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Thomas Wunder

Essentials of
Strategic Management

Effective Formulation
and Execution of Strategy

2016
Schäffer-Poeschel Verlag Stuttgart

Dr. Thomas Wunder is Professor of Strategic Management at the Neu-Ulm University of Applied Sciences in Germany. He has been teaching strategy at universities in Switzerland and the USA. Previously he was president of Péter Horváth & Partners Inc. in Boston und Atlanta as well as Executive Relationship Manager at Highland Worldwide. He received his doctorate from the European Business School (EBS). His research interest areas are strategy execution, international strategy alignment, and sustainable strategic management.

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Printed in Germany
Januar 2016

Schäffer-Poeschel Verlag Stuttgart
Ein Tochterunternehmen der Haufe Gruppe

Preface

Regardless of their position, career aspiration, role or department, most practitioners have to deal with aspects of strategic management either in making or in supporting strategic decisions. This book provides the essentials to master this task successfully. It is written for students who are on their way to becoming practitioners as well as for practitioners who want to look—again or for the first time—at the most essential and practical aspects of strategic management.

A general trend for textbooks on strategic management is that authors try to address all theories and research areas and skip nothing which is covered by other textbooks on this subject. Furthermore, there is a general tendency in mainstream strategic management textbooks to focus more on strategic analysis and on formulating strategies but less on executing them. This book takes a different approach in two ways:

imageFirst, the guiding principle in deciding what to include and what to leave out is to answer two key questions. Is it actionable and does it have a significant impact? Instead of providing an overview over all theories and aspects of the academic field, the book provides a selection of scientifically grounded approaches, methods and ideas that promise to be practical and to make a difference in a company.

imageSecond, knowing that a great portion of strategies fail due to bad execution, great emphasis is put on this area. In practical strategy work as well as strategy literature, strategy execution typically gets relatively little attention—sometimes even viewed as “graveyard of strategy”—although it is one of the biggest strategic management challenges of today.

This book is intended to provide students and practitioners with a selection of practically applicable methods at a level of detail that is necessary to make an impact in their future or current job situations. With this focus, the book should be particularly relevant for students of applied sciences. For practitioners the book provides actionable approaches to deal with their strategic situations in a systematic and comprehensive, yet pragmatic way. I focus on the essentials of strategic management drawing from state-of-the-art literature and own experience aided by the fortune of spending the past 15 years supporting leaders of mainly large and medium size multinational companies to refine and execute strategies. Having spent more than half of my professional career in the United States of America, I had the chance to not only consult on the topic but to practice it myself at the helm of a small U. S. subsidiary where I had to develop and execute my own business strategy. For six years I was a direct report to the CEO of Horváth & Partners Management Consultants, from whom I learned many essentials about strategy and leadership.

During this time I also had the opportunity to learn from two inspiring U. S. consulting firms we were affiliated with. Working two years in Lincoln, Massachusetts, surrounded by the excellent consultants of the Balanced Scorecard Collaborative (now “Palladium Group”) helped me to understand how to innovate continuously and make intellectually highly sophisticated ideas actionable. Key management concepts for successful strategy execution originally developed by the two founders, Harvard Business School Professor Robert S. Kaplan and David P. Norton, and further advanced by Horváth & Partners with some bestselling publications in Europe, are drawn on in the second part of this book. During another four years as an affiliate to the North Highland Company in Atlanta, Georgia, I was fortunate to learn what true customer dedication, sales excellence and effective business development are like. I was fortunate to gain a lot both professionally and personally being exposed to their unique company culture, their business spirit and the outstanding strategic leadership skills of their CEO.

How this Book Works

The book is designed to be actionable and user-friendly. One of the most important principles that I learned during my career is the power of simplicity. When dealing with complex organizations and facing complex strategic challenges the worst thing to do is adding complex strategic management processes, tools and methods. I tried to focus on the essentials and to illustrate many ideas with about 200 easy to understand charts. Throughout the book there are “Strategy Practice” boxes presenting real-life examples from globally renowned companies such as BAYER, Beiersdorf, BMW, Bosch, DB Group, Henkel, Hewlett-Packard, Hilti, Nestlé, Procter & Gamble, PUMA, Quiagen, Recaro, SAP, Siemens, Toyota, Unilever, Volkswagen, and ZEISS. I am grateful that many of those companies gave permission to present their examples in its original company format. This makes strategy approaches and methodologies tangible for readers and underlines their relevance and way of application in company practice today. Although many examples relate to large multinational firms, methods are generally applicable to businesses or non-profit organizations of any size and industry. Historical, anecdotal, more academic or other adjacent elaborations that I consider helpful will be briefly explained in “Strategic Snapshot” boxes. If you are a student, these boxes are detailed enough to contain valuable information for a better comprehension of the topic or for encouraging further readings. If you are a timelacked practitioner and want to focus fast on key methods that you need to consider for your strategy work, you might skip those boxes.

The book is based on the idea that people and organizations that engage in the essentials of a systematic strategic management process are generally more likely to outperform those that do not. The foundations of strategic management are laid in chapter one. Key approaches for strategic analysis and for formulating strategies including the more recent approach of business modeling are presented in the following two chapters. The fourth chapter of this book is dedicated to one of the biggest challenges in today’s strategic management: strategy execution. It is intended to help you understand why even the best strategies might not come true and how to get it right. Detailed guidelines will demonstrate how to build an effective strategy execution system. Throughout the book there are a number of management approaches and examples which relate to the important link of strategic management and sustainability. They illustrate practical ways of how to integrate economic, ecological and social factors. At the end of this book there is an exercise designed to facilitate an application of the essentials of strategic management explained in the various chapters from analysis through strategy formulation to execution and control: the Strategy Workout. With this exercise, readers will be able to take what they have learned in each step of the strategy process and apply it to their own or any other company in a seamless and integrated way.

In order to capture the key components and relationships of the strategic management approach presented in this book I developed a simple application-oriented strategy framework which I called “Wheel of Strategy” (WOS). It is meant to provide coherent and illustrative guidance of how to bring strategic management with its essential methods and ideas to life in company practice. It is a bird’s eye perspective on the set of integrated elements required to develop strategies and make them happen. Review questions for each chapter are summarized in the appendix at the end of this book, which provides students in particular an opportunity to reflect what they have learned and prepare for an exam.

Strategy can be fun, so, enjoy yourself, work hard and use your imagination.

Origins of this Book and Acknowledgements

The initial roots of this book were laid in 1995 at the University of Birmingham (UK) where I was fortunate to visit a Strategic Management class taught by an inspiring strategy practitioner. His hands-on ideas on how to devise and implement strategy and what can go wrong particularly related to, what he called, “the abnormal psychology of senior leaders” inspired me to further pursue this topic. Many ideas in this book are drawn from my experience gathered during the 15 years as a management consultant, doctoral student, business leader, and finally full professor of strategic management since then. The practical foundations were laid at Horváth & Partners Management Consultants where I had the chance to work strongly with their global strategy practice. Multinational corporations facing the challenge of executing corporate strategy and aligning their international subsidiaries, strategic business units and functional areas around common strategic themes gave me the opportunity to conduct strategy sessions in more than 15 countries and learn from strategy discussions in highly intercultural management teams. During my doctorate in strategic management at the European Business School (EBS), I was fortunate to build on that experience and work on the question of how to implement transnational strategies effectively. Coming from a highly planning-based strategy approach from management consulting, it was particularly inspiring to discuss this topic with academics that fundamentally questioned the controllability of companies and approached strategic management in a completely different way, that is complexity and evolutionary management. Some of those thoughts are addressed in this book although, for practical reasons, most of it is definitely more on the planning side.

I would like to thank some special people without whom this book would not have been possible. First and foremost, I sincerely appreciate the sacrifice writing this textbook has meant for my wife and our two little children. Over the last few years, I spent more hours on conducting research, writing texts and developing charts than when I was a consultant or graduate student. Therefore, I dedicate this book to my family. I was also fortunate to work with Schäffer-Poeschel publishing house that approached me a few years ago with the idea to write an application-oriented, concise and innovative strategic management textbook in English leveraging my practical experience and academic background. In addition to the entire Schäffer-Poeschel team, I would like to particularly thank my superb editor, Martin Bergmann, for his appreciated ideas, flexibility and great support to make this project come true. I would also like to thank Traudl Kupfer and Claudia Dreiseitel for professionally proofreading my manuscript and for lots of useful feedback. The Neu-Ulm University of Applied Sciences (HNU) provided a conductive environment and outstanding institutional support to make this project possible. I am grateful to the University Executive Board and the Dean of the Department of Business and Economics for providing their appreciated support. I would also like to thank my students at HNU and other universities at master and undergraduate levels as well as executive MBA programs. They provided lots of useful insights with their intellectual curiosity, perspectives, opinions, and questions. Last but not least, I wish to thank the reviewers both in Germany and the United States who shared their expertise with me. Knowing that any list of acknowledgements will almost always be incomplete, I am grateful to all people who supported this project and helped to make it happen. I feel truly gifted by their sophisticated feedback and support.

Thomas Wunder

Table of Contents

Preface

1              Strategic Management Foundations

1.1          What Is Strategy?

1.1.1       Origins and Views of Strategy

1.1.1.1    Roots of Strategy

1.1.1.2    Business Views of Strategy: the 5 P’s

1.1.2       Understanding Strategy with Six Principles

1.1.2.1    Quest for Competitive Advantage

1.1.2.2    Fit of Markets and Resources

1.1.2.3    Being Different and Making Choices

1.1.2.4    Path to a Destination

1.1.2.5    Consistency in Behavior

1.1.2.6    Multiple Level and Theme Alignment

1.1.3       Measuring Competitive Advantage and Company Performance

1.1.3.1    Economic Value

1.1.3.2    Accounting Performance (Profitability)

1.1.3.3    Economic Performance and Shareholder Value

1.1.3.4    Corporate Sustainability Performance

1.2          Strategic Decision Making

1.2.1       Foundations of Decision Making

1.2.1.1    Rational Model

1.2.1.2    Bounded Rationality

1.2.1.3    Intuition

1.2.2       Strategic Decision Situations

1.2.2.1    Characteristics of Strategic Decision Situations

1.2.2.2    Dealing with Strategic Decision Situations

1.2.2.3    Cognitive Biases and How to Counter Them

1.3          What is Strategic Management?

1.3.1       Evolution of Strategic Management

1.3.2       Schools of Thought and Paradigms in Strategic Management

1.3.3       The Wheel of Strategy Framework

1.3.3.1    Strategy Process

1.3.3.2    Structure and Corporate Culture

1.3.3.3    Strategic Leadership

1.3.4       Making Strategic Management Effective

1.4          Summary

PART I:
Developing Strategies: Strategic Analysis, Ideation, and Choice

2              Strategic Analysis

2.1          Understanding the Initial Strategic Situation

2.1.1       The Company and Its Stakeholders

2.1.2       Developing a Strategic Analysis Framework

2.2          External Strategic Analysis

2.2.1       Macroenvironment

2.2.2       Industry

2.2.2.1    Defining the Relevant Market

2.2.2.2    Industry Profitability Analysis and Competitive Forces

2.2.3       Competitive Arena

2.2.3.1    Markets and Customers

2.2.3.2    Competitors and Strategic Groups

2.2.3.3    Other External Stakeholders

2.3          Internal Strategic Analysis

2.3.1       Analyzing Resources, Capabilities, and Competencies

2.3.1.1    Strengths and Weaknesses Profile

2.3.1.2    Value Chain Analysis

2.3.1.3    7-S-Model

2.3.1.4    Additional methods for internal strategic analysis

2.3.2       Identifying Core Competencies

2.4          Consolidating Strategic Key Insights

2.4.1       SWOT-based Strategic Analysis Summary

2.4.2       Portfolio-based Situation Assessment

2.4.3       Focal Points for Strategy Formulation

2.5          Summary

3              Strategy Formulation

3.1          Strategic Guideposts

3.1.1       Vision

3.1.2       Mission

3.1.3       Values

3.2          Corporate Strategy

3.2.1       Corporate Parenting

3.2.2       Scope of Business

3.2.2.1    General Directional Strategies

3.2.2.2    Diversification Strategies

3.2.2.3    Vertical Integration Strategies

3.3          International Strategy

3.3.1       International Business Expansion

3.3.1.1    Whether to Go: Internationalization Motives

3.3.1.2    Where to Go: Country Market Selection

3.3.1.3    How to Go: Entry and Go-to-Market Strategy

3.3.2       Transnational Management

3.3.2.1    Strategy Postures in Multinational Corporations

3.3.2.2    Transnational Strategies

3.4          Business Strategy

3.4.1       Intensive Growth Strategies

3.4.1.1    Market Penetration

3.4.1.2    Product Development

3.4.1.3    Market Development

3.4.2       Generic Competitive Strategies

3.4.2.1    Best Product

3.4.2.2    Lock-in

3.4.2.3    Complete Customer Solution

3.4.3       Breaking Out of Traditional Competition

3.4.3.1    Cooperative Strategies

3.4.3.2    Blue Ocean Strategies

3.4.4       Business Models

3.4.4.1    Business Model Frameworks

3.4.4.2    Key Building Blocks of a Business Model

3.4.4.3    Business Model Innovation

3.4.4.4    Business Model Patterns

3.4.4.5    Sustainable Business Models

3.4.4.6    Benefits and Pitfalls for the Business Model Approach

3.5          Strategy Option Evaluation and Choice

3.5.1       Key Criteria for Evaluating Strategy Options

3.5.1.1    Plausibility

3.5.1.2    Consistency

3.5.1.3    Performance Impact

3.5.1.4    Business Risk

3.5.1.5    Stakeholder Compatibility

3.5.1.6    Internal Readiness

3.5.2       Strategic Choice—Selecting Strategy Options

3.6          Summary

Part II:
Bringing it into Reality: From Strategy to Action and Control

4              Strategy Execution

4.1          Making Strategies Happen: Barriers and Drivers

4.1.1       Barriers to Strategy Execution

4.1.2       Strategy Execution Excellence

4.2          Organizational Design

4.2.1       Culture—How Things are Done Around Here

4.2.1.1    Key Dimensions for Analyzing Organizational Culture

4.2.1.2    Integrating Strategy and Culture

4.2.2       Structure—the Managerial Underpinning

4.2.2.1    Organizational Structure

4.2.2.2    Business Processes

4.2.2.3    Managerial Systems

4.2.2.4    Integrating Strategy and Structure

4.3          Strategy Execution System

4.3.1       Developing a Strategy Execution System

4.3.2       Describe Strategy

4.3.2.1    Deriving Strategic Goals

4.3.2.2    Developing a Strategy Map

4.3.2.3    Benefits and Pitfalls of Strategy Mapping

4.3.3       Cascade and Align Strategy

4.3.3.1    Applying Strategic Themes

4.3.3.2    Identifying Strategy Alignment Needs

4.3.3.3    Sequencing Goals, Metrics and Actions

4.3.3.4    Setting Cascading Paths

4.3.3.5    Choosing Cascading Methods

4.3.3.6    Aligning Vertically and Horizontally

4.3.3.7    Benefits and Pitfalls of Strategy Alignment

4.3.4       Make Strategy Measurable

4.3.4.1    Developing a Balanced Scorecard

4.3.4.2    Setting Targets

4.3.4.3    Benefits and Pitfalls of Measuring Strategy

4.3.5       Plan Strategic Actions

4.3.5.1    Developing and Prioritizing Strategic Actions

4.3.5.2    Refining and Aligning Strategic Actions

4.3.5.3    Benefits and Pitfalls of Strategic Action Planning

4.3.6       Align Organization to Strategy

4.3.6.1    Resources

4.3.6.2    People

4.3.6.3    Management Information

4.3.6.4    Benefits and Pitfalls of Organizational Alignment

4.3.7       Execute and Control Strategy

4.3.7.1    Control Execution: Strategic Performance Reviews

4.3.7.2    Control Assumptions and Observe Environment

4.3.7.3    Test and Adapt Strategy

4.3.7.4    Benefits and Pitfalls of Strategic Control

4.4          Summary

Appendix: Strategy Workout and Review Questions

Strategy Workout

Kick-off

Firm selection

Company background

Brief strategy review

Stakeholders and strategic analysis framework

External strategic analysis

Internal strategic analysis

Consolidation of the initial strategic situation

Strategic guideposts

Corporate strategy

International strategy

Business strategy

Strategy option evaluation and choice

Organizational design

Describe the strategy

Cascade and align the strategy

Make strategy measurable

Plan strategic actions

Align organization to strategy

Execute and control strategy

Review Questions

References

Index

[1]

Hinweis zum Urheberrecht

Abbildung

Haufe-Lexware GmbH & Co. KG, Freiburg

Notes to the Reader

The content structure of this textbook is illustrated by the reader-friendly layout that facilitates learning and working with the content in many different ways.

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Strategy Workout and Review Questions: The appendix provides a strategy workout and review questions that test students’ knowledge and understanding of the central elements and coherencies of all chapters and should be transferred to cases from practice. If students identify knowledge gaps or uncertainties, we recommend to repeat the equivalent sections thoroughly once again.

1 Strategic Management Foundations

L

Learning Objectives

After studying this chapter, you should be able to

imageexplain triggering events for companies to rethink their strategic orientation.

imageunderstand the roots of strategy and their relevance for management today.

imagedescribe different business views of strategy and how they can be linked.

imageexplain the six principles of strategy and their relevance for strategic management.

imageexplain ways for measuring competitive advantage and company performance.

imageoutline foundations of decision making and apply them to strategic situations.

imageunderstand the impact of cognitive biases and recommend how to deal with them.

imageexplain the evolution, schools of thought and paradigms of strategic management.

imagedescribe the wheel of strategy framework and explain its interrelated components.

imageexplain how to make strategic management effective and describe its resulting benefits.

1.1   What Is Strategy?

Outperforming competitors and long lasting survival

How does a company outperform its competitors and win in the market? How can it perform well for a prolonged period of time and ensure long-lasting company survival? These are definitely not easy questions to answer. Only few companies have remained in the market and been successful forever and a day. An example is the Bavarian state brewery Weihenstephan, which celebrated its 970th birthday in 2010 and is the oldest company in Germany. Another long-term performer is the Merck Group. Founded in 1668, it is not only the oldest pharmaceutical and chemical company in the world but also ranks among the world’s leading firms in this industry today. Other multinational companies like Bosch, Daimler, Henkel or Siemens have been writing their success stories for more than 100 years. On the other hand, firms such as AEG, Chrysler, Nixdorf Computers, Kodak, and Agfa that used to be famous for their innovative products in times past have gone out of business, were swallowed up by others or had to sell major divisions.

Strategic Snapshot 1.1

“Few large corporations live even half as long as a person”

“Few large corporations live even half as long as a person. In 1983, a Royal Dutch/Shell survey found that one third of the firms in the Fortune ‘500’ in 1970 had vanished (de Geus 1988). Shell estimated that the average lifetime of the largest industrial enterprises is less than forty years, roughly half the lifetime of a human being! The chances are fifty-fifty that readers of this book will see their present firm disappear during their working career. In most companies that fail, there is abundant evidence in advance that the firm is in trouble. This evidence goes unheeded, however, even when individual managers are aware of it. The organization as a whole cannot recognize impending threats, understand the implications of those threats, or come up with alternatives.”

(Source: Senge 1990: 17)

Average life span of companies

Looking at the average life span of major companies actually reveals a sobering picture. For example, less than 15 % of the largest companies in the US listed in 1917 in Forbes Magazine still exist today. The rest vanished from the business landscape because they either have been taken over by other companies or gone out of business. Looking at even so-called world-class companies identified by Peters and Waterman or by Collins and Porras in their bestselling books “In Search of Excellence” or “Built to Last” reveals a similar picture. Only a minor portion of all companies perform well over several decades (Watson 2012: 287; Foster/Kaplan 2001: 7 f.). The average life span of companies in Europe is about 12 years, 28 years if they are publicly listed on a stock exchange, and 48 years if they are large corporations with more than 10,000 employees or $5 billion market capitalization (Stadler/Wältermann 2012: 10). Most companies that were high performers at a certain time are not able to remain superior in the long run, for example, for 10 years or more (Wiggins/Ruefli 2005 and 2002). Why did so many prominent companies vanish from the business landscape or lose the superior performance level they had at a certain time? They have failed to adapt their strategy to the changing environment and had to learn that past performance is no guarantee of future success.

Triggering events to rethink strategy

When do companies typically rethink their strategic orientation and engage in a (re-)definition of their strategy? Some triggering events that may act as stimuli for changes in strategy are (Wheelen/Hunger 2010: 24):

imagePerformance gap (unmet performance expectations): Many companies with revenues or profits that are no longer increasing, falling behind major competitors or even decreasing, rethink their strategic orientation to get back on course in the long term. This may also be the case for anticipated future performance issues caused by, for example, advancing competitors or disruptive technologies.

imageChanges in ownership: New shareholders may alter financial and strategic expectations of the company and require a new strategic orientation. For example, family-owned companies differ significantly from private equity firms when it comes to risk aversion, short- and long-term profit orientation or the desire for appreciation in the community.

imageNew anticipated trends: New trends such as new technologies or changes in customer preferences may make existing strategies ineffective and require new strategic approaches. For example, Nokia underestimated the trend from cell phones to smart phones and was forced to rethink its strategic position once companies like Apple introduced their new innovations such as the iPhone.

Strategy Practice Example 1.1

CEO Eras and Strategy at Daimler

Diversification was one of the key corporate strategic thrusts of Edzard Reuter in his era of being CEO of Daimler from 1987 to 1995. He wanted to transform the company into an “integrated technology corporation” and diversified Daimler with acquisitions in the aerospace and electrical industries such as MBB, MTU, Dornier, and AEG. His successor, Jürgen Schrempp, changed this diversification strategy and refocused the group onto the automobile business during his 10 years as CEO. He wanted to refocus the corporation and create a world auto giant with a strong shareholder value orientation. Under his leadership, the Daimler-Benz AG merged with the US corporation Chrysler in 1998. Due to unsatisfactory results the era DaimlerChrysler was finished in 2007 by Dieter Zetsche who has become CEO in January 2006. The company was renamed to its current name Daimler AG.

imageNew CEO or executive leadership team: New executives at the helm of companies usually bring in new strategic ideas and approaches (see Strategy Practice Example 1.1). This is similar to what frequently happens in sports when a new coach or manager comes in and fundamentally changes the strategic thrust.

imageIntervention from other external stakeholders: Interventions from other external stakeholders than customers and competitors such as governments, non-governmental organizations, banks, etc. may have a significant impact on the company. For example, recent decisions of the German government to exit nuclear energy until 2022 and increase the share of renewable energy sources for supply in Germany to 80 % by 2050 triggered significant changes in corporate strategy at some German energy corporations such as E.On.

imageMore unstable environment: More and more companies are facing unstable environments with a high degree for volatility. For example, some firms are required to advance their strategic agility and adapt their strategies more frequently than they used to. Other companies such as ZEISS (see 3.2.2.2) may foster diversification to get a balanced risk profile of their businesses portfolio with regard to turbulence in the global economy (see chapter 3.2.2.2).

1.1.1     Origins and Views of Strategy

Multiple applications of the strategy term

Nowadays, the term “strategy” is used in all kind of areas ranging from computer gaming, gardening, Poker as well as food to sports, dating or even housecleaning. This variety of applications makes it hard to develop a common and shared understanding. The same is true in a business context. The range of strategy interpretations reaches from anecdotal statements like “strategy is what makes money”—a perspective of the CEO of a Fortune 500 company in a strategy workshop—to more philosophical understandings like “strategy is revolution; everything else is tactics” (Hamel 1996: 70). Furthermore, the strategy term is frequently related to its origin in military history. How relevant this might be for tackling today’s management challenges will be discussed first followed by a brief overview of some actual views of strategy that can be applied to company practice today.

1.1.1.1   Roots of Strategy

“Stratos” and “agein”

The etymological roots of the term “strategy” go back to ancient Greek (6th/5th century BC) where—based on the terms stratos (army, military force) and agein (to lead)—stratégos was an expression for an army leader or military general. Later on in history, various military leaders referred to militarily motivated strategies in their renowned publications, such as:

image“The Art of War” written by the Chinese military strategist and mathematician Sun Tzu (544–496 BC). Nowadays it is considered the first strategy book in history. One of his important strategy principles is the idea of victory without fight.

image“The Prince” and “About the Art of War” written by the Italian Renaissance political philosopher and historian Niccoló Machiavelli (1496–1527).

image“The Book of Five Rings” written by Miyamoto Musashi (1584–1645), a Japanese swordsman and samurai. One of the important strategy principles he refers to in his famous publication is the importance of situation assessment from a bird’s eye perspective.

image“On War” written by the German-Prussian General and military theorist Carl von Clausewitz (1780–1831). He defined strategy as the use of combat for the purpose of war.

Relevance of military strategy principles for business

Figure 1-1 provides some fundamental principles of historic military strategies that seem to be timeless and relevant also for business management today (Kotler/Berger/Bickhoff 2010: 7): Concentration of resources strongly relates to one of the key challenges in management, that is the effective allocation of limited resources. The element of surprise is leveraged by companies in a variety of ways such as establishing a first mover advantage with their products in certain markets or by unexpected mergers, acquisitions, etc. Furthermore, companies elaborate very carefully on which competitive arenas they are playing in, based on their strengths and core competencies. Communication between the top leadership team and the employee base is a key pillar of any modern strategy execution system. The precise coordination of strategic objectives and resources relates to the management approach of strategy and organizational alignment which is vital for making strategies happen effectively. Finally, how companies can gain a substantial advantage through innovation can be seen over and over again by innovative companies launching new technologies, products or business models.

Limitations of military principles for business management

Anecdotally speaking, strategy “arranges strengths, means, time, space and methods in a guiding principle of action. It is, therefore, nothing else but an efficient success plan, whose fundamental elements What do I want?What can I do? and What do I do? have not been changed since Seneca’s “Want—Can—Dare“ (Note: Roman philosopher, 4 BC65 AD)“ (Werle 2005: 197). Historical insights from warlords may provide simple and highly generic inspirations for staying on target and capturing new perspectives—that might be useful in, for example, dynamic situations or when competing in multiple markets. However, based on a more critical evaluation, those principles provide hardly any answers for solving strategic challenges today. Although many ideas are timeless and valid, they lack uniqueness. The insights are revolutionary for its time but self-evident for most managers today. Most historic strategy ideas are on a high level. They particularly lack precise recommendations for one of the biggest challenges in strategic management, that is execution. Furthermore, “big names” are frequently used for marketing purposes (see Strategic Snapshot 1.2).

Fig. 1-1

Applicability of military strategy principles for business management

image

Source: Kotler/Berger/Bickhoff 2010: 7

Strategic Snapshot 1.2

Return of the “Warlords”

Although the relevance of military principles for solving today’s business challenges can be questioned, there are a number of popularized business publications of the last 20 years leveraging historical strategy perspectives. Examples are:

image“Miyamoto Musashis Book of Five Rings. 52 Brilliant Ideas for Your Business” (2012; published in German)

image“Sun Tzu and The Art of Business. Six strategic principles for Managers” (2011)

image“Sun Tzu. The Art of War for Managers. 50 Strategic Rules Updated for Today’s Business” (2010)

image“Clausewitz on Strategy. Inspiration and Insight from a Master Strategist” (2001), a publication of the Strategy Institute of the Boston Consulting Group

image“The New Machiavelli. The Art of Politics in Business” (1999).

Practitioners might be inclined to use the supposed credibility of historic military leaders for reducing complexity in strategic decision-making situations. One of the key limitations of military strategies for business is its traditional focus on opponents which is equivalent to focusing only on competitors in markets. Not only does this neglect cooperative strategies for the most part, but also the customer as most important stakeholder for business is not addressed at all. And finally, translating certain rules of war into business is inappropriate today if the recommendations are not compliant with law or ethical principles (Werle 2005).

1.1.1.2   Business Views of Strategy: the 5 P’s

To better understand what strategy means in a business context, it is helpful to recognize different interrelated views of strategy that can be found in management practice and science alike (Mintzberg 2000: 23–29, 1987 and 1978). Understanding and integrating those different views is supposed to reduce some of the confusion that comes with the strategy term and establish a foundational terminological framework that will be applied in this book:

imageMost practitioners are likely to define strategy as a plan that specifies what the company intends to do and when. It is made purposely in advance of the actions to which it applies.

imageOthers may understand strategy more as a specific competitive move or ploy to preempt an opponent’s response in a head-on competitive situation. In this understanding it is also a plan but more in a sense of outmaneuvering an opponent in a 1:1 business setting.

imageAnother understanding of strategy is specifically related to the position in the environment that allows an organization to generate sufficient “rent”. In practical terms this might be a particular industry or the financially most promising product-market combination within the competitive arena a company focuses its resources on.

imageWhereas the position is outside the organization, the understanding of strategy can also be based on a more internal view. Here, strategy is seen as a collective perspective in people’s minds. It is a kind of shared mental model that builds the strategic orientation of the company.

imageA final understanding of strategy as a pattern is not related to the intention of people but to the resulting behavior of an organization. Here the key is consistency in behavior, whether intended or not. Successfully realized strategies are not always planned in advance and planned strategies are not always realized (see also chapter 1.1.1.5).

Integrating the 5 P’s of strategy

Figure 1-2 provides an attempt to integrate the different views of strategy in a hierarchical order following the strategic planning logic of this book. Strategic guideposts are established by a company’s vision, mission and values. They provide a high-level normative direction and strategic context. This is a view of strategy as perspective. Framed by the strategic guideposts the company has to decide where and how it wants to compete based on industry and market attractiveness and dynamics as well as its own resources and capabilities. This is the core of formulating corporate and business strategies and reflects a view of strategy as position. Once certain strategy options have been decided on and strategy is set, it is refined with strategic goals, quantified with metrics and targets, and translated into strategic action programs as well as corresponding budgets and incentives. This is related to the view of strategy as plan. Some of those goals or actions may capture certain moves to outwit rivals or fight competitive threats, that is viewing strategy as ploy. Finally, strategy is what really happens. The strategic behavior of an organization may have been planned according to the process described or it may emerge unplanned through learning and trial and error. In any case, it is a consistent stream of actions and decisions. This is strategy as pattern. By describing how companies like Ikea, Starbucks, Apple or others present themselves in the market, key strategic elements can be clearly identified as they reflect consistency in behavior of those companies. Cornerstones of their strategies are visible for everybody without knowing whether they were ever planned in formal strategy sessions or just emerged over time.

Fig. 1-2

5 P’s of strategy and strategic planning logic

image

Source: following Simons 18; adapted

1.1.2     Understanding Strategy with Six Principles

Strategy is a multifaceted phenomenon about how to compete.

Strategy is a multifaceted phenomenon that can hardly be described with a single definition. The 5 P’s described before are a practical and a frequently used consolidation of various views of strategy. Different authors emphasize different elements when they provide their understanding of strategy. A common theme that can be found in most strategy definitions is the idea of competition. Consequently, strategy can be seen as an approach of how to compete. To shed additional light on what strategy is, selected aspects from various understandings of strategy are pointed out. According to certain authors, strategy is about

imagethe creation of competitive advantage (Ohmae 1982: 36)

imagethe determination and pursuit of basic long-term goals (Chandler 1962: 13)

imagethe idea of being different and choosing what to do and what not (Porter 1996: 70)

imagethe description of a “path” from a current to a targeted future state (Kirsch 1991: 301)

imagethe integration of an organization and its environment based on consistent patterns of organizational decisions over time (Mintzberg 1978)

imagethe definition of businesses in which to compete on a corporate level and how to compete on a business level (Andrews 1980: 18 f.).

Instead of trying to formally define what strategy is, these elements are used to derive the six principles shown in figure 1-3. They are supposed to sharpen the strategy concept that is relevant for moving forward and will be explained next.

Fig. 1-3

Six principles of strategy

image

1.1.2.1   Quest for Competitive Advantage

Strategy is about gaining, sustaining and renewing competitive advantage

Most people will agree that strategy makes a major difference between winning and losing in any competitive situation whether it is in business, sports, politics, or others. In business, it helps a company to establish some sort of advantage relative to its competitors that is crucial for outperforming them. As illustrated in figure 1-4, the strategy a company pursues is supposed to lead to competitive advantage, and thus, ultimately to superior performance in a given competitive arena. Strategy is about gaining, sustaining and renewing competitive advantage as a base for superior performance. The question what “superior” performance means is discussed more in detail in chapter 1.1.3.

Fig. 1-4

Relation of strategy, competitive advantage and performance

image

Gaining competitive advantage—the strategic triangle

Firms that are capable of providing their customers goods and services that are better, cheaper or delivered faster than those of their competitors are generally more likely to outperform their rivals and win in the market. Companies take strategies to achieve such a competitive advantage, and thus, ultimately superior performance compared to their competitors in the same industry or to the industry average. The competitive advantage a company wants to realize always needs to be assessed relative to other companies competing in the same—clearly defined—competitive arena or market and with respect to the needs and wants of the customer. Simply put, competitive advantage can be created when companies are able to utilize their resources and capabilities for meeting customer needs and delivering customer value in a way their competitors cannot, given the specific context in which they compete. This can also be referred to as the “strategic sweet spot” (Collis/Rukstad 2008: 89). A key principle of any business strategy is to consider these three main players—the so-called “strategic three C’s” or “strategic triangle” (Ohmae 1982: 91 f.)—and identify the strategic sweet spot as illustrated in figure 1-5.

Sustaining competitive advantage

Companies typically try to keep their advantage relative to their rivals over a prolonged period of time. In those cases, the companies would have a sustainable competitive advantage (Porter 1985: 11). This can be pursued, for example, by making the advantage difficult to understand and hard to imitate by rivals through, for example, a unique business model (see chapter 3.4.4) or by protecting it from imitation with patents, for example. However, a company can typically sustain its competitive advantage only for a certain period of time. As rivals work hard to imitate and neutralize it, protection might only last for a while and then expire. Furthermore, changes and discontinuities in the environment such as technological leaps might erode the advantage. For example, Leica Camera has been renowned for its high quality cameras over a long time. The firm ignored the trend of digital photography technology in the 1990s and tried to compete with high-class analog cameras. This strategy did not work out and lead to a competitive disadvantage. The company—meanwhile recovered—faced a severe crisis, had to look for investors and realized losses of more than €15 million in 2005.

Fig. 1-5

The strategic sweet spot

image

Source: Collis/Rukstad 2008: 89; adapted

Renewing competitive advantage

Given today’s highly volatile and dynamic environment, companies might not be able to or do not strive to sustain competitive advantage for a long time. They focus on continuously building temporary competitive advantage—that is a competitive advantage that lasts only for a very short period of time—based on speed, organizational agility and innovation. For example, in the food industry only a few companies focus on radical (breakthrough) innovation based on new to the world products that are proprietary and become blockbusters. Most companies have to work hard to continuously establish temporary advantage based on incremental innovation or so-called renovations, that is slight changes in taste, packaging, or size, for example (Wunder/Bausch 2014a). Also, some companies seek new products or technologies through acquisition strategies as they lack own capabilities to develop true breakthroughs. Firms may even purposely avoid long-lasting competitive advantage or alter their competitive advantage after a while. They do not strive to sustain competitive advantage as it makes them predictable and vulnerable from the perspective of their aggressive competitors. Instead there are pursuing strategies directed toward continuously renewing their competitive advantage (D’Aveni 1994; see also Strategic Snapshot 1.3).

1.1.2.2   Fit of Markets and Resources

Outside-in versus inside-out

In the quest for competitive advantage, a company has two key options for elaborating on strategies. First, it can take an outside-in perspective and try to identify sources for competitive advantage in the industry or market. Hereby, the market a firm decides to compete in and its strategic positioning in this competitive arena are considered key determinants for success. Second, the company can focus on its resources and develop strategies following an inside-out perspective. Hereby the key drivers of success are seen in the company’s resources, capabilities and competencies. These two perspectives are expressed in the market-based view of strategy and the resource-based view of strategy. They are traditionally used for explaining differences in competitive advantage, and thus, the ultimate performance of companies.

Strategic Snapshot 1.3

Competitive Advantage—Illustrated With Soccer

In the 2012/13 European soccer season, FC Bayern Munich became the first German team that won the so-called “Triple”, that is the National Championship, the National Cup and the European UEFA Champions League. This means that—in this season—Bayern Munich gained a competitive advantage over its rivals based on different sources such as individual players, the total team composition, the coach, as well as effective alignment of what the coach wanted and what the team delivered. The club was able to execute a strategy that led to this competitive advantage, and thus, to superior performance. However, one can also say that the club has been able to realize sustainable competitive advantage as they won the National Championship 24 times in 51 years since the foundation of the “Bundesliga” in 1963. The second best teams in this ranking won only five times. Although the players and coaches of Bayern Munich have been continuously changing over the past 51 years, the club was able to outperform its competitors for such a prolonged period of time. In the 2013/14 German soccer season, FC Bayern Munich—now with a new coach named Josep (“Pep”) Guardiola—won the German Championship at the earliest time ever in German Bundesliga history, that is with 77 points at the 27th of 34 games. The new coach did not try to merely sustain the competitive advantage the team gained in the previous season. He changed the strategic system fundamentally in a way that there seem to be no fixed positions for the players anymore. In and between matches, players that used to be excellent in certain positions and play well in “traditional” formations have now been changed continuously. Based on this new agility of the team and an outstanding squad, the coach continuously creates temporary competitive advantage that makes it very hard for competitors to anticipate their ploys and come up with an effective game plan.

Market-based view of strategy

chapter 2.2.2.2chapter 3.4.2