evaluate
their internal strengths and weaknesses to be able to develop an appropriate strategy in relation to the
industry it is operating in.
The final article takes a very different approach calling the two previous views outdated. The article
places the focus completely on company as the key player and the full responsibility of succeeding lies
with the strategy the company relies on instead of external factors such as power of the buyer and
supplier etc. Baden-Fuller and Stopford take the complete opposite view that the best markets to enter
are ones with slow growth, as this would allow innovative companies more opportunities to achieve
competitive advantages through creativity and innovation. They stress that strategies should be
effective and efficient and through this market share will improve as a symptom rather than a cause of
profitability as argued in the first article. Although the articles have very contrasting views in regards
to strategy approach they all agree that many factors are involved in successful strategy creation and
approaches such as the BCG matrix are too simplified only considering two factors. Strategies should
be situation specific and cannot be applied so broadly.
Now consider texts 5 and 6. What are the main ideas of these texts? And how do these ideas
relate to each other?
Article 5 regarding strategic alliances argues that knowledge is a firm’s most important resource and
describes the situations when an alliance would be beneficial in order to access new knowledge. This
would be mainly in the situation that there is a mismatch between knowledge and the product or when
the product requires a broad knowledge scope. The idea being that firms should avoid time consuming
situations where knowledge sharing would be more costly and repetitive. Instead, focusing on
situation where they would benefit from ‘filling in the blanks’ of what information they need. Or
alternatively provide unused or under-utilized information to other firms needing it to produce
products. The aim would be to use knowledge as efficiently as possible.
The main focus of article 6 is on what creates a sustainable competitive advantage, this is defined as
developing a strategy that creates value but cannot be replicated by competitors or continues to be a
competitive advantage even after duplication attempts. Article 6 considers resources as a source of
competitive advantage and has categorized these resources into 3 categories: physical capital
resources, human capital resources, and organizational capital resources. Barney does not specify
knowledge as a specific resource as is the case in the 5th article but admits it may be a resource that
can lead to a sustainable competitive advantage in situations where one company has this information
and competitors do not. The article also considers the role of experienced managers as beneficial
resources, which in a way can be looked at as an extension of knowledge; as experienced managers
will have knowledge to handle situations in a beneficial manner.
Although the two articles take different approaches they both discuss the importance of resources in
developing efficient strategies to place the company in a stronger position.
Two paradoxes emerge from the literature on competitive strategy. The first paradox concerns
the ‘inside- out’ versus ‘outside-in’ perspective on strategy. Some authors maintain that strategy
analyses should be undertaken ‘outside-in’ and should focus on the characteristics of the
industry, while other authors maintain that strategy analyses should be undertaken ‘inside-out’
and should focus on the characteristics of the firm itself. The second paradox concerns the
deterministic vs. voluntaristic view on strategy. Some authors argue that the environment
determines the optimal strategy for a firm (a deterministic view on strategy), while others argue
that firms can actively influence the environment through their strategy (a more voluntaristic
view).
What is your team’s collective opinion on both paradoxes? And how is this opinion based on the
insights of texts 2-6?
The paradoxes emerge since emphasis is being placed on differing factors. We do not see them so
much as paradoxes as alternative views as to what should be step 1 when developing a strategy.
Neither inside out nor outside in completely neglect the factors mentioned by the other perspective. In
all cases external factors such as competitors and internal factors such as strengths and weaknesses
were considered to varying degrees. In this sense they are not completely contradictory. Our opinion
is that both views have their merits however we may lean towards the outside-in perspective. It is vital
to understand the internal strengths and weaknesses of a company and have a full understanding of
available resources in relation to creating sustainable competitive advantage however without the
context of external factors it seems more difficult to weigh these factors accurately. We also will take
a more voluntaristic view on strategy. It should be possible to adapt to any situation, by capturing
change and differences in dynamics.
Similarities
All three are static in nature and ignore institutional factors.
All three try to explain performance differentials. BUT…
All three texts (2,3,4) explain performance differences
PIMS and Baden-Fuller: SBU profitability
Porter: industry profitability
o
o
o
o
PIMS: market share causes SBU performance;
Baden-Fuller: market share an indicator of SBU performance
Porter: Some industries more profitable than others; Baden-Fuller: all industries equally
profitable
Porter: one period analysis, PIMS: 2-12 years
Porter (& PIMS?): firms should follow generic strategies; Baden-Fuller: firms should follow
unique strategies
Both texts (5&6) focus on firms’ resources and thus belong to the resource-based school
Text 5: resource-based view
Text 6: knowledge-based view
Both texts argue that resources may yield competitive advantage and, thereby, superior performance
Text 5: emphasis on the fact that firms possess resources; text 6: emphasis on the fact that firms need
additional resources from other firms
Question-3 (paradoxes)
1. Inside-out vs. outside-in perspective
• Positioning school: outside in
• Resource-based school: inside out
2. Determinism vs. voluntarism
• Positioning school: largely deterministic
– Some industries are inherently more attractive than others
– Strategy as ‘fit’
• Resource-based school: emphasis on voluntarism
– Unique strategies and resources; innovation
– Strategy as ‘stretch’
Week 2
Last week:
Competitive strategy is to create a strategy to create a sustained competitive advantage for one
specific business unit. 5 forces is on a industry level. Not focused on environment etc.
The Corporate strategy focuses on the portfolio of the SBU’s and its overall strategy.
3 strategies: Differentiation, Cost leadership, Focus
Profitability= Value – Cost
Most important for firm- analysis: Baden Fuller (about one resource, knowledge)
Knowledge accessing theory: You don’t have to acquire it (costly)
Proposition:
 Strategic alliance when it is too costly to acquire knowledge – so form a strategic alliance with
your partner to press costs
 Knowledge integration: early-mover advantage there in more need for strategy alliances
 Fit between knowledge domain and
Barney (inside-out) – resource based view. (About all resources)
Criteria for resources to create sustained competitive advantage (valuable) R (rare) I (inimitable) N
(non-substitutable)
Underlying assumption: Tradability -> not everything can be bought. Not everything is tangible
Porter (outside-in)
This week: Corporate strategy
Why acquire companies? Based on resource? Market share?
If they are in the same industry diversification
Related diversification; same industry, other company
Unrelated diversification; other unrelated industries
Diversification vs performance
Analyse fit:
Article 1: Hedley, Barry (1977), ‘Strategy and the “Business Portfolio”, Long Range Planning,
vol. 10(1), pp. 9-15
The key is that strategies should be made to differ widely from business to business, as a function of
the growth and relative competitive position of each business and the company’s overall recourse
position particularly with respect to cash.
The ‘business portfolio’ concept provides a superior approach for developing the differentiated
strategic business objectives, which are necessary for any company to make the most of its
opportunities.
All business areas must be considered separately for purposes of strategy development.
Strategy success for each individual business segment  relative competitive position
Companies occupy wildly different relative competitive positions. Some businesses will be
competitively strong others will be weak.
Relative competitive position and growth are the two fundamental parameters for strategy for
individual business.
This article discusses the Business portfolio concept!
Final decisions on strategy for each business are then taken within the context of the company viewed
explicitly as a portfolio of individual businesses.
The effect and value of growth: (affect the rate at which a business will use cash)
1. The growth of a business is a major factor influencing the likely ease, and hence cost, of gaining
market share.
2. Provides opportunity for investment.
Importance of relative competitive position for cash generation:
Relative competitive position determines the rate at which the business will generate cash.
The stronger the company’s position relative to competitors, the higher its margins should be.
Measure of relative competitive position relative market share!
The growth-share matrix:
individual business can have very different financial characteristics and face different strategic options
depending how they are placed in terms of growth and relative competitive position.
Here you use the industry average;
It is relative measure. Market share can only be linked to its profitability.
Apple:
The apps: are stars, Cash cow: Iphone, Ipad, Dogs: Ipod (no growth potential). Mac Pro server
(expensive,
Portfolio Strategy
Most companies have their portfolio of business scattered through all 4 quadrants.
Strategy:
- Maintain position in the cash cow (but don’t reinvest excessively)
- Cash from the cash cows use to maintain or consolidate stars which are not self-sustaining.
- Remaining can be used to fund a select number of question marks.
Appropriate strategy:
cash generated by cash cows and by those questions marks and dogs which are being liquidated, is
sufficient to support the companies stars and to fund the selected question marks.
Portfolio approaches in practice:
The essence of the portfolio approach is that strategy objectives must vary between businesses. The
strategy developed must fit its own matrix position and the needs and capabilities of the companies
overall portfolio of businesses.
In Practice it is common to find all businesses within a company being operated with a common
overall goal in mind.
Unbalanced portfolio: The overall competitive position of the portfolio is on average declining.
Implications for Strategy development today:
more difficult to adapt due to pressures of inflation and recession.
Corporate response: ‘tightening of the belt’ Generate more profits in the short-term and control cash
tightly.  Prices increase as much as legally possible
Clear and explicit consideration of long-range strategy must be restored to our business consciousness
and decision-making
Resource based view: Most important resource is money
It can be dynamic by investing the money differently, therefore turning for example dogs into question
marks.
Problems
 Definitional Vagueness
 Capital Market Assumptions
 Motivation Problems
 Self-fulfilling Prophecies
 Possible Links to Other SBUs
Article 2: Porter, Michael (1987), ‘From Competitive Advantage to Corporate Strategy’,
Harvard Business Review, (May-June), pp. 43-59
Corporate strategy is the overall plan for a diversified company. Corporate strategy concerns two
different questions: what businesses the corporation should be in and how the corporate office should
manage the array of business units. Corporate strategy is what makes the corporate whole add up to
more than the sum of its business unit parts. To survive, companies must understand what good
corporate strategy is.
A sober picture
While there is disagreement about the success of corporate strategies, none of the available evidence
satisfactorily indicates the success or failure of corporate strategy. Many studies studied the movement
of stock prices but Porter studied the diversification programs of 33 companies over a long period of
time. His data gives a stark indication of the failure of corporate strategies.
Premises of corporate strategy
Any successful corporate strategy builds on a number of premises(facts of life about diversification).
They cannot be altered, and when ignored, they explain in part why so many corporate strategies fail.
The three premises are:
 Competition occurs at the business unit level
 Diversification inevitably adds cost and constraints to business units
 Shareholders can readily diversify themselves
These premises mean that corporate strategy cannot success unless it truly adds value to business units
by providing tangible benefits that offset the inherent costs of lost independence and to shareholders
by diversifying in a way they could not replicate.
Passing the essential tests
To understand how to formulate corporate strategy, it is necessary to specify the conditions under
which diversification will truly create shareholder value. When companies ignored these conditions,
results were disastrous. These conditions can be summarized in three tests:
 The attractive test (the industries chosen for diversification must be structurally attractive or
capable of being made attractive)
 The cost-of-entry test (cost of entry must not capitalize all the future profits)
 The better-of test (either the new unit must gain competitive advantage from its link with the
corporation or vice versa)
Concepts of corporate strategy
Many companies lack a clear concept of corporate strategy to guide their diversification. Porter has
identified four concepts of corporate strategy:



Portfolio management
The concept most in use is portfolio management, which is based primarily on creating value
by diversification through acquisition. Portfolio managers categorize units by potential and
regularly transfer resources from units that generate cash to those with high potential and cash
needs. Portfolio management still works, but is no longer a valid model for corporate strategy
in advances economies.
Restructuring
The restructuring strategy wants to create value through seeking out undeveloped, sick, or
threatened organizations or industries on the threshold of significant change. The parent
intervenes (for example shifting strategy or infusing new technology) and then reduces the
effective acquisition cost (for example by building a critical mass and sell off unneeded or
unconnected parts). A strong sense of corporate identity is very important. The result is a
strengthened company or a transformed industry.
Transferring skills

Transferring skills exploit the interrelationships between businesses in articulating them.
Thereby synergy, the need to capture the benefits of relationships between businesses, has
never been more important. But a company that can define the synergies it is pursuing still
faces significant organizational impediments in achieving them. To help understand the role of
relatedness in corporate strategy Porter developed the value chain. Transferring skills leads to
competitive advantage only if the similarities among business meet three conditions:
o They are similar enough that sharing expertise is meaningful
o The transfer of skills involves activities important to competitive advantage
o The skills transferred represent a significant source of competitive advantage for the
receiving unit.
Sharing activities
Sharing activities also exploit the interrelationships between business and is bases on sharing
activities in the value chains among business units. The ability to share activities is a potent
basis for corporate strategy because sharing often enhances competitive advantage by
lowering cost or raising differentiation. Sharing must involve activities that are significant to
competitive advantage, not just any activity.
Choosing a corporate strategy
Each concept of corporate strategy allows the diversified company to create shareholder value in a
different way. Companies can success with any of the concepts if they clearly define the corporation’s
role and objectives (have the skills necessary for achieving the strategy, organize themselves to
manage diversity and find themselves in an appropriate capital market environment). Porters study
supports the soundness of basing a corporate strategy on the transfer of skills or shared activities. His
study also illustrate that none of the concepts of corporate strategy works when industry structure is
poor or implementation is bad, no matter how related the industries are.
An action program
To translate the principles of corporate strategy into successful diversification a company must first
take an objective look at its existing businesses and the value added by the corporation. The following
action program provides a concrete approach to conducting such a review. A company can choose a
corporate strategy by:
1. Identifying the interrelationships among already existing business units.
2. Selecting the core businesses that will be the foundation of the corporate strategy.
3. Creating horizontal organizational mechanisms to facilitate interrelationships among the core
businesses and lay the groundwork for future related diversification.
4. Pursuing diversification opportunities that allow shared activities.
5. Pursuing diversification through the transfer of skills if opportunities for sharing activities are
limited or exhausted.
6. Pursuing a strategy of restructuring if this fits the skills of management or no good
opportunities exist for forging corporate interrelationships.
7. Paying dividends so that the shareholders can be the portfolio managers.
Creating a corporate theme
Defining a corporate theme is a good way to ensure that the corporation will create shareholder value.
Having the right theme helps unite the efforts of business units and reinforces the ways they interrelate
as well as guides the choice of new businesses to enter.
Conclusion
Moving from competitive strategy to corporate strategy is the business equivalent of passing through
the Bermuda Triangle. The failure of corporate strategy reflects the fact that most diversified
companies have failed to think in terms of how they really add value. A corporate strategy that truly
enhances the competitive advantage of each business unit is the best defence against the corporate
raider. With a sharper focus on the tests of diversification and the explicit choice of a clear concept of
corporate strategy, companies’ diversification track records from now on can look a lot different.
Competitive Strategy
 How to create competitive advantage in each SBU?
Corporate Strategy
 Which SBUs to invest in?
 How to be achieving synergy as corporate parent?
Make the whole add up to more than the sum of its SBUs
Premises of Corporate Strategy
 Competition occurs at the SBU level.
 Diversification inevitably adds costs and constraints.
 Shareholders can readily diversify themselves; they don’t need the company to do that
The most important driver is growth
How does he identify that the SBU adds value to the parent?
Can you actually add value?
Essential Tests
The Attractiveness Test (from the parent’s company)
 Ex-Ante vs. Ex-Post
 Early Growth vs. Long-term Profit
The Cost-of-Entry Test
 Cost-of –Entry vs. Expected Return

The Better-Off Test (from the target’s point of view)
 Once vs. Ongoing Benefits
 Value-Adding vs. Avoid Value-Destroying
Article 3:Prahalad, C.K. and Gary Hamel (1990), ‘The Core Competence of the Corporation’,
Harvard Business Review, (May-June), pp. 79-91
The Core Competence of the Corporation
The Tyranny of the SBU
 Underinvestment in Developing Core Competences and Core Products
 Imprisoned Resources
 Bounded Innovation
The Roots of Competitive Advantage
 Top managers should see their firm as a portfolio of competencies rather than a portfolio of
SBUs.
 In the short run, a company’s competitiveness derives the price/performance attributes of
current products.
 In the long run, competitiveness derives from an ability to build, at lower cost and more
speedily than competitors, the core competencies that spawn unanticipated products.
The idea of the article:
The diversified giant NEC competed in seemingly different businesses (semi-conductors, consumer
electronics etc.) and dominated them all. They did this because they did not consider the different
businesses as a collection of strategic business units (like in the growth-share matrix), but as a
portfolio of core competencies. This is the company’s collective knowledge about how to coordinate
diverse production skills and technologies.
They used its core competencies to invent new markets, exploit emerging ones and delight consumers
with products they never imagined, but definitely needed.
Porter is about managing different SBU’s and Prahalad is about managing core competencies.
Diversified Corporation as a ‘Tree’
Think of a diversified company as a tree: the trunk and major limbs as core products, smaller branches
as business units and leaves and fruits as end products. The stabilization of all those aspects is the root
system of core competencies. Root System provides nourishment, sustenance, and stability ->Core
Competence; it does not have to be tangible. Intangible core competencies are less easily imitated
According to this article core competencies create unique integrated systems that reinforce fit among
the firm’s diverse production and technology skills, which cannot be copied by competitors.
Competitive advantage
Top managers should see their firm as a portfolio of competencies rather than a portfolio of SBUs.
In the short run, a company’s competitiveness derives the price/performance attributes of current
products.
In the long run, competitiveness derives from an ability to build, at lower cost and more speedily than
competitors, the core competencies that spawn unanticipated products.
How not to think of competence
Since companies are in the race to build the competencies that determine global leadership, successful
companies have stopped imagine themselves as bundles of businesses making products.
Building core competencies is more ambitious and different than integrating vertically. Managers
deciding whether to make or buy will start with end products and look upstream to the efficiencies of
the supply chain and downstream toward distribution and consumers.
Identifying core competencies – and losing them
At least three tests can be applied to identify core competencies in a company.
 First a core competence provides potential access to a wide variety of markets.
 Second, it should make a significant contribution to the perceived consumer benefits of the
end product.
 Last, it should be difficult for competitors to imitate.
There are two lessons to be learned here. First the cost of losing a core competence can be only
calculated in advance. Second, since core competencies are build trough a process of continuous
improvement, and enhancement that may span a decade or longer, a company that has failed to invest
in a core competence building will find it very difficult to enter an emerging market.
From core competencies to core products
The tangible link between identified core competencies and end products is what they call the core
product. The core products are the components or subassemblies that contribute to the value of the end
product. Making a link between core competencies, core and end products is essential. Different rules
and stakes at each level play out global competition.
Philips sustains leadership in their chosen core competence areas; they seek to maximize their worldmanufacturing share in core products. By focusing on competence and core products, Asian
competitors have built up advantages in component markets first and have then leveraged off their
superior products to move downstream to build brand share.
In short, well-targeted core products can lead to economies of scale and scope.
Disadvantages of the SBU mind-set:
 Underinvestment in developing core competencies and core products:
It is possible that no single SBU in a organization may feel responsible for maintaining a viable
position in core products nor be able to justify the investment required to build world leadership in
some core competence.
 Imprisoned resources
SBU managers are not only unwilling to lend their competence carriers, but they may hide talent to
prevent its redeployment in the pursuit of new opportunities.
 Bounded innovation: of core competencies are not recognized, individual SBU’s will pursue
only those innovation opportunities that are close at hand marginal product line extensions or
geographic extensions.
Developing strategic architecture
A strategic architecture is a road map of the future that identifies which core competencies to build
and their constituent technologies. It is helpful to think that is all is like a tree of the corporation
organized around core products and core competencies. Strategic architecture should make resource
allocation priorities transparent to the entire organization. It is a tool for communicating with
customers and other external constituents.
Redeploying to exploit competencies
Once top management has identified overarching it must ask businesses to identify the projects and
people closely to connect with them. Core competencies are core resourced and may be relocated by
corporate management. The competencies are the wellspring of new business development. They
should constitute the focus for strategy at the corporate level.
Contrast of the tests of Porter to value SBU’s and Prahalad’s test to identify core competence
They are similar when looking at attractiveness. The first and second; attractiveness/ The third; cost of
entry.
Difference: One is tangible one is less tangible
Article 4: Lorenzoni, G. and C. Baden-Fuller (1995), Creating a strategic center to manage a
web of partners, California Management Review, 37(3), pp. 146-163.
Lorenzoni and Charles Baden-Fuller discuss the role of a strategic centre in creating value:
Typically each of these partnerships extends beyond a simple subcontracting relationship. Strategic
centres expect their partners to do more than follow the rules; they expect them to be creative.
For example, Apple worked with Canon and Adobe to design and create a laser jet printer which then
gave Apple an important position in its industry. In all the cases we studied, the strategic centre
looked to the partners to be creative in solving problems and being proactive in the relationships.
Gianni Lorenzoni and Charles Baden-Fuller present a series of suggestions through which the strategic
centre may be able to improve its effectiveness in strengthening the creative web. They emphasize the
need for new structures as well as new strategies.
Beyond the Hollow Organization
 Sharing a Business Idea
 Brand Power and Other Support
 Trust and Reciprocity
 Partner Selection
Simultaneous Structuring and Strategizing
 Marketing and Information Sharing
 Learning Races
Successful networks of partners are typically guided by a strong strategic center, which is far more
than a broker and organizer of contacts. This article examines three special features of the activities of
successful central firms:
 Their ability to create value for themselves and their partners
 The agenda and core competencies they develop
 The capacity to be innovative by simultaneous strategizing and structuring
The Role of the Strategic Centre
In the view of the authors, a group of firms that work closely together can form a ‘virtual company’.
This type of network can benefit from most of the advantages of being a large vertically integrated
company, while avoiding most of the pitfalls of integration. But that it is necessary for a network of
firms to have a strategic center that can act as builder and coordinator.
Three dimensions of the strategic center:
1 As a creator of value for its partners
The main features of this role are:
- Strategic outsourcing (subcontract), collect partners who contribute to the system. Roles are
clearly defined in a positive en creative way. In strategic networks, partners are more than
doers or actors; it is the norm rather than an exception for partners to be innovators.
- Capability, help partners develop core competencies. High competitiveness force them then to
share their expertise with the network.
- Technology, borrow ideas from others which are developed and exploited to create and master
new technologies (borrow-develop-lend).
- Competition, encourage rivalry inside the network in a positive way.
2 As leader, rule setter, and capability builder
Central firms have to develop some critical core competencies (these are, in general, quite different
from those stressed by most managers in traditional firms):
- The idea, creating a vision in which partners play a critical role
- The investment, a strong brand image and effective systems and support
- The climate, creating an atmosphere of trust and reciprocity
- The partners, developing mechanisms for attracting and selecting partners
3. As simultaneously structuring and strategizing
The most difficult battle is the battle between firms adopting different strategies and different
approaches to the market. In these battles, the winners are usually those who use fewer and different
resources in novel combinations. Marketing and information sharing is very important. Learning races
create a sense of competition and rivalry, but within an overall common purpose. But they can be
destructive rather than constructive if the partners do not have the skills and resources.
Durable partnerships between multiple firms are not easy, but if this interdependence can be managed
well, it can give the group a strong competitive edge against others.
Compared to articles from last week:
Similar: Both are about knowledge
Differences: Last week was explicitly about knowledge, this week its about more than that
The concept: to share knowledge through strategic alliances; this is not symmetric; we don’t know
which has more knowledge and shares more.
Article 5: Campbell, Andrew, Michael Goold and Marcus Alexander (1995), ‘Corporate
Strategy: The Quest for Parenting Advantage’, Harvard Business Review, (March-April), pp.
120-132.
Two Main Research Questions
 What SBUs should your firm, rather than rivals, own and why?
 What organizational structure, management processes, and philosophy will foster superior
performance from its SBUs?
The growth/share matrix, introduced in the 1970s and adopted by two-thirds of all U.S. corporations
within a decade, encouraged companies to balance their business portfolios with a mix of stars, cash
cows, and question marks. But the poor performance of companies using the portfolio-management
technique, and disillusionment with diversification, have discouraged all but a handful of companies
from using it today
According to Campbell at al, the core competence concept (Hamel and Prahalad) also has not
provided practical guidelines for developing corporate-level strategy. While the core competence
concept appealed powerfully to companies disillusioned with diversification, it did not offer any
practical guidelines for developing corporate-level strategy.
To fill the gap, the authors propose the Parenting Framework, with tools for answering two
questions:
Which business should a company own?
What parenting approach will get the best performance from those businesses?
The Parenting Framework focuses on the competencies of the parent company and on the value that is
created through the relationship of the parent company and its business. Based on research of this
paper, the parenting framework is grounded in the economics of competitive strategy. The parent
organization can improve the businesses’ plans and budgets, promote better linkages among them,
provide especially competent central functions, or make wise choices in its own acquisitions,
divestments, and new ventures.
Multi-business companies create value by influencing—or parenting—the businesses they own. The
best parent companies create more value than any of their rivals would if they owned the same
businesses. Those companies have what we call parenting advantage.
The best parent companies create more value than any of their rivals would if they owned the same
businesses. These companies have what we call a parenting advantage. An important aspect of that is
that the parent company understands the business and the other way around.
A fit between a parent and its businesses is a two-edged sword; a good fit can create value and a bad
one can destroy it.
To asses whether the fit between the corporate parent and its business, they developed a structured
analytical approach.
1. Examine the critical success factor of each business
2. Document areas in the business in which performance can be improved
3. Review the characteristic of the parent, grouped in a number of categories
Critical success factors: Understanding the businesses
Parenting Opportunities (potential for improvement within a business)
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Parenting opportunity is the potential for improvement within a business
Most business have parenting opportunities and could improve their performance if they had a
parenting organization with exactly the right skills an experience
There are three types to identify parenting opportunities:
1. Strategists list the major challenges facing a business, which are normally recorded in the
business plan
2. Strategists document the most important influences the parent had on the business and then
judge whether those influences are addressing parenting opportunities that were not identified
in the first analyses.
3. Looks at the influence different parents have on similar businesses to see whether they have
discovered still other parenting opportunities.
10 Places to look for parenting opportunities:
 Size and age; old large business tend to be very bureaucratic and young small businesses tend
to have insufficient functional skills
 Management; Does the business employ top-quality compared with its competitors?
 Business definition; Is the concept of what the business should be correct?
 Predictable errors; Does the nature of a business lead managers to make predictable mistakes?
 Linkages; Could business link more effectively with other businesses to improve efficiency?
 Common capabilities; Does the business have capabilities that could be shared among
businesses?
 Special expertise; Could the business benefit from specialized expertize that the parent
possesses?
 External relations; Does the business have external stakeholders that the parent company
could manage better than it does?
 Major decisions; Does the business face difficult decisions where it lacks expertise?
 Major changes; Does the business need to make changes in areas where it has little
experience?
Parenting characteristic fall into five categories:
1. The mental maps that guide parent managers
2. The corporate structure, management systems, and processes
3. The central functions, services, and resources
4. The nature, experience, and skill of managers in the parent organization
5. The extent to which companies have decentralized by delegating responsibilities and
authority to business-unit managers
Parenting characteristics are built on deeply held values and beliefs, making changes hard to
implement. Good parents constantly modify, fine-tune, their parenting, but fundamental changes in
parenting seldom occur, usually only when the chief executive and senior management are replaced
A structured analysis cannot replace judgement. Managers must be honest about their own strengths
and weaknesses.
Heartland businesses have the opportunities to improve that the parent knows how to address, and
they have critical success factors the parent understands well
They should have priority in the company’s portfolio development, and the parenting characteristic
that fit its heartland businesses should form the core of the parent organization
Edge of Heartland Businesses; It happens when some parenting characteristics fit, and others do not.
The parent both creates and destroys value
They could be moved into heartland businesses when the parent learns enough about the critical
success factors to avoid destroying value
Ballast Businesses; They are the businesses that the potential for further value creation is low but the
business fits comfortably with the parenting approach
Companies with too many ballast businesses can easily become targets for a takeover
Alien Territory Business; Most corporate portfolios contain at least a smattering of business in which
the parent sees little potential for value creation and some possibility of value destruction. Companies
need to be clear about their heartland before they can recognize alien territory, and they need to be
clear about their alien territory in order to recognize their heartland.
Value trap business; They are business with a fit in parenting opportunities but a misfit in critical
success factors. The potential for upside gain often blinds managers to the misfit-that is, downside
risks
Compared to BCG matrix: Alien businesses- ->dog, Hartland-businesses -> stars/ Value-trap
busineses -> question marks
Article 6 The Emergence and Evolution of the Multidimensional Organization J. Strikwerda,
J.W. Stoelhorst
What is the article about?
The M-form (The Multidivisional Structure), in which a corporate parent manages relatively
freestanding business units, was the most successful organizational design of the twentieth century.
However, contemporary economic conditions call for designs that allow firms to exploit synergies
across their business units and on this dimension the M-form is notoriously weak. We report on
empirical research that highlights the fundamental tension between clear lines of authority and the
exploitation of synergies that firms face as they move away from the M-form and implement shared
service centres, corporate account management, and matrix organizations. However, we also found
that a limited but substantial number of firms in our sample evolved organizational designs that signal
a new way of resolving this tension. These firms are organized around multiple dimensions (e.g.
region, product, and account) and are able to simultaneously hold different managers accountable for
performance on these dimensions. We discuss the nature of this multidimensional organization form
by contrasting it with the M-form and the matrix organization. The multidimensional organization is
best understood as the next step in the evolution from a resource centric physical production model to
a customer centric knowledge exploitation model. It is a way of organizing that seems particularly
well adapted to stimulating the teamwork that is necessary to create economic value in complex
markets on the basis of distributed knowledge and intangible resources.
Principle: business units are self-contained.
(Most business units now depend at least in part on recourses that are controlled by other units. 
raises fundamental questions about the status of the M-form)
In this article: research project to explore the ways in which leading Dutch organizations adapted the
M-form to better exploit synergies across business units.
The multidivisional, multi-unit or M-form is widely acknowledged as the most successful organization
form of the twentieth century. With this type of organization, activities are organized in separate
business units and control over the resources needed to create economic value is delegated to the
managers of these units. However, many contemporary firms violate the principle that is central to the
M-form; that business units are self-contained. Most business units now depend at least in part on
resources that are controlled by other units. The article focuses on the history and current use of the
M-form, and possible alternatives.
The rise and fall of the M-form
In the U-form, or unitary form, the firm is a single profit centre that is organized along functional
lines. A unitary organization stood in the way of growth strategies, and firms were broken up in
separate divisions, each of which was itself a u-form and a corporate “parent” acting as HQ
coordinated the divisions -> the M-form.
The M-form is based on four principles:
1. The firm is organized in separate business units
The divisions operate as strategic business units, pursuing a competitive strategy geared to
their specific target market
2. Business unit managers are accountable for creating economic value
Delegation of authority to business unit managers
3. Resources are allocated unequivocally to business units
This allows business units to respond to market requirements with a minimum of coordination
with other business units or corporate headquarters
4. The task of the corporate parent is to add value (create synergies) to the activities of the
business units Each business unit is an investment project in itself and the task of the
corporate HQ is to support the business units in creating economic value (by providing overall
strategic direction)
Two reasons for the popularity and success of the M-form are;
1. By creating an internal capital market the M-form stimulates entrepreneurship.
By organizing resources on the basis of markets swerved and delegating control of these
resources to business unit managers, firms using the M-form can better respond to market
opportunities. The M-form stimulates entrepreneurship and creates opportunities for
individuals to develop into general managers without the need to provide capital.
2. The M-form offers a simple way to exploit synergies
The value of the firm must be higher than the sum of the values of the business units.
Synergies can be financial (spreading investment risks across business units, reducing cost of
capital) or economies of scope/scale (corporate R& and management development programs),
the M-form pursues both.
The limited success of many corporate parents in adding value raised some fundamental questions
about the M-form. One of the causes for financial synergies was the efficiency of the internal capital
markets within M-form firms. However, by the ‘80s external capital markets had become much more
efficient, so there was little room left to add value through financial portfolio management. When
exploiting synergies by economies of scale or scope, the M-form was also limiting, as business units
needed to become more interdependent.
The M-form assumes that each of the firm’s customers only needs to deal with one business unit and
that each of the firm’s business units can control all resources needed to serve its market. Its only on
these two assumptions that business units can truly operate independently.
These assumptions are violated as soon as there are opportunities for:
- Cross-selling
- System integration across the products of different business units
- Complementarities among the resources of different business units
- Economies of scale in the use of resources across business units
Alternatives for the M-form
Because of the trade-off between the need to create synergies and the organizing principles of the Mform, a study was conducted among 36 large Dutch organizations. This has led to five main
conclusions about the status of the M-form;
1. The M-form still dominates the corporate landscape
2. The M-form is central to the “Theory in use” of executives
Executives’ comments on organization were typically based on the terms of the organizing
principles that underlie the M-form; clearly defined accountabilities and performance targets
at the level of business units are seen as the norm against which organizational solutions are to
be judged.
3. The matrix organization is a negative mental anchor
The interviews made it very clear that the concept of a matrix organization has very negative
connotations, despite the fact that all respondents acknowledged that a firm typically cannot
be managed on only one dimension.
4. Virtually no business unit is self-contained
In contrast to the ideas underlying the M-form, all firms are organized on the basis of business
units that depend on resources outside the own unit to achieve their objectives, albeit in
varying degrees. While the M-form may still dominate the thinking about organization, the
actual practice of organizing has taken firms away from the underlying logic of the M-form.
5. Mental anchoring to the M-form creates problems when implementing synergy mechanisms
Creating synergies by giving authority (profit-and-loss responsibility) to project or account
managers faces opposition from business unit managers, they perceive this as reducing their
own power and autonomy.
Multidimensional Organizations
A new type of organization is the multidimensional organization, where synergies are created and
exploited across business units by organizing along multiple dimensions ( as products, accounts,
regions, distribution channels).
The six main characteristics of the multidimensional organization:
Multidimensional firms;
 Simultaneously report their performance on two or more dimensions at multiple levels in the
organization;
 Simultaneously hold different managers accountable for the contribution of their dimension to
the firm’s overall performance;
 Organize resources in such a way that the managers who are responsible for the different
dimensions are dependent on each other for the resources they need to achieve their
performance objectives;
 Have multidimensional market positions;
The primary reason for organizing firms along multiple dimensions is that multidimensional
firms have identified multiple dimensions that are critical to their market position.
 Focus on the customer as the profit center;
The customer-centric nature of multidimensional firms is further enhanced by the practice of
treating customers as profit centers. Economic value is created by pursuing market strategies
on the basis of integrated product-and-service offerings that maximize customer profitability.
 Eliminate information asymmetries and transfer pricing;
In multidimensional firms, HQ owns the transaction data and customer data, which are
available to all and thus information asymmetries are eliminated and transfer pricing made
impossible.
The evolution of the Multidimensional form
Table 2 provides an overview of the main differences between the M-form, Matrix form and
Multidimensional Form.
Multi-division
Multi-dimensional: look at all aspects; different dimensions can be across different divisions
Same purpose; they want to create synergy.
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Strategy
In the line of organizational structure follows strategy ; multidimensional firms have
acknowledged that the sources of their ability to create value are shifting from tangible
physical assets and codified knowledge to the tacit personal knowledge of creative knowledge
workers. This results in strategies that are customer-centric instead of resource-centric.
Organization
Customer-centric strategies based on knowledge resources demand teamwork. This is why the
efficient use of resources and the pursuit of market opportunities are organized separately, so
that managers become dependent on each other. The firm is no longer seen in terms of one
dominant dimension along which resources are allocated to quasi-autonomous managers, but
in terms of multiple-dimensions that cooperate toward the common goal of creating value for
customers.
Planning and Control process
Only a central accounting system that is seen as a trusted source of financial data can
eliminate information asymmetries and the need for transfer prices between units, both of
which are essential for running an integrated customer-centric firm. In the M-form this
information stays within the business units.
Rewards
The essence of the multidimensional organization is that it turns on the principles of
teamwork. To be able to reward the collective effort, reward is primarily based on people’s
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contribution to the common goal. This in contrast to the reward system that dominate the
traditional m-form, which reward managers in proportion to their position in the vertical
hierarchy.
People
Whereas the traditional business unit manager is likely to be extrinsically motivated by strong
financial incentives and the status conferred by controlling resources, the emphasis on
teamwork in the multidimensional organization calls for managers that are intrinsically
motivated by their contribution toward a common goal.
Conclusion
Contemporary economic conditions increasingly call for the creation and exploitation of synergies;
and this is not something for which the M-form was conceived, or can be adapted easily. The most
common organization design is the M-form combined with synergy mechanisms such as corporate
account management and shared service centres. This particular combination creates tensions because
these synergy mechanisms go against the basic design principles of the M-form. Increasingly numbers
of firms evolve towards multidimensional designs that allow them to better exploit the intangible
resources that are increasingly becoming the main source of competitive advantage in contemporary
economies.
The multidimensional form does seem to be particularly well adapted to the economic logic of the
knowledge society. Knowledge-driven production calls for firms that are able to integrate distributed
and tacit knowledge. Because no single individual holds all the knowledge required to produce
complex products and services of most contemporary firms, both the exploration and exploitation of
productive knowledge requires teamwork.
On the market side, the main rationale for adopting a multidimensional organization is that many
markets are no longer one-dimensional. Customer preferences are changing and becoming more
fragmented; and thus in need of multiple distribution channels. Another reason is that industries are
increasingly networked. As a consequence, the locus of innovation has shifted from the individual
company to the network in which it operates.
On the resource side, the central reason for adopting a multidimensional organization is that it allows
firms to make better use of personal knowledge resources. The individual expertise of knowledge
workers is increasingly becoming the most valuable resource of firms, and by organizing market
opportunities and resource separately, individual expertise is no longer locked up in specific business
unites.
Homework week 2
Questions
1. Many authors have different views on corporate strategy. We will elaborate on 6 of them;
According to Hedley and Berry (1977) corporate strategies should different for every business units,
with a focus on the growth and relative competitive position of each business and the company’s
position. They believe that the ‘business portfolio’ concept provides the best approach for developing
the differentiated strategic business objectives.
Porter (1987) on the other hand says that a corporate strategy that improves the competitive advantage
of each business unit is the best defense against competitors. He put the focus on diversification and
the choosing a clear concept of corporate strategy.
Prahalad and Hamel’s (1990) view of corporate strategy is that a diversified company with seemingly
different business units should not consider the different businesses as a collection of strategic
business units (like in the growth-share matrix), but as a portfolio of core competencies. According to
this article core competencies create unique integrated systems that reinforce fit among the firm’s
diverse production and technology skills, hard to be duplicated by competitors.
Lorenzoni and Baden-Fuller (1995) discuss the role of a strategic centre in creating value. They are
interested in how companies structure their vertical relationships. In their view, where a group of firms
work together closely, they can form a virtual company. Strategic centres expect their partners to be
creative. Overall they state that if interdependence between multiple firms is managed well, it can give
them a strong competitive advantage.
Campbell, and Goold and Alexander’s (1995) view on corporate strategy is formulated in terms of the
Parenting Framework, which focuses on the core competencies of the parent company and on the
value that is created through the relationship of the parent company and its business units.
In the 1970s the focus of management dealt was on firm size, growth, and the portfolio theory. By the
early 1980s the conclusion was that high market share and low market share companies were often
very profitable but most of the companies in between were not. Corporate strategy kept its focus on
diversification until the 1980s when it was acknowledged that in many cases a portfolio of operating
divisions was of higher value when considered as separate completely independent companies. In the
1990s Gary Hamel and C. K. Prahalad declared that strategy needed to be more interactive. The
assumption was that each organization has some functional area in which it excels and that the
business should focus only on opportunities in those areas.
When implementing corporate strategy over the years the focus shifts from individual business units
and its competencies to that of the parent company. Instead of establishing different core values in the
individual business units and then establishing a strategy for the parent company, corporate strategy is
now more focused on the value that is created through the parent company and then reflecting it on its
business units.
From slide:
1: corporate strategy = portfolio management; SBUs operate independently and often in unrelated
businesses
2: alternative corporate strategies; transferring skills and sharing activities better than portfolio
management (& restructuring); importance of SBU relatedness & synergies
3: corporate strategy = realizing synergies through core competencies; core competencies more
important than SBUs; strategy as stretch
4: focus on networks of firms; “strategic center plays a critical role as a creator of value”;
Voluntaristic
5: corporate strategy = fit between parent strengths and SBU needs; focus on relationship between
parent and SBU
2. Article 6 discusses the emergence and the evaluation of the Multidimensional Organization by
exploring the ways in which Leading Dutch organizations adapted the M-form to better exploit
synergies across business units. The article focusses on the theory and current use of the M-form and
possible alternatives. The M-form, in which corporate parent manages relatively freestanding business
units, was the most successful organization design of the twentieth century. The principle of the Mform is that Business units are self-contained. One of the main messages of this article is however that
most business units now depend at least in one part on recourses that are controlled by other units. The
limited success of many corporate parents in adding value raised questions about the M-form.
Companies started using alternatives for the M-form because of the trade-off between the need to
create synergies and the organizing principles of the M-form. A new type of organization is the
multidimensional organization, where synergies are created and exploited across business units by
organizing along multiple dimensions (as products, accounts, regions, distributions channels).
This article is about corporate strategy just like the other articles of this week. The difference is that
article 6 emphasizes the need for information, recourse and knowledge sharing among business units
and achieving joint goals. The corporate parent should make sure the units work together. While in the
other articles the business units are independent and operate in their own competitive environment. In
this case the corporate parent is restricted to add value through selecting managers, evaluate
performances and giving advice.
From slide:
1-5: Implicitly suggests that firms organize themselves along one dimension
6: firms sometimes organize themselves along multiple dimensions
6: multidimensional organization involves shared responsibility
1-5: is more about corporate strategy (though some structural elements are present in the "corporation
as a tree idea" of P&H and the Lorenzoni & Baden-Fuller
6: corporate structure.
3. We consider the second view to be more effective than the first to a certain extent.
Each SBU has got its own unique competencies. Prahalad and Hamel state that a core competence is
enhanced when it’s applied and shared. Seeing the organization, as a compilation of autonomous
businesses would mean the managers of the SBU’s would only strive to achieve their own SBU’s
goals. It doesn’t benefit them to share the competencies with other business units so they do not
actively share them or even try to keep them a secret. Therefore the competencies and the people who
carry them do not develop as quickly as they could when they would be put to use in other
opportunities. Additionally, responding to new opportunities in the market is easier when resources
and competencies can be assigned quicker to the business units where they are needed most.
Lorenzoni and Baden-Fuller mention that achieving a communal goal with a competition element
leads to business units wanting to outperform the other SBU’s. When viewing the corporate
organization as an integrated network where skills and knowledge are shared, a competition element to
a communal goal can lead to high quality rapid innovation.
As Porter stated it is only useful to share activities and skills when it involves activities, knowledge
and skills that are significant to competitive advantage. Seeing the corporate organization as an
integrated network is only applicable when the benefits of sharing activities and resources outweigh
the costs. Campbell, Goold and Alexander add that if the corporate parent isn’t similar enough to the
business units, the parent will not only add no value but it is also likely to destroy value of the
business units.
Depends on the extent of knowledge sharing, on the environment (stability of the industry). The more
dynamic the company, the best an integrated network would be.
From slide
The ‘ideal’ corporate organization
 A compilation of autonomous SBUs? OR
 An integrated network of interlinked SBUs?
Week 3
The Design School- Strategy as a Conceptual Process
Assumptions
 Strategy formation should be a deliberate process of conscious thought
 Responsibility for that control and consciousness must rest with the chief executive officer
(CEO)
 The model of strategy formation must be kept simple and informal
 Strategies should be one of a kind
 The design process is complete when strategies appear fully formulated as perspective
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These strategies should be explicit and simple
Only after strategies have been formulated can they be implemented
Critiques
 Underplays the importance of hands-on learning. (Mintzberg, 1990)
 Assumes that S & W are generally known, but not necessarily the case.
 S & W could be situation specific (context-dependent).
 Separation of strategy formulation from strategy implementation.
Limiting Assumptions
 One brain can, in principle, handle all of the information relevant for strategy formation.
 That brain is able to have full, detailed, intimate knowledge of the situation in question.
 The relevant knowledge must be established before a new intended strategy has to be
implemented – in other words, the situation has to remain relatively stable or at least
predictable.
 The organization in question must be prepared to cope with a centrally articulated
 strategy.
The Planning School- Strategy as a Formal Process
Who? Igor Ansoff (1965)- Market penetration
What?
 Corporate Strategy (1965)
 “A disciplined and well-defined organizational effort aimed at the complete specification of a
firm’s strategy and the assignment of responsibilities for its execution” (Hax and Majluf,
1991)
 “Take the SWOT model, divide it into neatly delineated steps, articulate each of these with
lots of checklists and techniques, and give special attention to the setting of objectives on the
front end and the elaboration of budgets and operating plans on the back end” (Mintzberg et
al., 1998: 49)
 So: A rational, stepwise approach to strategy formation with a strong focus on formalization &
quantification
Assumptions
 Strategies result from a controlled, conscious process of formal planning, decomposed into
distinct steps, each delineated by checklists and supported by techniques.
 Responsibility for that overall process rests with the chief executive in principle; responsibility
for its execution rests with staff planners in practice.
 Strategies appear from this process full blown, to be made explicit so that they can be
implemented through detailed attention to objectives, budgets, programs, and operating plans
of various kinds.
Design vs. Planning School
Design School
 Strategy formation should be based on a simple and informal model.
 CEO is fully responsible for strategy formation.
Planning School
 Strategy formation should be based on an elaborate and formal model.
 Planning staff is partly responsible for strategy formation.
Root of core competence (compare to last week)
Article 1: Hax and Majluf (1991), A formal strategic planning process, Chapter 2 from
The Strategy Concept and Process, pp. 15-25.
Hax and Majluf (1991) believe that the art and science of strategic planning reside in balancing the
various polar dimensions of the strategy formation process:
 Explicit versus implicit strategy
 Formal-analytic processes versus power-behavioral approaches
 Strategy as a pattern of past actions versus forward-looking plans
 Deliberate versus emergent strategy
This article tries to answer the question: What should be the components of a good formal strategic
planning process?
 The strategic planning process is a disciplined and well-defined organizational effort aimed at the
complete specification of a firm’s strategy and additional responsibilities.
Hierarchical levels of planning
There are three basic conceptual hierarchical levels which have always been identified as the essential
layers of any formal planning process:
 Corporate level: reside decisions making with a full corporate scope. The lack of a corporate
vision deprives the firm to consolidate its overall activities and to guide the difficult trade-offs
between long-term development an short-term profitability.
 Business level: reside main efforts aimed at securing the long term competitive advantage in
all the current businesses of the firm.
 Functional level: consolidate functional requirements and constitute the depositories of the
ultimate competitive weapons to develop the unique competencies of the firm.
These three hierarchical levels are appropriate for the design of the formal planning process in most
business firms. In some special conditions these levels should be expanded or contracted For example
when dealing with a large diversified corporation or when the firm is engaged in international
businesses. And each level should incorporate all of the key managers who can contribute to the
formulation of the individual strategies being discussed. A key business and functional manager has a
role of (1) shaping corporate direction and one of (2) translating the corporate initiatives into his or her
own business strategy; thus the designation of linking-pin.
This figure shows the role of Linking-Pin managers in Various Hierarchical Planning Levels.
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Neither top-down nor bottom-up.
CEO: Identify, develop and promote “the 100 centurions”
Hierarchies should not be an obstacle for the development of strategic capabilities
In 1991 the advent of information technologies were producing enormous impacts in the modern
organizations. That’s why effective coordination across lateral network became more crucial to
understand the firm of the future than the managerial hierarchy, which may become either invisible or
irrelevant. Hax & Majluf (1991) believe that organizations should interpret their strategic tasks at the
corporate, business and functional levels not as a rigid hierarchical sequence of actions, but rather as
useful conceptual paradigms that address different focuses of attention which we believe are central to
run a business firm now as well as in the future.
Pros
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Cons
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The planning process helps to unify corporate directions.
The segmentation of the firm is greatly improved.
The planning process introduces a discipline for longterm thinking in the firm.
The planning process is an educational device and an opportunity for multiple personal
interactions and negotiations at all levels.
Risk of Excessive Bureaucratization
Routinized, creativity stifling, time consuming and repetitive
Way out: Not revising all steps every year, Identifying selectively each year, Selecting a
theme each year
Lack of an Integration with other Formal Management Systems
Grand Design vs. Logical Incrementalism
Formal Planning vs. Op
A Calendar-driven planning process is not the only form of a formal planning system.
Hierarchies should not be an obstacle for the development of strategic capabilities.
Article 2: The fall and rise of strategic planning- Mintzberg, H. (1994), The fall and rise of
strategic planning, Harvard Business Review, (January-February), pp. 107-114.
Henry Mintzberg (1994) believes that planners shouldn’t create strategies, but they can supply data,
help manager think strategically and program the vision.
Henry Mintzberg (1994) states that strategic planning isn’t strategic thinking. Planning has always
been about analysis and strategic thinking is about synthesis and involves intuition and creativity and
cannot be developed on schedule. When companies understand the difference between planning and
strategic thinking, they can get back to what the strategy-making process should be: capturing what
the managers learns from all sources (both soft insights from experiences and hard data from market
research) and then synthesizing that learning into a vision of the direction that the business should
pursue.
Formal planning depends on the rearrangement of existing categories, but Mintzberg states that real
strategic change requires inventing new categories, not rearranging old ones. Strategy making needs to
function beyond the boxes, to encourage the informal learning that produces new perspectives and
new combinations.
The pitfalls of planning
The problem is that planning represents a calculating style of management, not a committing style.
Managers with a calculating style fix on a destination and calculate what the group must do to get
there, with no concern for the members’ preferences. So Mintzberg states that the goal of those who
promote planning is to reduce manager’s power over strategy making.
The fallacies of strategic planning
An expert has been defined as someone who avoids the many pitfalls on his or her way to the grand
fallacy. For strategic planning, the grand fallacy is this: planning does not provide strategies. So
strategic planning is NOT equal to strategy making as the article says.
Planning should be after strategizing, as aid to strategy. This fallacy itself rest on three fallacious
assumptions:
 The fallacy of prediction - the expectation that the future unfolds as forecast and foreseen by
management. The failure to foresee discontinuities.
 Strategists can be detached from the operations of the organization -- those not engaged in the
daily operations of the organization depend on abstractions to in data and information that
aggregates into a meaning that is neither rich nor true. Effective strategists immerse
themselves in daily detail and abstract the relevant messages from it.
 The fallacy of formalization - formalization ignores the role of learning from unexpected
events and the apprehension of unanticipated patterns in developing novel strategies.
Formalizing activities works against the insight, creativity, and synthesis needed for novel
emergent strategy
Mintzberg’s research demonstrates that strategy making is an immensely complex process, which
involves the most sophisticated, subtle, and at times, subconscious elements of human thinking.
Learning inevitably plays a, if not the, crucial role in the development of novel strategies. Vision is
unavailable to those who cannot ‘see’ with their own eyes. Real strategists get their hands dirty
digging for ideas, and real strategies are build from the nuggets they uncover. And at last formal
systems could never internalize, comprehend, or synthesize information. Formal procedures will never
be able to forecast discontinuities, inform detached managers or create novel strategies. Thus the
strategy-making process cannot be formalized.
Planning, plans and planners
Business-unit managers must take full and effective charge of the strategy-making process. The lesson
that has still not been accepted is that managers will never be able to take charge through a formalized
process. What then can be the roles for planning, for plans and for planners in organizations?
 Planning as strategic programming: Planning cannot generate strategies, but it can make them
operational. Strategic planning involves three steps: codification (clarifying and expressing the
strategies in terms sufficiently clear to render them formally operational), elaboration
(breaking down the codified strategies into sub strategies and ad hoc programs and overall
action plans), and conversion of strategies (considering the effects of the changes on the
organization’s operations). Strategic programming is not ‘the one best way’. Sometimes it’s
better to leave their strategies flexible as broad visions, to adapt to a changing environment.
 Plans as tools to communicate and control: Why program strategy? For coordination, to
ensure that everyone in the organization pulls the same direction, and for gaining the tangible
as well as moral support of influential outsiders.
 Planner as strategy finders: Some of the most important strategies emerge without the
intention or awareness of top managers. It is obviously the responsibility of manager to
discover and anoint these strategies. But planners can assist managers in finding these
strategies, because planners can snoop around places and discover things.
 Planners as analysts: Besides carrying out analyses planners are studying the hard data and
ensuring that managers consider the results in the strategy-making process. Some of the best
models that planners can offer manager are simply alternative conceptual interpretations of
their world.
 Planners as catalysts: Any form of behaviour that can lead to effective performance in a given
situation end even criticizing formal planning itself. When they act as catalysts planner do not
enter the black box of strategy making, they ensure that the box is occupied with active line
managers and ensure they think about the future in a creative way. Such planner see their job
as getting other to question conventional wisdom.
Left- and right-handed planners
Two very different kinds of people populate the planning function. One is an analytic thinker, who is
dedicated to bringing order to the organization; programs intended strategies and carries out analytic
studies (conventional image)  right-handed planner.
The second is the less conventional creative thinker who seeks to open up the strategy-making
process. This person is identified with the brain’s right hemisphere  left-handed planner.
Many organizations need both types, and it is top management’s job to ensure that is has them in
appropriate proportions.
The Formalization Edge
We human beings seem predisposed to formalize out behaviour but the experiences of strategic
planning teach us that there are limits. These limits must be understood, especially for complex and
creative activities like strategy making, because it’s not an isolated process. Strategy making is the
process interwoven with all that it takes to manage an organization. Systems do not think, and when
they are used for more than the facilitation of human thinking, they can prevent thinking. The story of
strategic planning has taught us something about how we think as human beings, and that we
sometimes stop thinking.
Main Takeaways
 Strategic planning isn’t strategic thinking. One is analysis, and the other is synthesis (you have
to come up with all strengths and weaknesses).
 Planners should make their greatest contribution around the strategy-making process rather
than inside it.
 Real strategic change requires inventing new categories, not rearranging old ones.
 The goal of those who promote planning is to reduce managers’ power over strategy making.
 Where in the planning literature is there a shred of evidence that anyone has bothered to find
out how managers make strategies?
 Sometimes strategies must be left as broad visions, not precisely articulated, to adapt to a
changing environment.
Article 3: Many best ways to make strategy- By Michael Goold and Andrew Campbell (1987)
There is not one best way to manage a multi-business organization. Rather, the best way always
depends on the nature and needs of the businesses in a company’s portfolio, on the styles of the people
in the corporate office, on the company’s strategy and goals.
The authors have identified three successful styles of managing strategy;
1. Strategic planning
2. Financial control
3. Strategic control
Strategic planning
With this strategy, unit managers formulate proposals, but headquarters reserves the right to have the
final say.
Strengths;
- It builds checks and balances into the process of determining each business unit’s strategy;
business unit managers and corporate staff are forced to communicate
- It encourages strategies that are well integrated across business units.
- It fosters the creation of ambitious business strategies;
once HQ establishes the direction in which the business should be going, unit managers are
free to develop bold plans to achieve whatever goal has been set
- Because strategic objectives come from the top, the units can support those objectives without
great concern for the short-term financial impact of their actions
Strategic planning companies experience more expansion of their existing businesses than the strategic
control or financial control companies. They also make more investments with long paybacks. The
strategic planning style is most effective in organizations that are searching for a broad, integrated
strategy for developing the business units, where the focus is on long-term competitive advantage.
Strategic planning companies are more likely to choose an ambitious, expansive option than a cautious
one.
Weaknesses;
- Motivation problems among line managers, demotivation when strategy choices are rejected
- Many people involved in planning, thus the process can be cumbersome, frustrating and costly
- The loss of autonomy at the business unit level is troublesome when the distance between HQ
and the market is great. When HQ loses touch with the business or misunderstands the
environment, it can result in heavy losses.
- Diminished flexibility; the extensive decision-making process inhibits the company’s ability
to respond quickly to changing market needs or environmental conditions
Financial control
Within the financial control style, responsibility for strategy development rests squarely on the
shoulders of business unit managers. Almost a reverse image of the strategic
planning style.HQ exerts influence through short-term budgetary control. The objective is to get the
business units to put forward tough but achievable profit targets that will provide both a high return on
capital and year-to-year growth.
Strengths;
- It gives managers the motivation to improve financial performance immediately;
financial control companies have, on average, higher profitability ratios than the other
companies, they are also better at rationalizing poor performing businesses quickly and
turning around new acquisitions.
- It has a way of shaking managers loose from ineffective strategies
- It is good for developing executives;
assigning profit responsibility to the lowest possible level gives potential high fliers general
management experience early in their careers
- It is effective with highly diversified portfolios;
corporate executives need not have an intimate knowledge of each unit’s competitor and
marketplace. Because the business units develop their own strategies, HQ can manage through
the relevant ratios by comparing performance among different businesses.
Weaknesses;
- Bias against strategies and investments with long lead times and paybacks;
this makes financial control companies vulnerable to aggressive, committed competitors that
can tolerate a long-term view.
- Pushed to extremes, the financial control style can lead to milking businesses for purely shortterm gains and to excessive risk aversion that prevents healthy business development.
- The failure to back aggressive strategies means that growth in financial control companies
comes more from acquisition than from internal development; there are limits to how far
acquisition-based growth can be taken.
- The decentralized strategy has difficulty in exploiting potential synergies between business
units.
- Control systems limit the flexibility of financial control organizations; blind devotion to last
year’s budget targets can preclude adaptive strategies and advantageous moves.
Strategic control
Companies that follow a strategic control style aim to capture the advantages of the other two, while
avoiding their weaknesses. In practice, however, the tensions involved in balancing control and
decentralization make this style of management the hardest to execute because it creates ambiguity. At
best, a strategic control system accommodates both the need to build a business and the need to
maximize financial performance. Responsibility for strategy rests within the business and division
managers. But strategies must be approved by HQ. They also judge whether or not the appropriate
balance is being struck between investing to build a business and pushing for short-term financial
performance, often with the use of portfolio planning.
In general, strategic control companies have less internal growth than strategic planning companies,
but they achieve substantial improvement in their profitability ratios. Long-term development is traded
for short-term financial gains.
Large investments and acquisitions, so important to the business-building strategies of strategic
planning companies, are rare.
Further, although HQ cares about financial results, it is less ruthless than with financial control in
driving to raise performance.
Strengths;
- Business unit managers are motivated by the freedom and responsibility they are given.
- It can cope with diversity;
because HQ decentralizes strategy and tailors the controls to the needs of the business, it can
manage a broad range of businesses in different circumstances. However, managed badly,
diversity can lead to superficial planning.
Weaknesses;
-
The strategic and financial objectives, the long- and short-term goals, make accountability less
clear cut and create ambiguity; business unit managers can be uncertain whether they should
be putting forward aggressive growth plans or tight performance plans and can therefore
become too cautious about high-growth businesses and too soft on mature lines.
- Strategic goals are not easily measured; excuses for poor performance can’t be tested and
managers become confused about how they will be evaluated. The only real measures of
performance then become financial.
At its worst, the style becomes an ineffective form of financial control in which time is spent on
planning without any tangible benefits and in which achieving planned objectives takes second place
to impressing the boss.
Conclusion
Successful corporations make trade-offs between these choices and draw on the combination that best
fits the businesses in their portfolios.
Article 3: Cornelius, P., A. van de Putte and M. Romani (2005), Three decades of scenario
planning in Shell, California Management Review, 48(1), pp. 92-109.
Purpose - To review the role that scenarios, or 'alternative stories about the future' have played in the
strategy process at Shell over the last thirty years.
Design/methodology/approach - Notes the irreversible nature of many investments. States that
combining scenario planning with real options analysis is a useful approach that emphasizes the
follow-on opportunities that many investments can create for a company. Observes that scenario
planning can contribute to real options at three levels: identifying options in the future; helping to time
the decision to exercise the real option; and providing an input to the process of evaluating it.
Distinguishes between forecasts and scenarios and provides a brief history of the Shell scenarios.
Explains how scenarios can be used as an integral part of strategic planning, tracing their use at Shell
from methodology development in the 1970s through integration into corporate strategy, focus on
external stakeholders and thereafter to integration into business strategy in the 2000s.
Separates out global scenarios concerned with general trends, focused scenarios linked to country or
business strategies and project scenarios associated with specific investment decisions. Considers the
use of real options in project selection, comparing it with the more traditional discounted cash flow
approach.
Practical implications - Includes an illustrative example of the combined use of scenario analysis and
real options in the various phases of oil and gas field investment, from exploration to extraction.
Originality/value - An insight into the successful combination of scenario planning and real options
techniques to manage investment decisions in an uncertain world.
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Planning on the basis of ‘scenarios’
Scenarios are not projections, predictions, or preferences; rather, they are coherent and
credible alternative stories about the future. You don’t have to think of everything, only what
is possible (fallacy of prediction)
Takes into account major shifts that may occur in the business environment
Aimed at challenging the prevailing mind-set
Mintzberg et al. (1998: 59): “scenario planning stimulates creative thinking and is hence more
likely to improve strategy making than strategic planning”
Investment risks and opportunities have to be assessed in full recognition of the external environment
in which corporate strategies are elaborated. An important risk companies face is that major shifts in
the business environment can make whole investment strategies obsolete. For example the 9-11
terrorist attacks have fundamentally altered US foreign policy.
Changes in the business environment can also create important new opportunities. The end of the cold
war and Russia’s opening has allowed companies to invest in this resource rich country. China’s race
to the market has produced economic growth, and it became a key driver for the world’s commodity
markets.
Forecasts provide an inappropriate tool to anticipate shifts in the business environment, they might be
dangerous. To deal with this problem, Shell uses scenario analysis, a method introduced more than 30
years ago. Scenarios are coherent and credible stories about the future. At Shell they played a big role
in anticipating shifts in the global energy mix and hence in determining the group’s upstream and
downstream investments.
The value of many projects is contingent on earlier investments. Scenario planning can usefully be
combined with real options analysis, an approach that emphasizes that many investments create
important follow on opportunities for a company.
Scenarios can contribute to real options at three fundamental levels.
 First, they can help identify options in the future.
 Second, they can help time the decision to exercise the real option.
 Third, they can provide an important input in the process of evaluating it.
Scanning the future with scenarios
Significant efforts have been made to improve forecasting techniques. Economic methods have
become sophisticated. Despite all the progress, firm success has been limited especially over longer
forecasts horizons.
But there is a fundamental problem, forecasts are usually constructed on the assumption that
tomorrow’s world will be much like today. However, sooner or later the world does change in a major
way, which render forecasts wrong when it hurts most.
Shell developed scenario planning, which differs from forecasting in that it accepts uncertainty, tries to
understand it, and makes it part of the reasoning. Scenarios help prepare for a range of alternative and
different futures; they are coherent and credible stories, describing different paths that lead to
alternative futures. Scenarios focus attention on causal processes and crucial decision points.
Scenarios serve multiple functions. First, they present a background for the design and selection of
strategies. Second, they help make managers aware of environmental uncertainties by confronting
them with fundamentally different future states. Third, they provide a tool to identify what possible
happen and how an organization can act upon or react to future developments. Fourth, they offer the
possibility to combine quantitative data with qualitative input. Finally, scenarios can help stretch
managers’ mental models by explicitly confronting them with their own biased viewpoints.
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Present a background for the design and selection of strategies.
Make managers aware of environmental uncertainties.
Provide a tool to identify what might possibly happen and how to react.
Offer the possibility to combine quantitative data with qualitative input.
Help stretch managers’ mental models.
Scenarios as an integral part of strategic planning
The most legendary example is probably the first oil price shock that was anticipated in the first
scenario. Other examples include the impact of higher oil prices on economic growth (1970s), the
substantial decline in oil prices (mid 1980s), European integration, and the collapse of the former
Soviet Union. Recent example is China’s rise as a global economic powerhouse.
What matters the most is the ability to identify the driving forces, explain how these work, and ensure
that the client helps understands them.
The global scenarios remain at the centre of the process, providing a comprehensive assessment of
how the future business environment could develop. They are combined with a range of applications
that provide a broad framework of ideas influencing strategy at the corporate level and assisting the
business in identifying risks and opportunities. The global scenarios helped Shell gain competitive
advantage in the past and continue to drive upstream and downstream portfolio decisions.
Focused scenarios tend to be more closely aligned to improving the judgments of individual managers
on specific investment decisions. For example, could abrupt changes in the regulatory framework
make a project obsolete?
Selecting projects using real options
By going through all the scenarios and turning them into 100 % certainties, we can identify options
that we may overlook if we limit ourselves to predict probable futures. Thus, scenarios can help
determine the universe of possible options.
Firms should allocate investment resources according to the highest net present value (NPV). The
most commonly known method is discounted cash flow (DCF), whereby the present value of future
cash flows is adjusted for both time and risk. This approach appears suitable for valuation purposes
when uncertainty about the critical drivers of the valuation ( such as prices, volume and costs) is low.
The real option approach is a way of thinking that helps managers formulate strategic options, it
focuses on the potential value embedded in exercising the option once uncertainty has been resolved.
There is an inherent bias in the DCF approach in the sense that managers may be led to reject highly
promising, if uncertain projects.
The most important problem lies in the limited guidance that history can provide for the future. The
search for twin securities whose past stock volatilities could serve as a proxy for the future volatility of
a corporate investment project appears of limited value in rapidly changing environments.
These factors explain why future payoffs may differ from past payoffs:
 Factors affected by the firm’s decisions are usually project- or sectors related and are
generally easy to identify. Those are typically not correlated with the general movements of
the economy and require deep sector knowledge to identify and assess potential impact.
 Other factors may be outside the firm’s control. Often they depend on social, economic and
political environment and may affect an entire sector or region and the global economy. Like
the deregulation of markets leads to uncertainty and regulation leads to a decrease of
uncertainty.
Combining scenario analysis and real options: an illustrative example
Exhibit 7 shows the stages of an oil or gas field investment from exploration to extraction. Each stage
can be seen as a call option on the value of continuing with the exploration, a value that includes the
value of all future options.
Focusing on the complex interplay of technological, regulatory, environmental and supply factors,
scenario planning could help to anticipate the emerging discontinuity in the U.S. gas market.
Traditional DCF analysis would have rejected the investment in the development of the West African
gas field and the LNG chain to ship the natural gas to the U.S. Real options analysis would have come
to another conclusion. Instead scenarios would have signalled that the firm’s option to develop the gas
field could come to maturity.
Conclusions
Scenarios should be usefully be combined with a real options approach, as a project’s value may
change over time due to introduction of new information. Scenarios can contribute to real options at
three fundamental levels. First, they can help identify future options. Second, they can help time the
decision to exercise an option. Last, scenarios can provide important input in the process of evaluating
real options.
Article 5: Hamel, G. and C.K. Prahalad (1989), Strategic intent, Harvard Business
Review, (May-June), pp. 63-76. (less important)
The strategic intent of a large company may be to exercise industry leadership on a national or global
scale. The strategic intent of a small company may be to dominate a market niche and gain recognition
as an up-and-coming enterprise. The time horizon underlying the concept of strategic intent is long
term. Companies that rise to prominence in their markets almost invariably begin with strategic
intents that are out of proportion to their immediate capabilities and market positions. But they set
ambitious long-term strategic objectives and then pursue them relentlessly, sometimes even
obsessively, over a 10- to 20-year period.
So, Strategic Intent (S.I.) is Creating an obsession with winning at all levels of the firm, and sustaining
that obsession over a 10 to 20-year quest for global leadership
 S.I. captures the essence of winning.
 S.I. is stable over time.
 S.I. sets a target that deserves personal effort and commitment.
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While S.I. is clear about ends, it is flexible as to means — it leaves room for improvisation.
S.I. implies a sizable stretch for an organization; it creates an extreme misfit between
resources and ambitions.
Strategic intent implies a sizable stretch for an organization; Current capabilities and resources will not
suffice. This forces the organization to be more inventive, to make the most of limited resources.
Hamel and Prahalad also distinguish 'strategic intent' from 'strategic fit' in their model of
contemporary strategic leadership and strategic vision in this article. They argued that 'strategic intent'
might be more appropriate for leaders of organizations in dynamic global operating environments, as it
permits more organizational flexibility than traditional strategic management models.
Traditional strategic management involves a search for the strategic fit between business portfolios,
market niches and products, customers and distribution channels. Emphasizing financial targets and
containing strategy implementation within resource parameters maintain sustainable advantage.
Strategic intent, on the other hand, is an organizational ambitious at a strategic level, and requires
entrepreneurial business leaders who seek new rules for business strategies, focusing on strategic
challenges rather than financial targets, and obtaining resource leverage to achieve goals rather than
constraining goals within apparent resource constraints.
Top management challenges the organization to close the gap between current resources and
ambitions by systematically building new advantages. Corporate challenges come from analyzing
competitors as well as from the foreseeable pattern of industry evolution.
For a challenge to be effective the entire organization requires top management to:
 Create a sense of urgency or quasi crisis
 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 organization time to digest one challenge before launching another
 Establish clear milestones and review mechanisms
The degree of 'strategic intent' is contingent on the level of industry competition, organizational
history, level of resource control, and strength of external strategic alliance networks, etc.
Characteristics of the concept of strategic intent:
 Strategic intent focuses the organization on the essence of winning
 Motivating people by communication the value of the target
 Leaving room for individual and team contributions
 Strategic intent is stable over time
 Strategic intent provides consistency to short-term action while leaving room for
reinterpretation as new opportunities emerge.
 Strategic intent sets a target that deserves personal effort and commitment
To reach strategic intent, a company usually has to beat a bigger and better financed company. The
goal is not competitive imitation but competitive innovation
Four Approaches to Competitive Innovation
 Building layers of advantage
 Searching for ‘loose bricks’
 Changing the terms of engagement
 Competing through collaboration
This article is very strongly focused from the inside out. Its an example of voluntarism. Everything
can be changed, nothing is fixed
Main Takeaways
 A company’s strategic orthodoxies are more dangerous than its well-financed rivals.
 Traditional competitor analysis is like a snapshot of a moving car.
 Planners ask “How will next year be different?” Winners ask
 “What must we do differently?”
 The “Silicon Valley” approach to innovation: put a few bright people in a dark room, pour in
money, and hope.
 Competitive innovation is like judo: upset your rivals by using their size against them.
 Playing by the industry leader’s rules is competitive suicide.
 Top managers are like astronauts — to perform well, they need the intelligence that’s back on
the ground.
 Investors aren’t hopelessly short-term. They’re justifiably skeptical of top management.
Article 6: Eisenhardt, K.M. and D.N. Sull (2001), Strategy as simple rules, Harvard
Business Review, (January-February), pp. 107-116.
Three approaches to strategy;
1. Position strategy
2. Resources strategy
3. Simple rules strategy
This article focuses on the strategy of simple rules. In traditional strategy, advantage comes from
exploiting resources or stable market positions. In strategy as simple rules, by contrast, advantage
comes from successfully seizing passing opportunities.
Yahoo has, despite unattractive industry structures, few apparent resource advantages and constantly
evolving strategies, grown to one of the biggest Internet companies. This is not easily explained using
traditional thinking about strategy. The story of Yahoo is far from unique. Many other leaders of the
new economy, including E-Bay and America Online, also rose to prominence by pursuing constantly
evolving strategies in market spaces that were considered unattractive according to traditional
measures.
The secret of companies like Yahoo is strategy as simple rules. Managers of such companies know
that the greatest opportunities for competitive advantage lie in market confusion, so they jump into
chaotic markets, review for opportunities, build on successful forays, and shift flexibility among
opportunities as circumstances dictate. But they recognize the need for a few key strategic processes
and a few simple rules to guide them through the chaos.
Key Processes
Managers using strategy as simple rules pick a small number of strategically significant processes and
craft a few simple rules to guide them. The key strategic processes should place the company where
the flow of opportunities is rapidest and deepest. The processes might include product innovation,
partnering, spinout creation, or new market entry. A company’s particular combination of
opportunities and constraints often dictates the processes it chooses.
Simple rules for unpredictable markets
Most managers quickly grasp the concept of focusing on key strategic processes that will position their
companies where the flow of opportunities is most promising. But because they equate processes with
detailed routines, they often miss the notion of simple rules. Yet simple rules are essential. They
provide the company just enough structure to allow it to capture the best opportunities.
Example; Yahoo’s managers focused their strategy on the branding and product innovation processes
and lived by four product innovation (simple) rules;
- know the priority rank of each product in development
- ensure that every engineer can work on every project
- maintain the Yahoo look in the user interface
- launch product quietly
The simple rules fall into five broad categories;
The number of rules
It’s important to have the optimal number of rules. Thick manuals of rules can be paralyzing. They can
keep managers from seeing opportunities and moving quickly enough to capture them. Too few rules
can paralyze as well, managers chase too many opportunities or become confused about which to
pursue and which to ignore. The right number is usually between two and seven rules.
The optimal number of rules for a particular company can shift over time, depending on the nature of
the business opportunities. In a period of predictability and focused opportunities, a company should
have more rules in order to increase efficiency. When the landscape becomes less predictable and the
opportunities more diffuse, it makes sense to have fewer rules in order to increase flexibility.
Creation of rules
Rules often grow out of experience, especially mistakes. Often, a rough outline of simple rules already
exists in some implicit form in a company. It takes an observant manager to make them explicit and
then extend them as business opportunities evolve. (For an example, look at p.114 where e-bay’s two
strong values; egalitarianism and community, are translated into simple rules)
Companies with the same strategic process, same entrepreneurial emphasis on seizing fleeting
opportunities, same superior wealth creation can have totally different simple rules.
Knowing when to change
A consistent strategy helps managers rapidly sort through all kinds of opportunities and gain shortterm advantage by exploiting the attractive ones. More subtly, it can lead to patterns that build longterm advantage. Although it’s unwise to constantly change the rules, strategies do go out-of-date.
Shifting the rules can sometimes rejuvenate strategy, but if the problems are deep, switching strategic
processes may be necessary. The ability to switch to new strategic processes has been a success secret
of the best new-economy companies.
Conclusion
Like all effective strategies, strategy as simple rules is about being different. But that difference does
not arise from tightly linked activity systems or leveraged core competencies, as in traditional
strategies. It arises from focusing on key strategic processes and developing simple rules that shape
those processes.
However, no one can predict how long an advantage will last. There’s an almost universal recognition
that the most salient feature of competitive advantage in these markets is not sustainability but
unpredictability.
In stable markets, managers can rely on complicated strategies built on detailed predictions of the
future. But in complicated, fast moving markets where significant growth and wealth creation can
occur, unpredictability reigns.
Main Takeaways
 When the business landscape was simple, companies could afford to have complex strategies.
But now that business is so complex, they need to simplify ->Dynamic environment leads to
DCV or Hyper-competition.
 The new economy’s most profound strategic implication is that companies must capture
unanticipated, fleeting opportunities in order to succeed -> Unpredictability reigns over
sustainability!
 Thick manuals of rules can be paralyzing. They can keep managers from seeing opportunities
and moving quickly enough to capture them ->“Simplicity is the ultimate sophistication!” by
Leonardo da Vinci (1452-1519).
 While it’s appealing to think that simple rules arise from clever thinking, they rarely do. More
often, they grow out of experience, especially mistakes ->Avoiding Competitive
Disadvantages!
What Simple Rules Are Not! ->Broad, Vague, Mindless, Stale
Assignment week 3
1) Consider texts 1-3. What is the essence of strategic planning according to these texts? What do the
authors consider the main advantages of strategic planning and what are their main points of criticism?
Hax and Majluf (1991), A formal strategic planning process, Chapter 2 from
The Strategy Concept and Process
In the first article the main essence of strategic planning is a process that incorporates 3 main
hierarchical levels which are the Corporate level, the Business level and the Functional level. Strategy
development is a complex process that involves the key managers from all levels. The formal strategic
process described is divided into the permanent structural conditions, which are decided at corporate
level such as the mission, the philosophy and culture; and 3 major tasks in the planning process that
need to be continuously updated involving all levels. These are strategy formulation, strategic
programming and operational planning. The main strategic process is then summarized into 12 steps.
Hax and Majluf describe the main advantages of a formal strategic process as providing necessary
leadership and long term goals that will not only focus on short term profitability. This will also
recognize additional levels in the planning process such as the international dimension which will aid
in coordination. The process described in this article would generate more commitment and personal
participation since it includes all levels and will aid in developing internal communication and
knowledge. On the downside however a formal planning process may restrict creativity and create a
rigid structure making it difficult to react to changes in a dynamic environment. The process may
become too bureaucratic, time consuming and repetitive which in time will lead to a loss of objectives.
Mintzberg, H. (1994), The fall and rise of strategic planning,
This article is mainly a critique of formal planning processes but does not provide a structural
alternative. Mintzberg focuses on the role of planners in strategy development which is implemented
from the top-down based on ‘hard’ information which usually lacks specifics and qualitative
information. He prefers an emergent strategy process where strategy arises informally at any level and
should be developed from various sources of information including hard research and ‘soft
experiences.
The advantages of having a formal strategic plan include being able to promote these intentions and
communicate a single goal throughout the firm to make sure everyone goes in the same direction. It
can also be used to gain tangible and moral support from outsiders for e.g. in the form of finance from
government. Planners can also be used in a more constructive role placing them in a position where
they may be provocative and challenging to promote advantageous changes. Mintzberg sees the
disadvantages of a formalized structure as limiting creativity and thinking. Also the commitment of
employees is compromised as instructions are coming from the top level and forced on business
managers.
Goold, M. and A. Campbell (1987), Many best ways to make strategy
3 successful styles are identified as strategic planning, financial control and strategic control. The
strategy decided on depends on various factors such as the needs and nature of the business, the style
of the business portfolio and goals. The strategic control strategy is the hardest to implement as it is
difficult to balance control and the level of decentralization.
The advantages of strategic planning are that it builds a system of checks and balances into the system,
employees are forced to communicate with each other and strategies are implemented throughout
SBU’s allowing for coordination. A clear corporate strategy allows SBU’s to pursue more ambitious
strategies as the need to focus on short term financial impact is diminished. The disadvantages from
strategy planning described in this article include demotivation for line managers as this is another
top-down strategy with no input from other levels. Specifically regarding the financial control system
the main disadvantage is the strong focus on short term profits of SBU’s and excessive risk aversion.
The level of decentralization also makes it difficult to benefit from possible synergies that closer
cooperation would bring.
2) Alternatives to strategic planning.
Article 3. Financial control. Business unit managers instead of the headquarters develop the strategy
with the clear short-term objectives to achieve profit targets and high return on capital.
Strategic control. This style tries to capture the advantages of both business unit managers and the
head quarters when developing strategy. Business unit managers develop strategies but the head
quarter has to approve of them.
Article 4. Scenario planning. Making coherent and credible alternative stories about the future,
describing different paths that lead to alternative futures. It makes the uncertainty of the future part of
the reasoning. Possible strategic options can be identified for each future. For example, Unilever
conducted scenario planning regarding the Eurozone with scenarios as a possible breakup or countries
leaving the Eurozone.
Article 5. Strategic intent. It has clear goals regarding strategy, but the means remain flexible. The
goals are set at a higher level than the available recourses can achieve, forcing the organisation to be
inventive and innovative. For example, when Canon started, it wanted to have a bigger market share
than Xerox. With the use of a series of corporate challenges, they achieved their goal.
Article 6. Complexity theory. There are just enough explicit directives in the organization concerning:
how-to, boundary, priority, timing and exit rules. There are not too much rules to inhibit innovative
ideas but enough to execute them effectively. For example, Facebook stimulates it’s developers to
come up with new features for the site. They are given free rein to their imagination, but the ideas
have to be in tune with a few directives to be considered for implementation.
Specific criticism.
All articles criticize the diminished flexibility when using a strategic planning style.
Article 3 and 6. Criticize the extensive decision-making process of strategic planning because it
inhibits the company’s ability to respond quickly to changing market needs and environmental
conditions. The more rules there are, the less adaptable and innovative the company can be.
Article 4 criticises the assumption that business environments are predictable and stay more or less the
same, while they actually change. Once made, operating decisions will not be altered, while they
should remain flexible.
Article 5. The same goes for article five. Companies need to stay flexible in order to react properly on
ever changing markets, seizing the best opportunities.
3) Collective opinion about strategic planning
Like Hax & Maljuf and Mintzberg state, the strategic planning process is complex and involves many
factors. It forms a clear direction for the organization but it also decreases flexibility, creativity and the
ability to quickly anticipate on , for example, environmental change. We agree with Mintzberg’s
statement against the formal strategic planning process, ‘Formal procedures will never be able to
forecast discontinuities, inform detached managers or create novel strategies, thus the strategy-making
process cannot be formalized’. Whether strategic planning is less or more appropriate depends on the
business and market the organization is in and there is not one best way to do it. Strategic planning
has to constantly adapt to changes in the business environment and market needs. Eisenhardt and Sull
mention that in stable markets advantage comes from exploiting resources or stable market positions,
in unstable markets advantage comes from successfully seeing fleeting opportunities. To successfully
anticipate on fleeting opportunities an organization has to act fast and be creative, strategic planning is
not appropriate in this case. This is due to the long decision-making processes and formal nature of
strategic planning.
Week 4
Strategic decision-making -> the process of strategy
Article 1: Strategic Change: Logical Incrementalism- J.B. Quinn
The comments of Quinn focus on the misconception that incrementalism is anti planning, the
relationship between incrementalism and strategic speed and nimbleness, the difficulties of testing in
theory in real, large scale systems, and the challenge of introducing business school students into
incremental thinking.
 Two Dominant Approaches to Strategy Formulation
The Formal Systems Planning Approach
Strategy formation is a fully rational, economic, inflexible act based on hard facts.
The Power-Behavioural Approach
Strategy formation involves divergent goals, politics, bargaining, negotiation, satisficing, coalitions,
and muddling.
 Why using incremental logic?
Event-Driven Incrementalism
Unexpected events prevent CEO from developing a clear strategic vision from the outset. (external)
Learning-Driven Incrementalism
Cognitive limits prevent CEO from developing a clear strategic vision from the outset. (internal)
Political/Opportunistic Incrementalism
CEO has a clear strategic vision from the outset but wants to build support for it.
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Neither the “power-behavioural” nor the “formal systems planning” paradigm adequately
characterizes the way successful strategic processes operate.
Effective strategies tend to emerge from a series of “strategic subsystems,” each of which
attacks a specific class of strategic issues in a disciplined way, but which is blended
incrementally and opportunistically into a cohesive pattern that becomes the company’s
strategy.
The logic behind each “subsystem” is so powerful that, to some extent, it may serve as a
normative approach for formulating these key elements of strategy in large companies.
Because of cognitive and process limits, almost all of the subsystems-and the formal planning
activity itself-must be managed and linked together by an approach best described as “logical
incrementalism.”
Such incrementalism is not “muddling”. It is a purposeful, effective, proactive management
technique for improving and integrating both the analytical and behavioural aspects of
strategy formulation.
Incrementalism in Strategic Subsystems
 The Diversification Subsystem
 The Divestiture Subsystem
 The Major Reorganization Subsystem
 The Government-External Relations Subsystem
In each case, conscious incrementalism helps to:
 Cope with both the cognitive and process limits on each major decision.
 Build the logical-analytical framework these decisions require.
 Create the personal and organizational awareness, understanding, acceptance and commitment
needed to implement the strategies effectively.
Precipitating events
Often external or internal events, over which management has essentially no control, would precipitate
urgent, piecemeal, interim decisions that inexorably shaped the company’s future strategic posture.
One clearly observes this phenomenon in the decisions forced on General Motors by the 1973-1974 oil
crisis. Yet early decisions made under stress conditions often means new thrusts, precedents, or lost
opportunities that were difficult to reverse later.
An incremental logic
Recognizing this, top executives usually tried to deal with precipitating events in an incremental
fashion. During the oil crisis in 1973-1974, the ensuing interactions improved the quality of decisions
for all. To improve both the informational content and the process aspects of decisions surrounding
precipitating events, logic dictates and practice affirms that they should normally be handled on an
incremental basis.
Incrementalism in strategic subsystems
One also finds that an incremental logic applies in attacking many of the critical subsystems of
corporate strategy.
The diversification subsystem
Strategies for diversification, either trough R&D or acquisitions provide excellent samples.
A step-by-step approach is necessary to guide and assess the strategic fit of each internal or external
diversification candidate.
The process helps unify both the analytical and behavioural aspects of diversification decisions.
Most important among these processes are:
 Generating a genuine, top-level psychological commitment to diversification
 Consciously preparing to move opportunistically
 Building a comfort factor for risk taking
 Developing new ethos
Each of these processes above interacts with all others to affect actions sequences, elapsed time, and
ultimate results in unexpected ways. They then modify these step by step as new opportunities, power
centres, and developed competencies merge to create new potential.
The divestiture subsystems
Similar practices govern the handling of divestures. In designing divestitures strategies, top executives
had to reinforce vaguely felt concerns with detailed data, build up managers’ comfort levels about
issues, achieve participations in and commitment to decisions, and move opportunistically to make
changes.
But when divestures involved the psychological centres of the organization, the process had te be
much more oblique and carefully orchestrated. There is an example given of General Mills about that
in the article.
Careful incrementalism is essential in most divestitures to disguise intentions yet create the awareness,
value changes, needed data, psychological acceptance and managerial consensus required for such
decisions.
The major reorganization subsystem
It is well recognized that major organizational changes are an integral part of a strategy. Macro
organizational moves are typically handled incrementally and outside of formal planning processes.
These changes have timing imperatives all their own. In making any significant shift, the executive
must think trough the new roles, capabilities, and probable individual interactions of the many
principals affected. The executive tends to keep close counsel in his discussions, negotiates
individually with key people, and makes final commitments as late as possible in order to obtain the
best matches between people’s capabilities, personalities, and aspirations and their new roles.
Major organizational moves may also define entirely new strategies the guiding executive cannot fully
foresee. There are examples discussed about Exxon and General Mills in this article.
Effective organization decisions, therefore, allow for testing, flexibility, and feedback. They should
and usually do, evolve incrementally.
The government- external relations subsystem
Almost all companies cited government and other external activist groups as among the most
important forces causing significant changes in their strategic postures during the periods examined.
In the realm is explained that uncontrollable forces dominate. Data is soft, can often be only
subjectively sensed and may be costly to quantify. Even the best-intended and most rational-seeming
strategies can be converted into disasters unless they are thoroughly and interactively tested. There is
given an example of this about General Motors. Only after prolonged interactions with regulators, and
public interest groups did GM truly understand the needs and pressure potentials of its opponents.
Companies will probably always have to derive major portions of their government external relations
strategies in an experimental, iterative fashion.
In a decision making sense, they do the following:
 Fine tune annual commitments
 Formalize cost reduction programs
 Help implement strategic changes
Formal plans are also ‘incremental’
There are two reasons for this. First in order to utilize specialized expertise and obtain executive
involvement and commitment, most planning occurs from the bottom up in response to broadly
defined assumptions or goals, many of which are long- standing or negotiated well in advance.
Second, most managements design their plans to be ‘living’ or ‘ever green’. They are intended only as
frameworks to guide and provide consistency for future decisions made incrementally.
Logical incrementalism
Strategic decisions do not lend themselves to aggregation into a single massive decision matrix where
all factors can be treated relatively simultaneously in order to arrive at a holistic optimum.
It is virtually impossible for a manager to orchestrate all internal decisions. External environmental
events, behavioural events and power relationships, technical and informational needs, and actions of
intelligent opponents so that they come together at a precise moment.
Conclusion
‘Logical incrementalism’ is not ‘muddling, but it is conscious, purposeful, proactive and good
management. This article discusses the rationale behind logical incrementalism in strategy
formulation.
Retrospective Commentary (Against Criticism)
 Incrementalism is not anti- planning
Probably the most disconcerting problem has been the tendency to pose incrementalism as the
intellectual opposite of planning.
Managed or logical incrementalism demands conscious process management. Within this framework,
extensive formal planning is possible and highly desirable. Yet one can plan to advantage; individual
projects can be planned into detail, overall sequences can be planned broadly, and technical
information, market scanning, and motivational and organizational support systems can be planned
with professional thoroughness.
 Incrementalism speeds strategic progress
The right question is not whether strategy formulation in large organizations ‘should’ be incremental,
but rather the degree of incrementalism that is appropriate and the probable consequences of various
possible degrees.
 Testing theory in large-scale systems
A major strategy is a one-time event.
This paragraph describes that they use partial test and that they usually exists in much smaller systems.
This choice often ignores one of the important caveats about incrementalism- that it applies most
clearly to large-scale systems.
Like most theories and action patterns, the utility of incrementalism tends to be highly situational.
 Incrementalism versus structure in MBA programs
Teaching incremental thinking to MBA or undergraduates is a real challenge.
Handling the softer, sequential, but often outcome- determining behavioural issues in a strategy
situation will always be a problem in educational simulations. Another unfortunate segmentation is the
breakdown of strategic management or business policy courses into ‘strategy formulation’ and
‘strategy implementation’ courses.
The complexity of ‘logical’, ‘proactive’, or ‘radical’ incrementalism makes to process itself difficult to
explain and even more difficult to practice well. Strategy creation in large organizations is itself the
most complex of management actions.
Article 2: Eisenhardt & Zbaracki, SMJ (1992)- Strategic Decision Making
Strategic Decision
 Decision that is ‘important, in terms of the actions taken, the resources committed, or the
precedents set.’
 Focus on those infrequent decisions made by the top leaders of an organization that critically
affects organizational health and survival.
Rational Model (‘Straw Man’)
 Assumes full info, no cognitive or process limits, all alternatives considered, one known goal
‘Optimize’
Define strategic decision:
One, which is important in terms of the actions taken, the recourses committed or the precedents set.
That is we focus on those infrequent decisions made by the top leaders of an organization that
critically affect organizational health and survival.
Major choice paradigms:
1. Rationality and bounded rationality
2. Politics and power
3. Garbage can.
1) Rationality and bounded rationality
The rational model of choice follows the everyday assumption that human behaviour has some
purpose. In research on decision-making this translates into a common model of rational action:
‘According to this model, actors enter decisions situations with known objectives. These objectives
determine the value of the possible consequences of an action. The actors gather appropriate
information, and develop a set of alternative actions. They then select the optimal alternative. ‘
The most recent model transformed the rational vs. bounded rational dichotomy into a continuum,
probing whether and when decision-making is rational. (Bounded rationality is the idea that in
decision-making, rationality of individuals is limited by the information they have, the cognitive
limitations of their minds, and the finite amount of time they have to make a decision.)
Rationality Vs. Bounded rationality:
Threatening environments, high uncertainty and external control decreased rationality.
This research indicates how decision makers can move along the rationality versus bounded rationality
continuum, typically by increasing conflict. Authors acknowledge that decision process are often
boundedly rational and seek to improve the rationality, usually by using more information and creating
more diverse viewpoints. More complex or turbulent environments require less rationality.
An alternative view:
This work argues that rationality is multidimensional, and so strategic decisions makers are rational in
some ways but not in others. And it argues that such behaviours are effective , particularly in fast
paced environments.
Politics:
A third feature of the political model is the assertion that people at least sometimes engage in politics.
By politics we mean those observable, but often covert, actions by which people enhance their power
to influence decision. Tactics by which people both gain power and attempt to make themselves
appear les political in the process.
An alternative view:
Taken together the studies show that politics are common in strategic choice. However underneath this
consistency lies a deep division emerging within the literature. The traditional view is that politics
arise from conflict. That’s is people with conflicting preferences engage in politics in order to gain a
favourable decision. However a contradictory view is emerging. Politics are triggered by power
imbalances. Frustrated executives turn to politics as a last resort in autocratic and power-vacuum
situations. These authors concluded that politics creates animosity, wastes time, disrupts information
channels and ultimately leads to poor performance
3) Garbage Can
Garbage can model describes decision making in highly ambiguous (having more than one possible
meaning) setting called organized anarchies. The model was largely a reaction to rational and political
models of choice, which Cohen believed, lacked sufficient sensitivity to decision making in a
complex, unstable, ambiguous world. Central to the garbage can perspective are organizations termed
‘organized anarchies’ organizations beset extreme ambiguity.
The ambiguity surfaces in three principal ways:
1. Problematic references: the inconsistent and ill-defined preferences that decision makers often
possess.
2. Organized anarchies have unclear technology. People have only a loose understanding of
means and ends.
3. Organized anarchies are characterized by fluid participation. Decision making participants
come and go from the decision process, with their involvement depending upon their energy,
interest and other demands on their time.
Decision-making occurs in a stochastic meeting of choices looking for problems, problems looking for
choices, solutions looking for problems to answer, and decision makers looking for something to
decide. In comparison to political and rational models, the garbage can model calls attention to the
importance of change. What gets decided depends very strongly on timing and luck.
Decisions are not the result of analysis by boundedly rational individuals or the power of a coalition,
but rather a random confluence of events.
A central debate emerges. Does the garbage can model describe actual decision-making or is it
simply a labelling of the unexplained variance of other more powerful descriptions of strategic
decision-making?
Article 3: Mintzberg, Ahlstrand & Lampel (1998)- Strategy as Cognition
Two Wings on Cognition
 Seeing is believing!
 Objective: Cognition re-creates the world.
 Believing is seeing!
 Subjective: Cognition creates the world.
Cognition

-making.
 As Information Processing->Avoid aggregate collective bias.
 As Mapping ->More profound than expected.
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Article 4: Upper echelons: the organization as a reflection of its top managers- By Donald C.
Hambrick and Phyllis A. Mason
Why do organizations act as they do? This paper argues for a new emphasis in macro-organizational
research: an emphasis on the dominant coalition of the organization, in particular its top managers.
Organizational outcomes, both strategies and effectiveness, are viewed as reflections of the values and
cognitive bases of powerful actors in the organization. Inquiry into the upper echelons (tiers/levels)
perspectives may provide three major benefits;
1. For the scholar it may offer substantially greater power to predict organizational outcomes than
current theories afford.
2. Those responsible for selecting and developing upper level executives may benefit from new
theories.
3. The strategist who is trying to predict a competitor’s moves and countermoves may benefit.
Development of the Model;
Views of previous research are discussed and all together will lead to a model developed by the
authors.
Emphasis on Observable Managerial Characteristics -> More Stringent Test
 The cognitive bases, values, and perceptions of UE are not convenient to measure or even
amenable to direct measurement.
 Some of the background characteristics of greatest a priori interest (e.g., tenure and functional
background) do not have close psychological analogs.
 Eventual application of the UE perspective in management selection/development and
especially in competitor analysis would require observable background data on managers.
Unit of Analysis
 Top Management Team (TMT) instead of CEOs
On Causality
 Strategic are self-reinforcing.
 Industry environment affect the types of managers found in top ranks.
 The occurrence of a particular set of executive backgrounds in a firm is NOT a random
process.
Reconciliation with the inertial perspective
The view taken here is that top executives do matter.
Human limits on choice
It is argued that complex decisions are largely the outcome of behavioural factors rather than a
mechanical quest for economic optimization. Generally, the more complex the decision, the more
applicable this behavioural theory is thought to be. So, for that class of choices called “strategic”
(complex and of major significance to the organization), the behavioural theory is especially suitable.
Strategic choices stand in contrast to operational choices such as inventory decisions and credit
policies, which lend themselves more to calculable solutions.
Each decision maker brings his or her own set of givens to an administrative situation. These givens
reflect the decision maker’s cognitive base:
1. Knowledge or assumptions about future events
2. Knowledge of alternatives
3. Knowledge of consequences attached to alternatives.
They also reflect his or her values: principles for ordering consequences or alternatives according to
preference.
As summarized in figure1 at the next page, the situation a strategic decision maker faces is complex
and made up of far more phenomena than he/she can possibly comprehend. The decision maker brings
a cognitive base and values to a decision, which creates a screen between the situation and his/her
eventual perception of it.
Values are treated here as something that, on the one hand can affect perceptions but, on the other
hand, can directly enter into a strategic choice, because theoretically a decision maker can arrive at a
set of perceptions that suggest a certain choice but discard that choice on the basis of values.
Emphasis on Observable Managerial Characteristic;
In this paper the emphasis is on observable managerial characteristics, which will be discussed later
and then lead to the propositions.
The developed model;
Development of Propositions;
Age
P 1: Firms with young managers will be more inclined to pursue risky strategies than will firms with
older managers. Specific forms or risk include unrelated diversification, product innovation and
financial leverage.
P 2: Firms with young managers will experience greater growth and variability in profitability from
industry averages than will firms with older managers.
Functional track
Functional track orientation may not dominate the strategic choices an executive makes, but it can abe
expected to exert some influence. Functional tracks have been classified into three categories, the first
two of which are based on an open-system view:
1. Output functions (marketing, sales and product R&D) emphasize growth and the search for new
domain opportunities and are responsible for monitoring and adjusting products and markets.
2. Throughout functions (production, process engineering and accounting) work at improving the
efficiency of the transformation process.
3. Major firms are increasingly dominated by executives whose backgrounds are in areas such as law
and finance, which are not integrally involved with the organization’s core activities. Such executives
pursue strategies that fit their relative deficiencies in hands-on experience
Other career experiences
The primary conclusion coming from previous studies is that chief executives brought in from the
outside tend to make more changes in structure, procedures and people than do chief executives
promoted from within. The behavioural reasons for the changes are less commitment by an outsider to
the status quo, a desire to weaken those who resist or resent the new chief executive and a desire to
create new, loyal lieutenants. Executives who have spent most of their career within one organization
have relatively limited perspective, while on the other hand in-depth industry familiarity and tested
working relationships.
P 10: Years of inside service by top-managers will be negatively related to strategic choices involving
new terrain, for example product innovation and unrelated diversification.
P 11: For an organization in a stable environment, years of inside-service will be positively
associated with the profitability and growth.
P 12: For an organization facing a severe environment discontinuity, years of inside service will be
negatively associated with profitability and growth.
What seems clear is that executives’ career experiences partially shape the lenses through which they
view current strategic opportunities and problems.
Formal education
Education serves, to some extent, as an indicator of a person’s values and cognitive preferences.
P 13: The amount, but not the type, of formal education of a management team will be positively
associated with innovation.
P 14: There is no relationship between the amount of formal management education of top managers
and the average performance (either profitability or growth) of their firms. However, firms whose
managers had little formal management education will show greater variation from industry
performance averages than will firms whose managers are highly educated in management.
(Explanation: Analytic techniques learned in an MBA program are geared primarily to avoiding big
losses or mistakes)
P 15: Firms whose top managers have had substantial formal management education will be more
complex administratively than will firms whose managers have had less such training.
Specific forms of administrative complexity include thoroughness of formal planning systems,
complexity of structures and coordination devices, budgeting detail and thoroughness and complexity
of incentive-compensation schemes.
Socioeconomic background
A previous study found some relationships between the socioeconomic backgrounds of executives and
the growth strategies of their firms. Within this research, firms were classified as entrepreneur-run,
family-run and professionally managers.
P 16: Firms whose top managers come disproportionally from lower socioeconomic groups will tend
to pursue strategies of acquisition and unrelated diversification.
P 17: Such firms will experience greater growth and profit variability than will firms whose top
managers come from higher socioeconomic groups.
Financial Position
The relationship between stock ownership of top executives and corporate performance has been
studied, and in general, the conclusion is favored that owner-managed firms do not outperform firms
that are managed by non-owners. In this article it is proposed;
P 18: Corporate profitability is not related to the percent of shares owned by top managers, but is
positively related to the percent of their total income that top managers derive from the firm through
salaries, bonuses, options, dividends and so on.
Group heterogeneity
Routine problem solving is best handled by a homogeneous group (efficient, more of the same
opinions), and ill-defined, novel problem solving is best handled by a heterogeneous group in which
diversity of opinion, knowledge and background allowed a thorough airing of alternatives.
P 19: Homogeneous top management teams will make strategic decisions more quickly than will
heterogeneous teams.
P 20: In stable environments, team homogeneity will be positively associated with profitability.
P 21: In turbulent, especially discontinuous, environments, team heterogeneity will be positively
associated with profitability.
The theory states that organizational outcomes, strategic choices and performance levels, are partially
predicted by managerial background characteristics.
Article 5 What is organizational culture? - Hatch (1997)
Organizational culture is probably the most difficult of all organizational concepts to define. The
culture concept was originally proposed as one way to answer the question: What makes us human? In
the early days of anthropology, interest in culture meant an interest in understanding what is
distinctively human, what separates humans from the other animals and thus what defines our
similarity.. As researchers pursued this interest out into the field, culture became associated with
particular groups of people like primitive tribes and modern societies. This association caused
anthropologists to talk about groups as if they were cultures. This shift of culture onto groups opens
the door to the study of organizational culture.
Most organization theorists have emphasized the meaning of culture as the way of life in an
organization. All the definitions theorists have provided explicitly associates the concept of culture
with groups, and that they all refer to something held in common or shared among group members:
meanings, assumptions, understanding, norms, values, knowledge  sharing.
Sharing has two contrary meanings: common experience (when we share we are directly involved with
others in a way that emphasizes our similarity), and dividing something into individual pieces (which
emphasizes our separateness  doing something separately together).
Thus when speaking of culture as shared believes, keep in mind that a culture depends upon both
community and diversity (differences between various subgroups of the organization).
National culture differences within organizations
The most unified understanding of organizational culture comes from the idea that organizations are
manifestations of larger cultural systems. Hofstede examined this idea in relation to the influence of
national cultures on IBM and developed four dimensions of national culture:
 Power distance
The extent to which the members of a nation are willing to accept an unequal distribution of
power, wealth and prestige. When organizations attempt to impose their authority structures
and hierarchy in low power distance cultures, difficulties generally follow.
 Uncertainty avoidance
The ways in which human societies have learned to cope with uncertainty. Different societies
have different levels of tolerance for uncertainty, and these differences can be defined as the
degree to which members of culture feel threatened by uncertainty. In low uncertainty
avoidance cultures, people are more accepting of innovative ideas and behaviour than high
ones
 Individualism
The degree to which individuals in a culture are expected to act independently of other
members of the society. Individualistic cultures are loose and individuals are expected to
ttake care of themselves. By contrast, in collectivist cultures, cohesive groups give individuals
their sense of identity, belonging and security, demanding considerable loyalty in return.
 Masculinity
The clear separation of gender roles in society. In higher masculine cultures, men are expected
to be more assertive and women more nurturing. In these cultures more emphasis on work
goals having to do with career advancement and earnings, whereas less masculine cultures
favoured work goals concerning interpersonal relationships and the physical environment.
These dimensions of cultural difference supply information about some of the core beliefs and
assumptions that pervade organizational cultures, which we will discuss now.
Schein’s model of organizational culture
Schein’s theory of organizational culture exists on three
levels: on the surface we find artefacts, under artefacts lie
values and behavioural norms, and at the deepest level a
core of beliefs and assumptions.
Beliefs and assumptions
Beliefs and assumptions form the core of an organization’s culture. Assumptions are taken for granted.
They represent what members believe to be reality and thereby influence what they perceive and how
they think and feel. Thus differences in the basic assumptions held by proponents of different
theoretical perspectives lead to different perceptions of what is central to explanations of organization.
Culture is not a single belief or assumption, it is a set of interrelated beliefs and assumptions.
Schein defines seven issues that helps organizations to define its core assumptions: the organization’s
relationship to its environment, the nature of reality and truth, the nature of time, the nature of human
activity, the nature of human relationships and the nature of homogeneity vs. diversity.
These core assumptions find their way into many aspect of organizing. Schein groups these into two
categories: (1) external adaptation (mission and strategy, goals, means and control systems), and (2)
internal integration (common language, group boundary definition, rewards and punishments, status
and power relations). But the most important influences of core assumptions are norms and values.
Norms and values
Values are the social principles, goals and standards held within a culture to have intrinsic worth. They
define what the members of an organization care about. Values constitute the basis for making
judgments about what is right and what is wrong. Values are more conscious than basic assumptions.
Members of an organization are able to recognize their values fairly easily and become especially
aware of then when someone tries to change their culture in some fundamental way.
Norms are unwritten rules that allow members of a culture to know what is expected of them in a wide
variety of situations and are closely associated with values. In short, values define what is valued,
while norms make clear what is taken to be considered normal or abnormal. The link between them is
that the behaviours that norms reward or punish usually can be traced to be outcomes that are valued.
Artefacts
Artefacts are further extensions or expressions of the same cultural core that maintains the values and
norms. Artefacts are the visible, tangible and audible remains of behaviour grounded in cultural
norms, values and assumptions. Categories of artefacts include: physical objects created by the
members of a culture, verbal manifestations seen in written and spoken language, and rituals,
ceremonies and other behavioural manifestations. Artefacts are the most accessible and observable
elements of culture, but lie furthest from the cultural core, so are easily misinterpreted by those who
are culturally naive.
How culture works
According to Schein the essence of culture is its core of basic assumptions and established beliefs.
This core reaches outward through the values and behavioural norms that are recognized, responded
to, and maintained by members of the culture. The values and norms, in turn, influence the choices
and other actions taken by cultural members. Finally, culturally guided action produces artefacts.
From the point of view off Schein, culture appears to be driven from the inside out, but at the same
time that values and assumptions are pushing their way up to the level of artifacts, the artifacts are
being interpreted in ways that can transform the values and assumptions that produced them in the first
place. This happens because the members of a culture to express their identity and to formulate and
pursue their purposes consciously and creatively use artifacts and norms. To study this aspect of
culture it is useful to turn form Schein’s model to the symbolic tradition with organization theory.
Symbolic-interpretive organizational culture theory
This theory is based on this quotation of Clifford Geertz: ‘man is an animal suspended in webs of
significance he himself has spun, I take culture to be those webs, and the analysis of it to be therefore
not an experimental science in search of law but an interpretive one in search of meaning.’
Thus the symbolic-interpretive approach starts from the assumption that cultures are socially
constructed realities. Humans can engage in the socially constructed aspects of organizational life
because they make, use and interpret symbols. The use and interpretation of symbols permits the
members of an organization to create and maintain their culture.
Symbols
A symbol is anything that represents a conscious or unconscious association with some wider concept
or meaning. Thus, a symbol consists of both a tangible (tastbare) form and a wider meaning with
which it is associated. The same symbol can support different and even contradictory meanings.
Symbols come in many forms, but all of them fall into one of three broad categories: physical objects,
behavioural events and verbal expressions. There is a theoretical relationship between cultural
symbols and artefacts, because an artefact can becomes a cultural symbol when members of the
culture attach meaning to it and use the symbol thus made to communicate meaning to others (national
flag).
Interpretation
Members of a culture can give different meanings to the same symbol as well as use different symbols
to convey the same meaning. Interpretations are formed under a more or less constant barrage of
influence provided by other members of the culture. Interpretations are not made in a vacuum, rather
they, like the culture that embeds them, are socially constructed realities.
Organizational subcultures
When comparing the definitions
of organizational culture and
subculture, the main difference
is that, instead of seeing a culture as one unitary whole, as Schein does, the subculture view paints a
picture of numerous small cultures (subcultures) all existing within the same organization. Several
ways to envision this is illustrated is this figure.
The subculture view makes us acutely aware of the many differences that distinguish multiple
subcultures co-existing within a single organization. Different organizational cultures can be placed
along the continuum according to the relative degree of unity-fragmentation among their subcultures.
The greater the degree of fragmentation among subcultures, the closer the organizational culture will
come to the end of continuum marked ‘fragmented’. Organizations can shift between levels of unity
and fragmentation, so this vies allows us to see that cultures are not static, but change over time.
Types of subcultures
What distinguishes the subcultures of an organization from one another? There are two framework
proposed for describing these differences. One in which subcultures are defined in relation to an
organization’s overall cultural patterns, especially with respect to the culture’s dominant values. And
one, which distinguishes subcultures on the basis of occupation, work group, hierarchical level and
previous organizational affiliations. Subcultures bases on previous organizational affiliations can
often be found in organization formed by merger or acquisition.
Why are there subcultures?
Van Maanen and Barley make two observations about human behaviour that help to explain the
occurrence of subcultures. Firs is the interpersonal attraction explanation: people tend to be attracted
to others they see as like themselves, so similar people will be attracted to an particular job or
organization. A second explanation involves interaction among the members of an organization.
Studies of group dynamics show that when individuals regularly engage in interaction, groups are
more likely to form and become cohesive. Thus interaction patterns also explain sub-cultural
differentiation. Of course, the forces of interpersonal attraction and opportunities to interact may
combine to explain patterns of subculture formation.
Strategic decision-making: The role of bounded rationality, learning, politics, cognition, and
culture
1. Consider texts 1 and 2. What are the main messages of both texts? Do you see any similarities
between them?
Main messages
Quinn J.B. (1989), Strategic Change: logical incrementalism
Logical incrementalism is a management technique for improving and integrating both the analytical
and behavioral aspects of strategy formulation. In decision-making, management is limited by the
information they have as well as the cognitive and process limits. A strategy starts off with broad
concepts that, as time passes, become more and more specific. Making the strategy concrete as late as
possible is useful because the band of uncertainty becomes more narrow and more information
becomes available.
Eisenhardt M. and Zbaracki M. J. (1992), Strategic decision making
This article reviews the three major strategic decision perspectives: rationality and bounded
rationality, politics and power, and garbage can. They find that strategic decision makers have
cognitive limits, their decisions have unique patterns and cycle through different stages of decision
making. They state that people within a company have partially conflicting preferences. People engage
in politics to enhance their power, as powerful people get what they want. They deemed the last
perspective as less relevant for the decision making process.
The message of the article was also that future research should reason with reality. On the future
agenda should be cognition, conflict and normative indications.
Similarities
Both articles recognize the existence of cognitive limitations and the engaging in a cycling among
decision making steps. of the decision makers.
Both articles state that the strategic decision-making process is partially rational/planned and partially
flexible. Especially in uncertain settings, decision makers adjust their strategy. Changes affect the
course of decision making.
A difference between the articles is that the first article states opportunism (or logical incrementalism)
is essential for an organisation while the second article questions it as being positive. They state there
is research suggesting it is ineffective, static and that it’s pervasiveness is exaggerated.
2. Consider texts 3-5. What is the essence of each of these texts? What are the main similarities
and differences between them?
Mintzberg, H., B. Ahlstrand and J. Lampel (1998), Strategy as cognition
According to these researchers strategy is a mental process. Two wings are identified; the objective
wing, which examines the cognitive bias and mental limitations of the strategist, the information
processing view and on how structures of knowledge are mapped in the mind of the strategist. The
subjective wing focuses on “strategic cognition as a process of construction.” The subjective wing
emphasizes the distortions that are built into human information processing. The cognitive school sees
cognition as construction. The environment does not only impact on us, we are able to construct our
own reality
Hambrick, D.C. and P.A. Mason (1984), The organization as a reflection of its top managers
Here they place emphasis on observable managerial characteristics and not on cognitive bases. The
managers eventual perception of the situation combined with his/her values provide the basis for
strategic choice. The behaviour of the manager is the same as the behaviour of the firm. A
manager/team has limited view on the situation, so they make a decision based on limited information.
Organizational outcomes, both strategies and effectiveness, are viewed as reflections of the values and
cognitive bases of powerful actors in the organization
Hatch, M.J. (1997), What is organizational culture?
Organizational culture focuses on the values, beliefs, and expectations that members come to share.
Hatch looks at approaches to organizational theory and behaviour, which attempt to make sense of
how individuals construct the reality of organizational life. Organization from this point of view does
not exist in any concrete sense; it rests in minds of people and the precarious web of interpretations
through which humans order their day-to-day interactions. “Culture” stands as a metaphor for
capturing the nature of organization as a network of shared meaning.
Main similarities
All these motivations are focused from the inside out. They either look at the organization’s internal
culture and its respective sub-cultures and group dynamics as the main driver behind decision-making.
Or they look at the cognitive perception or the characteristics of the managers as the main drivers
behind decision-making. However different the angle, they are al focused on the characteristics of the
workforce to explain company decision-making.
Main differences
The perception of how organizations are supposed to think about the decision processes is
inconsistent. According to Mitzberg, managers are taught the rational or analytical method of strategic
planning and that decision-making should be driven by a cognitive motivation. Hambrick and Mason
state that managerial perceptions of top managers affect the identification of important issues and their
interpretation within teams. Here the character of the manager motivates the direction of the decisionmaking process. Hatch puts the focus on organizational culture and the power of its sub-cultures to
explain decision-making.
3. Organizations are collectives of humans that socially influence each other and are influenced
by the organization as a whole and by its leader (the CEO). Although leadership is not addressed
directly in most of this week’s texts, it is an important driver of organizational success. But what
constitutes a good leader? What characteristics should he/she have, and how should he/she act?
What would be your team’s collective opinion about the role of the following elements in good
leadership: logical incrementalism, bounded rationality, political behavior, cognition, intuition,
and culture? Please discuss the role of at least three of these elements.
The first article discusses some of the qualities of a good leader that this group agrees with including a
leader must recognize the limits of planning and should be able to take some risks. Leaders should be
able to allay concerns of followers, build up comfort levels for managers to be able to perform their
jobs and achieve active participation and commitment. A good leader should be able to provide goals
and a sense of guidance while also being able to take into consideration new roles, capabilities and
individual reactions to change.
The role of logical incrementalism can be seen in a good leader being able to move people and
resources step by step towards organizational goals and incrementally learn from new available
information to lead the organization successfully. Bounded rationality is important as the level of
rationality that is deemed successful changes depending on the environment. In more uncertain
environments it is better to be flexible and able to adapt the level of rationality to the situation to be
able to take risky decisions when needed. In the sense of political behavior a leader needs to have a
strong personality or in the words of Eisenhardt and Zbaracki, be a powerful person to be able to push
decisions through as final decisions are made by powerful people. This may not always equate to a
powerful person being a good leader as there is no support that the most powerful person will always
have the right answer, only that this is a quality needed for decisions to be made.
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