Chapter 3 Exploring Strategy Management: Commercial theory and practice

Learning objectives Explore the difference between strategic thinking and strategic planning Explore key change drivers and factors that influence the attractiveness of an industry and the firm’S competitive position Explore the potential sources of competitive advantage for the firm. Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Learning objectives Identify and explore strategy at the corporate and business/competitive levels Understand the core premise of the resource-based view of the firm Explore the concept of dynamic capabilities Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Introduction ‘By strategy, I mean a cohesive response to a challenge. A real strategy is neither a document nor a forecast but rather an overall approach based on a diagnosis of a challenge. The most important element of a strategy is a coherent viewpoint about the forces at work, not a plan.’ (Rumelt, 2008) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Introduction Strategy is about: how to achieve and sustain competitive advantage in the long term having a clear sense of purpose, and the organisational capacity to make difficult choices about the direction and evolution of the firm The commercial management function can play a significant role in informing strategic thinking and action Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Introduction ‘The basic problem confronting an organization is to engage in sufficient exploitation to ensure its current viability and, at the same time, devote enough energy to exploration to ensure its future viability.’ (March, 1991) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Introduction No single definition of strategy but a multiplicity of perspectives With clear military origins it draws on: economics, the theory of the firm, psychology and sociology Three critical components in articulating a strategy: objective, scope and advantage (Collis and Rukstad, 2008) Cummings and Wilson (2003) perceive it as a combination of: ‘orientation’ and ‘animation’ Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Key change drivers Include, for example: increased globalisation technology consolidation of industries and the consolidation/fragmentation paradox increasingly complex regulation political change the ‘eco-factor’ Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Porter’s Five Forces model (Porter, 1980, 2008) Five forces are: the bargaining power of buyers the bargaining power of suppliers barriers to entry the threat of substitutes degree of competitive rivalry Important to look at the impact of the combination of all the forces, not just one or two of them Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Competitive advantage Occurs when the firm has the capability to differentiate itself from its rivals, when it is able to create more economic value than competing firms by providing a product or service to its customers that is in some way superior to that of its competitors. Importantly, this advantage should result in consistent superior performance, often referred to as supernormal profit. (Augier and Teece, 2008; Kay, 1993). Supernormal (abnormal) profit occurs when revenue exceeds the opportunity cost of inputs Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Competitive advantage It can be sustained only by pursuing either differentiation or cost leadership, endeavouring to avoid the middle ground (Porter, 1980, 1985) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Where is the firm on ‘the curve’? Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Where are we on ‘the curve’? Are we ambidextrous? Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Market-led innovation Innovation has become part of the strategy lexicon ‘Fundamental strategic innovation is achieved by the creation of new competencies and new business models that break the rules of their industry.’ (Jacobs and Heracleous, 2005) Process innovation due to: incremental innovation major improvements architectural innovations (O’Reilly and Tushman, 2008) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Corporate-level strategy ‘Corporate strategy is the way a company creates value through the configuration and coordination of its multi- market activities.’ (Collis and Montgomery, 2004) Concerned with: domain selection domain management Involves analysis of approaches to diversification: related – vertical and horizontal integration unrelated Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Corporate-level strategy Portfolio management tools e.g.: the growth–share matrix (‘Boston Box’/BCG Grid) Portfolio analysis seeks to: measure the diversity of a firm’s activities, with the aim of achieving and sustaining a balanced portfolio of businesses, each at a different stage of development Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Corporate-level strategy Portfolio analyses generate: ‘strategic imperatives such as invest, divest, harvest, and manage for cash’ (Angwin, 2011). Plethora of portfolio tools, e.g. the GE/McKinsey Business Screen Limitations of portfolio planning gave rise to parenting advantage (Goold et al., 1994) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Business (competitive) level strategy The concept of generic strategies was initially conceived at the business level: ‘Porter focuses on business-unit strategy because his early research showed that overall corporate return in a diversified corporation is best understood as the sum of the returns of each of its businesses. So for Porter, strategy always means competitive strategy within a business.’ (Allio and Fahey, 2012) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Resource-based-view (RBV) of the firm ‘Competitive advantage of firms lies with its managerial and organizational processes, shaped by its (specific) asset position, and the paths available to it.’ (Teece et al., 1997) The RBV: adopts an inside-out perspective argues that the key determinants of superior performance reside within the firm Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Resource-based-view (RBV) of the firm To achieve a competitive advantage, the firm: must identify a gap or ‘market-space’ (Kim and Mauborgne, 2008) needs to ‘anchor differentiation upstream, basically noting that if a firm is going to be able to differentiate its products, it must be different in its capabilities and/or business model.’ (Augier and Teece, 2008) Relevant at the corporate and business level RBV seeks to provide a coherent structure to help discern the capabilities of a firm, and how they can deliver competitive advantage Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Resource-based-view (RBV) of the tirm Resources – stocks of available factors that are owned or controlled by the firm Capabilities – a firm’s capacity to deploy resources, usually in combination, using organisational processes, to effect a desired end (Amit and Schoemaker, 1993) meta-capabilities (Liedtka and Rosenblum, 1996) dynamic capabilities (Teece et al., 1997) Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Summary Although our focus has been on the orientation aspect of strategy; it is important to note that implementation is equally – some would argue significantly more – important (Mintzberg, 1994) Strategising is an ongoing, dynamic process rather than a set solution in the form of a plan Strategy is seen as a dialogue or strategic conversation, and not exclusively one among the senior leadership team Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Summary The process of exploration and analysis seeks to: identify the strategic agenda: the fundamental issues that concern the firm’s development in the long term, which involves market sensing, really understanding the complexity of the industry dynamics, and identifying value Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Summary define a clear sense of purpose and understand the need for a guiding policy for the firm in creating value: ‘an overall approach chosen to cope with the obstacles identified in the diagnosis’ (Rumelt, 2011) clearly articulate the core value proposition, with a ‘specifically tailored value chain’ (Magretta, 2011) or delivery system Commercial Management: theory and practice, First Edition. David Lowe. © 2013 David Lowe. Published 2013 by Blackwell Publishing Ltd.

Recommended reading ISBN-10: ISBN-13: Chapter 3

Additional reading ISBN-10: ISBN-13: Chapter 6