Strategy for Action – II: Strategy Formulation, Development, and Control

122 Pages·2013·4.24 MB·English

by  Giorgio Gandellini

SpringerBriefs in Business
For further volumes:
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Giorgio Gandellini · Alberto Pezzi
Daniela Venanzi
Strategy for Action–II
Strategy Formulation, Development,
and Control
1 3
Giorgio Gandellini Daniela Venanzi
Alberto Pezzi Department of Economics
Department of Business Studies University of Rome III
University of Rome III Rome
Rome Italy
Italy
ISSN 2191-5482 ISSN 2191-5490 (electronic)
ISBN 978-88-470-2474-8 ISBN 978-88-470-2475-5 (eBook)
DOI 10.1007/978-88-470-2475-5
Springer Milan Heidelberg New York Dordrecht London
Library of Congress Control Number: 2011942911
© The Author(s) 2013
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To my daughters Eva and Maria,
and step-daughter Lucia, and to my
grand-daughters Cristiana, Sofia, and Irma,
and step-grand-son and daughters Leonardo,
Viola, and Ginevra
G. Gandellini
To my parents
A. Pezzi
To Paolo and Alice
D. Venanzi
Overview
The innovative and unique feature of this work on strategic management (consisting
of two conceptually related, (consisting of two conceptually related, but independent
volumes), which sets it apart from the myriad of books on the subject, is that, it trans-
lates into practical and operational frameworks many of the most relevant concepts
that characterize this area. Its aim is providing university students and practitioners
with a concrete, decision making, and action-oriented overview, sometimes icono-
clastic, of the strategic management process.
The objective is reached through the adoption, in most parts of this work, of a
set of logical and judgmental models, which show the operational interrelation-
ships among the relevant factors that have an impact on firms’ competitiveness and
that are or can be translated, where appropriate, into spreadsheet templates.
The model which introduces the first volume sets the stage for addressing
the issue of value creation for the market, and the major phases of the strategic
management process: environmental analysis, strategy formulation, and develop-
ment, strategy evaluation, and control. Its conceptual and operational structure is
described in the first part, together with a practically oriented definition of strat-
egy, and a discussion of both the importance of strategic planning and of the logic
and benefits of the judgmental modeling approach to decision making.
The second part addresses the classical approaches to the analysis of the exter-
nal and internal environmental factors, which have an impact on the “functioning”
of the basic model, i.e., the structural characteristics of the industry context, and
the companies’ technical, organizational, financial, and human resources, includ-
ing the translation into operational models of otherwise rather theoretical concepts.
The contents of the second volume, further summarized below, are focused
on the development and control of strategic moves from both a “business” and a
“corporate” perspectives, and cover other relevant issues that are “transversal” to
these contexts: organization, ownership, collaborative strategies, value creation,
and financial aspects.
vii
Contents
1 Introduction to the Second Volume ............................. 1
2 Business Strategy: Formulation, Development and Control ......... 3
2.1 The Strategy Pillars ...................................... 3
2.1.1 Putting Strategy in its Place .......................... 4
2.1.2 The Five Major Pillars of Strategy ..................... 5
2.2 How do Firms Formulate Strategies? ......................... 6
2.2.1 Deliberate Strategy Framework ....................... 7
2.2.2 Positioning Framework ............................. 11
2.2.3 Emergent Strategy Framework ........................ 13
2.3 Competitive Advantage ................................... 15
2.3.1 Results and Sources of Competitive Advantage ........... 17
2.3.2 Assessing and Anticipating Competitive Dynamics ........ 18
2.4 Sustaining Superior Performance ............................ 19
2.4.1 The Threats to Sustainability ......................... 19
2.4.2 Some Examples ................................... 20
2.4.3 Preventing the Threats or Reacting to them .............. 22
2.5 New Developments in Strategy Formulation and Control:
Critique and Integration of the “Blue Ocean Strategy” Approach ... 23
2.5.1 The Blue Ocean Myth .............................. 23
2.5.2 The “Value Curve” Approach ......................... 25
2.5.3 The Major Problems with the “Value Curve” Approach .... 26
2.5.4 A More Systematic Approach ........................ 28
2.5.5 The Need for Appropriate Quantification ................ 29
2.5.6 An Articulated and Integrated “Strategic
and Economic Control Dashboard” .................... 29
2.5.7 Testing the New Approach ........................... 34
2.5.8 Potential Weaknesses of the Strateco Dashboard
and Its Components ................................ 35
References .................................................. 36
ix
x Contents
3 Corporate Strategy: Diversification and Management
of Multiple SBUs ............................................ 39
3.1 Objectives and Configurations of Diversification ............... 39
3.2 Vertical Diversification and Integration ....................... 42
3.3 Horizontal Diversification and Expansion ..................... 44
3.3.1 Cost Reduction .................................... 44
3.3.2 Revenue Enhancement .............................. 49
3.4 Geographic Diversification ................................. 50
3.4.1 Assessment of the Countries’ Attractiveness ............. 50
3.4.2 Countries’ Profiles and Their Impact on the Key
Success Factors .................................... 58
3.4.3 Entry and Development Strategies ..................... 65
3.4.4 A Comprehensive Dashboard for Strategic Management
in Multiple Businesses and Countries .................. 69
3.5 Unrelated Diversification .................................. 71
3.5.1 Pros and Cons ..................................... 72
3.5.2 Passing the Essential Tests ........................... 73
3.6 Strategy … in Action! ..................................... 74
3.6.1 Background ...................................... 75
3.6.2 Decisions and Available Budget ....................... 75
3.6.3 Estimates About the Market Characteristics
and the Competition ................................ 77
3.6.4 The Structure and Impact of Our Strategic Decisions ...... 79
3.6.5 The Decisions Made by the Competitors in the First Year ... 80
3.6.6 Market and Economic Results ........................ 81
3.6.7 The Decisions Made by the Competitors in the Second Year ... 84
References .................................................. 88
4 Organization, Ownership and Collaboration Strategies ............ 89
4.1 Basic Organizational Structures ............................. 89
4.2 The Essential Elements for Designing an Organizational Structure ... 93
4.3 Fitting Strategy and Organization ........................... 94
4.4 Ownership Versus Market Transaction Alternatives .............. 95
4.4.1 Mergers and Acquisitions ............................ 96
4.4.2 Joint Ventures and Minority Stakes Purchase. . . . . . . . . . . . . 97
4.4.3 Strategic Alliances ................................. 98
References .................................................. 100
5 Financial Performance and Sustainability of Strategy ............. 101
5.1 Strategy and Value Creation: Old and New Metrics .............. 101
5.1.1 Competing Value-Based Metrics ...................... 101
5.1.2 The Drivers of Value Creation ........................ 109
5.2 Financial Feasibility of Strategic Moves: A General Framework ... 111
5.2.1 Sustainability of Strategy ............................ 111
5.2.2 How to Reconcile Strategic Moves and Financial Goals .... 114
References .................................................. 116
Chapter 1
Introduction to the Second Volume
The first part of this second volume addresses more specifically the issue of
“business strategy” (within a single strategic business unit), expanding the analysis
of the strategic decisions, emphasizing the importance of a sustainable competitive
advantage, and proposing an integrated conceptual and operational framework (the
“Strateco Dashboard”), that complements and significantly improves the recent
and well-known Blue Ocean approach to strategy development.
The second part discusses strategic decisions from a “corporate” perspective
(i.e. diversicfi ation and strategic management of multiple businesses), providing
also a concrete example of the relationships between strategic decisions and results
through a simpliefi d business simulation.
Finally, the last two parts present an overview of important topics that are relevant
for both the above contexts:
• the organizational aspects, the issues of ownership versus market transactions,
and the logic of various forms of collaborative agreements;
• the measurement of the performance of strategy in terms of value creation for the
shareholders, highlighting differences and similarities, as well as strengths and
weaknesses, of the main metrics. Furthermore, it proposes a comprehensive and
operational framework for the assessment of the nfi ancial feasibility of strategy,
through the measurement of the impact of the planned strategic moves on nfi ancial
needs and the evaluation of their nfi ancial sustainability.
G. Gandellini et al., Strategy for Action–II, SpringerBriefs in Business, 1
DOI: 10.1007/978-88-470-2475-5_1, © The Author(s) 2013
Chapter 2
Business Strategy: Formulation,
Development and Control
Abstract Focusing on the major issues related to strategic management of a single
strategic business unit (SBU), the rfist part of this chapter will discuss the most rel-
evant aspects that should be addressed in strategy formulation. After an overview of
different perspectives on the behavioral process that conducts to the formation of strat-
egies, we will then focus our attention on the importance of creating and maintaining
a competitive advantage. We will nfi ally present a systematic logical and operational
framework for conceiving, developing and controlling a sound strategic plan that inte-
grates and complements the famous Blue Ocean approach to strategy development.
Keywords Strategic  management • Strategic  planning • Strategic  business 
unit • Marketing  strategy • Market  share • Pricing  strategy • Value/price 
ratio • Critical  mass • Demand  curve • Judgmental  modeling • Decision 
support systems
2.1 The Strategy Pillars
The competitive strategies adopted by companies are highly customized and
strictly dependent on the various combinations of their choices of products, mar-
kets, technologies, approaches versus competitors, or the manner in which these
choices are implemented. For this reason, it is difficult and almost impossible
to find two companies that adopt the same strategy. This diversity derives from
the different points of view of the strategist who, as we will see, may either be a
rational planner or a shrewd visionary. However, the variety of alternatives is also
affected by a necessary process of contextualization of the strategy in the specific
internal and external environment in which the firm operates.
We already emphasized, in the introduction to the first volume of this series, in
which we discussed the logic and context of strategic management, that “competi-
tion occurs at the business unit level” (Porter 1987). Before addressing the issue of
corporate strategy (i.e. strategic managing multiple businesses), we therefore need
to understand the functioning of the basic “bricks” of competitive strategy. In view
of this, it is preliminarily useful to identify the place of strategic decisions within
G. Gandellini et al., Strategy for Action–II, SpringerBriefs in Business, 3
DOI: 10.1007/978-88-470-2475-5_2, © The Author(s) 2013
4 2 Business Strategy: Formulation, Development and Control
the strategic management process, and, particularly, which type of decisions must
be made in order to develop an exhaustive, systematic and consistent plan.
2.1.1 Putting Strategy in its Place
How, in practice, can companies formulate a strategy?
Before addressing the major issues that a good strategic plan should cover, it is
useful to summarize the place of strategy in the context of the entire strategic man-
agement process.
Figure 2.1 adapted from Hambrick and Fredrickson (2005), highlights several
important aspects:
• On the one side, the major activities that managers should carry on in the strate-
gic management process:
– the activities in the top part of the figure, identified with circles, represent the
most important decisions that need to be made;
– the square in the bottom left part summarizes the contents of the cognitive and
information collection phases.
– The hexagon in the bottom right part identifies the actions that need to be
implemented in order to realize the strategic choices.
• On the other side, the interrelationships among the various activities and the
iterative sequence of the process that connects them: as we can see, continuous
feedbacks between aspirations and objectives, analysis, decisions, implementa-
tion, and control, are fundamental for a correct strategic management approach.
We should further emphasize the following points:
• Even though mission, vision and objectives represent the most relevant components
of the strategic choices, they represent a sort of “compass” and the conceptual and
Fig. 2.1 The strategic management process, and the place of strategy