Exploring Strategy, Text and Cases, 12th Edition Richard Whittington Solution Manual.pdf

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Solution Manual

Resource:

Exploring Strategy, Text and Cases

Edition:

12th Edition

Author(s):

Richard Whittington Patrick Regner Duncan Angwin Gerry Johnson Kevan Scholes

Instructor’s Manual Exploring Strategy Text and Cases Twelfth edition

Richard Whittington Patrick Regnér Duncan Angwin Gerry Johnson Kevan Scholes With the assistance of Clive Kerridge and Jason Evans

Contents Chapter

1

Introducing strategy

23

Part

I

THE STRATEGIC POSITION

31

Chapter

2

Macro-environment analysis

32

Chapter

3

Industry and sector analysis

41

Chapter

4

Resources and capabilities analysis

56

Chapter

5

Stakeholders and governance

71

Chapter

6

History and culture

80

Part

II

STRATEGIC CHOICES

92

Chapter

7

Business strategy and models

93

Chapter

8

Corporate strategy

105

Chapter

9

International strategy

125

Chapter 10

Entrepreneurship and innovation

136

Chapter 11

Mergers, acquisitions and alliances

145

Part III

STRATEGY IN ACTION

156

Chapter 12

Evaluating strategies

157

Chapter 13

Strategy development processes

170

Chapter 14

Organising and strategy

183

Chapter 15

Leadership and strategic change

190

Chapter 16

The practice of strategy

198

Case Teaching Notes Glastonbury: from hippy weekend to international festival

209

The global pharmaceutical industry: harnessing the whirlwind

214

Siemens A: exploring the future

220

Relocation, Relocation, Relocation: evolving strategies to deal with shifting shopping patterns at Vision Express Ricoh Canada Inc.

225 241

H&M in fast fashion: continued success?

250

The Formula 1 Constructors

261

‘Access to Healthcare’: integrating a CSR programme in Coloplast

268

Manchester United FC: struggling to compete with Europe’s elite clubs

275

Adnams – A Local Company

299

3 .

‘Dare to know’: The integration of Université Paris-Dauphine with Paris Sciences et Lettres (PSL) University

308

Ryanair: the low fares airline – new directions?

313

Multi-sided platform competition in the video game industry

343

Megabrew: creating an undisputed global brewing champion?

347

AirAsia and the Tune Group: diversifying across industries

356

Severstal: a journey from growth to consolidation within the steel industry

362

Indian Premier League: glitz, glamour and globalisation

370

Handelsbanken – banking done differently

374

Caitec: A Chinese Business in Africa

378

Going for a Ride: Entrepreneurial Journeys in the on-demand transportation sector

386

Leadership at Apple Inc

392

Has Teva been saved? Responding to challenges and problems in generic pharmaceuticals

400

Managing M&A: Elekta’s acquistion of Neuromag

403

CRH plc: Optimising value through corporate strategy

409

Counterstrategy: resisting the Mexican narco-trafficking business

417

Oak Tree Inn: Growth challenges facing a family-run tourism business

427

Strategic planning at King Faisal Hospital and Research Centre Saudi Arabia

435

Mormor Magda’s ice cream – can you be hot in a cool market?

445

Emmaus: the founder as a resource?

450

Siemens B: ‘making real what matters’

459

Cultivating a rich harvest at Orchard

468

Strategy Work in Dörr och Portbolaget – How open can you be?

473

In the boardroom at HomeCo

480

4 .

1. Introduction Exploring Strategy represents one of the most comprehensive packages of material and support for teachers and students of strategy. The following materials and assistance are now available: •

The text with improved design and layout to assist readers – including objectives for each part of the book and chapter learning outcomes, concept definitions, chapter summaries, additional reading and much more.

•

Over seventy illustrations and fifteen Thinking Differently sections, each including

•

questions to facilitate their use as mini cases or class discussions.

Sixteen end-of-chapter case examples with specific relevance to the content of the chapter

•

and with questions relating to the major learning issues in the chapter.

End-of-chapter work assignments, which provide further opportunities for student

•

assessment, additional work or self-assessment.

Thirty case studies (text and cases version only) together with comprehensive teaching notes (in this manual and on the website). The case collection contains a rich mixture of material, including long and short cases from many different sectors and different countries.

A number of ‘classic cases’ from past editions (where they are not carried forward into the

• •

twelfth edition but are still useful to tutors and students).

The Strategy Experience simulation gives students hands-on experience of strategic analysis and decision making. The simulation can be used by individual students, or as part of a wider classroom exercise.

For students: •

Revision aids (flashcards, key concepts and glossary (in six languages))

• Multiple-choice questions, work assignments and grade book •

Help with case studies (web links, FT articles and advice on analysing cases).

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For tutors: • This Instructor’s Manual •

PowerPoint slides

•

Tutors’ workshops led by the authors are held annually. These are practical days concerned with how teachers might gain most advantage from the book and associated materials. They also act as a forum in which to meet other strategy teachers.

Details on all of these items and extensive tutors’ debriefs of work assignments, illustrations, case examples and case studies are included in this manual.

Many of these materials are also relevant to our shorter version, Fundamentals of Strategy. This shorter version has the advantage of consistent definitions and frameworks and the same illustrations and end-of-chapter case examples. It should therefore be very easy for teachers using Exploring Strategy or Fundamentals of Strategy to switch between these two texts according to the needs of a particular course.

2. Using this manual This manual is designed for the assistance of teachers of strategy in planning how to gain maximum advantage from the text Exploring Strategy and the associated teaching and learning materials. It should provide help with: •

planning a teaching approach to suit the type of participants, time available, etc.;

•

deciding on how to use the text, illustrations, case examples, readings and case studies in a teaching scheme; choosing additional material to include in a course;

• • • •

using the work assignments for the illustrations, case examples and those at the end of each chapter; preparing to teach the case studies; using the Exploring Strategy website.

The next two sections are intended to be of particular use to teachers who are relatively new to teaching strategy or are designing new courses. Experienced teachers may wish to pass over Sections 3 and 4.

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3. Planning your approach This section provides some general guidance on how the design of a strategy course can be varied to meet the requirements of the participants and the practicalities of the situation. The factors listed below will also influence the way in which the text, readings, work assignments, case examples, case studies and videos can be used to best advantage.

3.1 Purpose of the course Strategy courses can be designed to meet many different needs. At one extreme, the course may mainly be concerned with raising awareness of why organisations need to change and develop over time and some of the ways in which this occurs. Alternatively, a course may be designed to improve the skills of participants in the formulation and implementation of strategy. Between these extremes are other purposes for strategy courses. For example, improving managers’ understanding of how their job function fits the overall strategic development of the organisation, helping to break down the very narrow operational outlook of many managers or integrating material from other parts of a business or management course. The following is some guidance on how the use of text and cases might be adapted to these various purposes.

•

If awareness is the key purpose, the text can be used to provide a basic framework (say through a lecture series), devoting as much time as possible to illustrative work. The illustrations and case examples in the text should prove valuable resources and teachers try to supplement these with their own topical material (media sources, company websites, etc.). Where participants have access to live organisations, use of issues from those organisations should be encouraged (e.g. student research and presentations). Guest speakers could also prove valuable – particularly, interesting success stories. The case studies and videos can be used mainly to encourage discussion and illustrate particular aspects of strategy. Work assignments should be useful to consolidate some of the key concepts in strategic management.

•

If skills development is most important, then the purpose of the text should be to help participants understand concepts and analytical tools which they can apply and practice. Most of the case examples and case studies lend themselves to an analytical approach, and participants should be set tasks that require them to produce detailed and practical solutions. Work assignments for the illustrations and at end of the chapters should be useful to test skills development and the understanding of key concepts. With some groups, it may be possible to require participants to develop their skills on real, company-based issues, through a project. For example, students can be asked to undertake an analysis of a particular industry or company (which could be done on the basis of secondary data), to assess the strategic choices available to an organisation and propose how issues of implementation would be managed. Many of the advanced level work assignments are specifically designed to test readers’ in-depth understanding of issues and/or ability to use them in a project situation.

• Where the relationship between strategy and the separate business functions is of primary importance, group work (preferably with cross-functional teams) could be very helpful. This could be for work on the case studies, in-company work or business simulations.

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3.2 Level of participant The purpose of a strategy course is likely to differ with the level of participant (see Table 1). For example, this could relate to their age, job function or type of course which they are studying.

•

For younger people with little full-time work experience the text should prove useful in providing a systematic approach and illustrations of strategy in practice. The illustrations and case examples in the text (and associated work assignments) should be used to relate theory to practice. Case studies and the video material should be used in fairly focused ways to consolidate stages in the learning rather than in an all-embracing way until later in the course. Selected readings should also prove helpful. The standard level work assignments will be the most appropriate for this group.

• Where participants have some work experience but are nevertheless fairly junior (e.g. final year sandwich course students and many young manager courses), the same comments are relevant except that there are more opportunities to encourage participants to relate to real-life situations through presentations, in-company projects, etc.

• For more experienced managers (e.g. in many part-time or executive MBA programmes or incompany courses) it should be possible to reduce the formal inputs of concepts and methods.

Many experienced managers will have some knowledge of the basic concepts and tools already, although their understanding may be quite unreliable. It is often effective therefore to invite attendees to read the relevant text before the session, either as a refresher or as an introduction.

It is then possible to devote the majority of time to applied work (the case studies, group projects, presentations, etc.). For in-house courses, application can be directed at the organisation’s own issues; it may be possible to do the same amongst the more diverse participants in an open executive MBA course. It is also likely that the content in Chapters 12–16 will warrant more emphasis since they raise critical issues of processes of strategic management confronting practising managers. It may also make sense to begin the course by discussing different ways of understanding strategy and strategic management. The strategy lenses introduced in the Commentary at the end of Part I provide a basis for this since they reflect on how strategy might be seen and interpreted in different ways.

Table 1 Using the text and cases with different participants No work experience 1. Typical groups

Undergraduates

2. Sequencing of In chapter sequence material from text

3. Relative emphasis of issues

Main emphasis on Chapters 1–11

Limited work experience

Experienced managers

Sandwich degree Part-time MBA, in-company students, supervisory courses level, full-time MBA In chapter sequence (possibly highlighting of In chapter sequence Chapters 12–16 earlier)

More balanced emphasis

8 .

Greater emphasis on ‘process issues’ and Commentaries

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4. Text to read

After class sessions

5. Applied work

Illustrate issues from Practice analytical the text in a carefully and conceptual focused way understanding

(case studies, etc.) used to

Selected key readings

After class sessions

Selected key readings

6. Additional reading

Before or after class sessions As a way of improving practical skills, especially as applied to their own organisations Selected key readings (typically from Harvard Business Review or similar)

3.3 Study mode The mode of study should also influence course design.

•

For full-time courses, a good level of preparation of case study work should normally be expected. Such preparation provides an opportunity for smaller groups to work together on tasks for significant periods of time. A tightly organised package of student work (the case studies, group work, presentations, etc.) is, therefore, possible as an important way of consolidating the concepts/approaches from the text. However, the chance of live incompany work may be more limited – although projects based largely on secondary data can be very effective.

•

In contrast, part-time or executive students should be more in touch with ongoing management issues but may have less preparation time available and find it more difficult to meet in groups. It may be, therefore, that some group time needs to be built into the programme and/or online discussion forums should be set up. It can also be helpful to provide selected readings linking theory and practice to part-time students as a basis for group/class discussions or presentations. Assignments and exercises can be directed at students’ employing organisations.

•

Increasingly, online and distance learning elements are being used in business and management programmes. The structured nature of the text together with the illustrations, case examples readings, case studies, work assignments and website material can form the backbone of learning modules. Section 4 below, which reviews work assignments, provides guidelines on how the issues and materials in the book can be used to provide a structured learning ‘path’ for students.

3.4 Time available The study hours available will also influence the course design and the use of text and cases.

•

For long programmes (50 hours+) it should prove possible to use the text and cases extensively

•

and to supplement the course with other materials and activities.

For shorter programmes, a more selective use of the materials is likely to be necessary. For example, a course concerned largely with strategy formulation could confine the use of the text to Chapters 1–11 (or 12) and the associated illustrations, case examples, readings, case studies, 9 .

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video, work assignments and website material. In this case, our related book Fundamentals of

•

Strategy might be considered as a course text. A course on strategic change and implementation would be centred on Chapters 13–16. The other chapters would be recommended as follow-up or contextual reading.

Where time is very limited – particularly with more experienced managers – sessions may consist of an introduction to some basic ideas through the frameworks from the text together with a case study (or similar activity). More extensive use of the text would be in the participants’ own time either pre- or post-course. The authors regularly use such an approach on short courses for senior managers. The work assignments also provide a valuable checklist and/or self-study guide around these basic concepts. Although experienced managers may appreciate the relative brevity of Fundamentals of Strategy, they often find the more detailed attention to the practicalities of process available in Exploring Strategy very useful as a reference source: it has been our (surprising) experience that the longer book is preferred.

4. Designing the teaching scheme 4.1 Pre-course work It should be clear from the above that there are many circumstances where pre-course work could be essential. The text and case studies are designed to facilitate this. Where pre-course work is needed, it is suggested that it is prescribed in the following way: •

The appropriate chapters of the book with a few suggested issues to bear in mind. For

•

example, it might prove useful for participants to read Chapter 1 and be expected to discuss what is meant by ‘strategy’ or to read Chapter 4 and discuss what strategic capabilities matter most in organisations in different sectors.

Preparation of illustrations, case examples or case study material. Here, specific guidance

•

can be found in the teaching notes in Section 6 and in the work assignment debriefs.

Any company-specific data that they might need. For example, if participants are to undertake project work they may need to access company reports, accounts and websites.

To accompany the reading of Chapter 1 and/or Chapters 13 and 16, students could be asked to reflect on how strategic issues are managed in their own organisation. Or students could be asked to bring some topical data (e.g. media articles or blog posts) that might be used to develop a presentation on the course.

4.2 Starting the course The specific requirements of each course will vary but here is some guidance on how courses in strategy might be started: •

A traditional approach would be to run through the issues in Chapter 1 and relate them to the structure of the course. This is most successful if the course follows the text quite closely and in chapter sequence.

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• With groups of experienced managers, it can be stimulating to begin with a session on different approaches to strategic management and strategy development using the material from Chapters 1, 13 and 16 and the Commentary at the end of Part I that introduces the four strategy lenses. This does not preclude a follow-up that works through the chapters in sequence, but helps put that approach into context.

•An alternative approach is to begin the course with a case study, case example or illustration. The end-of-chapter case for Chapter 1 (AirBnB), the first illustration in Chapter 1 and the first case in the case section of the book (Glastonbury) are provided for this purpose.

This approach starts the course with participants talking about the strategic issues relevant to that company and industry, and gives pointers to issues that will be covered in the rest of the course. A similar opening can be achieved by asking one or more participants to talk about the key strategic issues in their own organisation or for an organisation that is well known to many participants.

4.3 Planning the topics The text lends itself to a range of different treatments and we encourage teachers to use it in a way which suits their own style and the needs of the participants. Some approaches might be as follows: •

The most straightforward teaching scheme is one that follows the sequence of topics from

•

the text. For example, on a final year undergraduate programme the text can be ‘covered’ in one-hour lectures leaving time for applied activities. It is strongly recommended that a lecture series of this type be used to augment the text (e.g. by addressing more fully some of the concepts or explaining how they can be used in practice) rather than replicate what is in the text.

Courses can be taught on an ‘issues basis’. For example, by focusing on the main strategic

•

•

choices discussed in Part II of the book (e.g. competitive strategy, internationalisation, mergers and acquisitions). Here, Parts I and III of the book would be used as background reading by students to prepare for and inform class discussion on the issues.

A ‘case-based’ course uses a series of case studies as the backbone of the course. Classes then focus on the issues raised by the cases. Here, it makes sense to choose the cases to focus on particular issues or themes. The case version of the book provides an extensive choice of cases that can be used for this purpose. It should then be expected that students (a) do recommended pre-reading from the text and (b) apply that reading to their preparation of the cases.

On other courses, the text can be used somewhat differently. For example, one of the authors teaches a part-time MBA course where the opening few weeks of the programme run parallel sessions following the ‘content’ issues in Chapters 2–6 and the ‘process’ issues of Chapters 13 and 16 and the Commentary. This is augmented by a readings programme and a group project running through the course.

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4.4 Balance of the course The teaching scheme will need to be balanced in relation to many of the needs identified in Section 3 in many ways: •

The degree of emphasis given to different topics as discussed above.

•

The mixture and sequencing of lectures, seminars, case studies, group work, etc. These are largely determined by the circumstances for which the programme is designed as outlined in Section 3. It is useful to look at some typical ways in which this mix can be planned: • Case study/applied material only courses, where the text is used as pre-reading and/or follow-up. This approach is not very common on open access courses but can be very useful in an in-company workshop where a review of the organisation’s own strategy forms the basis of the programme, and frameworks and techniques from the text are drawn upon as appropriate. These kinds of courses can lean towards a ‘flipped classroom’ approach, where reading and frameworks is done outside the classroom and class time is devoted to participant application and discussion, with the teacher acting primarily as a facilitator.

• Case study/applied material-based programmes. Here, the applied material is prepared before the class sessions and forms the basis of a discussion of key concepts during the session. This is the Harvard approach and the text could be used either as pre-reading or for follow-up. The case studies, case examples, illustrations, website material and work assignments would form the basis of such a course. As above, this tends towards the ‘flipped classroom’ approach, with little lecture input, more application and discussion by course participants.

• Lectures and applied work. Here, the formal lecture accounts for perhaps 20–30% of the programme, the remainder being used for applied work – case studies, presentations, projects, etc. The text, case studies, case examples, illustrations, website materials and work assignments are ideal for providing the backbone of a course of this type. The dangers are that students do not read widely enough so teachers need to provide proper guidance on additional reading (including those identified at the end of each chapter).

• Lecture and illustrative material. Here, the lecture programme may amount to 50– 70% of the course with illustrations, case examples, case studies and website material being used to provide practical examples of the issues in the text/lectures. This is only recommended for undergraduates.

4.5 Assessment Many courses will require participants to be assessed. The text and cases (and the above advice on course design) provide opportunities for a wide variety of different assessments. For example: •

Formal examinations can be used to test understanding of the key concepts presented in the text. There are dangers that students give overly theoretical answers to questions. One way of avoiding this is to use short quotations from case studies, articles or illustrations as the 12 .

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basis of the issue that requires discussion in the examination question. This could include requiring answers that are directed at explaining concepts to managers as they could be asked to do, perhaps, in a job interview.

•

Case study examinations are a commonly used method of assessment. There are typically two approaches here. i) The case study is distributed before the examination, but not the questions. Students are then able to prepare, perhaps in groups. The questions are then provided in the examination and answered on an individual basis. Students are, however, able to use their prepared notes. The biggest danger with this approach is that students overwhelm themselves with prior analysis, and simply replicate their notes, failing to answer the questions posed on the examination paper. ii) An alternative approach is to use a brief case study together with the questions provided to the students in the examination setting or shortly before it. The problem here is that students’ speed of reading can vary considerably – particularly if they are reading the case in English as a second language.

•

Project-based assessment involves students (or groups of students) applying the concepts and techniques in the book to a real organisation. This could be done, for example, by part-time students working on their own organisations. Or it can be done with students working on nominated organisations using secondary data. Please see also the paragraph immediately following these bullet-points.

•

Student presentations are another method of assessment, popular with many strategy teachers.

•

They can be used to assess students’ work on illustrations, case examples, case studies or incompany project work that they have undertaken. It is desirable to combine an assessment of the presentation with a write-up.

Participant’s topic – where participants are required to present a write-up and/or presentation on a strategic issue – often in the context of a topical situation or their own organisation.

• Multiple choice online assessment is often an efficient way of assessing basic learning, especially with very large student cohorts. It can particularly be a useful check on learning halfway through a course.

• Simulation-based assessments can be effective. Here typically the criteria of assessment are not results in the simulation itself, but the ability to apply techniques and concepts to explain results and, especially in team-based simulations, to reflect on the process (e.g. team dynamics).

• Readings – where a readings programme throughout the course is used as a basis of linking theory to practice and can be assessed through presentation and/or write-up in essays.

A note on Group Projects. Group projects can be an excellent form of learning and, therefore, lend themselves to be incorporated into the assessment package. The group project provides an extra learning dimension from the individual project namely, the process by which the group undertook the project and managed themselves. We would advise that the project write-up should 13 .

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include issues of process as well as content. Many teachers shy away from group projects because they feel that the assessment of individual contributions can be difficult (which it is!).

However, the potential learning from group work is so great that we would encourage teachers to experiment with assessing the project work. There are several ways in which worries about assessing individuals can be alleviated. First, the group project can be part of an assessment package and weighted accordingly (e.g. 30–40% of the overall mark). Second, the formal requirement may be that the group project is assessed only on a pass/fail basis. The student’s examination mark is that gained in other assessments. Third, the group can be given an overall group average mark and be asked to advise the tutor on the individual marks of group members (in relation to their contribution). Where the authors have used this particular approach, it has proved useful to provide limits within which individual marks can be varied (say 10 marks) and to ensure that students are clear that the final decision rests with the tutor. Fourth, students can be asked to complete an individual piece of work, for example, on their own key learning points from the group work.

4.6 Sample teaching plan This is an example of a teaching plan for a 500-strong cohort of level 3 undergraduates taking strategic management as a core double-weighted module over two semesters. Total contact hours are 36 hours, group work comprises 110 hours and independent study 154 hours. The module comprises a mixture of lectures, interactive workshops, group work, independent learning and online-mediated study (via an online learning management system such as MyStrategyLab). Case studies are a key learning vehicle for the module. Students are also required to conduct group and individual research into organisations. A series of surgery sessions and online-mediated sessions are available to students wishing to reinforce their learning. Key skills are developed in the areas of teamwork, oral and written communications, selection and application of data collection methods, research and referencing skills, data analysis and online communications.

The strategic management module has two main learning components:

•

Acquiring theory and concepts in strategy

•

Application of theory and concepts to the analysis of organisations.

To some extent, these two components interact – application of the concepts helps to clarify understanding of the theory. The theory comes early in the module, in order to have something to work with. The module lectures (focusing more on the theory) are, therefore, mostly in Semester 1 and early Semester 2.

Successful studying for the module requires the following: • Working through the Exploring Strategy interactive study guide together with the textbook •

Attending lectures, having prepared for them

• Working with study group on analysing case studies and a chosen organisation •

Participating actively in workshops.

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Reflecting this balance, the module has three elements of assessment: 1. Online assessment (10%). A range of question types to test students’ basic understanding of the theory at the end of Semester 1 (e.g. multiple choice, pull-down list, matching, ranking and text match).

2. An individual written assignment, including a copy of the group presentation (30%).

This requires application of the theory to a chosen organisation. Group work involves analysing the organisation, developing and ranking strategic options and making a presentation on one aspect of the organisation. Each individual then writes up a part of the analysis.

3. A two-hour case study-based examination (60%). This requires application of the theory to a case study that is issued two weeks before the exam and students analyse it in their study groups prior to the exam.

The module requires commitment and time on the part of the students. They must be able to organise their own study time – reading, working through the interactive online study guide and doing the self-assessment tests, analysing the case studies, gathering data on the selected organisation, preparing presentations for the workshops and working on the assignment. Using study groups effectively is an important skill. Study group discussions provide an opportunity to practise using the strategy vocabulary. The grid in Table 2 gives a general outline of the requirements of the module.

The course structure is as follows: Lectures: Workshops: Surgery sessions: Online:

Guest lectures:

All students attend 11 two-hour lectures – 8 in Semester 1 and 3 in Semester 2.

Each study group has 7 two-hour interactive workshop sessions. They commence in week 3, Semester 1 and run throughout the year.

Six optional surgery sessions are available.

All students are required to complete the interactive study guide accompanying the Exploring Strategy textbook. All communication is via the learning management system (not e-mail) and students should access it at least twice a week.

A series of guest lectures, ‘Strategy into Practice’, are organised over the course of the year. This provides an opportunity to hear how strategy is implemented in practice by leading business managers.

Tables 3 and 4 show topics, reading and cases.

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Table 2 Outline of module requirements Work area

Purpose

Group work

Read the core text (Exploring Strategy), other recommended reading and work through the interactive study guide Read and analyse the assigned

Understand the theory

Discuss the ideas in groups; consider how to apply them and what their implications are

cases using strategic management theory and the analytical techniques from other modules (e.g. finance, HR and marketing)

Collect and analyse information on the chosen organisation.

Use strategic management theory and the analytical techniques from other modules (e.g. finance, HR and marketing) Develop group presentation

Discuss and compare analysis Understand organisations in practice, and how to apply the theory

Develop research and

within groups, in workshops and via the online discussion group/discussion board facility.

Assess areas of overlap or disagreement. Identify areas of uncertainty or difficulty for surgery/workshop discussion or for debating via the online discussion board Discuss analysis within study groups. Assign areas for

analytical skills. Apply strategic management theory individuals to investigate in to an organisation greater depth for the group.

Identify areas of uncertainty or difficulty for surgery/workshop discussion or for debating via the online discussion board Discuss who is going to make the Simulate a team-based work presentation, how all group situation and a presentation members can be involved, to management – develop what format it will take. communication and Rehearse and polish the influencing skills presentation and prepare answers to questions that might arise Work in groups and discuss

Work on individual assignment

Apply strategic management theory to the chosen organisation and develop written presentation skills Utilise team work to simplify

Work on the case study for the exam

analysis and work towards a common aim of Success

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analysis. Do the final write-up individually

Compare analysis of the case study. Discuss areas of disagreement and decide what position to take. Help weaker team members to understand the issues

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Table 3 Lecture schedule Lecture (2 hours)

Topic

Preparation for lectures (Exploring Strategy text and online interactive study guide)

Semester 1 Week 1

Introducing strategy

Chapter 1 text and online

Week 2

The environment

Chapters 2 and 3 text and online

Week 3

Strategic capabilities

Chapter 4 text and online

Week 4

Strategic purpose Culture and strategy

Chapters 5 and 6 text and online

Weeks 5/6

Surgery sessions Business strategy

Week 7

Chapter 7 text and online

Corporate strategy and diversification International strategy Mergers, acquisitions and alliances

Week 8

Chapters 8, 9 and 11 text and online

Innovation and entrepreneurship Week

9

Chapter 10 text and online Evaluating strategies

Week 10

Chapter 12 text and online Surgery session

Week 11 Semester 2 Organising for success Week 1 Week 2 Week 3

Chapter 14 text and online Chapter

Leading strategic change

15 text and online Chapters 13 and

Strategy development processes

16 text and online

Surgery sessions

Weeks 4, 6, 8 and 9

Table 4 Workshop topics Workshop

Analytical focus

Preparation Case example Chapters 2

1

Business environment: PESTEL,

and 3.

five forces

Alibaba – the Yangtze River Crocodile Global forces and the advertising

Organisational resources: value

industry

2

chain, strategic capability

Case example Chapter 4. Rocket Internet – will the copycat be imitated?

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3

4 5

Organisational context: stakeholders, corporate governance, culture

Case example Chapter 6. Culture clashes at Barclays Bank

Corporate-level strategy: diversification, portfolios, parenting International strategy and the development and evaluation of strategic options

6

brand more than Richard Branson?

Case example Chapter 9. China goes to Hollywood – Wanda’s move into the US movie industry

Implementation of strategy:

Case example Chapter 15. Sergio

organising and change management 7

Case example Chapter 8. Virgin – is the

Marchionne – motor of change

Revision

Case example from last year’s examination

Workshops 2–6 allocate 30 minutes for group presentations.

5. A guide to using the work assignments This section contains guidance for using the work assignments that appear with each illustration, case example and at the end of each chapter in Exploring Strategy. These notes are not intended to be prescriptive and instructors are encouraged to use these assignments in ways that best suit your own learning situation.

The work assignments with each illustration are designed to consolidate one or two learning points from a part of the chapter. The questions with case examples at the end of the chapter take the main issues from each chapter and suggest ways in which readers can consolidate their understanding by applying these concepts to appropriate case studies, illustrations and/or organisations of their own choice. There are also integrative assignments that look across chapters. The work assignments are provided at two levels of difficulty in order to give flexibility in their use: 1. Standard are straightforward applications of concepts or frameworks to specific situations.

2. Advanced require a fuller analysis usually linking two or more concepts and/or situations and requiring reading round the issues.

The sections below provide chapter-by-chapter guidance on how teachers might use the work assignments to consolidate students’ understanding of the concepts in Exploring Strategy. There are, however, a few general guidelines that you may wish to consider in deciding how to gain most benefit from incorporating these work assignments into the students’ programme of study: •

Remember there are many different ways in which you can use these assignments. For example as: • topics for students to pre-prepare for a session, where the concept or issue will be discussed in the light of their preparation;

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•

a basis of a student’s presentation in a class session;

• a student assessment; • a self-study package, which students use to test their own understanding.

•

•

Although many of the work assignments draw on illustrations and/or case studies in Exploring Strategy, we have tried to write them in a way that does not make them entirely dependent on this specific source material. Most of these work assignments should be useable in a situation of the tutor’s/student’s choice.

The reverse is also true; the use of illustrations, case examples and case studies should not be confined to the specific issues in the work assignments. With case studies, you will find that the authors’ teaching notes in Section 12 suggest many other issues and questions in addition to those cited in work assignments.

6. A guide to using the case studies •

•

•

Section 12 contains comprehensive teaching notes for each of the case studies that appear in the text and cases edition of Exploring Strategy. These notes have been prepared by the authors of each case study and edited by Clive Kerridge and Jason Evans. The facing page is a guide to the main focus of each case study and also appears in the book. There is also a selection of cases from recent editions of the book which remain relevant for teaching.

These can be found on the companion website.

These case studies allow the reader to extend their linking of theory and practice by addressing the strategic issues of specific organisations in much greater depth – often providing solutions to some of the problems or difficulties identified in the cases. Cases are intended to serve as a basis for class discussion and not as an illustration of either good or bad management practice.

The case studies have been chosen (or specifically written) to provide readers with a core of cases, which together cover most of the main issues in the text. As such, they should provide a useful backbone to a programme of study but can be supplemented by other material. We have provided a mixture of longer and shorter cases to increase the flexibility for instructors.

In addition, there is a short case example at the end of each chapter (in both versions of the book). Some cases are written entirely from published sources, but many have been prepared in cooperation and with the assistance of the management of the organisation concerned. Case studies can never fully capture the richness and complexity of real-life management situations, however, and we would encourage readers and tutors additionally to take every possible opportunity to explore the live strategic issues of organisations – both their own and others.

The authors are always interested in the development of new cases relevant to the frameworks, concepts and issues of the book. If you have an idea for such a case, please be in touch in the first place with richard.whittington@sbs.ox.ac.uk, with a brief outline of the case idea and an explanation of how it might fit with the book. A small fee is typically paid for such cases.

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These are also available on the website ‘classic cases’ from previous editions of Exploring Strategy.

7. Exploring strategy teachers’ workshops Each year, since 1989, the authors have held one-day workshops for teachers who use either Exploring Strategy or Fundamentals of Strategy or are considering doing so.

These have been practical days concerned with how teachers might gain most advantage from the book and the associated teaching/learning aids (illustrations, case studies, work assignments, video and website materials).

In addition, these annual workshops have provided a forum to meet with the authors and other strategy teachers and share experiences of teaching problems and their solutions. Users of the book are often invited to give presentations on particular cases they have developed or teaching or assessing solutions that have worked for them and might be of interest to others. Please contact richard.whittington@sbs.ox.ac.uk if you are interested in delivering such a presentation.

Further information about forthcoming workshops can be obtained from the publisher: www.pearson-books.com

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CHAPTER 1

Introducing strategy Introduction Some changes to this introductory chapter include a new Section 1.1.1 on ‘Why exploring strategy’?

There are a great number of books on strategy and this new section explains what is distinctive about Exploring Strategy; its comprehensiveness and multi-disciplinary approach, its emphasis upon the practice and practicalities of strategy, and its exploration of world class and cutting-edge research covering a broad set of key of strategic issues in a wide range of organisational and geographic contexts.

There is also another new piece, Section 1.2, ‘What is strategy’ which contains a brief discussion on the origins of strategy and how we arrive at our definition of what strategy is. It is worth noting that, at this stage in the chapter, this is just the broad definition that has been used in earlier editions, but it is now unpacked and fully defined later on, on page 17. Section 1.3.1 on Strategic Position now gives greater prominence to ‘Purpose’ which is described earlier in the text (1.2.2). In the Sections 1.3.1 to 1.3.3, that summarise the main topics covered in the book, there is now much greater attention to key frameworks and models that will be discussed in each chapter. Section 1.6.1, that discusses exploring strategy in different contexts, now has a new subsection on an important type of organisation, the family business.

In the summary at the end of the chapter, the fuller definition of strategy is discussed. Overall the structure of the chapter is now shown visually by a new figure, Figure 1.1.

Illustration 1.1 Tesla Motors: the future is electric!

Many students will be familiar with the distinctive electric cars of Tesla. They may not be so aware that it is part of an overall energy system vision. Anyway, the main purpose of this Illustration is to introduce students to the range of issues that make up strategy. It touches directly on key topics introduced in this chapter, for example, strategic purpose (to offer the world a sustainable energy system); corporate-level strategy (moving from car manufacture to battery production for homes and businesses); and business level strategy (using disruptive technology). With respect to the specific questions: 1. On the definitions of strategy: in terms of Figure 1.1, Tesla seems to be more Chandlerian than Mintzbergian with a clear determination of long run goals and objectives (‘…which fits our overarching purpose to move from mine-and-burn hydrocarbons towards a sustainable solar electric economy’). It might be worth discussing whether this is typical of entrepreneurial startups than larger corporations and the pros and cons of this (a business plan can be pretty important to early-stage investors: see Chapter 10). At the same time, Tesla has a Porterian concern for using disruptive innovation to gain advantage in the car market. The theory behind Tesla’s purpose of offering the world a sustainable energy system is not clearly articulated in the illustration. However, from Drucker’s point of view it might be that burning hydrocarbons is

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causing global warming and the provision of an alternative sustainable and clean energy source will remove our carbon dependency (‘we also provide zero emission electric power generation’).

2. Accounting for Tesla’s success: on the Porterian principle, Tesla is clearly offering a different product to the rest of the industry with a high performance luxury, electric car priced competitively. Its follow on car, model 3, is designed to be a higher unit volume car with lower prices – again disrupting the car market. Its customers also value Tesla cars differently to other cars, as these products are attractive due to their sporting performance, zero emissions and free power. There is also no denying the important role that Elon Musk plays as a charismatic visionary as well as the enthusiasm of Tesla’s other entrepreneurs. However, Elon Musk’s recent outspoken comments have been taken badly by critics and investors, with shares plummeting both due to his comments and admissions and a company failing to meet its stated targets. This shows that entrepreneurs have a darker side, such as a propensity to take higher risks, that may not be palatable to more conservative investors. In addition, some entrepreneurs are excellent as visionaries, presenting entirely plausible futures, sometimes described, as ‘remembering the future’, but are far less able to deliver on promises, needing others to actually manage the process and implementation of strategy. This can lead to separation of vision from what can actually be implemented. Also, characteristic of many mega projects that need a certain amount of hyperbolae to ‘get off the ground’, it is perhaps not surprising that they do not always deliver to the extent promised. In broader terms, this also illustrates the difficulties of companies such as Tesla, implementing a strategy that aligns with its stakeholder context.

Illustration 1.2 Strategy Statements An important point in this Illustration is to show how strategy applies to widely different kinds of organisations – both a large technology company and a public university. Although the precise content of the two organisation’s materials vary, they both cover the major issues involved in a strategy statement: goals, scope and advantages/capabilities.

1. Strategy statements for Samsung Electronics and York University. Samsung is very clear about its goals ($400bn. in revenue, and top five brand by 2020; note its vision. According to Samsung’s new motto it intends to give the world inspiration to create the future of electronics – sounds more like a mission statement); its scope is clearly expanding, from mostly consumer electronics into health, medicine and biotechnology; and Samsung believes its competitive advantages lie in new technologies, innovative products, creative solutions and the brightest talent in the world.

York University is clear about its mission (to be a world leader in research, offer outstanding teaching and learning and offer all students an outstanding experience). Its scope is equally education, research, research training and addressing social issues. It does not say much about its distinctive capabilities although mentions important resources such as departments, colleges, clubs and societies and its link with the City of York.

On the face of it, there is not much difference between Samsung and York: strategy statements – and strategy – are relevant to both private and public sectors. However, you might notice that Samsung features a financial goal (revenues), while York prioritises a quality goal (world leading research, outstanding teaching and learning).

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It might be worthwhile challenging the claims to competitive advantage of both Samsung and York. How unique are Samsung’s competitive advantages (vis-à-vis Apple or HTC)? Does York have very substantial competitive advantages over many other universities internationally (for instance, your own!)? Here one could refer forward to Chapter 4, and its discussion of valuable, rare, inimitable and non-substitutable resources.

2. Strategy statements for students’ own organisations. This may well surface the fact that some provide more public information than others, and are often vaguer about particular issues, especially sources of competitive advantage. You might encourage students to discuss the reasons for this. Clear statements of detailed strategy – competitive advantage, precise objectives and so on – are rather more difficult to construct than broad claims about where organisations want to go. Asking students why they think this is the case should surface issues of the complexity of strategy development, competition and accountability.

Illustration 1.3 Strategists This Illustration is intended to reinforce the theme that strategy is something that students could get involved in personally – as a middle manager (Galina), as a strategy consultant (Chantal), as a strategic planner – ‘in-house strategy specialist’ (Harminder). All of these roles are further discussed in Chapter 16.

The two questions ask students to think about strategy in relation to their own education and careers.

The references at the end of the chapter point them to the major consulting firms’ websites and graduate employment website www.vault.com, all of which have an abundance of interesting and attractive material relating to strategy consulting in particular.

The three strategists also usefully raise concepts and techniques that appear later in the book. You might like to note particularly how Galina raises issues to do with the role of strategic planning versus emergence (Chapter 13), how Chantal talks of problem solving (Chapter 16) and Harminder explains the importance of analysis (Chapters 2, 12 and 16) and stakeholder management (Chapter 5) in order to achieve strategic outcomes.

Assignment 1.1 Strategy statements

The purpose of this assignment is to get students to engage with strategy in real organisations. These could be their own university or – better, in order to get a range – their actual employer or a desired employer. Students should be told to expect that the extent of information is likely to be variable.

Students could be asked to ponder why some organisations are more informative than others.

Published strategy information is often particularly deficient in two areas: •

Details with regard to objectives: Vision and mission statements are common. However, organisations are often reluctant to reveal much about their detailed objectives both for fear of

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giving clues about their precise strategy to competitors and because they do not wish to be held •

tightly accountable should they fall short.

Competitive advantages: Organisations often draw attention to various strengths or resources that they have, but they do not show how these actually constitute advantages over competitors. For example, many universities claim to have a long historical heritage, but they do not explain why this is actually an advantage in competition today or show how their heritage is really advantageous against other universities with similarly long histories.

It is useful to encourage students to be critical of the strategy information that is made available publicly. You might also alert them to the varying ways that organisations use the same term (e.g. vision and mission) in practice. Students ought to be aware of how strategy concepts often depart from the textbook in the real world.

Assignment 1.2

The exploring strategy framework

This assignment requires students to use Figure 1.4 as a guide to identifying the different elements in the strategy of an organisation. It can be very useful in terms of highlighting the scope of the subject and the organisation of the book.

The Airbnb case at the end of the chapter is designed for this exercise and the teaching notes for the case studies later in this manual provide a guide to its use. Using the student’s own university would be the basis for a more substantial piece of work, but would also reinforce the theme that strategy is close to home, and relates to the students’ own lives. Likewise, a desired future employer would be an engaging assignment.

It might be helpful to provide students with a ‘blank’ version of the three-circle model for them to fill in themselves.

Assignment 1.3 Strategy consultants Reinforcing the message in Illustration 1.3 (‘Strategists’), this assignment is intended to emphasise to students that strategy is not just for top managers or about the fate of big organisations. Strategy is a kind of work that they too could do. For many students, the attraction of courses such as marketing or human resource management is that they lead directly into a career. For strategy, that direct link to a job is often not so clear. This assignment asks them to consider what is attractive (and not so attractive) about strategy work in a strategy-consulting firm. It also encourages them to think about what they might need to do to get such work (typically a very high class of degree). Further information on the work of strategists is contained in Chapter 16.

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Assignment 1.4 Strategic management by context The aim of Assignment 1.4 is to help students understand that the elements of strategic management shown in Exhibit 1.4 are likely to differ somewhat between different types of organisation. This is raised in Illustration 1.2 of the text (Samsung and York University). Students should be able to see differences in different contexts. Try to get them to consider this in terms of specific organisations they know; or from articles in the press on businesses and business problems; or from the case section of the book as suggested below. Some of the differences which should be identified might be the following: A small business is typically heavily influenced by an individual (e.g. owner) or small group (particularly in a family business), so understanding the values and views of such stakeholders is vital. However, typically small firms also face important strategic choices about the basis upon which they compete (e.g. should they seek particular market niches?), how they configure scarce resources and maintain flexibility in strategic response. It can be useful to ask students to consider how these issues might change as businesses grow.

The complexity of a multinational business such as AB Inbev or SABMiller in the Megabrew case will mean that global logistics and structure and control are important. However, the students should also see that other elements of strategy are also there; both organisations have portfolio strategic choices to make; they have had to integrate after mergers and manage disposals; they face differences of culture between parts of the company and in different countries; and need to determine ways to control their operations across the world.

The influences on strategy in a public sector organisation require the student to recognise the nature of public control and influence. A wide range of stakeholders is likely to be important in both the public sector and not-for-profits. Determining and planning the allocation of resources in a context in which different stakeholders have significant influence is a major issue, as in the King Faisal Hospital and in Academies and Free Schools.

Overall, students should understand that all the elements of strategic management are important in most organisations; but that the weighting between these elements may differ.

End-of-Chapter Case

The rise of a Unicorn: Airbnb This case is based on the meteoric rise of Airbnb, a service provider most students will know and many will have experienced. Yet, they are unlikely to have considered the strategic implications of this business. Below, these notes address the specific questions highlighted in the case example.

However, it’s worth considering some interesting features of the case that offer opportunities for wider discussion.

Firstly, note that Airbnb has tapped into major environmental changes where technology has encouraged a much greater tailored responsiveness to the needs of customers. Also, note a change in

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social need to both consume and provide services. Secondly, the case focuses upon the development of Airbnb but, as discussed in Chapter 4, the repercussions of organisational history are a strong theme in Exploring Strategy. Thirdly, this case raises interesting issues about corporate purpose and sustainability that will be important to young managers in the future. In other words, whilst some seek profit, others seek to conserve the resources of the planet or be fair to its people: again, these are themes in Chapter 4. All these issues are areas that might be explored with students as a pointer to key areas for their own strategic management, that is, increasing importance of services, rapidly changing environments, sustainable development and the importance of strategic choice.

1. Strategy Statement Consideration of Section 1.2.3 reveals the following points of discussion: •

In terms of the goals of airbnb, these were not clearly articulated at the outset of the business, unlike Tesla in Illustration 1.1. However, they came to be connecting people seeking lodging with renters who have listed their personal properties on the Airbnb platform. As Airbnb has grown, these goals have been refined to be providing a home to people anywhere and they now appear to be changing to include the entire travel experience.

•

The scope of Airbnb’s activity has clearly changed in operational terms, reflecting their rapid

•

growth. Initially the founders stated they were just targeting conferences and festivals across America. However, the business soon outgrew just conferences and festivals. Airbnb then expanded geographically, and rapidly became global.

Their advantage is providing easy to book, significantly cheaper accommodation than traditional providers in a very wide variety of locations. Their website allows rapid matching of buyers and sellers, and their steps to provide security to renting and letting parties has allowed a degree of trust to be built up with high levels of repeat business. Airbnb benefits from network effects so that the more users it attracts, the more successful the business. The case also makes a lot of the airbnb culture as a distinctive feature of the company.

2. ‘Three horizons’ analysis Consideration of Section 1.2.1 reveals the following points of discussion: •

The core business of Airbnb is the matching of renters and letters for accommodation worldwide. At this point in time the business is still growing rapidly and there is no end in sight, so we cannot determine the end of horizon 1, however new competitors are beginning to enter the market. As the market is global, and the potential is vast, this does not pose an immediate threat, but the website and capabilities upon which the business is based would not be so difficult to copy, suggesting that the growth rate may turn downwards at some point.

As the nature of online businesses tends to be fast growth and, if the network advantage is not unassailable, fast decline, we must assume that the beginning of a slowdown in sales would mark the beginning of a steep decline (see Yahoo for instance).

•

In terms of horizon 2, it seems that Airbnb is trying to broaden the scope of its offering, so that one is not just booking accommodation but a local experience. This enrichment of

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product offering, may help to tie in customers and would be harder to replicate by •

competitors. This could extend the life cycle of Airbnb if it builds customer loyalty.

A horizon 3 Airbnb is considering becoming a lifestyle brand business encompassing a wider set of products than just accommodation. The focus is upon ‘belonging’ although it is not clear exactly what this might entail and whether it would really extend the strategic horizon.

3. Environment, strategic capability, strategic purpose and culture Consideration of Section 1.3.1 reveals the following points of discussion: •

A wide range of environment issues emerges with opportunities such as new geographic

•

territories, different types of property offerings and new social trends. Threats are also looming such as increased new competitors, local backlash from incumbents and regulatory constraints; Issues such as the increasing legislation with the need for permits and potential tax charges

•

are a threat to airbnb and may present opportunity for competitors; Airbnb has few physical resources, although the website is distinctive. Its brand is also well recognised although it remains to be seen if it is transferable to other services/products. It has developed useful capabilities including mechanisms for protecting clients and promoting properties for rental, although these are not distinctive to Airbnb. Airbnb’s main advantage is its network that grows in importance with every additional client.

•

•

Strategic purpose has emerged overtime (see strategy statement) and now has clarity in terms of growing a successful model to its limits. However, the strategic purpose going forwards is less clear.

The early entrepreneurial culture of Airbnb clearly impacted on its ability to raise finance and for the company to take-off. Although the enthusiasm of the entrepreneurs has been very important in terms of winning financial and market support for Airbnb, what is less clear is whether the culture that now exists can actually generate benefit for the business. One might argue that Airbnb does need entrepreneurial passion to create a driving vision for the third horizon, which is what the case is arguing for, although to consolidate its huge gains in the global property letting market there could be a good argument for a different company culture.

4. Alternative strategies Consideration of Section 1.3.2 reveals the following points of discussion: •

The case recognises Airbnb’s phenomenal growth and does not see any immediate threat to its business strategy. However, competitors are now emerging and this will inevitably begin to reduce Airbnb’s dominant position in its markets. Possible threats will be from different geographies with competitors better attuned to local tastes and also from core markets where competitors may better address specific profitable segments.

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•

Possible alternatives include growing the network even further to establish unassailable dominance – so local or more specialised competitors cannot build sufficiently large networks to be competitive.

•

Continue to strengthen the brand so that its values are hard to imitate.

•

Use brand to extend offerings into related products and services. Perhaps become a travel brand rather than just an accommodation brand. This would be closer to their core identity than a lifestyle brand. However, if they pursue the latter then they will need substantial investment to make it work.

Continue to expand into new geographies.

• •

Continuing to build the network and strengthening the brand are important options but not to invest in these areas would leave the company to imitation. At the moment, the distinctive aspects of Airbnb are not so substantial that they could not be imitated. Therefore, the company also has to consider how to fund a substantial step change in investment and this is probably why they are currently discussing an IPO.

5. Strategic thinking into action Consideration of Section 1.3.3 reveals the following points of discussion: •

Evaluation of the strategic options from above should reveal a number that are suitable,

•

acceptable and feasible; Yet, their future strategic direction cannot be developed without substantial investment as the

•

company is not generating large amounts of revenue; Airbnb strategy was originally emergent, then planned, when they accessed external funding, and one could argue that they are now in a creative phase of exploring what they might do next;

• •

Leadership and change management may continue to come from the original founders although Airbnb funders will have a major say in what comes next; In terms of the work involved going forwards, Airbnb managers have a lot to do to communicate their vision for the future and to sell this vision to investors in order for the IPO to be successful. Assuming it works, Airbnb should then have sufficient funds to invest heavily in its next strategic direction.

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PART I

The strategic position

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CHAPTER 2

Macro-environment analysis

Introduction This chapter focuses on the macro-environment, going beyond the industry level and raising issues of non-market strategy, for example, the political and the social context. Many of the issues here will help students immediately grasp the longer term and broad horizons of strategy as a subject. PESTEL analysis is very accessible and scenario exercises can be stimulating and reasonably doable, at least for more advanced students (see Assignment 2.4).

Chapter 3 focuses more specifically on industries and sectors, including of course Porter’s five forces analysis. Instructors should recognise that results of the industry and sector analysis can be fed back into the initial PESTEL analyses that students may have undertaken as part of any work related to this chapter. In other words, PESTEL is relevant to both Chapters 2 and 3. The same applies to scenario analysis.

Illustration 2.1 A PESTEL for the FANGs This illustration introduces a tool, as in the Figure, that helps in assessing the overall balance of threats and opportunities in a PESTEL analysis. The purpose is to go beyond the descriptive summary of PESTEL factors to an assessment of how rich or threatening the overall environment is. The focus is on the so-called FANGs – Facebook, Amazon, Netflix and Google (now Alphabet), treating them collectively as a sector (rather than as individual companies). As a sector, the overall balance appears towards threats, especially given some of the political, social, ecological and legal issues facing them.

However, as just about always, there are opportunities too, particularly on the technology side.

1. Taking one of the FANG companies, what do you think is its greatest macro-

environmental threat, and what is its greatest macro-environmental opportunity?

This is to invite students to investigate the strategic environment of a company that is likely be very familiar to them – maybe too familiar! It is also a good way of getting students to start doing their own practical business research. Students will typically have at least an intuitive understanding of how to do this kind of research themselves and the exercise need not take too long. But fairly obvious and accessible starting points for information on the FANGs are the websites of the BBC News, the Guardian and equivalents around the world.

More specialised but free media sources would include technology commentators such as Fast Company, Techcruch and Wired. The Management Discussion sections in the various companies’ annual reports will be useful too. Perhaps less obvious are the companies’ 10K reports (freely available from the US Securities Exchange Commission), which will provide 32 .

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a formal statement of Risk Factors, as well as a Management Discussion. An important point to draw out is that important risks are likely to involve more than markets and competitors, the usual preoccupations of strategy analysis.

2. Have the Opportunities and Threats changed since 2018? How would you update this analysis?

Writing the manual before publication of the book, the question is hard to answer here. But it does encourage students to do some of the research described above in order to update the illustration. It may be useful to be particularly alert to political factors: on Figure 2.3, most of the FANGs have become much more exposed to civil society organisations, hence moving up the vertical axis.

Students often worry about spill-overs between categories: for instance, curbs on energy consumption could be considered under the Political and Legal categories as well as the Ecological one. This kind of spill-over is common and students should not be too concerned.

PESTEL is a checklist: the important thing is to have checked all possible kinds of opportunities and threats, under one category or another.

Illustration 2.2 Intelligence Unit 8200 and the small world of Israeli hi-tech This illustration is intended to help students recognise the importance of organisational fields using network concepts such as density, hubs and brokers. It might even be useful to ask students to sketch a sociogram of Unit 8200’s network (Figure 2.5).

1. Identify at least one important hub and one important broker in the Unit 8200 network.

A hub is a particular organisation responsible for connecting many network members.

Clearly the Unit itself occupies the most central hub position, but so too does the 8200 alumni association. A broker is a particular organisation that connects otherwise separate groups of organisations. The Advanced Technology Park at Be’er Sheva is an increasingly important broker, soon connecting Unit 8200 with Ben Gurion University, the National Cyber Bureau and many multinational technology companies. The venture capital firm JVP is another important broker.

2. If you were a foreign cybersecurity company, what would you do to access Israel’s expertise?

It would clearly be important to access the Unit 8200 network. You might recruit Unit alumni, locate in the Advanced Technology Park, acquire well-connected local companies, invest in the venture capital firm JVP and establish research collaborations with Ben Gurion University.

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Illustration 2.3 Juul duels with the rules Juul has come under a lot of fire for its e-cigarettes, with lawsuits proliferating in the United States and its Chief Executive being forced to stand down in late 2019. The Illustration raises the importance of the Political and Legal environments, with informal rules being important too.

1. Assess the relative importance of formal laws and informal norms for the development of Juul’s strategy in the United States.

It is clear that the four lawsuits filed in 2018 are playing a part in changing Juul’s strategy, with a stronger position regarding marketing to children. However, Monsees’ declaration that underage consumers are a negative, and the restriction of flavours and social media advertising, suggest that the company is also responding to informal normative pressures from society as a whole. Juul wants to pre-empt further formal legal action by conforming more visibly to norms in the institutional environment. Juul appears to have been blatant in offending prevailing norms and legal backlash could cost it its business. In this sense, informal norms and formal laws could be closely connected. As in Israel, hostile legal changes can come quickly.

2. How do you think the different institutional environments internationally have influenced Juul’s overseas strategy so far and what kinds of countries do you think it should prioritise?

Juul’s overseas strategy is very responsive to different institutional regimes. It chose Israel for its first overseas market because of the absence of regulations on e-cigarettes. It carefully calibrated its products to the United Kingdom’s regulations of the time. It then launched stronger formulations in the more liberal Canada. Finally, it expanded into Indonesia, where there is no regulation at all. It is currently considering a number of other Asian countries. It makes sense for Juul to prioritise large markets with a relatively relaxed smoking culture and low regulation. India is a large market where about 70% of males smoke: unfortunately for Juul, in late 2019 the Indian government banned all e-cigarettes. The law can clearly be highly influential on strategic opportunities and threats.

Illustration 2.4 Colouring the World PwC’s scenarios for the world of work describe the futures of most students in your classes: they should have a point of view! However, the scenarios are nearly as interesting for what they leave out as for what they include.

1. What are the other megatrends that might have been considered beyond the five here?

Here an appeal to PESTEL could help. The five megatrends explored in the illustration correspond to most of the PESTEL factors: Technology with artificial intelligence etc.; Social with demography; again Social with urbanisation; Economic with China and similar; and finally

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Ecological with resource scarcity. It is striking, however, that PwC does not directly consider Political or Legal trends with regard to work. In many Western economies, the last four decades have seen deregulation of the workplace in some basic economic respects (trade union rights and so on) but greater regulation in some social respects (gender equality, maternity and paternity rights and similar). Growing regulation of social issues at work seems very likely but there are also signs – with the rise and spread of legal minimum wages for example – that broader regulations on the basic economics of work are returning. Looking forwards to 2030, it is quite possible that there will be a sea change in work regulation, with a reversal of some of the trends of the last four decades. It might be worth asking why PwC did not address this directly: as a private-sector consulting firm, it may not have been comfortable so directly discussing apparently political issues.

2. What are the different implications of these scenarios for an international consulting firm such as PwC? Which scenario would it like best; which would it like least?

Yellow World, with its social enterprises and community businesses, does not seem to have much space for a large, corporate-orientated consulting company such as PwC. Its best hope in this world would be to advise remaining large corporations on how to match the shift amongst many employees towards more meaningful work.

Red World, with its relentless competition, might not afford much opportunity for a consulting company such as PwC either. Profit margins are likely to be too low for the large fees currently enjoyed by consulting firms. However, there may be a market in advising on rapid innovation.

PwC would probably have to shrink, grow leaner, and specialise in advice on issues such as innovation, restructuring and cost-cutting.

Green World does have a place for large corporations, and the complications of social responsibility, trust and climate change are exactly the sorts of things that a consulting firm could advise on, with good fees as well. PwC should invest in developing solutions to the challenges of Green World. In 2019, Green World seems like the world we are currently inching towards, though the emphasis varies between countries.

Blue World, with big business dominant, is not so far from the kind of environment that originally spawned large consultancies such as PwC. There will always be problems to advise on and big businesses should, as ever, be able to afford the large fees. For PwC, the implications of Blue World are largely ‘business as usual’.

Overall, given the big, complex and comfortable businesses that have traditionally been its market, PwC probably would like most Blue World, while seeing plenty of opportunities in Green World. Yellow World is definitely threatening, and Red World would probably involve smaller margins and less patient clients.

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Thinking Differently The crowdsourced forecast Why might experts make bad forecasters in the case of (i) Presidential elections; (ii) new product developments?

Expert judgement is liable to both excessive detachment and excessive attachment. In Presidential elections, experts (middle-class, highly educated and based in Washington or similar cosmopolitan cities) become too remote from ordinary voters to understand their true feelings.

Voters may even hide their true feelings when asked or polled because they believe that the experts will disapprove of them. Experts are, therefore, liable to underestimate feelings that are different to those familiar to themselves. It was for this kind of reason that, in June 2016, many experts were surprised by the outcome of the United Kingdom’s European Union referendum, which opted for so-called Brexit.

In the same way, detachment from the lives of many people may also encourage elitist experts to underestimate the markets for new products that are not appealing to their own tastes.

Mencken’s warning may be disagreeably expressed but is still apt: ‘No one in this world … has ever lost money by underestimating the intelligence of the great masses of the plain people’. But another problem for experts in particular technologies or products is that their expertise may be too closely attached to the success (or failure) of those technologies or products. Experts are more likely to have vested interests than people who have not yet made any connection with the matter in hand.

Assignment 2.1 PESTEL analysis

PESTEL is a useful starting point for environmental analysis. Illustration 2.1 provides some initial guidance for students. In particular, the Figure is designed to encourage students to take a view (on the balance of positives and negatives) based on their analysis, rather than simply list forces and influences. A good follow-up question is to assess which of the forces are likely to be most significant in driving industry change. Students should justify their views in terms of the evidence from the past and the likely impact in the future of any particular influence.

For simplicity, it is sensible to guide students to do a PESTEL of a relatively undiversified business (like BP, BMW, Airbnb or Uber) rather than of a diversified conglomerate (like Alphabet or General Electric).

Assignment 2.2 Political risk analysis

This could be very valuable for students as they will be forced often to challenge their unexamined assumptions about their countries of origin, and engage with the judgement of expert analysts about issues that they may take for granted. As in Thinking Differently, these 36 .

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experts can of course be wrong, but students will be obliged to assemble their own evidence to support their beliefs. Also, expert political risk analyses may be suddenly outdated, for example, by a change of oil price for many oil-producing nations or by an unexpected election or referendum result (see the Brexit referendum above).

It might be wise to anticipate that some students may be reluctant to engage in objective political risk analysis of their own country (e.g. China, Egypt or Russia). It is, therefore, sensible to offer students a choice. It might also be sensible to set out marking criteria that explicitly give more weight to the evidence provided than the final view about political risk.

Assignment 2.3 Forecasts

This assignment will help familiarise students with the key sources of economic forecasts, at the same time as cultivating a cautiously critical view of them. Note, while this may helpfully integrate any economics courses that students may have taken, it does not really require a formal training in macroeconomics. Everybody, regardless of training, should be able to have a stab at this assignment. Indeed, instructors might want to specifically warn students from being too technical in their economics.

Students should be able to tell differences between forecasts and outcomes from widely available statistical and media sources. Media sources – especially the Economist, the Financial Times, the Wall Street Journal or local equivalents – should be able to give some views on reasons for lower or higher growth than original forecast. The question assumes a focus on world economic growth, but one could equally specify growth for a particular country or region (the suggested sources typically forecast for important countries and regions as well). Again, it might be wise to discourage a technical discussion of which reasons were most important for any difference between forecast and outcome: the point is to encourage awareness of the impact of economic cycles along with a critical approach to forecasts, not to train students to be macroeconomic forecasters themselves.

Assignment 2.4

Building scenarios Guidelines for the construction of scenarios are given in Section 2.4. It is recommended that students follow these, building either two or four scenarios for a given industry. The work done in Assignment 2.1 on PESTEL should provide the bases of identifying the key forces or influences which will enable them to do this. Some of the problems of scenario building should be emphasised to students:

•

Students may try to build in too many factors and, therefore, not be able to limit the number

•

of scenarios. Identifying ‘megatrends’ may help here.

They may find difficulty in generating scenarios with a coherent and compatible set of factors.

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•

Some may be wary of having to exercise judgement; and others will confuse judgement with hunch. Try to encourage a realistic debate that tests out assumptions and projections against known facts and trends.

A particularly useful exercise is to ask students to build scenarios for an industry for which the Text and Cases edition has a company case (or for their own industry/company, if possible) and then to assess the company’s strategic position in the light of the different scenarios (e.g. see the notes above on the brewing industry).

One of the issues that might surface is the ease or difficulty with which scenarios can be constructed. It usually emerges that scenarios are much easier to construct where the number of key forces at work in an industry is relatively few. They are less easy to construct if the number of important forces is high because the number of variables the student is trying to handle becomes too great. Thus, there may be a limited number of reasonably simple forces at work in national brewing, retailing or utility industries; however, there will be many more complex forces in other industries, for example, automotive or contemporary digital businesses that work with high technology and deal with many international political and legal regimes. It might therefore be wise to nudge students to consider lower-tech and national industries.

Integrative assignment 2.5 Full analysis of an industry or a sector

This assignment would be a demanding research project over a significant part of the course. It is, however, a very good test of students’ ability to apply tools to real data appropriately, as well as developing their research skills. Students will see it as practical and, if allowed a choice of sectors, relevant to their own interests.

Good research resources are essential. As well as free web-based resources such as company reports, trade association statistics and some government or supra-governmental (EU, UN) reports and statistics, students would likely need limited-access resources such as the business press and journals available through Business Source Premier, Factiva or Proquest and reports from organisations such as Euromonitor and Mintel. Your institution’s librarian will advise you on what is available to students and how proficient they are likely to be in using such sources.

You would also want to guide students on which industries or sectors to choose. Very broad industries – for example, the world airline industry – are likely to overwhelm students with data.

It might be helpful to encourage focus – for example, the airline industry in India, or similar.

Industry focus also reduces the risk of plagiarism. There are many student assignments of a similar nature available for a fee on the web, and it would definitely be wise to avoid allowing students to research the same industries in successive years. Requiring a specific focus on particular themes (e.g. internationalisation) or some less common concepts (e.g. the strategy canvas, cycles of competition, etc.) can also reduce plagiarism. Insisting on precisely citing sources for key data and points (through an endnote system or similar) makes simple plagiarism harder too, as well as being good practice: lots of out-of-date references might indicate plagiarism.

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If allowed, students will find very helpful a couple of example assignments from previous years to guide them roughly on what they are supposed to do. A report length limit of around 2,000– 2,500 words would encourage students to focus on what is really important. Requiring an ‘executive summary’ would also force students to consider what is really important and what are the key implications.

Over a two semester course, this assignment could be stage one of a two-part assessment regime; the second semester could have as an assignment asking students to consider implications of the first part for the strategy of a particular company in the original industry or sector.

Case Example Alibaba – the Yangtze River Crocodile This case focuses on PESTEL, and could also provide a good way of introducing a discussion of politics, social networks and technological forces in particular. The case has been updated since the 11th edition, particularly in the light of Jack Ma’s broad withdrawal from the company’s management. The case might also be a good opportunity to draw on the contemporary knowledge of any Chinese students in your classroom.

1. Carry out a PESTEL analysis of Alibaba at the time of the case. Evaluate the balance

of opportunities and threats, using same kind of figure as in Illustration 2.1.

A basic PESTEL figure is below. Although there are many positive opportunities in the Macro-environment, there are also many threats. It might be worth observing how many of these opportunities and threats are tied to state policy, not exclusively just under the Politics category: for example, the state’s policies regarding supporting ecommerce and moving away from heavy industries are positive, but the anti-corruption campaigns and the antiforgery investigations are potentially negative. The issue of growing competition may be more fully explored after students tackle Chapter 3, but JD.com appears better placed to tackle the technological threat of a shift to mobile commerce. Overall, this analysis would suggest that the balance of opportunities and threats is turning more negative for Alibaba.

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2. Draw a basic sociogram of Alibaba’s network (see Section 2.2.3 and Figure 2.5). Explain why this network may be useful.

A basic sociogram is offered below. What will be immediately apparent from this sociogram is the international connections enjoyed by Alibaba under Jack Ma, pictured in the middle: he is well connected in China, Japan and the United States. It is noticeable that these connections are not just business connections but also political.

This network is useful because it may help Alibaba deal with political threats, a growing issue in the PESTEL analysis above. Connections with leading investment bank Goldman Sachs (‘the squid’) will help with access to capital markets in the United States, possible acquisition opportunities, political contacts and favours, as well as general market access.

Softbank and Yahoo may help with connections to latest Japanese and American technological and consumer trends, though very likely links with the second company are a declining asset. A good question to ask is the extent to which these kinds of connections might be important, for example, in Russia and Brazil, where they are growing fast but so far do not seem to have made the equivalent links.

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Eugenio Loreto/EPAEFE/Shutterstock T. Lesia/Shutterstock

Globe Turner/Shutterstock

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CHAPTER 3

Industry and sector analysis

Introduction This chapter is entirely focused on industry and sector analysis. Porter’s five forces analysis remains the core of the chapter, but the structure of this section (3.2) is slightly changed. The industry definition comes first as an integrated part of industry analysis (3.2.1) followed by the competitive forces (3.2.2). This is now followed by a section on complementors and network effects. Illustration 3.3 provides a step-by-step overview of how to conduct a comprehensive industry analysis including a brief example. Section 3.3.2 on Industry structure dynamics and the Industry life cycles now has a brief discussion on rejuvenation of products and services (e.g.

Netflix). Other illustrations and the end-of-chapter case example have been updated. The latter emphasises how significant Google and Facebook and other social media have become for the advertising industry.

Illustration 3.1 Busted banking barriers?

Entry barriers into the banking industry have traditionally been unusually strong and this industry thus allows one to illustrate all five important entry barriers discussed in Section 3.2.2. The first question requires students to make a careful analysis of the strong barriers to entry into banking. The second question extends the illustration and focuses on more strategic barriers. They include banks keeping or driving out competitors and students are asked to reflect over ethical considerations in relation to this type of strategic behaviour.

1. Evaluate the strengths of the banking industry’s entry barriers according to Porter’s criteria.

Here students should make a step-by-step analysis of all the entry barriers into the banking industry. However, as with five force generally, it is important they carefully justify their analysis and provide clear conclusions. They should clearly motivate why a particular entry barrier is of importance and how. A common mistake in five force analysis is to make more or less thoughtful lists of five force sub-factors without carefully analysing their impact on the industry and its various competitors. Banks have grown, often by acquisitions, into mega entities and today huge scale and experience barriers protect banks from new entrants. The market structure in many markets is categorised by an oligopoly situation with reduced competition. Banks have also vertically integrated to take control over not only distribution, but also supply channels, for example, of mutual funds. They have fiercely retaliated when new entrants have managed to enter often by acquiring them. Although government action lately has aimed at increasing competition as indicated in the illustration, this has been preceded by several years of legislation that rather have increased entry barriers by increasing 41 .

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capital requirements, which has implied even larger bank entities. Finally, banks often have incumbency advantages based on their brands, government relations and IT infrastructure.

2. How would you evaluate the ethical behaviour of banks trying to keep competition out?

Question 2 extends the illustration by asking students to think about ethical considerations in relation to the five forces and strategy more generally. Hence, banks deliberately trying to reduce competition by different means. To what extent can this kind of strategic behaviour be defended in the pursuit of an improved competitive position? This question is especially pertinent in the banking industry as its ethical standards have been questioned repeatedly during the last few years. It should also be considered that higher standards of ethical behaviour and a more significant contribution to society are increasingly expected from companies today (see Chapter 5). It’s simply no longer enough to supply products and make money for shareholders, companies, including banks, need also to have high ethical and sustainability standards and contribute to society more broadly. In fact, this is increasingly expected by large institutional shareholders like government retirement funds and the like.

Illustration 3.2 Facebook’s network fears Network effects’ have probably become the most ubiquitous phrase used in relation to online businesses and Facebook’s strategy is centrally focused on them. There are network effects in an industry when one customer of a product or service has a positive effect on the value of that product for other customers. Even though most industries aren’t subject to them, they can make an industry highly structurally attractive with high barriers to entry, low intensity of rivalry and strong power over buyers (as entrants and rivals can’t compete with competitors’ larger networks when buyers become locked into them). If network effects are present in an industry, they thus need to be carefully considered in addition to the five forces when trying to understand industry structure and strategic positioning. The questions for this illustration encourage students to consider what network effects are and think about how the students’ own and their friends’ decisions in choosing social media networks are part of them.

1 Why is Facebook so powerful? Would you switch to another social network if it had better features even if it was considerably smaller?

2 What other social media networks and apps do you use that you think could beat Facebook? Why? 1. Why is Facebook so powerful? Would you switch to another social network if it had better features even if it was considerably smaller?

Facebook is powerful because of the network effects they dominate in the social media industry. Here students thus need to specify what exact network effects Facebook builds on and why they are so important for the company and how this is related to the students’ own decisions when choosing social media networks. A new social media network or platform may include cool features that attract some students. However, if none or very few of their friends use them and they thus can’t communicate with them via the network it’s doubtful 42 .

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still they would keep choosing them over Facebook. The more customers that use Facebook the better for everyone in the network of users or put simply: more users = more value users.

The value of Facebook thus increases for a user when the network of users grows as this implies a larger number of friends, messages, updates, photos, videos, etc. Cooler, but smaller social media networks may thus not be threatening for Facebook if they don’t attract enough users.

2. What other social media networks and apps do you use that you think could beat Facebook? Why? Students are likely to mention a range of social media platforms, for example, Snapchat and TicToc but they need to think carefully to what extent these can build on network effects to beat Facebook. The reason why network effects have become something of a holy grail for online businesses is the possibility for a single company to become the first to build and thrive on them and thus get ahead of competitors. While Facebook currently is in the lead, the illustration shows that several other social networking sites preceded Facebook and it’s not unconceivable that Facebook one day will face a superior social media platform. To stay ahead, Facebook thus must continuously update and improve their services and ensure that users’ switching costs are sufficiently high to lock them into their particular service.

Whatsapp and Instagram could have threatened Facebook as they increasingly attracted more teenage users, but they were acquired by Facebook. As Facebook has faced continued declines in engagement among its teenage users, they also tried to acquire Snapchat for $3 billion in 2013, but the founders declined. In brief, students should consider the attractiveness of the social media network or app and their potential for growth and thus network effects.

Illustration 3.3 Steps in an industry analysis This illustration emphasises that industry analysis is something more comprehensive than a quick five force overview. Too often students make quite thin and weak five force analyses including simple descriptions and lists of factors that may or may not influence industry attractiveness and competitive strategy in the industry. Some steps in an industry analysis may even be ignored, like defining the industry clearly (step 1), determining the strength of each force (step 3), assessing possible changes in the five forces (step 5) and drawing final conclusions (step 5 and 6). The first question thus invites students to make a proper industry analysis step by step. They are forced to think carefully about important industry forces and factors. Students should have some insights into the coffee shop industry, and it provides a fairly easy-to-understand case of industry analysis. The second question turns to the primary aim of the five force analysis, helping organisations and companies to understand their competitive position and what strategy to pursue. Surprisingly, this last step in industry and five force analyses is often ignored altogether.

1. Help Emily and go through each step above. Answer the questions and make a complete analysis. What is your assessment of the industry?

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illustration and not only step 3 including the five force analysis (step 6 is considered in Question 2 below). The five force analysis can be summarised using the plot device introduced in Figure 3.5. The radar-plot might look roughly such as the following:

2. Based on your analysis: How should Emily handle the different forces? What strategic options should she consider?

This question emphasises what the ultimate aim of an industry and five force analysis really is: to assist organisations or individual entrepreneurs like Emily in formulating and developing strategy. There are several strong competitive forces in this industry some of which Emily possibly could influence or at least avoid, but others would be more difficult for Emily to do something about. Forces that are somewhat weaker present an opportunity for Emily to exploit to her advantage. Students should be invited to propose different strategic options and strategies but be required to carefully motivate how they handle each of the competitive forces and any potential change in them. While students are likely to suggest a whole range of strategies the most feasible ones are likely to involve some type of differentiation (see Chapter 7) to neutralise the rather strong entry and rivalry forces. The most challenging aspect of the supplier force is access to good locations as rents at the most attractive sites are likely to be high. Even though customers are quite strong based on the wide range of coffee shops to choose from in rural areas they are not too price sensitive and they can be attracted by a differentiated concept.

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Illustration 3.4 Consolidation across the UK charity and public sectors The aim of this illustration, of course, is to show that industry structure analysis is relevant to notfor-profits and the public sector as well. Indeed, charities appear ruthlessly competitive and the public sector too risk developing multiple entities that perform similar activities and indeed compete with each other.

1. How would you describe the current charity industry structure? How could it change if consolidation increases and what would be the benefits and disadvantages?

The first question encourages students to think about the current industry or sector structure and how it possibly could improve. Currently, it can be described as highly fragmented and competitive. While the mergers and increasing concentration levels imply growing industry consolidation it is far from a consolidated structure. The largest charities are growing fastest through mergers and acquisitions and there may be widespread advantages to the sector moving towards a more oligopolistic situation.

2. Which of Porter’s five forces are creating problems for the UK’s charity sector?

The second question points to at least three of the Porter’s forces as causing problems: (i)

There are low barriers to entry, with ‘constant refreshment’ of the industry by new charities.

(ii) There is strong buying power on the part of local authorities commissioning services. (iii) There is intense rivalry because of the number of competitors and tendency towards overlap and duplication of charitable services. In addition, they face substitutes in the form of local authorities and other agencies performing services in-house, but at this point, the trend in that respect was in their favour. The suppliers of funds – donors – have many alternative charities to give to.

Thinking Differently From five forces to one Porter’s five competitive forces framework has sometimes been criticised for focusing too much on competition and not taking value creation into consideration. This Thinking Differently is based on a Harvard Business Review article based on game theory that rather has value creation as the point of departure for competitive analysis (M. D. Ryall, ‘The new dynamics of competition’, Harvard Business Review, 91(60), 2013, 80–87). The question invites students to think carefully about how this emerging view differs from Porter’s:

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How would you compare the ‘value capture model’ with Porter’s five forces when making an industry analysis? What’s the benefits and drawback of each?

Most obviously, the difference relates to what was mentioned above: the primary focus on competition in Porters view and the emphasis on value creation in this alternative view. The question, however, requires students to engage more deeply with the objective of an industry analysis. Is it more defensive in trying to keep entrants and competitors out and buyers and suppliers weak as in Porters framework or is it to identify opportunities to create more value as in the ‘value capture model’? There may also be ethical considerations to consider here – what perspective is more legitimate, trying to make other actors (entrants, competitors, buyers and suppliers) weaker as in Porters view or trying to generate a higher value together with those? While this illustrates the potential drawback with the Porter framework one of its primary benefits is of course its intuitive appeal and relative easiness to apply (indeed, that is why it has become one of the most popular strategy tools!). The benefits of the ‘value capture model’ should be clear from the above – a changed perspective with the primary focus on value creation and how value can be created together with other actors, but also incorporating what actor that can appropriate most value from this. One clear drawback compared to the five forces is the lack of a clear and easily applied framework for applying this model in practice, something that also is acknowledged in the Harvard Business Review article.

Assignment 3.1 Five competitive forces Five forces analysis is an absolutely fundamental technique in strategy. Section 3.2 should give students the ability to carry out a basic five forces analysis of any industry. They should be encouraged to consider all of the elements of each of the five forces; so, for example, under barriers to entry, scale and experience effects, channels, retaliation and so on. The radar-plot technique of Figure 3.4 should only be used as a summary once the full analysis is complete; the danger is of it being used to short-circuit the analysis. Students should be expected to do more than simply list elements; they should clearly identify the implications (positive or negative) of each. The second question about conclusions for industry attractiveness should underline the importance of drawing out implications, rather than just listing.

Assignment 3.2 Network effects Network effects are often considered a demand or buyer side economies of scale and is present when one customer of a product or service has a positive effect on the value of that product or service for other customers. Students are here invited to choose an industry that they think involve network effects and thus need to think carefully if it is the case that the more customers that use the core service or product in the industry the better for everyone in the network of users (hence, more users = more value for users). Students are likely to choose various social media networks like Facebook described in Illustration 3.2 or other online and businesses like Google, Amazon and Apple. Network effects are especially prominent in software and hardware industries and in businesses where platforms play an important role, like the video console gaming industry. Note that Chapter 7 now has an extended discussion of platform businesses.

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One online business example is online auction sites as the value of this service increases for a customer and user as the network of other sellers and buyers grows. eBay in the online auction industry has built their strategy on these network effects. They got an early start and attracted a large network of sellers and buyers and today the amount of goods on their site surpasses any competitor, which makes their service more attractive compared to others. However, to stay ahead, eBay, and others that build on network effects like Airbnb and Uber, must continuously update their services and ensure that customers’ switching costs are sufficiently high to lock them into their particular service.

Assignment 3.3

Comparisons between industries and over time This assignment allows students to build on Assignment 3.1 in order to consider the investment implications of differences between industries and change over time. The assignment is a substantial one if relying on students’ own research. However, time can be saved if two case studies are used (e.g. pharmaceuticals or brewing, perhaps looking backwards at change over the past three to five years, rather than change in the future). Similarly, students may save time by using the radar-plot technique (Figure 3.4), as in the discussion of Illustration 3.3.

It is important to note the two follow-up questions. Explicitly asking for justification helps students avoid the superficial analysis which is easy to do with five forces. Asking the question about investment helps students think about concrete implications, again something that five forces analyses often neglect. By looking over time, students will learn to be cautious about investing in industries with declining attractiveness. By comparing industries, students can also consider industry attractiveness in their diversification decisions, an issue picked up in Chapter 8.

At the same time, it is worth countering the implications of five forces analysis with two thoughts:

• •

Industries that are highly attractive are likely to have high barriers to entry, so the costs of entry may outweigh the benefits of entering.

An industry that is becoming relatively unattractive may be neglected by competitors, and, if you enjoy a strong competitive advantage in that industry, it may still be a source of profit to you.

Assignment 3.4 Strategic groups This assignment builds on the notion of strategic groups and strategic space outlined in Section 3.4.1 in the text. Figure 3.6 provides an example of how the exercise could be carried out. This could, for example, be applied to the advertising industry: •

Key strategic dimensions might come under either of the scope or resource commitment characteristics in Section 3.4.1 – for example, product range or extent of vertical integration.

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Possible key strategic dimensions in the advertising industry might include geographical

•

•

coverage, diversification, size of firm, degree of creativity and so on. Key strategic dimensions can most easily be identified by first carrying out a five force analysis as it will result in recurrent themes of importance in the industry, like economies of scale, differentiation, etc.

Students are encouraged to draw more than one strategic group map if they believe that more than two dimensions are important. It is useful to ask them to consider the extent to which different bases of such maps give rise to similar or different configurations. They might find, for example, that however the maps are drawn up, some companies always tend to end up in the same groups. In other words, some companies may have a very similar set of strategic characteristics along many dimensions.

Students are asked to examine the strategic group maps to see if there are any under- populated ‘white spaces’ in the industry. For example, in brewing, is there an opportunity for a giant specialist in making ‘own brand’ beer for the large retailers? However, students should assess carefully why there are few competitors in any such white spaces. White spaces can often turn out to be dangerous ‘black holes’ rather than attractive opportunities.

Assignment 3.5 Critical success factors and the strategy canvas It is very likely that students will concentrate on success factors that are salient to them as consumers – for example, the product ranges of a clothing retailer. Less visible elements, such as ownership by a diversified parent company, may be neglected. However, for a short assignment, this need not matter too much: the essence is comparison in order to identify areas of (potential) competitive advantage. The key insight of a strategy canvas is to encourage competitors to compete where it is relatively easy to secure a significant advantage (Blue Ocean), and not necessarily to compete fiercely over the top- rated success factors if advantage can only be obtained at very considerable cost (Red Ocean). You can introduce less visible, but strategically significant elements after they have done their basic analysis.

Integrative assignment 3.6 Full analysis of an industry or a sector

This assignment would be a demanding research project over a significant part of the course. It is, however, a very good test of students’ ability to apply tools to real data appropriately, as well as developing their research skills. Students will see it as practical and, if allowed a choice of sectors, relevant to their own interests.

Good research resources are essential. As well as free web-based resources such as company reports, trade association statistics and some government or supra-governmental (EU, UN) reports and statistics, students would likely need limited-access resources such as the business press and journals available through Business Source Premier, Factiva or Proquest, and reports from organisations such as Euromonitor, Key Notes and Mintel. Your institution’s librarian will advise you on what is available to students and how proficient they are likely to be in using such sources.

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You would also want to guide students on which industries or sectors to choose. Very broad industries – for example, the world airline industry – are likely to overwhelm students with data. It might be helpful to encourage focus – for example, the airline industry in India, or similar.

Industry focus also reduces the risk of plagiarism. There are many student assignments of a similar nature available for a fee on the web, and it would definitely be wise to avoid allowing students to research the same industries in successive years. Requiring a specific focus on particular themes (e.g. internationalisation) or some less common concepts (e.g. the strategy canvas, cycles of competition, etc.) can also reduce plagiarism. Insisting on precisely citing sources for key data and points (through an endnote system or similar) makes simple plagiarism harder too, as well as being good practice: lots of out-of-date references might indicate plagiarism.

If allowed, students will find very helpful a couple of example assignments from previous years to guide them roughly on what they are supposed to do. A report length limit of around 2,000–2,500 words would encourage students to focus on what is really important. Requiring an ‘executive summary’ would also force students to consider what is really important and what are the key implications.

Over a two-semester course, this assignment could be stage one of a two-part assessment regime; the second semester could have as an assignment asking students to consider implications of the first part for the strategy of a particular company in the original industry or sector.

Case Example Global forces and the advertising industry The case on the advertising industry enables students to practice using the key techniques of Porter’s five forces and complementors, strategic groups and PESTEL. The accompanying Strategy Experience simulation further explores strategic issues in this industry.

This teaching note is focused on the key techniques introduced in Chapter 3 for undertaking an Industry and Sector Analysis of the Advertising Industry. The analysis should enable students to: •

assess the attractiveness of this industry, competitive rivalry and profit potential;

•

consider the basis for building competitive advantage in this industry and strategies that will deliver sustainable advantage in an industry undergoing such radical change by influencing the five forces;

•

Use strategic groups and strategic dimensions to understand competitors and analyse strategic opportunities

1. Carry out a five forces analysis of the advertising industry with the data provided. What is the strength of the five forces and what underlying factors drive them? What is the industry attractiveness?

Buyers: The Top 100 advertisers globally account for nearly 50% of measured advertising.

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companies, such as Unilever and Procter & Gamble, who are re-negotiating accepted advertising agency remuneration models which require advertising agencies to share the risk as well as the success of their advertising campaigns created on behalf of their clients.

Suppliers: Major advertising agencies have the power to use contracts to lock-in specialist suppliers with specialist knowledge to help differentiate their offering on an exclusive basis.

Small- and medium-sized agencies have to compete for these suppliers. Google is a potential supplier to advertising agencies, but is also a potential substitute.

Substitutes: Google and other search companies compete for a share of the marketing budget targeted by advertising agencies. In the case, it is pointed out that WPP the world’s largest advertising agency sees Google as both a supplier (‘friend’) and a competitor (‘enemy’) and coined the term ‘frenemy’ for its relationship with Google.

Similarly, social media can be seen as acting as advertising substitutes, with the powerful word-of-mouth effect of Twitter, Facebook and other messaging apps replacing traditional media in advertising terms.

New entrants: Technologically focused ‘digital’ agencies and consultancies – in the form of companies such as Accenture and IBM and accounting practices like PwC and Deloittes – are taking more advertising budget away from ‘traditional’ media focused agencies. There are different levels of response from advertising agencies, depending on their size and access to capital for acquisitions.

Rivalry: Lower advertising budgets in Western Europe and North America; new technologybased entrants, increase the scope for rivalry. However, sector expertise and creativity can mitigate price-competition. The larger global players are consolidating into multi-discipline conglomerates by buying emerging specialist companies [this is explored in section 2]. It might be useful to ask students to compare how smaller and mid-sized agencies compete with the top five global players. Small and mid-sized agencies must have specialist industry sector knowledge in order to compete. Among the mid-sized to smaller agencies, the emergence of price competition.

Complementors: The Five Forces Framework should be used with care and is not necessarily complete in itself. Some industries have used the identification of a ‘sixth force’ in the analysis: organisations that are complementors rather than simple competitors. So a key question in the advertising industry is: are search companies such as Google, Bing and Baidu complementors, suppliers or competitors to advertising agencies? [Note: this is also explored in the section 2: Strategic Groups.] Where Google is used by advertising agencies as a ‘media company’ it can be viewed as a supplier and possibly a complementor if data is shared to ‘add value’ for strategic insight/foresight to the advertising agencies’ offering.

Where Google is used by clients of advertising agencies and does not give the agency complete access to search data analytics (as has been pointed out by WPP), Google could be regarded as a competitor or substitute. However, Google could be seen as a complementarity organisation if the relationship is open and mutually beneficial, that is, friend.

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Industry Attractiveness: The ultimate aim of a five forces analysis and the fundamental question at its conclusion should typically be: is the industry attractive, in the sense of offering profit opportunities? It is easy to be dismissive about the advertising industry.

However, Table 2 in the case indicates pretty good profit margins for the major players. It is also instructive to check the advertising industry or media industry (of which advertising is a large part) stock-market indices, as against the market as a whole. Over the last five years, US advertising agencies tended to outperform the New York Stock Exchange as a whole.

This indicates that investors at least regard it as a relatively attractive industry, with good future profit potential. It is fairly easy to get free online updates on the advertising sectoral indices through BigCharts.com and similar. This would be a useful student exercise.

What is the industry attractiveness? Which forces are becoming more negative or positive for the major advertising agencies?

As can be seen from the case, rivalry has intensified with the development of new technologies, and the resultant emergence of search and social media as potential advertising media substitutes.

Plus buyers, the clients of major advertising agencies, have put pressure on advertising agencies to accept a different remuneration model which has impacted on revenues and margins.

In order to counter these negative forces, major advertising agencies with the capital available have acquired smaller emerging rivals and suppliers in order to differentiate themselves from their competitors by being able to offer a wider range of specialist advertising and marketing services.

On the positive side, the holding company model offers a continued degree of flexibility and specialisation within individual agencies – the ‘unbundling’ of services – as clients demand more services in specialist channels in non-traditional areas and online, while being able to keep a global client’s overall spend within a single overall set of agencies. Unbundling may signal the structural end of the older-style ‘one-stop-shop’ agency, but it is also an indication of the increasing complexity of advertising offerings and the advertising value chain – stretching across holding companies, advertising agencies, media agencies and marketing services.

The rise of the global holding companies is a solution to grasp some of the positives of globalisation and convergence, while creating enough scale to serve global company needs effectively.

It has also forced the advertising industry to develop new business models and to go beyond advertising to focus on consumer-centric marketing tactics.

2. What strategic group dimensions and strategic groups can you identify? What are the differences between them?

Strategic groups can be mapped on two-dimensional charts with key dimensions or axes. For example, for the advertising industry, the dimensions: (1) Global reach and (2) Range of specialist services between creative and analytic have been chosen to demonstrate strategic groups in the advertising agency.

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Other dimensions could be: (1) Range of industry expertise (pharma, retail, auto, fmcg) (2) Reputation for advertising effectiveness.

The dimensions in the chart have been chosen because they are characteristics that are shared by the top performers and specialist companies emerging in the advertising industry. These dimensions also show differences between the strategic groups as follows: The large global multi-company holding companies such as WPP, Omnicom, Publicis and Interpublic offer a wide range of creative advertising services over a large global footprint.

Traditionally they have relied on a reputation for creatively effective advertising (as evidenced by winning creative awards) but are losing a significant share of advertising budgets to agencies and consultancies specializing in data analytical, consumer targeting services, shown in the middle right and bottom left of the chart. Where they have the financial resources, their response has been to make acquisitions in this space.

Mid-sized agencies often cannot compete on range of services, acquisitions or global footprint so have to look for their competitive advantage through creative reputation and/or quality of service.

The strategic group concept is useful in three ways: Understanding competition – the company can focus on its direct competitors, that is, those within its particular strategic group.

Analysis of strategic opportunities – it enables the identification of the most attractive strategic spaces. Can the company take advantage of another strategic space? For example, would Google wish to compete with the technology consultancies like IBMiX, who in turn are trying to compete with the multi-company advertising agencies like WPP by offering creative services? As mentioned earlier, WPP and other agencies in the top 5 have made acquisitions at the analytical end of the dimension in order to acquire specialist knowledge.

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Understanding and analysing mobility barriers – obstacles to moving from one strategic group to another. These are equivalent to the five forces barriers to entry. In the chart, it might be more advantageous for a specialist digital agency to expand its global reach than expand into creative media advertising and compete with ‘boutique’ advertising agencies or the mid-sized agencies.

3. What PESTEL factors are driving changes in the industry? What are the main threats or opportunities that arise from the factors below?

PESTEL ANALYSIS ISSUE

IMPACT ON BUSINESS

POLITICAL Rise of consumerism in China and Africa Potential change of governments in key markets At a regional or an individual country level, legislation/regulation regarding what can and cannot be claimed in advertising and at what level personal data can be used for advertising.

ECONOMIC Potential trade war between US and China – disruptive to brands and agencies.

Recession in key markets directly affecting advertising budgets.

Inflation having an impact on consumer spending

SOCIAL / CULTURAL Shifting demographics as western world population growth slows and major population increases in developing countries, where for example, 50% of the population is under the age of 25.

Transition in society from digital immigrants to digital natives who have been interacting

Positive impact on the advertising industry Spending on advertising traditionally goes up in periods running up to elections Both positive and negative – an understanding of countries/regions that are ‘liberalising’ and encouraging consumerism and those that are not

Potential negative effect of exclusion from major markets and knock-on budget cut-backs Negative effect of budget cut-backs

Negative effect on personal disposable income and therefore spending on consumer goods

Potential negative as western Europe stagnates.

Potential positive if the company can take advantage of the growth markets.

Potential negative as advertising agencies have to learn and adapt to producing a different form of advertising.

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with computers, video games, smartphones and social media since childhood The rise of ‘direct action pressure groups’ especially to do with the environment, for example, movements such as Extinction Rebellion

Direct effect on changing laws which impact on manufacturing and consumer behaviour.

TECHNOLOGICAL Widening range and sophistication of electronic media and video channels to reach consumers Increasing amount of personal data (big data) on consumer preferences and behaviour being collected and analysed

Potential negative for traditional advertising agencies if they do not invest in the capabilities to take advantage of these developments Potential positive – enables more precision and personalisation of advertising messages

The rise of artificial intelligence and programmatic buying of media advertising

Penetration of smartphones in developed and developing countries ENVIRONMENTAL Climate change and worldwide initiatives (UN and individual countries) and legislation which impacts on energy efficiency, cars, travel and food production UN’s environmental guidelines affecting manufacturing companies in automotive and fmcg Rising awareness among consumers of environmental issues with regard to sustainable production of food and other consumer items Impact on the environment of production processes and packaging including plastics Awareness of personal travel and personal carbon footprint.

Potential andconsumers negative –precisely represents system forpositive targeting andnew swiftly with on-line ads Potential negative for traditional advertising agencies if they do not invest in the capabilities to take advantage of these developments Opportunity for advertising agencies to work with clients to develop their environmental profile Promote themselves and their products as ethically and environmentally responsible, for example, refillable container movement

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LEGAL / LEGISLATION At a regional or a national level, legislation regarding what brands can and cannot be advertised What can and cannot be claimed in advertising and how genders are portrayed

What personal data can be used for targeted advertising

Depending on region/country, there could be positive or negative impact on what brands can be advertised, for example, cigarettes and alcohol.

Also, some countries have laws about how gender is portrayed in advertisements. Some countries or regions may be more or less attractive as a consequence.

The use of personal data is also controlled in some countries.

NOTE: It is worth reminding students that the advertising industry is a B2B industry, that is, the customers or clients of advertising agencies are other companies, for example, retail, manufacturing, service/media companies, as well as governments and charities. While advertising agencies produce advertisements seen by consumers, their customers are not consumers, they are companies.

THE ‘SO WHAT’ QUESTION After completing a Five Forces and PESTEL, the important question is: so what? How do the identified factors impact negatively or positively on the industry? At a strategic level, what action should be taken?

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CHAPTER 4

Resources and capabilities analysis

Introduction Chapter 4 now uses the terms ‘resources’ and ‘capabilities’ as most contemporary strategy texts do and the latter corresponds to what we in earlier editions referred to as ‘competences’. ‘Capabilities’ is commonly used in both research and in practice-oriented writings and in discussions within organisations. ‘Analysis’ has been added to the chapter title to emphasise the various analytical tools like VRIO, value chain and value systems. The discussion of tacit organisational knowledge has been moved to be more closely linked to inimitability in text (end of Section 4.3.3). The various dynamic capabilities examples have been moved up front in the Dynamic Capabilities Section 4.5. Illustrations and end-of-chapter case examples have been updated and, for example, AstraZeneca is discussed in Illustration 1 now and Samsung included in Illustration 5.

Illustration 4.1 Resources and capabilities 1. Categorise the range of resources and capabilities highlighted by the executives above in

terms of Section 4.2 and Table 4.1.

2. To what extent and why might these resources and capabilities be the basis of sustained competitive advantage?

3. Imagine you are the general manager of an organisation of your choice and undertake the same exercise as in Questions 1 and 2 above.

The questions require students to consider resources and capabilities as explained in Section 4.2 and summarised in Table 4.1. Such consideration might begin with a simple categorisation exercise as suggested in Question 1. For example: •

The technical resources or competencies of the Australian Red Cross are impressive. They not only have specialist technical resources like project, financial and IT skills, but behavioural capabilities in people using and performing these. The issue here, however, is whether the students would see them as threshold or distinctive in the sense of the discussion in Section 4.2.2. It could, for example, be argued that for a not-for-profit organisation, these resources and capabilities are threshold requirements. The counter argument is that they are distinctive underpinning the global Red Cross humanitarian organisation as distinguished from other (local) humanitarian organisations.

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•

AstraZeneca emphasises a distinctive and detailed mix of resources and capabilities when they

•

discuss their strategy. Moreover, they underline how they keep on developing various pertinent categories of them. It is more and more common that organisations and corporations stresses their specific capabilities and skills as a foundation for their strategies. The discussion might be around how, or if, they are distinctive from any other global pharmaceutical companies and thus critically evaluate the degree of distinctiveness.

Infosys too claims distinctiveness not only in terms of lab resources including their network of 600 researchers, but also capabilities in the way the company attracts, educate and retain high quality engineers. Again, the question arises as to which resources and capabilities are simply threshold ones needed to be ‘in the business’ they are in and which go beyond that and provide distinctiveness? For example, if they build their resources and capabilities through acquisitions then presumably their competitors could do so as well.

Question 2 then prompts students to consider which of these is likely to provide competitive advantage, thus providing a basis for moving onto Section 4.3. They may argue that all of the resources and capabilities they identify might do so. If so, it is useful to push them further and ask which would be more difficult to imitate and, therefore, which bases of competitive advantage are likely to be more sustainable. Students may, for example, evaluate if Infosys’ lab network and capabilities to attract and train new employees is more imitable than for AstraZeneca. This should lead them to discover that evaluating inimitability is far from straightforward. They will see that it is a quite intricate exercise not the least because you need to evaluate the resources and capabilities relative to competitors and you may not have complete insight into their resources and capabilities. This leads to question 3 and an evaluation of the extent that you in fact can analyse these intricate matters.

Illustration 4.2 Groupon and the sincerest form of flattery 1. Andrew Mason admits that Groupon has thousands of copycats, yet his assessment is that

imitating Groupon is difficult. Do you agree?

2. Assess the bases of Groupon’s resources and capabilities using the VRIO criteria (Figure 4.2 and Table 4.2).

3. If you were the new Groupon CEO, what resources and capabilities would you build on to give the company a sustainable competitive advantage?

It is not always easy to determine to what extent an organisation’s resources and capabilities are distinct and can provide for competitive advantage. It may even be challenging for top managers themselves to evaluate this. This illustration discusses this in the context of Groupon, which went public in 2011 and was the largest internet business IPO ever at this time. There has since been an extensive debate among industry experts and financial analysts to what extent Groupon’s resources and capabilities are inimitable and this illustration exemplify core features of this debate. The illustration can also be used to make an initial VRIO analysis (Figure 4.2 and Table 4.2). It illustrates the challenges in making these types of evaluations. Hence, it shows that while it is rather easy to 57 .

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distinguish how some resources and capabilities provide for sustained competitive advantage it is much more difficult for others. This is particularly true for completely new and evolving businesses such as Groupon’s.

The first question refers to Andrew Mason’s various statements and his emphasis on Groupon’s operational complexity. While he made some peculiar statements during his reign as CEO, he is probably right that the complexity of the operations could keep serious competitors out temporarily. It is not easy to enter and grow a business of similar size and complexity as Groupon. The question, however, is if this ‘operational complexity’ is rare and inimitable and thus fulfils the VRIO criteria, which is discussed under the next question.

The next question involves an analytical exercise in terms of VRIO: value, rarity, inimitability and organisation support. Three capabilities can be distinguished in the illustration. First, the operational complexity that CEO Andrew Mason refers to, second Groupon’s technology platform and third their customer base. In the tables below each one of these is analysed according to the VRIO criteria.

First, as indicated in the illustration the customers clearly Value Groupon’s services and the capabilities that support these seems valuable. The major questions then rather concerns to what extent Groupon’s capabilities are Rare and Inimitable.

Second, then is the question of Rareness. The customer base is clearly rare and no one of Groupon’s competitors has as large customer base. However, as indicated in the illustration, if other companies that have even larger customer bases would enter the business this could be a clear threat. Amazon already had their own daily deal model even if it is yet not a direct competitor and Facebook had a similar business for a while, but exited. These larger companies could presumably also handle the organisational complexity, but it is still rare and not readily accessible for many smaller entrants in the daily deal industry. The technologies in Groupon’s platform, however, are clearly not rare and they have acquired IT technology from other companies themselves to build this capability.

The next issue is Inimitability. The customer base is not easily imitable as it is subject to network effects or externalities – the more users in a network the better for every customer (see Chapter 9).

It will be difficult for competitors to catch up as long as Groupon’s customer base keeps on growing.

As the company grows, it also becomes increasingly expensive for competitors to acquire customers as they have to offer them even better deals. However, again, should Amazon, Facebook or Google chose to fully enter they could possibly leverage their much larger customer bases. In addition, Groupon needs to make sure that their customers return to keep the customer base thriving.

While Andrew Mason is right that it is not easy to build their operational complexity including 10,000 employees across 46 countries including thousands of salespeople talking to tens of thousands of merchants every single day, it is still imitable. It may take considerable time to imitate Groupon’s operations, but it is still possible and probably easier for larger web-based companies such as Amazon.

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The technology platform can easily be assembled and acquired by Groupon’s competitors even if it may take a while. There are IT systems and consultant companies readily available on the open market that could be bought.

Finally, we have the issue concerning Organisational support. There is not quite enough information in the illustration to assess to what extents the mentioned capabilities are supported by other capabilities in the organisation, but Groupon clearly exploit all three capabilities in their business.

The third question concerns the overall question of sustained competitive advantage. The VRIO analysis shows that Groupon has temporary competitive advantage in their customer base and organisational complexity and of these two capabilities, the former probably comprise a longer competitive advantage. This is indicated by both ‘temporary’ and ‘sustained’ competitive advantage being marked below in the table (see the VRIO table below). However, this extended competitive advantage depends on Groupon keeping on growing the customer base and keeping on investing in it. Of course, it also depends on the moves of the competitors, as mentioned Amazon could enter with similar deals models.

Finally, it can be noted that after being fired Andrew Mason launched his own debut music album of ‘motivational business music’ with the title ‘Hardly Workin’ including the leading song ‘Look No Further.’

Customer base

Rare?

Inimitable

Valuable?

–

No Yes Yes Yes

Competitive implications

?

Supported by the organisation?

No

–

No

Competitive parity

Yes

–

–

Temporary

No Yes

(Yes) (Yes)

advantage Sustained

Yes

Competitive disadvantage

competitive competitive

advantage

Organisational complexity Valuable?

Rare?

Inimitable?

No

–

–

Yes

No

–

Yes

Yes

No

Yes

Yes

Yes

Supported by the Competitive implications organisation?

No

Competitive disadvantage

– (Yes)

Competitive parity Temporary

competitive advantage Sustained competitive advantage

Yes

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Technology platform Valuable?

Rare?

Inimitable?

Supported by the organisation?

Competitive implications

No

–

–

No

Competitive disadvantage

Yes

No

–

(Yes)

Yes

Yes

No

Yes

Yes

Yes

Competitive parity Temporary competitive advantage competitive Sustained advantage

Yes

Illustration 4.3 An integrated value system in the Nepalese poultry industry 1. Draw up a value system and value chains for another business and organisation in terms of the activities conducted within each part (see Figure 4.5).

2. Would it make sense to integrate or outsource some of the various value chain activities in this value system in relation to the focal organisation?

3. What are the strategic implications of your analysis – what would you do?

The questions on this illustration are designed to encourage students to undertake a value chain analysis similar to that shown in the illustration with a view to drawing conclusions and implications from it. The illustration shows how analysing a value chain raises the question of what value-creating activities an organisation should be focusing on and what activities it has which do not create a value.

Questions 1 and 2 may be pursued by the students following the guidance in Section 4.4.2 or by following the sort of steps outlined in Chapter 2 in Exploring Techniques of Analysis and Evaluation in Strategic Management (edited by Veronique Ambrosini, Prentice Hall, 1998): Understanding and Using Capital Value Chain Analysis by Andrew Shepherd or a similar explanation of value chain analysis. In doing so, it is useful to encourage students to put values on the elements of the value chain – even if they are not exact. The business that is used does not necessarily have to be a complex one: indeed, there may be advantages in using something quite simple. But if a case study is required, a number of the cases or illustrations in the book might be suitable, for example, Ryanair or H&M. In relation to Question 3, as Shepherd points out in his chapter (see above), ‘knowing what your value chain does well is difficult to identify but is most important in the face of rising competition. Value chain analysis is an excellent means of disentangling the complexities to reveal what is really going on between a company and its market’. Managers may know this implicitly but the value chain exercise can make this explicit. In turn, this mapping may have significant implications, as it did in this illustration, by flagging up the value adding capabilities being missed leading, in effect, to a change in the business set up.

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Illustration 4.4 SWOT analysis of Pharmcare SWOT is often cited as the most widely used strategy tool. The questions are designed to prompt critical thinking about its use: 1. What does SWOT analysis tell us about the competitive position of Pharmcare within the industry as a whole?

Question 1 should prompt consideration of scoring methods of analysis. Whilst the high scores may indicate key strengths or weaknesses, care has to be taken about relying on the significance of the numbers because of the following reasons: •

Items in the analysis are not necessarily equally weighted. Indeed, a single factor could

•

dominate the whole analysis. Weighting of factors can be used to allow for this.

It must be remembered that the numbers are the result of managerial analysis and debate,

•

rather than based on objective measurement.

They are also dependent on the extent to which competitors have similar strengths or weaknesses: scores have to be taken into account in comparison with competitor strengths and weaknesses.

•

It does not allow for what is not known. For example, what new entrants yet to appear on SWOT might bring to the industry.

2. How readily do you think executives of Pharmcare identify the strengths and weaknesses of competitors?

Given the importance of analysing competitors, Question 2 raises the issue of how readily this can be achieved. In fact, executives often know a great deal about competitors and, where they do not, they often have access to people who do (e.g. former employees of competitors now working within their own company). Indeed, often managers can take a more objective view about their competitors than they can about their own companies!

3. Identify the benefits and dangers (other than those identified in the text) of a SWOT analysis such as that in the illustration.

There are a number of other benefits and dangers than those identified in the text that might be surfaced. For example, in terms of benefits: • SWOT provides the possibility of a structured summary drawing together many of the

•

insights from the sort of analyses outlined in Chapters 2–4.

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debate, and can help avoid the tendency that some have to focus on the issues that they have personally decided are most significant to the exclusion of others.

However, there are some other dangers and problems: • Students and managers often think that an answer will fall out of a SWOT analysis. That is unlikely.

There is also a danger of spurious accuracy. Because there are numbers on a page, • students can feel that this is some sort of evidence or proof with more value than is really there. The evidence lies in the logic underpinning the scores, not in the scores themselves.

Illustration 4.5 Dynamic capabilities (and rigidities) in mobile telephone companies 1. What type of dynamic capabilities could help smartphone companies avoid becoming stuck in their old resources and capabilities?

2. Why is it difficult for some firms to successfully seize opportunities and reconfigure their capabilities?

3. a. Can you sense any possible future opportunities in smartphones? b. How could they possibly be seized and developed (reconfigured) by the smartphone companies?

The primary aim of this illustration is to distinguish dynamic capabilities from ordinary capabilities, show what dynamic capabilities can be and provide some concrete examples of them. In addition, it will help students realise that there is no guarantee dynamic capabilities will last forever.

The first question points to David Teece’s three forms of dynamic capabilities discussed in Section 4.2.2. (Sensing, seizing and reconfiguring). The important point is to distinguish these kinds of ‘meta capabilities’ from ordinary capabilities. However, it is also evident that even though a company has dynamic capabilities it is still no guarantee for keeping ahead of competition permanently. Thanks to their dynamic capabilities, Ericsson and Motorola were pioneers and early moved beyond their current (ordinary) capabilities and instead built (ordinary) mobile phone capabilities. Nevertheless, over time, they got stuck in these and they instead became rigidities. Next Nokia moved ahead thanks to their dynamic capabilities, but they also got trapped and Apple took their place. Then Samsung has grown tremendously and has been successful in certain segments. This shows that while dynamic capabilities can temporarily help renew and recreate resources and capabilities there is no guarantee they will last indefinitely.

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technologies may hinder companies from sensing what is around the corner and even if they sense it their old technological and other capabilities may not be enough to seize this and reconfigure the old technological and organisational structures.

The third question looks to the future and allows student to think about and analyse the possible dynamic capabilities of Apple and other mobile telephone and smartphone companies (Huawei, Oppo, etc.) and to what extent they will be able to keep on prospering long term. Does Apple and Samsung have the dynamic capabilities to stay ahead as a leading smartphone company? Students could be asked to think about possible mobile/smartphone features that these companies need to sense and how they could do this. For example, there may be particular qualities that students would like in smartphones and specific ways for the companies to sense this (like surveying students!). Provided any new features the question next is how the mobile/smartphone companies could seize them and reconfigure themselves to build new (ordinary) capabilities. Hence, this exercise essentially adds a row under the Samsung example in the table in the illustration and asks students what future sensing, seizing and reconfiguration may include (and what companies that may be involved).

Thinking Differently Micro-foundations of capabilities This Thinking Differently focuses on new developments in strategic management research focused on what underlies organisation’s resource and capabilities. The research has attracted considerable attention during the last few years and the role of people’s behaviour have been particularly emphasised. The question encourages students to think about what microfoundations including individual behaviour that may underlie resources and capabilities: Pick an organisation mentioned in this chapter (e.g. Apple, IKEA, Microsoft, Ryanair, Starbucks, and Zara) or one you admire and would like to work for. What micro-foundations (e.g. individuals and their competences, skills, networks, choices, activities) do you think underlie their resources and capabilities?

Here students should think carefully about what individual’s competences, skills, networks, activities, etc. that may underlie the resources and capabilities of various organisations. For example, students can think about the role of Steve Jobs for the emergence of Apple’s resources and capabilities (they may also have seen the movie ‘Steve Jobs’ from 2015, which paint a portrait of his early product launches at Apple). Founders of companies naturally play an important role for the subsequent development of resources and capabilities like Swedish Ingvar Kamprad at IKEA, American Bill Gates at Microsoft and Spanish Amancio Ortega Gaona at Zara and Inditex. Similarly, top managers more generally can play this role, like Michael O’Leary for Ryanair and Howard D. Schultz for Starbucks. The emphasis, however, is not merely on founders and CEOs; in Apple’s case, for example, not only Steve Jobs and current CEO Tim Cook play an important role for Apple’s resources and capabilities, but Jonathan Ive, long-time chief designer, who Steve Job named his ‘spiritual partner’. Likewise, people’s interactions more generally based on organisational culture, for example, can underlie resources and capabilities of an organisation; IKEAs strong culture is evidence of this.

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Assignments A number of the questions are designed to assist students in progressively developing their understanding of the concept of resources and capabilities. It might be useful to ask students to base a number of the questions on one organisation such as Rocket Internet or (from the case book) H&M (specifically written with these sort of assignments in mind), Formula 1 or the reader’s own organisation. In doing so, it is important that students are able to identify the following: •

Issues that are critical to the competitive advantage rather than simply a necessary part of

•

the company’s activities.

Linkages in the organisational activities that make up capabilities and between capabilities and resources are important aspects of sustaining competitive advantage, and they should be identified (see Section 4.3.3 in the text).

•

The configuration of the value chain and resources and capabilities will change depending on the competitive strategy of the organisation. Within any industry, individual companies will position themselves differently. Students might be asked to identify two or more strategic groups and compare and contrast the configurations of resources and capabilities that are needed to sustain competitive advantage in each group. This should underline the fact that repositioning of an organisation is usually a major task.

Assignment 4.1 Resources and capabilities The purpose of this assignment is to encourage students to understand the differences between resources and capabilities and their different values to an organisation. A good way of doing this is to get students to provide their own examples for the different parts of Table 4.1. Further, encourage students to consider those resources and capabilities which are at the threshold level as distinct from those that are distinctive and might provide the basis for competitive advantage.

Assignment 4.2 Value, rarity, inimitability and organisational support This assignment goes beyond Assignment 4.1 in encouraging students to consider, more substantially, the bases upon which resources and capabilities might provide competitive advantage using the VRIO framework. Illustration 4.2 (Groupon), the Rocket Internet end case and the H&M case (in the Text & Cases book) provide further descriptions of how to use the VRIO framework. There are a number of lessons that should come out of this assignment:

•

There are unlikely to be single or simple resources and capabilities that meet all of these criteria.

• More likely, it is a mix of resources and capabilities that might do so; but again, students should see that the criteria pose a stiff challenge.

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•

Students should consider which of the criteria are necessary for the achievement of competitive advantage. For example, value of itself does not provide competitive advantage unless it is combined with some other criterion such as inimitability.

Assignment 4.3 Value chain analysis In asking students to map the key value activities, the value chain framework is useful. However, value chain analysis can get quite complex, especially if costs or asset values are being allocated to value activities. Nonetheless, the sort of analysis shown in Illustration 4.3 can be very valuable. In doing a similar exercise, invite students to consider the key value activities in particular.

In terms of the wider value system in which that organisation is operating, invite students to consider where the value adding activities reside. For example, what does it make sense for Ryanair or Rocket Internet to focus on in terms of their value-creating activities as distinct from others in its value systems; or indeed compared to competitors? Students might also discuss whether or not the organisations that they have been studying choose to retain activities which might be better performed by others within the value system.

Assignment 4.4 Benchmarking

There are many examples of benchmarking that students could refer to. Indeed, many of these have been the subject of fairly public (and sometimes academic) critique. In the United Kingdom, for example, these include the Research Assessment Exercise (RAE) in universities (or on an international level the Financial Times (FT) rankings of business schools), school league tables and the rankings in the National Health Service (NHS) or for schools. Indeed, it might be possible to provide the students with the background information on any of these together with critiques of such exercises as a ‘case study’ of benchmarking. If so, encourage the students to provide their own critical feedback rather than rehearse the critique provided. Some of the questions they might ask include the following: What would students see as the relevant benchmark, for example, for a hospital, hotels, hi-tech companies, service intensive companies and consultancies?

Or should a benchmarking exercise be ‘strategy driven’? To take the example of universities, some research-led university business schools might argue that their best in class benchmark organisations are top US schools; other more practitioner schools might argue it is consultancies; teaching orientated schools might argue it is other high-quality-teaching-based institutions. This in turn raises the question of whether a common benchmarking exercise makes sense.

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Assignment 4.5 Changes in resources and capabilities It might be useful to encourage students to look at changing capabilities over time within a particular industry. For example, if they chose the automobile industry, they might see that resources and capabilities to do with the standardisation of production were an early form of achieving competitive advantage through low cost in the car industry. By the 1970s/1980s, advantage was being achieved more on the back of technical excellence and superiority providing greater reliability and userfriendliness. This technical expertise and the ability to manage suppliers continued to deliver advantage in the 1990s through the provision of additional extras and gadgets. By the turn of the century, however, students might observe that the different manufacturers were finding difficulty in finding resources and capabilities to provide competitive advantage. A number of them were turning to diversification as an answer by looking for complementary, added-value services to support their range of cars. The students might further note that many of the car manufacturers found it very difficult to achieve success in this and may point out that this is not surprising, given that the historical development of their capabilities has largely been to do with manufacturing excellence. This also raises the question to what extent the car manufacturers have dynamic capabilities that allow them to renew and recreate their (ordinary) resources and capabilities. To create new or extend or modify extant capabilities they of course need to be able to sense and seize new opportunities and reconfigure themselves to build new capabilities.

Given the lack of innovation in the industry beyond the development of electric and hybrid cars, students may observe a lack of strength in dynamic capabilities. It could also be discussed if it at all is possible to within extant companies to build completely new resources and capabilities. For electric and self- driving cars, entirely new companies like Tesla and Alphabet’s Waymo (from Google’s selfdriving car project) have been pioneers. Another approach for this assignment is that students choose to continue the analysis of the changes in the mobile/smartphone industry (see Illustration 4.5).

Integrative assignment 4.6 SWOT The text explains our view that SWOT is most valuable as a summary/pooling together of insights gained from the various concepts and frameworks discussed in Chapters 2–4. The critical issue is, therefore, the justification of the items that students have chosen to be on their shortlists. In particular, student groups should be encouraged to:

•

Avoid long lists. For example, the lists in Illustration 4.4 of main strengths and main weaknesses

•

would have been refined from a much longer list through a process of debate and some redefinition and grouping. The focus should be on relative strengths and weaknesses versus specific competitors or other similar organisations. This process of debate is valuable in itself.

Explain the relationship between these main areas of strengths or weaknesses and the key issues

•

Recognise that individual factors may be either a strength or a weakness, depending on the choice

in the environment. There is a danger that these end up as two separate lists and the matrix shown in Illustration 4.4 fails to ensure that the connections are made. of strategies.

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•

State priorities and weightings given to individual factors – again through the process of using the matrix.

• Consider how they would use what emerges from the SWOT analysis for purposes of strategy evaluation and in particular the screening of options for suitability (see Section 1.2 of Chapter 1).

In summarising answers to the question, it can be useful to ask students to explain in two or three sentences their overall assessment of the organisation’s position. This is a good test as to whether or not the points above have been addressed properly.

Case Example Rocket Internet – will the copycat be imitated?

This case focuses on the resources and capabilities of Rocket Internet including the key distinction between threshold versus distinctive capabilities and an evaluation of them using the VRIO framework.

Question 1: Analyse the resources and capabilities of Rocket Internet.

Typically, a student would divide the components of resources and capabilities and analyse the threshold and distinctive categories, which when compiled might look similar to the example given below.

Threshold Resources

Threshold Capabilities

•

•

• • •

Technology platforms Offices and facilities Expert teams in various functional areas VC money/financing

• •

IT skills General managerial skills including distribution and marketing Incubator support capabilities (marketing, design, web platforms, distribution, etc.)

Distinctive Resources

Distinctive Capabilities

•

• •

• • •

The Samwer brothers The Rocket Internet brand A global mobile task force: Global Venture Development Programme

Company reputation of repeatedly and • successfully models

launching

online

business

•

HQ identification, conceptualisation and execution of new online business models Combination and integration of broad online skills Internationalisation and multiplication speed Culture and HR recruitment/integration of founders and high potentials

Activity mapping or value chain analysis might also be used for Question 1. If used imaginatively, both help explain where and how resources and capabilities are developed, employed and managed. They can also help indicate why and how distinctiveness might arise.

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Critical reflection on the choice and subsequent use of these tools to produce insights should be promoted. For example: • Why did students choose the particular framework they used over alternatives?

•

•

Show them that analysis per se is not an end in itself; that analysis is done either to answer questions such as the ones that follow or to create questions. Asking the students in what situation such an analysis might actually be used by managers relates the exercise to the practise of the senior manager.

Ask what actions managers might take as a result of undertaking such an analysis. Again, the analysis per se is not the goal, but rather what implications and actions that comes out of it.

Interestingly, Rocket Internet is built around dynamic capabilities for online business models generally. The central activities of the company are to sense and seize new online business opportunities and build and reconfigure the necessary (operational) capabilities. However, the case does not explicitly discuss Rocket Internet’s own dynamic capabilities. They would include the sensing and seizing of opportunities in the incubator and VC industries and possible reconfigurations of capabilities there.

Question 2: Inimitability of capabilities and the VRIO framework.

The aim here is to use the VRIO criteria technique to analyse Rocket Internet’s resources and capabilities in depth and evaluate if they grant the company competitive advantage and if so if they are sustainable. Here it is helpful for students to consider other Berlin-based incubators and venture capital companies (and there are plenty not only in Berlin, but of course all over Europe) and think about to what extent they would be able to match Rocket Internet’s resources and capabilities. Students should think carefully about their categorisations and justify their views.

Of course, it is also essential not to confuse Rocket Internet as an incubator and VC firm with the online companies they build and invest in.

The temptation here is to list all distinctive capabilities as providing sustained competitive advantage, but the VRIO framework helps in differentiating sustained from temporary competitive advantage. However, there are clearly border cases where this distinction is difficult to make. For example, as regards Rocket Internet’s ability to internationalise and multiply their online business quickly (indicated by both temporary and sustained competitive advantage being filled below).

Below is a summary of a VRIO analysis of some of Rocket Internet’s resources and capabilities.

It is apparent that only a couple of the resources and capabilities meet all of the demanding VRIO criteria and thus comprise sustained competitive advantage (HRM & culture and headquarter – HQ – identification, conceptualisation and execution of new on-line business models).

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Question 3: The importance of the Samwer brothers.

The Samwer brothers with Oliver Samwer as the trio’s driving force still lead Rocket Internet after more than a decade since they founded the company. Although the company has an external Managing Director, their role is still crucial. Their leadership and Oliver Samwer’s in particular is clearly a fundamental to Rocket Internet success and not the least important for keeping up the pace of the company’s expansion. They clearly provide for sustained competitive advantage. However, it is still unlikely that the company would quickly collapse should they choose to leave or sell the company. By now their visions, ideas and values have been built into the Rocket Internet culture, capabilities and practices and are thus likely to last at least for some time after their exit. Over a longer time period, however, there is a risk that these visions, ideas and values deteriorate when not fuelled by the brothers.

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CHAPTER 5

Stakeholders and governance

Introduction We have found that students are increasingly engaged with the issues of this chapter, especially social enterprise and corporate social responsibility. It also returns to the discussion of mission and vision in Chapter 1. The issues are likely to elicit different reactions according to the national origins of students, and their diverse experiences and views can be a valuable resource to draw upon in class and seminar discussions.

In other words, if you haven’t tackled the topics of this chapter in great depth before, we think that now is a particularly good time to do so!

Illustration 5.1 Oxfam’s Infamy

1. Identify Oxfam GB’s various stakeholders along the lines of Figure 5.2 and assess their engagement in terms of the power/attention matrix in Figure 5.3.

Figure 5.2 describes the stakeholders of a large organisation, but implicitly assumes a conventional private enterprise (shareholders, financial community, competitors and so on). Part of the challenge in this question is to transfer private sector stakeholder categories to a not-forprofit context such as Oxfam – equally, these categories could be transferred to a public sector organisational context.

The question focuses explicitly on Oxfam GB. Several parallels can be drawn between Oxfam GB and the categories of Figure 5.2: •

the owners/shareholders are Oxfam International

•

the financial community (suppliers of finance) are the equivalent of the donors, many of whom have cancelled their funding the main customer could be seen as the UK government, from whom Oxfam GB received

• •

about 40% of its funding, in return for helping particularly causes employees are the 5,000 employees but one might even add the 20,000 volunteers, as well as

•

the celebrity ambassadors management could embrace the Oxfam International Board of Supervisors, Oxfam International’s Executive Directors group, the Oxfam GB Chief Executive and the associated management team and the Oxfam GB trustees

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As well as these categories from Figure 5.2, one must of course add the clientele – such as the Haitian community and their government – and the regulators, such as the UK Charity Commission. These could be grouped under the category of social/political stakeholders, referred to in the text (outside Figure 5.2).

In terms of the power/attention matrix of Figure 5.1, it is clear that some of the powerful stakeholders were paying very little attention. In particular, the Board of Supervisors, trustees and the regulatory UK Charity Commission are all potentially very powerful, but appear not to attend very closely to what was happening on the ground in contexts such as Haiti. Possibly Oxfam GB’s own management comes in the same category. All these stakeholders could be allocated to Box C therefore: powerful but inattentive, and so to be ‘kept satisfied’. They would have received many presentations and reports, but rarely penetrated very deeply beyond such surface attention. These stakeholders would have moved after the scandal into Box D: key players that would have to be closely informed and managed.

Adapt the corporate governance chain described in Figure 5.5 to Oxfam GB. What were the weaknesses in this chain?

Again, Figure 5.5 has to be adapted somewhat from the private sector context to the not-forprofit. The ‘beneficiaries’ in a typical private sector enterprise are the shareholders, but here they might be held to be the citizens of crisis-ridden countries such as Haiti: there is a clear gap in the governance chain leading back from the poverty and disaster-stricken ultimate beneficiaries around the world and the headquarters back in the United Kingdom. However, one might insert Oxfam International somewhere towards the top of the chain, perhaps as equivalent of the Supervisory Board in Figure 5.5: there is another very stark weakness in the linkage between this Board-level and the Executive Directors within Oxfam UK. A further weakness is the linkage between senior executives based in the United Kingdom and the managers on the ground working in situations like Haiti: the seven senior staff caught using prostitutes had clearly been getting away with inappropriate behaviour on a substantial scale.

If one wanted to talk about reforming the governance chain, and obvious place to start is that link between the Supervisory Board-level, which appears to have 21 members (its own Chair, its Executive Director and the Chair of each of the 19 Affiliates): this is too big to be effective and, because made up predominantly of country affiliates all similarly motivated to protect their autonomy, likely to pursue consensus and avoid asking too many uncomfortable questions of each other.

Illustration 5.2

Too hot in the kitchen? Jamie’s family management

1. In which respects does the Jamie Oliver Group exemplify issues relevant to entrepreneurial businesses (see Section 5.2.3)?

Jamie Oliver is in many respects a typical entrepreneur, founder and majority owner of his business. However, in one respect discussed in Section 5.3.3, he is not entirely typical because not highly focused on profit. He does follow the entrepreneurial pattern, though, in allowing his 72 .

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attention to be biased in particular directions (see Section 5.2.2. also), in this case towards the creative and public side of the business. He has also delegated to professional managers as the business has grown and diversified (even if Paul Hunt at least seemed to doubt their professional competence).

2. Explain the relevance of the principal-agent model (Section 5.3.1) to Oliver’s trust in CEO Paul Hunt.

Jamie Oliver states that ‘there are times when you need family and you need the thorough trust that family brings’. Oliver is the key principal, as owner of more than 75% of the business. As the business grew, Oliver had delegated to professional managers, who acted as his agents. Thus emerged the typical principal-agent relationships of larger businesses. However, it is clear that he believes these managers let him down. Given Oliver’s many interests beyond the simple businessside, it is probably that he had run into all three of the problems typical in the principal-agent relationship: knowledge imbalances (he was not expert in all the diversified activities he owned, ranging from talent to graphic design); monitoring limits (although he was a workaholic, he could not keep abreast of 38 different businesses); and perhaps misaligned incentives (given that his managers presumably had negligible ownership stakes, it is possible that they did not prioritise the profitability of the business as a whole). In hiring a family manager, Paul Hunt, he is going closer to the typical family business model introduced at the start of Section 5.3.1: as a family member, Hunt can be trusted not to act just in his own personal interest.

Illustration 5.3 Volkswagen’s governance crisis 1. To what extent does Volkswagen reflect the strengths and weaknesses of the stakeholder model of governance (Section 5.3.2)?

Interestingly, Volkswagen’s stakeholder model (involving workers and the local state of Lower Saxony as well as investors on its supervisory board) does not seem to have produced the strengths often associated with it. There was not better management and arguably the ‘defeat device’ was a short-term and ineffective fix to a problem with diesel engines that needed a long-term solution (even the replacement of diesel altogether). Indeed, Winterkorn’s ambitious growth strategy appeared high risk, contradicting the expectations of lower recklessness associated with the stakeholder model.

The weakness that seems to have operated here is probably that of decision-making. It was hard to exercise an objective and tough decision-making process in an organisation in which some stakeholders were satisfied with promises of continued growth (worker representatives) and others were at war (Piëch versus Winterkorn). A stronger decision- making process might have eliminated the complacent conspiracy of silence around a short- term fix such as the ‘defeat device’.

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2. What should Volkswagen have done with regard to governance and management after the resignation of Martin Winterkorn?

With regard to management, the worry is that the new managers (Chairman Pötch and CEO Müller) were insiders, who had failed to challenge prior bad practice. Arguably, Volkswagen needed outsiders who were not compromised by previous failures and were not products of the existing toxic culture. Given the company’s global scale and ambitions, and the existing biases of the board, some non-German senior managers might be desirable.

However, such outsiders would be unlikely to succeed in the current governance regime.

Governance should be addressed. Arguably, the influence of the Porsche/Piëch family ought to be challenged: certainly, its representatives need to have less equivocal expertise (the nieces and the wife were not obviously qualified). More non-German supervisory board members should be introduced. An increase in the share of ownership held by external investors (and correspondingly a reduction of those of the Porsche/Piëch family and Lower Saxony) would facilitate the introduction of more diverse, and fresher, views to the supervisory board.

Illustration 5.4 Unilever’s sustainability strategy This illustration should touch close to home because many students will be users of Unilever products – from ice cream to haircare.

1. Where would you place Unilever in terms of the four stances on social responsibility in Table 5.2?

In terms of the four categories of Table 5.2, a range of views is possible. Most students will argue that Unilever is probably at least ‘a forum for stakeholder interaction’ and arguably a ‘shaper of society’. To an extent, Unilever tries to reconcile social, environmental and shareholder interests, reflecting the triple bottom line of the stakeholder interaction stance: for example, it pursues social interests by its promotion of women’s causes inside and outside the organisation; it aims to protect the environment through initiatives such as Loop packaging; and, under Polman, it also adopted ambitious revenue objectives, projecting a doubling over a single decade.

At the same time, however, the company’s Sustainable Living Plan made a wider statement about how the world should change. Polman denounces the common shareholder value model too. With these various public pronouncements, it is certainly arguable that Unilever aimed to be a ‘shaper of society’, even if some of its objectives appear to be somewhat contradictory and liable to the accusation of ‘greenwashing’. Of course, students who wish to emphasise these contradictions will end up arguing that Polman’s rhetoric is merely a matter of ‘Enlighted Self-Interest’ (Table 5.2): ‘greenwashing’ may be an effective branding strategy. The debate is worth having, even if it is hard to be conclusive.

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2. What do you think were the relative importance of Paul Polman’s personal ethics and strategic advantage in the Unilever Sustainability Plan? What might influence the new Chief Executive’s continuation of the Plan?

It seems that Polman’s personal ethical beliefs are genuinely held – he is prepared to take the risk of alienating shareholders by denouncing the shareholder value model. He elevates Mandela and Mother Theresa as his heroes. However, a consumer business such as Unilever is also very exposed to consumer backlash from civil society (see Section 2.2.1 and Figure 2.3). It might also supply a competitive or differentiation advantage (see Chapters 4 and 7). In this sense, Unilever’s Sustainability Plan could even be described as a matter of ‘Enlightened Self-Interest’ (Table 5.3).

Polman’s successor, Alan Jope, appears to want to maintain the Sustainability Plan: continued shareholder support, and the Plan’s role in supporting consumer-friendly differentiation and innovation will be important influences on Jope. But as a new CEO, he might want to redefine the Plan, stamping his own personal mark and branding on it, rather than referring continuously to something that is a decade old and very much the product of his predecessor.

Thinking Differently Benefit corporations What would you argue as a director of a benefit corporation when the survival of your company depended on suspending expenditure on social objectives?

While benefit corporations are an interesting innovation and will be attractive to many students, this question is designed to encourage critical thinking about what should happen when ideals clash with economic pressures. Theoretically, profits and the public benefit have equal claims, hard-wired into the legal status of the corporation. However, a director may argue that their responsibility is to maintain the long-term capacity of the organisation to meet its public benefit obligations. At a time of immediate risk to continued survival, expenditure on social objectives might be suspended, therefore.

When the survival risk is safely back in the past, then social expenditures could be restored, allowing benefits to be achieved that would have been impossible if the corporation had disappeared altogether.

Of course, this argument could be a slippery slope: even in good times, it is often possible to argue for the sacrifice of immediate social objectives in order to build the economic capacity of the corporation to meet its obligations better at some vague and deferrable point in the future.

Assignment 5.1 Governance chain Petrobras and Adnams have strikingly different standards of governance. It might be useful to contrast the family spirit that infuses Adnams (via the Adnams and Loftus families) and the political and corrupt tendencies which came to dominate Petrobras, despite its best intentions. It looks likely that Petrobras managers are confused about the expectations of beneficiaries, after so many failed attempts to push through reforms; unmotivated to pursue beneficiary interests, given the culture of top-level corruption; and reluctant to keep beneficiaries fully informed, in order to protect themselves through the various inconsistent and incomplete waves of reform.

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Assignment 5.2 Stakeholder and shareholder models of corporate governance This assignment should encourage students to reflect on the pros and cons of both models. Section 5.3.2 provides the textbook account of pros and cons, but the material in this chapter should help students take a more critical and personal view. Illustration 5.4 on Unilever provides a denunciation of the shareholder model. On the other hand, see Illustrations 5.1 and 5.3 on Oxfam and Volkswagen for insights into possible failings in the stakeholder model in practice.

The point students should probably be encouraged to get to is that formal models – stakeholder and shareholder – may have certain characteristics in theory, but that a good deal depends on the practice in each particular case. Theoretical strengths and weaknesses can differ from actual strengths and weaknesses.

Assignment 5.3

Social responsibility examples

Your students probably won’t need prompting, but a range of good examples of corporate social responsibility can easily be found with an internet search using those terms. Students should be encouraged to be critical and to use a variety of sources to increase the range of examples. Thus, a 2019 search for examples found near the top a Forbes list of ‘The 10 companies with the best CSR reputations’: this places the maker of plastic bricks, Lego, as top in the world. Petrobras (end-ofchapter case) superficially looks good in its attention to stakeholders, but its practice fell a long way short of its promises. As always, a diverse range of sources and a critical stance will help.

Assignment 5.4 Corporate social responsibility issues in particular industries The brewing and advertising industries each have major issues of widespread concern. In brewing, under-age drinking, drinking and driving, the vulnerability of women after drinking and the consequences for violence and nuisance in town centres are all live issues. For the views of an industry association, see: http://gsri2.worldwidebrewingalliance.org/. In advertising, there are issues to do with the representation of controversial or potentially damaging products (alcohol, gambling and so on), the representation of particular groups (the disabled, different ethnic groups, young women and so on), accuracy (in a post-fact age), the environmental friendliness of advertising media (e.g. print) and so on. For a discussion of social responsibility in advertising, see: http://smallbusiness.chron.com/.

Large companies typically have corporate social responsibility or sustainability reports. In the advertising industry, you can compare for example: Publicis: https://www.publicisgroupe.com/ WPP: https://sites.wpp.com/

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Assignment 5.5 Stakeholder mapping Many students find the concept of stakeholders very useful in understanding the political dimension of strategy. There is also a useful example in the end-of-chapter case on Petrobras. However, when they are asked to undertake an analysis of stakeholders, they can find this more difficult than they expected.

Assignment 5.6 is designed to allow students to experience these practical difficulties and learn how to undertake a useful stakeholder analysis using Figure 5.3. The problems students can encounter are typically as follows: •

Despite the reference to this in the text, students often try to map out stakeholders in a position

•

that would be correct for all circumstances and strategies over time. It is important that they appreciate that the positioning of stakeholders is strongly determined by specific events and strategies and is likely to vary over time. The contrasting stakeholder power/attention matrices for Illustration 5.1, with regard to gay marriage and the new operating system, should illustrate this.

They may describe stakeholders in ways that are too generic. For example, students may describe

•

In some cases, it is important to distinguish between an individual and their role. This is

Manchester United supporters as a single stakeholder group, whereas it may be more useful to plot different groups, for example, regular match attendees as distinct from the (very many) absentee supporters. And even here, geographical locations might be useful, for example, supporters in Manchester who see the club as local as distinct from supporters in different parts of the United Kingdom and the world. The interests and power of these different sub-groups are different. particularly important if the current incumbent of a potentially powerful role has a low level of interest, since a new individual filling that role could substantially redefine the stakeholder mapping.

Following the mapping exercise, the question is designed to encourage students to consider strategies for managing stakeholders in terms of both maintenance activity and repositionings that they feel would be crucial to the success of a strategy.

You may also wish to help students see the connections between the concept of the value chain (Chapter 4) and stakeholder analysis. Both are concerned with understanding and managing relationships. So, if the rules concerning those relationships change, this will change the stakeholder mapping – particularly in relation to power.

Integrative assignment 5.6

Governance, CSR and capabilities

This is a challenging assignment in the light of corporate scandals (Boeing, Enron, Volkswagen, etc.), the rise of shareholder activism and increasingly tough scrutiny of public sector organisations. It requires students to connect concepts in this chapter with those in Chapters 4 and 12. The key debate in this chapter should also help students address some of the issues that might include the following: 77 .

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•

The simplistic starting point might be that organisations should maximise returns for their owners.

•

However, the principal–agent concept tells students that this may not happen because managers (as the shareholders’ agents) may also work in their own self-interest. In the public sector, politicians and managers may do the same.

So the question is whether and how the interests of other stakeholders should be accommodated

•

and how this should influence the choice of strategies?

If these issues are to be addressed, do organisations need new capabilities, including new managerial competences? For example, competences in managing relationships with shareholders; indeed relationships with a wider range of stakeholders, or competences in identifying which stakeholder needs what sort of relationship?

Case Example Petrobras and the Lizards Lizards are often associated with rather underhand behaviour – no doubt unfairly. Petrobras, however, appears to have become the centre of some very corrupt practices, interestingly in stark contrast to its claims to serve Brazil and its various stakeholders. Both state and private ownership interests have also come into question.

1. Identify at least five key conflicts between stakeholders’ interests and expectations at Petrobras (refer to Table 5.1 as a starting point). Which are the most powerful stakeholders (refer to Table 5.2)?

There are many potential conflicts and some have several dimensions. However, the most prominent conflicts are probably: •

Employees (60,000, at a time of high unemployment) versus taxpayers (funding continuous

•

losses and over $100bn debt) Investors (since the 1997 partial privatisation) versus Brazilian government (still with 64%

•

of the shares) The Brazilian oil sector (‘The petrol is ours’) both versus consumers (for instance, the striking truckers facing higher prices than in the United States) and versus the environment (with oil spills from off-shore production)

• •

Suppliers (such as the corrupt contractor Odebrecht) versus taxpayers and investors who are both burdened with unnecessary costs and inefficiencies Politicians (such as the convicted former president Lula da Silva) versus taxpayers and investors who are both burdened with unnecessary costs and inefficiencies

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The most powerful stakeholders fluctuate over time, but civil society stakeholders such as social, sports and cultural organisations are probably not very important at any point. Consumers and investors have not been very powerful, given the high fuel prices and chronic losses. Historically the politicians have been the most powerful, as demonstrated by the level of corruption: Petrobras became part of the political machinery. The reversal of CEO Parente’s pricing policy, and his resignation, in 2018 seems initially to have confirmed the powerlessness of investors, given the government’s larger ownership stake. However, the new President Bolsonaro appears provisionally to be more supportive of investor power, given his appointment of the new Chief Executive Castello Branco, an enthusiast for privatisation.

2. Identify at least five ways in which ownership has influenced the strategy of Petrobras.

It would be possible here to refer to the discussion of state-owned enterprises in section 5.2.3, and also to Figure 5.4. But also there has been some change in ownership, with the introduction of private investors since 1997. State-ownership has been influential on the strategy is several respects: •

the expansion of oil production in Brazil and its territorial waters (from 2,700 barrels a day

•

to 2.6 million barrels of oil per day) the development of national technological expertise (the creation of the largest group of oil researchers in the southern hemisphere, with world-leading expertise in deep-water exploration)

• • •

the expansion of national employment in a low-employment economy (peaking at around about 80,000 in Brazil alone) the development of related industries within the country (e.g. gas and power, fertilizers and bio-fuels) the maintenance of low fuel prices to help citizens and particularly the poor

On the other hand, the introduction of private investors had been influential, particularly in prompting various initiatives to change strategy. Various recent CEOs – Bendine, Parente and Branco – had launched strategies to favour shareholder value, for example: •

raising fuel prices

•

divesting non-core assets such as the petrol station network

•

selling an oilfield to an overseas company, Statoil

•

cutting levels of investment

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CHAPTER 6

History and culture Students may not immediately see the importance of history, but once linked to organisation culture (and perhaps the Experience lens) they can soon see that it helps explain a lot. We believe in history, and accordingly have developed a new framework and discussion in Section 6.2. As the end-ofchapter case on Uber shows, even a new entrepreneurial hi-tech company can feel trapped by its history.

Illustration 6.1 The Family Bank Rothschild & Co. can trace its origins back to the eighteenth century but the relationship with its past is not entirely simple.

1. In terms of Figure 6.2, how would you describe Rothschild & Co’s relationship with its

history? How valuable is it?

Clearly there is no complete ‘continuity’ of strategy (in the terms of Figure 6.2), given the original French bank’s nationalisation in the early 1980s and the departure of Guy de Rothschild for the United States. David de Rothschild created a new bank in 1984, albeit using an old family shell company, Paris Orleans. But nor was there a ‘rupture’. First of all, David’s management principles of collegiality, retention of shares and refusal to act for predators were pitched as consistent with a family business such as the original Rothschild bank had always been. Second, the bank’s old connections, both family and political, proved crucial too (in getting initial support from Eveyln de Rothschild and in winning the Renault privatisation contract).

Figure 6.2 therefore suggests that one of (or perhaps a mix of) two kinds of relationship were in play. There is probably some ‘rediscovery’, as old connections were drawn upon and old values were reasserted (with David’s management principles). But this rediscovery was not a simple return to the past: historical ‘selection’ was dominant as David and then his son Alexandre deliberately chose elements of the past to emphasise. For a new bank, for whom credibility is essential, playing up the family lineage would be a crucial source of ‘legitimation’ – hence the return to the historical name of Rothschild & Co, the adoption of the five arrow shield as logo and the appeal to the ancient Latin motto of consensus, integrity and hard work. The emphasis on high technology affirms the primacy of selection over rediscovery, which would imply a more wholehearted return to the past: high tech is an entirely new kind of business, even if pursued in avowedly traditional ways.

This set of historical relationships, even if manipulated to an extent, is immensely valuable to the bank. Very few young French bankers would be able to establish what became a leading bank in Paris within a few years – but a Rothschild could. David de Rothschild was able to pull on his family connections to both the London bank and the Marseille bank, while reviving the prior 80 .

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bank’s links into the Parisian elite (see the relationships with Presidents Pompidou and Macron).

For Rothschild & Co., history made the whole strategy possible.

2. Which elements of the cultural web (Figure 6.6) are prominent in this account of Rothschild banking?

Several elements of the cultural web are obvious in this illustration, though others are less prominent. There are of course stories, such as the foundation of the bank going back to Mayer Rothschild in eighteenth century Frankfurt, or even the twin disasters of German Occupation and Mitterand’s nationalisation in the twentieth century. Symbols are important, such as the five arrow shield or even the re-adoption of the family name for the bank. The power structure is notable, guaranteed by the 58% of the voting rights controlled by the family, and the refusal to issue shares to senior managers: succession to David’s relatively young son Alexandre is unproblematic. The motto of consensus, integrity and hard work could be taken as both a reference to certain rituals within the bank or an expression of the overall paradigm, at least as intended by David de Rothschild and his successor Alexandre. There is less material obviously relating to control systems and organisational structure, but one can easily imagine that they were largely consistent.

None the less, growth from a small family bank based in Paris to a global, diversified bank of 3,500 employees is likely to put the coherence of the bank’s culture under considerable strain.

Illustration 6.2 ‘Learn the Culture Proper to Each’. University Pays a Price for Success.

This Illustration may be particularly interesting to students who are studying in a similarly aggressive educational such as the University of Bath under Glynis Breakwell’s leadership. Some students might have considered Bath as a place to study – or be studying there as members of your class!

1. In what respects did certain employees regard the University of Bath’s culture under Breakwell as falling short of the aspirations described in the 2016-21 strategic plan?

Bath’s 2016-21 Strategic Plan defined a ‘supportive culture’ as one of its five key attributes, creating a welcoming, inclusive community that values individuals and realises their potential.

The University’s trade union leader quoted in the Illustration describes a ‘culture of fear’ on the other hand. Staff were hired on very short-term contracts, and therefore afraid for their future employment. Low pay does not speak of a culture that values individuals. The constraints on progressing higher in their careers also contradict an aspiration to help individuals realise their potential. It might be worth asking students whether these policies are integral to the idea of the university as a ‘business’, as one of the senior staff members appears to allege in the Illustration.

2. Identify key elements in the University’s organisational field and explain the importance of these to the controversy.

As in Section 6.3.2, an organisational field is a community of organisations that interact more frequently with one another than with those outside the field and that have developed a shared culture. The University of Bath is not just an organisationally specific culture but is part of the culture of universities in the United Kingdom and more widely: cultures exist at a field-level, not just the organisation-level. Some of the controversy around Breakwell’s initiatives is explained by how they offended the shared culture of the field.

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More specifically the field includes university academics both locally and more widely, other university staff (with whose union representatives she refused to negotiate), the trade union movement more generally, students (and their union) and potential students (whose recruitment was affected), national politicians (especially those MPs who resigned from the advisory board), local politicians and local businesses, the newspapers and other media, and other Vice Chancellors (who were embarrassed by the controversy). The withdrawal of political support, the outrage of academic and non-academic staff and the impact on student recruitment were all highly important to obliging Breakwell to stand down early.

Illustration 6.3 The Bogleheads and Vanguard Asset Management 1. Map Vanguard’s corporate culture to the cultural web elements of paradigm, stories, symbols, power, organisation structure, control styles and rituals and routine.

The key cultural web elements are as follows: •

Stories: Bogle’s ‘nobody knows nuthin’ story from his youth.

•

Symbols: Vanguard’s employees known as ‘crew’; the portrait of Vanguard shooting on

•

La Fidelité.

Power structure: An important point because of the absence of potential counter-weights to top management, it should be noted that Vanguard is owned by its own funds, so there are no powerful external shareholders.

• Organisational structure: McNabb as both CEO and chairman.

•

Control styles: Low performers ‘walk the plank’.

•

Routines/rituals: Jack Bogle always attends when the Bogleheads come annually for their conference to ‘visit their money’.

These six elements support a paradigm of low-cost investing based on indices.

2. How do the various elements of the web interrelate? Do any of the elements not fit together?

The various elements seem to inter-relate well in a mutually reinforcing pattern, with one exception. The concentration of formal power in the hands of McNabb as both CEO and chairman seems a bad fit, especially given that it is in breach of the corporate governance principles they preach for their investments. It also appears anomalous – in an asset management company that encourages low costs and transparency – that McNabb’s remuneration is a secret.

Students might also be recommended to Illustration 7.1 on Vanguard.

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Illustration 6.4 Kodak: the decline and fall of a market leader 1. Which of the reasons for strategic drift are evident in the Kodak story?

This question provides the opportunity for students to consider the reasons for strategic drift explained in the chapter. Many are evident in the Kodak story. Kodak’s inability to change was certainly not because it did not have the technologies or knowledge of market changes. As the illustration points out, it had digital technology and early warnings of market changes. There were other reasons for its demise that are best explained in terms of strategic drift. As with many successful organisations, the success of the past was an impediment to change: why change a winning formula? The quote from Rebecca Henderson in Section 6.4 highlights this. There was also continued experimentation around that success theme, which was probably evidence to managers, at least, that change was happening. The strategy built on the capabilities with which Kodak managers were familiar but which had, in effect, turned to core rigidities. These no doubt took form in sets of linked routines and procedures throughout the organisation that would have been very difficult to unravel. Not least of these were, very likely, relationships with suppliers and distributors that would have been difficult to break. Moreover, Kodak continued to be successful despite the advent of the digital camera: so performance effects were lagged. It also seems that there were both cultural and political pressures to resist change within Kodak, with most senior executives, for example, being a product of past success and past technology.

2. Drawing on the lessons from Part 1 of the book as a whole, how might Kodak’s problems have been avoided?

Part 1 has many concepts and tools that are relevant to combating Kodak’s short-sightedness and conservatism, for example: Chapter 1: the ‘three horizons’ framework (Figure 1.1), which would have extended the company’s strategic views from the present and the near-term to the longer-term future.

Chapter 2: the concepts of ‘inflexion points’ and ‘weak signals’ (Section 2.3.2), which might have made the company more sensitive to emergent radical change. Similarly, scenario analysis (Section 2.4) may have helped.

Chapter 3: the concept of ‘blue oceans’ could have helped Kodak, as digital cameras could have been seen in those terms early on.

Chapter 4: dynamic capabilities (Section 4.5) might have helped Kodak avoid over-reliance on static resource advantages.

Chapter 5: better corporate governance arrangements might have assisted internal challenge to conservatives amongst senior managers in the corporation. In particular, non-executive and external directors might have played a more active role (Section 5.3.3).

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Chapter 6: understanding the concept of ‘path dependency’ (Section 6.2.1) might have alerted senior management to the risks of conservatism, while Figure 6.1 would point to the influence of culture on strategy and the need to adjust that culture.

Thinking Differently Institutional logics versus organisational cultures How might institutional logics shape such strategic choices as diversification, innovation and internationalisation (see Chapters 8, 9 and 10) for (i) a family-business owner looking to pass on the business to the next generation of children; (ii) a state-owned enterprise from a commodityhungry country such as China; (iii) a growth-seeking professional services firm, in law for example, considering new businesses and new countries to operate in?

The importance of the institutional logics concept is that it underlines how organisational cultures are never purely ‘organisational’ nor ever totally coherent: external societal logics are likely to intrude.

Thus: (i)

A family-business owner wanting to be sure to pass on their business to the next generation might follow a familial rather than purely profit-maximising logic by diversifying into a range of businesses in order to reduce risk, while being cautious in terms of innovation and internationalisation, which are typically high-risk strategies.

(ii) A Chinese state-owned enterprise is likely to follow a nationalist or political logic by pursuing internationalisation more aggressively than a standard profit-maximiser in order to secure raw material resources which China lacks. (iii) A professional firm might be constrained by different professional logics, formal or informal.

Thus, in some countries, it may be illegal for a law firm to diversify; other countries may operate different legal principles (Roman or common law, for example) which might make entry and operations more difficult.

Assignment 6.1 Does history form strategy?

A good way of approaching this might be to undertake a simple chronological analysis, as in Section 6.2.3, constructing a time-line that identifies the most significant events and decisions over a long period of time for an organisation. One of the illustrations here might be used as a basis (e.g. Indian Railways or Kodak: see Illustrations 6.1 and 6.4). As indicated in the notes to that illustration, the purpose of undertaking such an analysis might be to understand: •

the historical legacy that informs the strategic trajectory of the organisation;

•

whether there are any early decisions that have had long-term (even lock-in) effects on the strategy of the organisation such as Indian Railway’s Empire origins or Kodak’s technological base.

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Students might, therefore, consider that for an organisation like Indian Railways history has been extremely important as an influence on, not only strategy, but also on problems in effecting change to new strategies. It might be useful to ask students if such historical influences are likely to exist in younger organisations: is Google just as much shaped by its history as a recent entrepreneurial startup? In other words, is history a function of long periods of time or a function of key issues, events or decisions in the past (whether recent or not)?

Assignment 6.2

Public description of culture This would be a good assignment to reward a critical or sceptical approach on the part of students.

More than one source, and ideally a source from outside the organisation itself (from the media perhaps) would help with such a critical or sceptical approach.

Assignment 6.3 Strong and positive culture This assignment may be attractive to students as it is very much in touch with students’ interest in finding good employers. Again, this would be a good assignment to reward a critical or sceptical approach on the part of students. More than one source, and ideally a source from outside the organisation itself (from the media perhaps) would help with such a critical or sceptical approach.

Assignment 6.4 The cultural web This assignment is designed to help students map and understand organisational culture in a systematic way using the cultural web as a framework. You will, however, need to bear in mind that whilst Figure 6.7 should assist in identifying factors under each element of the cultural web, this is only a starting point. Students should also explain key factors rather than just provide long lists. For example, can they identify really centrally important and influential core assumptions? These may be very few and very basic. Can they also identify the key cultural artefacts that underpin and reinforce such assumptions? (See the notes above on linkages with regard to the Vanguard Asset Management in Illustration 6.3.)

Assignment 6.5 A strategic drift

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environment. Of course, another explanation is that the organisation is dominant enough to be, in effect, creating its own environment so that students might choose businesses such as Apple, Ryanair in low-cost travel or a retailer such as Walmart in the United States.

Phase 2: Strategic drift. This is the situation where an organisation has almost imperceptibly lost touch with its environment. It might be useful to raise two issues here: •

In the early stages of drift it may be happening without performance decline being obvious, so the managers themselves may not see it. Customers, however, may see early signals. Can students, as customers, identify such an organisation?

•

In later stages, drift becomes obvious because performance decline has occurred. Businesses such as Marks & Spencer (see Chapter 15) and Sony come to mind. In the public sector, arguably the NHS in the United Kingdom has been in a long stage of drift. Can students suggest other businesses currently?

Phase 3: Flux. This is where an organisation is in a state of turmoil following its decline in performance. Again, can students identify firms showing such manifestations of decline?

Phase 4: Embraces different situations. Can students identify, for example: •

An organisation that has drifted, whose performance has suffered and has been taken over.

•

One that has failed completely and closed down.

•

Another that has gone through major transformational change.

Integrative assignment 6.6 An example of a major change in strategy might be that from a business shifting from a national focus to a multinational strategy. This would raise a series of issues such as: •

A domestic business may have enjoyed competitive advantage, perhaps, in terms of a national focus, but there would be no such advantage on entry into other countries. So managers would be faced with trying to establish bases of advantage when, before, it was a question of maintaining it.

•

In turn, this links to strategic capabilities. These may have been built over many years within one country; are they transposable to other countries where customers may have different needs or value different capabilities? In addition, if the strategic capabilities are based on the sort of linkages between competences and resources described in Chapter 3, are these easily movable to other geographic contexts?

•

In turn, this relates to organisational culture. It could be that the strategic capabilities are embedded in the organisational culture of the national firm. It cannot be assumed that cultural characteristics will readily shift or be capable of being built in the same ways.

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•

How has the strategy that is successful in one country developed? It may be that this has grown

•

incrementally based on years of management experience. Again, how is this to be ‘exported’ to other countries; indeed can it be? Or, is it to be assumed that locally devised strategies can be planned and driven by top-down management with the same effect?

Further, a multinational strategy has implications about the development of skills of strategy

•

development by a corporate parent as opposed to a single business.

All of this suggests that there will be challenges of strategic change, not least in the home country where managers may be faced by quite radically different strategic emphases and, on a more personal level, perhaps with different priorities and prospects.

Case Example Uber and the Ubermensch Uber is probably a very familiar company to many students, although it has faced bans or significant restrictions in a number of countries such as Germany, France, Italy, Hong Kong and India, as well as a 2019 ban in London.

1. With reference to Figure 6.2, how would you describe Uber’s relationship under Dara Khosrowshahi with its history under Travis Kalanick?

The challenge for Khosrowshahi is to guide what had become a global but troubled corporation to a successful Initial Public Offering. He was an outsider and without the legitimacy of the deposed founder, Kalanick. He had to change Uber, but could probably only do so much.

In terms of Figure 6.2, Rediscovery was not an option: the past was too much associated with the disgraced Kalanick and besides, as the London manager Tom Elvidge remarks, the company needed to ‘grow up’. It could no longer work as a scrappy start-up, being too big and facing the task of attracting outside investors on a large scale. There was no happy and appropriate past for Khosrowshahi to return to. Similarly, Continuity was not an option. He had been brought in from Expedia by existing investors precisely because they wanted change: there was a reason that they had not hired a new CEO from inside the business or even from inside the industry. On the other hand, complete Rupture might be problematic: the company’s existing staff could not be replaced or retrained in such a radical way that old beliefs and behaviours could be completely extinguished. The demands of rapid growth and the upcoming IPO were placing too many demands upon the business for it to handle total change at this point. Besides, the old ways had brought a great deal of success, something that investors were buying into.

For Khosrowshahi, therefore, the most attractive option was Selection. Khosrowshahi explicitly stated on his LinkedIn page that the Uber culture needed to ‘evolve’. Evolution does not suggest revolution. Indeed, in developing eight new ‘cultural norms; he retained some of Kalanick’s old core values, for example, big, bold bets. Some elements of the old values were selected out – for instance, asking for forgiveness rather than permission – and new elements were selected in – for example, ‘Do the right thing. Period’. This selective mixing of the past and the new was probably the best option of Khosrowshahi, though it is to be noted that Uber’s valuation in its 2019 IPO 87 .

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was less than $100m, far short of the original target. The shares fell still further in value in the months following the public offering.

2. Referring to Section 6.3.3, analyse Uber’s culture under Travis Kalanick in terms of values, beliefs, behaviours and taken-for-granted assumptions (the ‘paradigm’). How much has this culture changed and how consistent is it across Uber as a whole?

Uber’s culture under Kalanick had the following aspects: •

Values: Kalanick had explicitly defined 14 core values for his company, including big bold bets, principled confrontation and toe-stepping. Overall, the company’s values were highly aggressive.

•

Beliefs: the underlying beliefs were probably in the superiority of the free market, as exemplified by the surge pricing policy (even during the Sydney terrorist attacks) and the lack of sympathy for indebted drivers caught by centrally imposed price cuts.

•

Behaviours: Uber’s behaviours were highly aggressive, as exemplified by the deliberate policy of making and cancelling orders with rivals such as Lyft in New York or its ‘game-ofthrones’ internal politics, as described by Susan Fowler (victim of sexual harassment).

•

Taken-for-granted assumptions: the underlying assumptions or ‘paradigm’ is one of rampant individualism, with little concern for the welfare of others. Sacrificed were the economic interests of drivers, the well-being of employees (especially women) and the safety of passengers (again, a particular issue for women).

As discussed with regard to the first question, Khosrowshahi had not undertaken a radical rupture with the past, but adopted a more selective approach. Khosrowshahi had introduced a new set of ‘cultural norms’, which had officially displaced many (not all) of Kalanick’s 14 core values.

However, the culture had not been completely changed. Thus, the Advanced Technology Group’s engineers had arguably been reckless with its self-driving test-cars, leading to the death of a pedestrian. The allegedly ‘toxic’ culture of management infighting was still being raised at an allhands meeting about a year after Khosrowshahi’s arrival. And, despite the massive expansion of the central safety team in Arizona, the company representative still seemed keen to relativise the number of complaints by referring to the 100m rides. It is probable that the cultural change was partial, and greater in some parts of the organisation than in others.

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Strategy lenses1 Introduction The strategy lenses are introduced in Chapter 1. They are then used in the Commentaries at the ends of Parts I, II and III. The first Commentary provides a thorough discussion, the second and third are in tabular form. The first Commentary also has a short Nokia case to illustrate each of the four lenses.

The lenses encourage students to look at strategic issues from different perspectives, generating new insights and approaches. It is important for students to recognise that strategy is not always the outcome of rational, objective analysis (the design lens). Although Exploring Strategy challenges the simple rational view throughout the book, the lenses provide a systematic way of seeing alternatives (experience, variety and discourse). Each of these lenses has a different focus on rationality, innovation and legitimacy.

The main discussion of the lenses comes at the end of Part I because by then students can be expected to be gaining confidence in the fundamental concepts of strategy and have some concrete material to refer to. The lenses may not be suitable for all students, so they are separated out in distinct Commentaries that can easily be ‘skipped’. On the other hand, the lenses can be highlighted to enable students as one way of gaining a distinction-level grade in their work for the course. As one instructor commented: ‘I expect all the students to cover the basics. The ambitious ones who want a first (top result) have to go further than that, and the commentaries are useful for this’.

Ways to teach with the lenses

Instructors can use the lenses in seven different basic ways, as outlined below. 1. Building theoretical underpinning Feedback from instructors typically highlights the importance of a sound academic underpinning to the subject of strategy. The strategy lenses draw on four different bodies of academic theory. The design lens represents a relatively orthodox view that draws on economics and decision sciences. The experience lens builds on psychology, sociology and the study of managerial behaviour. The variety lens draws on complexity and evolutionary theorists. And the discourse lens reflects the growing appreciation of the roles of language in strategy. The commentaries refer to key works by leading scholars so that both students and instructors can delve more deeply.

2. As a commentary on chapter contents The Commentaries at the end of each Part refer back to the constituent chapters. In this way, the lenses can provide a means and a series of insights whereby students can reflect on what they have read in the chapters and obtain additional and different insights from those chapters. The lenses thus provide a good way of reviewing what students have read so far.

1

These notes on the use of the strategy lenses were drawn up in collaboration with Jill Shepherd, Segal Graduate School of Business, Simon Fraser University, Canada (jills@sfu.ca).

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3. As a critical perspective The lenses can also be used as a basis for a more critical approach to the field of strategy. Certainly, the experience and variety lenses raise some challenging questions about the orthodox view of strategy as top-down and rational. The introduction of the discourse lens also allows links to be built more explicitly to those who argue that strategy is a domain closely linked to the exercise of power and authority by an executive elite in which the rhetoric of strategy is employed to build and preserve such elites.

4. As a tool for case analysis When analysing cases, students are naturally inclined to use rational analytical techniques. However, they can be invited to approach the cases through alternative lenses in order to generate additional insights. In the public and not-for-profit sectors, the politics and legitimacy of discourse are frequently salient, while the innovation prized by the variety lens is often hard to come by. The lenses also work for private sector cases, especially with Part III issues such as leadership, change, structure and practice. We highlight the following cases as being particularly relevant to the lenses: Manchester United, Adnams and Flight Centre.

5. To structure the course One way of employing the lenses, probably for more experienced students such as parttime/executive MBAs, is to provide the lenses at the beginning of the course, as a way of structuring debate and discussion about management practice and problems within a strategic context. Here, the lenses are used to frame strategic questions. As the different aspects of strategy are discussed, students are required to use the different lenses in order to gain different insights as the course progresses. This is especially useful for practising managers because it continually poses the question as to the extent to which relatively orthodox views of strategy are relevant and useful in practice.

6. For making sense of strategy’s complexity Often students find that strategy is highly complex and involves huge amounts of data which is difficult to make sense (especially where they are involved in real-world projects). Students begin to understand that the tools themselves do not provide answers. It is their judgement and interpretation rather than the analysis itself that have to be relied upon. For many students this is disconcerting. For them, the lenses can help legitimise and structure the complexity they face. And the four lenses can then become useful tools for generating alternative approaches to this complexity.

7. As an invitation to reflective practice Once students appreciate that different lenses are present in all organisations’ strategy making and strategy making that is done by managers, the facilitating role can move on to suggest that individuals might have personal preferences with regards to the lenses in various ways as follows. They might recognise that they see the world more through one lens or another; they might see certain colleagues as using one lens or another; try looking at particular issues they face systematically through the different lenses.

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How does Facebook make strategy?

This short case aims to illustrate each of the theoretical lenses with real-world examples.

1.

Explain which of the four lenses are relevant to strategy-making at Facebook. Which do you think explains most about what is happening there?

All the lenses are at least somewhat relevant to strategy at Facebook. Most directly consistent with the design approach are the growth goal (one billion users initially) and the fact-based decision approach. The design lens is also evident in Facebook’s commitment to an explicit social mission (‘to make the world more open and connected’) and its planned approach to increasing spending on safety and security. The experience lens is reflected perhaps in Sheryl Sandberg’s importation of Google techniques and profit-orientation into Facebook. The continuing growth-at-all-costs mentality is an expression of Facebook’s early experience as an entrepreneurial start-up; apparently this legacy is difficult to shake-off. The culture of the hackathons – Chinese food and crazy hours – reflects Zuckerberg’s formative experience as student and founder: he has never worked for an ordinary company. The variety lens is relevant to the bottom-up innovation approach, especially hackathons and similar. The discourse lens is arguably reflected in the self-justifying rhetoric about openness and connections: the cynic might say this is just a smokescreen for more ruthlessly profit-orientated behaviour.

2. How would you bring change to Facebook? (You may wish to consult Chapter 15.)

Chapter 15 has several techniques that are relevant to change at Facebook: the change kaleidoscope, the types of change framework and Kotter’s eight steps. All could be applied insightfully. However, here one might point to how the lenses help in choosing approaches to change. For example, if you believed in the design lens, you would design a top-down programme of change, based on Kotter’s eight steps, for example. On the other hand, a variety lens approach would favour the kind of continuous local adaptation (and skepticism towards top-down programmes) discussed in Chapter 15.6.2. The experience lens would suggest the need to change experience at the top – perhaps Cheryl Sandberg’s tenure has been too long. A discourse lens would go further and point to political issues: it is not just Sandberg who needs to step aside, but Zuckerberg himself. The discourse of the organisation, and the underlying politics, arguably need radical confrontation if significant and enduring changes are to be achieved.

Alternatives to the lenses There are, of course, other perspectives on the strategy field too. For example, there is Richard Whittington’s What Is Strategy – and Does It Matter? (2nd edition, International Thomson, 2000) and Stephen Cummings and David Wilson’s Images of Strategy (Sage, 2003). The lenses then can be used as a basis (which can be extended by using other perspectives) for critically reflecting on strategy as both subject and practice in organisations.

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PART II

Strategic choices

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CHAPTER 7

Business strategy and models

Introduction This chapter has been changed to include an entirely new section on multi-sided platforms and their characteristics and way of competition, etc. and a table overview of various multi-sided platforms and companies. The multi-sided platform is a common business model today and commonly discussed today in relation to strategy not the least in relation to the US FAANG and Chinese BAT companies. The new section on multi-sided platforms explains what they are and their relationship to other business models and strategy and how they work. The prior edition introduced business models as a separate Section (7.4) in this chapter: We emphasise that mapping out business models is most informative for more complex business interrelationships where value is generated for and by more parties than simply one buyer and one seller and where several parties may capture a margin. While new business models are often celebrated, we explain how they do not necessarily provide for competitive advantage and why they need to be supported by business strategy. The business model pattern Section 7.4.2 has been extended with an additional and common business model pattern: Peer- topeer business models (P2P). Besides these new sections the interactive strategies Section 7.3 now integrates cooperative strategy with game theory to eliminate repetitive parts.

Illustration 7.1 Vanguard’s low-cost strategy comes to Europe The description of Vanguard’s incredibly successful low-cost strategy in the mutual fund industry allows students to think carefully about how a variety of business strategies may be possible in one single industry. This is the primary focus of the first question. The second question emphasises what underlies generic strategies and invites students to think about the activities and practices underlying a particular generic strategy.

1. What type of competitive strategy, low-cost, differentiation, focus or hybrid, would you

suggest as a way of competing with Vanguard?

The traditional means to competition in this industry has been differentiation and this will continue to be a feasible strategy, but students should be encouraged to specify the practices underlying differentiation. There may be other ways of differentiation than the traditional one – the focus on actively managed investments focused on generating high returns and thus being able to charge higher fees; for example, differentiating through customer service or delivering extraordinary accessibility and simple financial services. A central question to consider for students is if it would be possible to pursue a similar low-cost strategy as Vanguard. While copying Vanguard is likely to be difficult for a newcomer as there are substantial scale economies involved it is clearly a feasible strategy for incumbent larger competitors. Vanguard was a pioneer in building on low cost, but there should clearly be room for others pursuing this type of strategy.

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Students should be asked to carefully substantiate their generic strategies and thoroughly motivate why and how a particular strategy may be feasible. A focus strategy on a particular type of customers may, for example, work if they have particular needs compared to the common customer and if specific services can be provided to fulfil those needs. The hybrid option should also be considered, and it appears as if Vanguard indeed aims to move in this direction by not only building on low cost, but by providing ‘super-high quality advice’ as the CEO indicates.

2. Using webcam chats is one approach to lower costs in financial advisory services as indicated above. What other ways could there be to lower costs to support a low-cost strategy?

This question encourages students to think about factors underlying a particular generic strategy including specific organisational factors and practices. The illustration shows several factors that support Vanguard’s low-cost strategy: their governance form, distribution, internalisation of activities, organisational culture, decreasing outlets and advertising spending and building on economies scale. The take-away for students is that multiple factors, practices and activities underlie generic strategies. Students should also be encouraged to think creatively about other possibilities to lower costs in financial advisory services. They may think about other online and internet-based solutions apart from webcams that can decrease costs. There are currently thousands of new fintech start-ups that try to challenge the traditional way of competing in the finance industry and many of them build on online solutions that lower costs.

Illustration 7.2 Volvo’s different Indian buses This is a case of a remarkably successful differentiation strategy, in what seemed to be very unpromising circumstances.

1. Rank the elements of Passey’s strategy for Volvo in order of importance. Could any have been dispensed with?

Passey’s strategy for Volvo included a superior product, post-sale services, free training, direct advertising and engineering support for the trial buses. Asking students to rank these is in a sense a tricky question; it is designed to highlight that a package of various additional product/service features was required in order to promote the superior product. The take-away for students is that differentiation does not just rely on a superior product. As Passey himself says, ‘you have to do a lot of things’.

2. How sustainable is Volvo’s luxury bus strategy?

The question of sustainability can be addressed by reference back to the VRIO factors in Chapter 4. Volvo clearly has a valuable product, one that starts as rare to the point of uniqueness in the Indian market. The challenge of course is that their strategy is imitable, especially by quality companies such as Mercedes. Indian students at least may also point to the substitute of regional air travel, booming in the sub-continent. On the other hand, Volvo has acquired another unique and valuable resource, a strong brand name: ‘Volvo’ is synonymous with luxury bus services!

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Illustration 7.3 Game theory in practice in the public sector This illustration allows for an understanding of how game theory can be used in practice. Although game theory often appears to be quite esoteric, the illustration shows how its fundamental principles can be applied and it invites students to think about other situations and contexts where game theory could be applicable.

1. Besides the public sector, can you think of other business situations where war games could be useful?

War gaming’s ability to ‘get in the mind’ of various players is generally useful when dealing with organisations whose motives are likely to be more complex than just profit – for example, governments, not-for-profit organisations or campaign groups. Students may thus think of other public sector areas and not-for-profit organisations where a game theory and war gaming approach could be applicable.

War gaming is, however, also applicable in the for-profit sector, particularly in situations where diverse stakeholders are focused on distinct strategic decisions and commitments. This can, for example, involve huge strategic investments in new manufacturing facilities (e.g. a paper mill) or new product models that require major investments (e.g. a new aircraft). A related area where this can be particularly useful is in merger and acquisition situations. Thus, acquirers might want to understand the likely moves of rival potential buyers, the responses of customers or suppliers and the views of other stakeholders such as key managers (Will they depart from the target company upon acquisition?) and the local communities where the target company has many employees (Will they obstruct possible redundancies and closures?).

2. War games could possibly play a role when preparing for strategic change at a university.

What stakeholders or players would be relevant and what would their interests be?

The university setting is familiar for students and should allow them to recognise different stakeholders and their interests. Students may be involved in various student organisations and unions and may thus have faced other actors’ interests that probably did not coincide entirely with their own. They may even be able to identify a strategic change area at their own university that has involved multiple stakeholders. If this is not the case, they can imagine such a change; for example, substantially narrowing the number of education programmes or substantially increasing the number of foreign students. Besides students and student organisations, teachers and their unions, university management, diverse faculties, administrative staff and several other stakeholders may be involved. ‘Getting in the mind’ of all other actors can then help move participants into a cooperative rather than antagonistic approach to solutions to the strategic change.

It’s important, however, to remember that there are limits to war analogies. While they are often used in strategy (‘battles for market share’, ‘fights for technology leadership’, ‘contested M&A bids’ and so on) there is a danger that they promote zero-sum views of strategy, with strategy as a matter of simple winners and losers, and the parties involves as either ‘with us’ or ‘against us’.

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diverse players’ perspectives and possible actions without necessarily determining an ultimate winner. The war gaming technique is taken direct from the military but has the advantage in fact of encouraging a more empathetic perspective on the various actors.

Illustration 7.4 Uber’s ubiquitous business model This brief case of Uber’s great success is not only designed to show how a new business model can change what was once a mature and often unprofitable industry. It challenges students to engage with the specific details of business models. Section 7.4 and Figure 7.9 should provide students with an understanding of the basic business model components and give them the ability to analyse these.

Students should be encouraged to consider all three business model elements and how they contribute to Uber’s business.

1. In terms of Figure 7.9, what are Uber’s value creation, value configuration and value capturing?

Students should be expected to do more than simply list the business model elements. They should be encouraged to specify the details of value creation and what different value creation services that are offered to customers and how this surpasses what the industry offered before.

Moreover, they should consider the value for other participants like the drivers. Similarly, the value configuration structure should be specified including the composition of resources and activities and who performs what (customers, drivers and Uber). Finally, for value capture, students should explain why and how the model generates a margin and how profit is apportioned between the various actors (Uber and drivers) involved. This discussion may also open up for a discussion about if the Uber business model can be sustained long term. Many critics question Uber as US Lyft, Chinese Didi and multiple regional and local competitors compete for the same customers and drivers and Uber does not seem able to dominate many markets.

2. If you were the head of a traditional taxi company, how could you change your business model to compete with Uber?

This question allows students to think creatively around business models in the taxi, on-demand transportation or ride-hailing service industry (with new entrants the industry definition and label has been broadened). Students can be encouraged to map the traditional taxi business model and think about how the different business model components, value creation, configuration and capture possibly could be changed. Would it be possible to imitate Uber’s model, or could traditional taxi companies possibly adopt part of it? Alternatively, entirely different business models may be possible, for example, based on carpooling and ride sharing or other means.

Several companies with no prior experience from taxi services have made investments in these.

Apple has made huge investments in Chinese on-demand transportation service Didi Chuxing (formerly Didi Kuaidi), which acquired Uber’s loss-making Chinese arm. Likewise, Daimler, whose Mercedes-Benz cars are popular with many European taxi services, became the first major carmaker to enter the ride-sharing business when it acquired US RideScout and the Germanybased Intelligent Apps, which operates the mytaxi cab-booking app. In addition, companies with no experience from cars have entered into that industry including Alphbaet’s/Google’s

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self-driving car project Waymo and Apple’s car-related project dubbed Project Titan (besides Tesla, of course). The business models of taxi services, car manufacturers and app platform providers may thus merge.

Thinking Differently Transient rather than sustainable advantage The focus here is on the view that the era of sustainable competitive advantages is over as most industries today are too turbulent for this. Instead, according to this view, the focus should be on multiple transient competitive advantages. While IKEA arguably has managed to achieve sustainable competitive advantages in the past the question encourages students to think about possible transient advantages IKEA could build on: If IKEA chose not to build on sustainable competitive advantage, how could they build on many transient advantages?

The question forces students to think about the differences between sustainable and transient advantages and any differences in business strategies that underlie them. The end-of-chapter case may be of help in understanding IKEA’s current advantages and what more transient ones they possibly could build on. Students can come up with diverse ideas for temporary advantages like IKEA quickly jumping on the very last hip furniture trends (a ‘fast furniture’ model like H&M’s fast fashion one). Students should, however, be forced to motivate why and how these would provide transient rather than sustainable advantages (H&M’s fast fashion model has, for example, provided sustained competitive advantage). The question for this Thinking Differently is quite challenging and there are far from straightforward answers as something that conceivable is transient may turn out to be sustainable and vice versa (this relates to the uncertain and incremental nature of strategy development processes covered in Chapter 13). Moreover, the time frame difference between what is transient and sustainable may not always be obvious. While we think of sustainable competitive advantages as lasting a few years at least, the transient advantages in the illustration are described as going through a life cycle of launch, ramp up, exploitation and erosion and this seems to be a process that would last for a few years too. The difference between the two views may thus be more subtle than indicated (the length of competitive advantages is in fact something strategic management researchers has debated for a long time).

Assignment 7.1 Business strategy in the public and charity sectors

Students may well have reservations about the relevance of business strategy in the not-for-profit sectors, and it is worthwhile pushing them on this. Public services are always manipulating the variables of cost and quality, just as in Porter’s or D’Aveni’s frameworks. Where citizens see superior packages of cost and quality available in comparable organisations (other local authorities, other hospitals, other schools and so on), then there will be considerable pressure to adjust the strategy.

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With regard to charities, the relevance of business strategy – indeed, the unavoidability of such strategy – can be shown by reference to Illustration 3.4 on consolidation in charity and public sectors.

In addition, Illustration 7.3 demonstrates how useful thinking strategically may be when trying to improve public sector services.

Assignment 7.2

Applying generic strategies or the Strategy Clock We use both Porter’s generic strategies and the Strategy Clock (Section 7.2.5). Our view is that Porter’s generic strategies are widely used in teaching and speak to important issues of trade-offs and ‘hard choices’ and relative cost. However, we also emphasise that hybrid strategies are quite common and on the question of ‘stuck-in-the-middle’, regarding which Porter has often been seen as too simplistic, Section 7.2.4 reproduces Porter’s own account of three circumstances where the choice between alternative generic strategies may be blurred.

This assignment reveals one of the advantages of the Strategy Clock (Section 7.2.5); it is a lot easier to access price information than cost information. The Strategy Clock thus directs attention to price, something which students can more easily perceive from outside than costs, and it allows more continuous adjustment of strategies than the dichotomous choices of Porter. In order to emphasise this continuous adjustment, the Clock presents its alternative strategies in terms of ‘zones’ rather than single points.

For this assignment, it is best for students to consider a set of firms in the same market, in order to make it easier to identify companies pursuing hybrid or stuck-in-the-middle strategies. The most suitable markets will be those such as clothes retail, mobile phones or airlines, where competitors are familiar and relatively easy to compare. Success will be hard to measure, especially for more diversified companies, but sales growth, market share data or press commentary would help.

Assignment 7.3 Differentiation The purpose of this assignment is to establish whether students are able to explain the concept of differentiation. Note that the differentiation Section (7.2.2) has been extended with an emphasis on three primary differentiation drivers. The assignment requires students to explain differentiation not only in terms of ‘being different’ or by citing the importance of the differentiation zone in Figure 7.5 but rather in terms of, for example: • What specific differentiation driver that underlies the differentiation: product or service attributes,

• •

customer relationships and/or complements.

That the drivers underlying differentiation must be difficult for competitors to imitate.

This is likely to be achieved by building on distinctive resources and capabilities of the organisation. However, the more perceptive students may point out that this is difficult to achieve

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and manage. So, organisations may not be able to create bases of non-imitability readily (compare

• •

the VRIO criteria in Chapter 4). For other organisations, differentiation may be achieved by being flexible or faster to respond in markets than competitors, but that too is a function of the culture of the organisation. Students should, therefore, be able to make linkages between the concepts and differentiation explained in Chapter 7 and the value chain (Chapter 4) and organisational culture (Chapter 6).

That differentiation comes at a cost and must be clearly offset by the ability to charge higher prices.

Overall, however, perhaps the most important basis of successful differentiation is the ability of an organisation to understand customer needs and what is valued by the customer better than competitors: that there is a danger that differentiation is driven on technical grounds rather than by an awareness of customer needs.

Assignment 7.4 Business models This assignment invites students to examine various company’s business model components and how they may differ. Business models are covered in Sections 7.4 and 7.4.1 and Figure 7.9 is of particular importance for this assignment. Spotify, Netflix and Apple are given as examples here as students are likely to be quite familiar with those, but students can of course be encouraged to examine any organisation of their interest or maybe an organisation they would like to work for.

There are some points to consider here: •

•

•

•

That mapping business models are most informative for more complex business interrelationships that generate value and profits by and for more parties than just a buyer and seller (analysing the business model components of Spotify and Apple may thus be more informative than doing this for Ford).

That it’s of significance to specify the details involved in each business model element and not only their main characteristics (e.g. Spotify creates value by offering streamed music, but the service involve several others specific value adding services on top of this, like user targeted music compilations, most songs played by others, most songs played/year).

That for complex business models all three elements can involve multiple actors and not only a single seller and customer (e.g. the Netflix and Spotify models include external content providers, but Netflix is also involved in the production of original content and Spotify produce music compilations).

That business models get established over time and may be shared by several competitors, but their business strategy and thus competitive advantage can still differ (Spotify share a similar business model with several competitors, but they have managed to build a considerable larger network of users that potentially could give them network effect advantages.).

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Assignment 7.5 Cooperation rather than competition Students should draw on the general principles explained in Sections 7.3.1 and 7.3.2, which point to the circumstances in which cooperative strategies make sense. For example: •

Buyer–seller collaboration is a key element of Formula 1, where manufacturers see motor racing

•

as a way of developing their own technologies.

Collaboration of buyers of pharmaceutical goods to increase buying power.

•

•

There are many examples of competitors who collaborate to increase their market or competitive power. Not least is the case in lobbying governments for changes that facilitate entry and power in markets. This would be applicable within both the pharmaceutical and Formula 1 industries.

Co-production with customers is beginning to happen in markets such as pharmaceuticals, where pharmaceutical firms, faced with increased buying power are finding ways of working with government buying agencies and doctors to increase efficiency or reduce the cost of treatment.

• Collaboration in Formula 1 also includes one team providing services for another (e.g. McLaren providing marketing services for Tyrrell); collaboration over shared suppliers (Jaguar, Benetton and Williams all use Michelin tyres and share data); and engineers and mechanics all know each other and informally help each other out in particular circumstances.

Integrative assignment 7.6 Game theory and international strategy Chapter 9 refers to the issues of interdependence and retaliation that are very relevant to game theory.

For example, Yip’s competitive drivers of internationalisation (Section 9.2) refer to the need to coordinate strategy globally in order to defend against the attacks of other globally coordinated competitors: it is important to respond to their moves in a coherent rather than piecemeal fashion.

Likewise, Section 9.5.2 and Figure 9.6 refer to ‘reactiveness’ and ‘clout’ of defenders in response to aggressive moves into particular geographical markets: retaliation potential needs to be figured into the strategic calculus.

In terms of game theory principles raised specifically in this chapter, the following points (based on Section 7.3) are likely to be particularly important: • Repetition – Managers should recognise that competitors will infer from behaviour in one geographical market at one point in time like behaviour in another geographical market at another point in time. Weakness in initial response to a competitor move will only encourage future aggression by the competitor. It is sensible, therefore, to ‘train’ competitors to expect certain kinds of response in order to discourage unwanted moves: for example, a price war launched by a competitor in one geographical market could be always countered by launching price wars in two geographical markets.

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•

Signalling – Repetition makes signals important. For example, any initial intrusion into an important geographical market should be countered very firmly at once as a warning against further incursions, there or elsewhere.

•

Deterrence – As well as active responses, the passive possession of a capability can act as

•

deterrent. For example, it might be worth holding a minor position in a competitor’s home market in order to have a credible capacity to retaliate against any aggressive move by counter-attacking in the competitor’s own heartland.

Commitment – Another form of signalling is to emphasise commitment. For example, should an international competitor attack in a particular geographical market, it might be worth increasing financial or psychological investment in that area in order to signal determination, perhaps by sending over senior managers, building new local capacity or expanding the local headquarters.

Case Example The IKEA approach Everyone has heard of IKEA – whether you love or hate their products. It remains one of the best modern examples of what the hybrid strategy actually means and why it is difficult to imitate. But it requires considerable management effort to sustain without which there is a constant danger of drifting into a ‘stuck-in-the-middle’ position – being ‘out-flanked’ by both low priced and differentiating competitors at the same time. This may particularly be the case in China.

The case study is concerned with specifically the issue of generic competitive strategies as discussed in Section 7.2. It is particularly useful in exploring what cost leadership requires (Section 7.2.1) and also the difference between a hybrid strategy and being ‘stuck-in-the-middle’ (Section 7.2.4).

1. Identify where (in its value system) and how IKEA have achieved cost leadership.

IKEA’s low prices are under-pinned by cost management which is better than competitors: •

Extensive control of the value system and process orientation •

Choice of materials and designs that are cheap to manufacture

•

Selection of manufacturers – and progressively extending backward integration into

•

IKEA-owned manufacture Global sourcing

• •

Flat pack and self-assembly reduces transport costs and assembly costs.

Scale of operation (many more stores) •

An inherited culture of frugal behaviour (driven by the personal values of the founder Ingvar Kamprad).

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2. Identify how IKEA have achieved differentiation from their competitors.

There is a combination of factors that helped IKEA differentiate itself from its competitors: •

Selling a lifestyle, not just products off a shelf. This is sustained consistently through many aspects of the customer experience: •

Contemporary designed products with a connecting ‘theme’

•

Corporate branding in store colours, etc.

•

Consistent store layout

•

Range of products is extensive – unusual in low price stores

•

Use of the catalogue

•

Committed staff with better knowledge, providing better service

• Move towards process orientation ensuring delivery of promises.

3. Explain how IKEA tries to ensure that their ‘hybrid’ strategy remains sustainable and does not become ‘stuck-in-the-middle’.

With both low costs and differentiation, IKEA effectively operates a hybrid strategy (Sections 7.2.4 and 7.2.5). Of course, Michael Porter doubts whether such strategies are sustainable, warning of the danger of being ‘stuck-in-the-middle’. The keys to success with the hybrid strategy are: (a) customers that value the offering and (b) difficulty for competitors to imitate. Some useful points in discussion could be: •

Students should identify the fact that this hybrid strategy is really ‘the IKEA approach’ to

•

doing business – in other words, it is ingrained in the organisational culture. It might also constitute the kind of ‘managerial innovation’ that Porter allows as a means of escaping the ‘stuck-in-the-middle’ trap (Section 7.2.4).

Perhaps the most difficult aspect of a hybrid strategy is the need to be clear about the

•

Of course, the Chinese (and perhaps the Indian) market may expose the contradictory

capabilities underpinning the basis of differentiation, and then to reduce the costs in areas that do not critically underpin this basis of differentiation. By doing so, it may be able to reduce costs below that of competitors without jeopardising its basis of differentiation. For example, IKEA worked hard on reducing overheads and distribution costs and bargaining hard with suppliers. But they still continued with the heavy cost of catalogues – a ‘luxury’ in the eyes of their ‘low price only’ competitors. pressures between cost and differentiation, with much lower prices being demanded and less willingness to put up with self-assembly. A query that might be worth putting to any Chinese or Indian students in the class is whether Swedish minimalism is so attractive in the eyes of consumers in those markets as it has been proven in the west.

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Avoiding being stuck in the middle involves several challenges for IKEA: •

•

•

•

A continuing danger is that the company fails to continue to be tough about the differentiating features and cost management. This, in turn, required higher margins to sustain profitability.

This slowly undermines the driving down of prices and/or puts more pressure on other elements of cost. The hybrid advantage may be lost?

There is a particular danger that the IKEA culture has been maintained by internal appointments to CEO (Dahlvig in 1999, Ohlsson in 2009, Agnejfäll in 2013 and Jesper Brodin in 2017). This runs the obvious danger of missing significant changes in their markets or learning from best practice elsewhere.

Another danger is that the market moves away from this particular concept for the usual reasons of changing incomes, demographics and lifestyles. Or the concept fails to ‘travel’ as the company globalises – they have already made mistakes on that front. The key to these two factors is good market research and some flexibility around the core concept.

They may also be outflanked by ‘low price’ operators improving their product features and/or other companies entering that space. In fact, the casualties in the recession tended to be these low-price operators (such as MFI in 2008).

At the other end, differentiators may improve their cost management.

• In summary, however, successful is a company or a concept, they cannot sit on their laurels.

Business history is littered with those that did.

4. How would you explain IKEA’s business model in terms of value creation, configuration and capture?

IKEA’s business model was rather unique for many years and although other companies have imitated parts of it, but IKEA still does not have a fully fledged imitator that has managed to copy both their model and business strategy. The key business model elements are covered in Sections 7.4 and 7.4.1 and Figure 7.9 are particularly helpful for this question. Some issues to consider in delineating IKEA’s business model are: •

•

That IKEA targets and creates value for a quite wide range of customers with its low cost designed furniture conveniently displayed in its own accessible big city outlets. The market segment is thus broad and includes a variety of families and businesses rather than a specific narrow market segment. Value is also created through delivery and assembly. In some markets, this is contracted out to external companies via IKEA to customers and they then thus create this value for customers.

That IKEA’s value configuration relies on a complex system of interlinked activities including design, own and partners furniture manufacturing of furniture and sales and marketing through their own outlets and websites. Their resources and activities have developed over many years and to a large degree rely on their organisational culture; both

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factors which imply imitation difficulties for competitors. For kitchens and electronics IKEA cooperate with external partners. It should be noted that customers are part of the value configuration as they (most often) assemble the furniture themselves.

•

That IKEA captures a margin through their sales of furniture based on a low-cost structure (primarily based on economies of scale) and to a minor extent service fees related to delivery and assembly and rent of transportation aids. To the extent that external actors are involved in delivery and assembly they too capture value.

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CHAPTER 8

Corporate strategy

Introduction There are a few new additions to this chapter. Section 8.2.1 has now added a third constraint to market penetration strategy; economic constraints. Also, in Section 8.2.4, we have decided to replace the term conglomerate diversification with unrelated diversification as we felt the former term was too restrictive. There is a new Section 8.5.3 on divestment that also has a new Figure 8.5, showing a decision tree for divestiture options. There are also new Illustrations: 8.1 (Choosing new directions at Tesco) and 8.3 (Outsourcing – a broken model? – about outsourcing at Cambridge University Hospital Trust). For the thinking differently section, the question is posed whether there is a need for corporate strategy at all.

Illustration 8.1 Choosing new directions at Tesco The illustration describes Tesco’s growth from start up to the UK’s largest grocer and then to its record-breaking loss in 2015. The questions seek to understand Tesco’s successful growth strategy and why it is now experiencing serious problems.

1. Using the Ansoff matrix, plot Tesco’s growth over time. What do you notice about the

pattern of expansion?

From its foundation until 1974, Tesco expanded rapidly in the United Kingdom through acquisition, buying direct competitors. This meant it built market share rapidly through Market Penetration (box A in Ansoff’s matrix). In 1974, it opened its first petrol station which can be seen as a new strategy of new products and services (Ansoff: Box B), however, it also continued with its market penetration strategy through buying competitors. It also launched a club card in the early 1990s which again is a new service (Ansoff: Box B). From the mid-1990s, Tesco expanded rapidly overseas (Ansoff: Box C). During the early 2000s, Tesco put far more effort into offering a wide range of new products, including clothes, electricals and financial products (Ansoff: Box B), but at the same time continued with its aggressive overseas expansion (Ansoff: Box C). It is also worth noting that Tesco still continued to expand in the United Kingdom, albeit in a piecemeal way (Ansoff: Box A). In 2009, Tesco started its own bank which was a new service for existing and new markets (Ansoff: Box D). In 2018, Tesco took over wholesaler, Booker, which was a vertical integration along the supply chain, another type of diversification that might be related or unrelated – in this case related.

The general pattern of expansion was the early strong focus on market share to create market dominance. This is generally the least risky form of expansion as it closely links to the experience

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and capabilities of Tesco. However, over time there were fewer and fewer opportunities to expand in the home market which is why there was a gradual emergence of investment in new products and services, and market development. Generally, market development is a preferred strategy as it is quick and less risky than new product and service development, and to some extent, this is the case with Tesco. In the early 2000s, however, the overseas expansions were not doing so well and, whilst searching for growth, Tesco started its own bank which tapped into existing customers and markets as well as new ones. This strategy moves towards box D as Tesco did not have existing capabilities for this new venture. Overall, one can make the case that Tesco’s expansion started with the lowest risk option, building on existing capabilities and then subsequently more risky strategic options were pursued until the group’s performance overall began to suffer.

2. How has Tesco’s corporate strategy changed over time?

Overall Tesco’s need for growth drove expansion from the least risky quadrant of Ansoff’s matrix to the most risky. As competitive pressures in its core business rose inexorably, Tesco started to sell off overseas branches and exit more risky products to focus attention. In other words, its growth strategy that drove the company for nearly a century has been replaced by a retrenchment strategy that emphasises cost reduction rather than market and product expansion. Its latest move along the supply chain is to try to protect the costs of supply to its core activities and probably act as an influencer of costs for some competitors. It is also noticeable that Tesco is using alliances as a far cheaper way of gaining control of rare resources than acquisitions. Attention, therefore, is firmly focused upon cutting costs with job losses and restructuring. However even though on paper, acquiring its main supplier should result in cost savings through synergy gains, wholesale is a different industry to supermarkets and it remains to be seen if Tesco has, or can develop, the competencies to fully exploit this huge investment.

Illustration 8.2 From sat-nav to driverless cars TomTom illustrates a very successful business that faced decline. In response, the company embarked on a succession of related diversifications that could lead the company quite far from its traditional activity.

1. Explain the ways in which relatedness informed TomTom’s post-2008 strategy.

The sharp decline in TomTom’s core sat-nav business caused the company to consider alternative areas for expansion. Using its core technology, TomTom was able to find new uses by moving into related areas of fleet management and vehicle telematics. The main change was from selling hardware to selling services by providing free mapping on smartphones and integrated management systems for traffic management. These related diversifications stay with TomTom’s core technological competence, technological synergy, but takes it into new product offerings with some new customers.

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really winning in terms of new capabilities of video editing and sharing capabilities. This may be tapping into market synergies, aiming to attract prior purchasers of the Multi-Sport watch to the action camera.

The company is now quite far from its traditional activity. Although the case does not provide data on the relative size of each part of its business, and we may surmise that sat-nav, and TomTom’s recent initiative with car companies will mean it stays and important part of the business for the time being, tough competition in sat-nav and TomTom’s other initiatives raises questions about the real nature of the business going forwards.

2. Were there alternative strategies open to TomTom post-2008?

It is not clear from the case the extent to which TomTom is global in 2008 but it may have been possible for the company to expand aggressively into other geographic areas, as market development, in order to build market share. They might also have increased the functionality of the product, product development that would be unlikely to be imitated by smartphones. If they had the resources, they might also have tried to dominate further the market, by getting tight links with automotive manufacturers in order to control the market, although this might have been very expensive and would not really neutralise the threat of smartphones.

One possible strategy for TomTom would have been to sell the business to other managers who may have been better able to manage its assets. With a new management team, they may have been able to see a new strategic direction more clearly than the incumbents who tend to identify with earlier strategy. They might also have sold to a direct competitor who would have valued the brand and they might also have searched for alliance partners that might have increased the value of the TomTom product as a complementor. Arguably, TomTom might also have examined whether any network effects could be possible through data sharing, although this seems unlikely.

Looking forward from the end of the case, although there seems to still be revenue potential in the traditional Sat-Nav product for cars, tough competition means reliance on this product could be dangerous. TomTom has already shown its propensity for diversifying and its latest foray into action cameras shows it is now less constrained by technology synergies and more open to market synergies. Nonetheless, it would seem sensible to try to find new offerings that continue to build on its core navigation devices and also tap into personal wear, perhaps in the large fitness industry.

So, for instance, we might consider personal mobility devices with markets in GPS trainers, bicycles, glasses.

Reducing dependence upon sat-nav for cars is prudent but also raises a corporate strategy question of where to invest. New products take time and resources to start up and there is a higher risk of failure. Also, new competencies are needed if TomTom is to be a successful collection of startups under one umbrella. This should only be considered if the company is sure it has exhausted the technological synergies of real-time mapping. Its most recent initiatives in 2019 suggest that it still perceives value in investing in real time mapping for use with driverless cars.

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Illustration 8.3 Outsourcing – a broken model?

1. Why do local authorities outsource? In general terms, outsourcing offers companies the opportunity to reduce their overall costs by procuring the same, similar or better service or product more cheaply than they can provide it for themselves. In the context of local authorities in the United Kingdom, they have experienced very severe budget cuts that means they have to find ways to reduce costs. In the Cambridge University Hospital Trust illustration, there was reason to believe that outsourcing would access better levels of capability than in-house at much lower cost and risk than providing the service in-house, and this would improve the organisation’s operating efficiency. The logic was that external subcontractors are specialists in the particularly activity being outsourced and could provide a superior service than a department within the parent company.

2. What are the problems with outsourcing? Outsourcing is often controversial, both in public and private sectors. Managers tend to justify outsourcing particular activities because they are ‘not core’ to what they do. For Cambridge University Hospital Trust, patient record systems was a core activity but probably perceived as a ‘hygiene’ factor rather than an ‘order-winner’, for winning and retaining customers. So the attraction of achieving better levels of efficiency at far lower cost is evident. However, there are risks that include private contractors not really understanding the complexities of the task, the Hospital Trust may have under estimated the scale and challenges of implementing a new system, a culture within the Hospital Trust that could not, or would not, adjust. Although not evident in the case, there can be opportunism by subcontractors. However, what does seem to be clear is that, having outsourced contracts, this can result in the running down of in-house expertise. However, bringing contracts back into the Hospital Trust is also not without risks. Insourcing, or bringing an activity back inside the parent company can appear to be a positive move as it overcomes potential opportunism from suppliers and also cultural and technical alignment problems. It also may allow future adjustment in synchrony with the parent. However, it may also raise the cost base of the parent company in comparison to its competitors. In a price competitive industry this could put the parent at a competitive disadvantage, particularly if the insourced activity is largely invisible to stakeholders.

A further risk is that the insourced activity will not be performed to as high a level as an external firm that specialises in the same area.

Illustration 8.4 Eating its Own Cooking – Berkshire Hathaway’s parenting 1. In what ways does Berkshire Hathaway fit the archetypal portfolio manager (see Section 8.6.2)?

Berkshire Hathaway exhibits a good many, but not all of the characteristics of a portfolio manager. Buffet describes the company as a ‘conduit’ rather than an agent and seems rather less concerned with institutional investors than with smaller shareholdings. But nonetheless, the logic of an intermediary expert holds.

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A great deal of autonomy at business unit level is allowed, but notably there are constraints.

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For example, reinvestment of surpluses is not permitted without reference to the centre. So what is encouraged is value creation in terms of current and operational strategies rather than fundamental changes in strategy.

The emphasis seems to be less on acquiring under-valued assets than acquiring mature

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businesses with cash flow and profit potential.

Buffet does not seem to regard the portfolio as one in which he rapidly divests or acquires.

He seems to invest in businesses for the long haul. There is, however, an emphasis on a lean corporate staff – just 21 at HQ, and clear incentivisation for results at business unit level.

Interestingly, however, Buffet does not conform to the extent that he is prepared to take minority stakes in large businesses (e.g. Goldman Sachs). These give him influence, but not the managerial control that is usually required in a pure portfolio manager.

2. With $100 to invest, suggest industries and businesses Warren Buffett is likely never to invest in.

Buffet is unlikely to invest in industries that are new, high-technology, highly competitive, hypercompetitive or prone to oligopolistic competition (Section 3.3.1). Buffet prefers industries and businesses that are mature and with secure profit streams because of market or brand power (Goldman Sachs dominates investment banking, Coca-Cola dominates soft drinks, BNSF is part of a duopoly with Union Pacific dominating US rail-freight in the mid-West). This emphasis on the mature excludes him from so-called ‘glamorous’ industries that are likely to attract far more competition and capital than can be profitably absorbed. Thus, Buffet is famous for having avoided all internet stocks during the 1990s boom.

Illustration 8.5 Chipotle: Doing things differently 1. What parenting advantages did McDonald’s perceive it might bring to Chipotle?

McDonald’s brought distribution systems, real estate expertise, construction knowledge and organisational structure along with its capital investment. It brought a highly professionalised system of management and organisation that it thought could be applied to a rather chaotic and unprofessional start-up. In terms of the value adding activities listed in 8.6.1, McDonalds was providing envisioning, specifically in terms of growing Chipotle rapidly by creating new distribution outlets and a new brand, facilitated synergies by having employees share each others facilities and there is a suggestion that McDonalds would be coaching Chipotle employees to improve their efficiency. McDonalds provided financial support for new initiatives and it is probable they monitored their investment, although their intervention seemed limited. As many of the McDonald initiatives were downwards, the parenting style might seems to be parental developer. In terms of the parenting matrix, McDonalds perceived there was a good fit between the parenting opportunities it perceived in Chipotle and its parenting skills – it was aware of the benefit of its ownership.

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2. Despite its success, why was Chipotle spun-off?

It would seem that despite McDonald’s best efforts they ended up with a ‘Crown Jewel’ problem (8.6.4). As a parent little if any value was added to Chipotle. In terms of the parenting matrix this can be termed lack of ‘feel’. McDonalds did not appreciate fully the way in which Chipotle was competing in its market. This was manifest in a very different set of attitudes, beliefs and competencies that underpinned Chipotle’s market success. At a granular level, the differences are clear with clashes over the quality of food ingredients and the ways in which customers were treated. The culture in Chipotle was different from McDonalds in many ways including the way they dressed and acted, and so there was sustained resistance from the founder and employees to McDonald’s ideas. In this situation, McDonalds was not adding value and in fact, one could argue Chipotle was a Ballast Business and better disposed of, rather than waste further management attention and investment. Fundamentally the ways in which McDonalds and Chipotle compete in their markets is different and although the latter has gone on to be a big success it is by no means certain that this would have happened under McDonald’s ownership as its shareholders believed.

Thinking differently Corporate Strategy is a Fool’s Errand Question: Evaluate the arguments for and against corporate strategy for Berkshire Hathaway or Tesco .

Berkshire Hathaway is a portfolio manager that actively choses sectors in which to invest or divest based upon the headquarters’ (Warren Buffet’s) expertise as investor. The financial track record of Berkshire Hathaway is well known and on this basis this style of corporate strategy does pay off for shareholders – Warren Buffet is clearly expert at identifying opportunities better than the markets.

However, he is also mindful that it is not just a question of picking the right companies to invest in, but also it is necessary to ensure that Headquarter costs are kept to an absolute minimum and the managers of his individual businesses are given autonomy, and incentivised, to perform. The counter argument is that Warren Buffet is an exceptional individual and does not represent the majority of conglomerate businesses. More commonly widely diversified conglomerates, at best only approximate to the market, and often underperform it. Investors can diversify more cheaply, and more quickly, than conglomerates, so their businesses should be sold off, thus saving the expense of lavish headquarters. The implications for Berkshire Hathaway are whether they are likely to identify someone with Warren Buffet’s superior capabilities in the future.

Tesco on the other hand is a synergy manager – it aims to enhance value for its business units by managing synergies across them – often through full integration. In its early expansion phase, when Tesco was buying up a lot of direct competitors, there were rich opportunities for synergy gains in terms of efficiencies and also market power. Later expansion into new markets and also into new products meant synergy gains were more focused and Tesco’s success was more varied. Arguably as these new initiatives were further and further away from the core business, there were increasing coordination costs and synergy gains were more elusive, which explains why, when Tesco was losing money in 2015, many of these business units were sold off. In order to manage Tesco’s complex empire, it has a much larger head office that Berkshire Hathaway, as it is far more involved in facilitating cooperation and integration across its various businesses. The assumption is that the cost 110 .

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of this larger head office is justified by the value created through integrating and coordinating its business units.

Assignment 8.1 Ansoff Matrix

Students can apply a similar procedure here to what was suggested for the discussion of Illustration 8.2, from Sat-Nav to driverless cars. See the relevant case notes later in this Manual for discussions of CRH, Marks & Spencer, Megabrew.

Assignment 8.2 Related or unrelated diversification and the dominant logic This assignment will raise practical issues around the degree to which companies are related or unrelated in terms of diversification. The Ansoff Matrix can be helpful here, but it should be underlined to the students that relatedness and logics are ultimately evaluated subjectively rather than objectively. Relatedness (and synergy) are often exaggerated by managers (consider the Chipotle case of Illustration 8.5).

The following three cases proposed in the question are particularly interesting: 1. Alphabet has been diversifying very rapidly out of pure search into a wide range of activities. If you go online to look at Alphabet’s subsidiaries, this will give an idea of its diversity. It might be claimed that many of these activities are effectively unrelated diversification, but it still might fit within a basic ‘dominant logic’ of internet-based communications.

2. The highly diversified Indian Tata Group (from steel to consulting services) provides an interesting case of diversification apparently working in a developing country context, as argued for in Section 8.3.

3. The Virgin Group is a highly unrelated diversified set of businesses that appear to be united only by a brand. The performance of the companies is opaque so it isn’t possible to really assess the success of the group, with analysts suggesting the logic has more to do with Richard Branson’s enthusiasms and wish to take on established players, rather than making a return for shareholders.

Assignment 8.3 Corporate parenting Generally, unrelated businesses are best managed by ‘portfolio management’ styles or ‘parental development’ styles (e.g. both Virgin, Siemens and Alphabet can offer from the centre technological resources and brand or reputation benefits). Related businesses should not be managed by portfolio management styles, and should benefit from a ‘synergy manager’ style (Marks & Spencer). Notice how the question raises the issue of whether all units are equally well suited to the overall corporate 111 .

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style: as it is difficult for parents to mix styles, this question raises the possibility of divesting units that do not fit the prevailing style. The Virgin group is notable for not only starting up new businesses and buying existing businesses, but also for disposing businesses that do not perform to its expectations.

Assignment 8.4 Portfolio matrix

This assignment is liable to be quite difficult, but can be revealing.

A great deal will rely on choice of company. Reliable market share data are not available for all markets. However, consumer markets often have better information than others (e.g. search engines, newspapers, mobile phones); so too do major industrial markets (e.g. aircraft, computers). Market share data can be obtained from industry reporting services such as Key Note or Mintel; often a news search through a service such as ft.com or Factiva will be useful (combine search terms such as name of product plus ‘market share’). Also, many diversified companies have simply too many products or services to map. Students should be encouraged to choose relatively simple businesses or concentrate on main products/services or areas. Thus, a diversified company such as Unilever might have too many brands and products to be practical, unless products are aggregated into broad areas such as ‘hair care’ or ‘personal products’. You should advise students to estimate market shares and growth rates, in the absence of other information; however, it is important that they justify their estimates; otherwise, this could be a lazy short-cut.

As always, it is important to draw managerial implications from the analysis. Which businesses should receive more investment, be milked, divested or whatever? Students should be asked to be alert to when the logic of the matrix seems to contradict the real-world needs of the business.

Integrative assignment 8.5 Shareholders’ reactions to mergers and acquisitions Mergers and acquisitions are a key method of diversification and are discussed in Chapter 11. The behaviours of the share prices of the bidding and target companies in any deal need to be evaluated against the following background.

The finance literature has generally found that acquiring firms’ stock prices typically fall by a small margin in the period immediately before and after the announcement of a significant takeover bid (see S. Moeller et al., Wealth Destruction on a Massive Scale? Journal of Finance, 2005, 60, 2, 757–782 for a review of the theory and evidence here). This implies that shareholders are not confident that the takeover will improve returns – rather the reverse. However, related mergers and acquisitions seem to be received by acquiring firms’ shareholders more positively on the average, implying that good related diversification strategies are anticipated by shareholders to improve returns potentially. It is also important to note how the shares of the target (bid-for) company respond; they typically rise substantially, often higher than the original bid. The rise in share-price above the value of the original bid signals that target shareholders hope to extract some of the anticipated

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additional synergy value of the combined companies as well as hoping for a bidding war between alternative buyers, raising the final price. As share-prices for the target rise, the danger is that the shareholders of the target firm will receive all the benefits of the eventual merger or acquisition upfront in the deal price, leaving nothing for the acquiring firms’ shareholders.

Against this background, students should expect the bidding firms’ share-price to fall around the bid announcement date. In cases where this does not happen, they should look for exceptional strategic reasons for this success. Theoretically, this success should lie in strategic relationships (synergies and similar), which the student should explain. Where bidders’ share-prices fall particularly far, they should look for reasons for skepticism about the strategic rationale; typically, the press coverage will provide ample guidance here.

End-of-Chapter Case

Grand Strategies in Vision

By Peter Barton Background The global optics industry has evolved across idiosyncratic local markets characterised by great social and regulatory variance. Most markets were traditionally structured with a plethora of small players in manufacturing and retail alike, but they have undergone significant and rapid change. Over the past two decades, there has been substantial consolidation within the frame market in an attempt to leverage business synergies. Large conglomerates have shifted the balance of power across the industry and, through expansion and consolidation, now command significant domination and control over a large part of the supply of eyewear brands, and, increasingly, the retailers they are sold through.

In relation to the value chain, for manufacturing, profits are made through brand value (over generic products) particularly in relation to Fashion (e.g. for Chanel, Ray-Ban etc.), which is driven by marketing. Furthermore, value and profit is made through quality (e.g. Ray-Ban quality enhancements, lens technology (e.g. Essilor)), which is driven by R&D and production processes.

Profit is made at the retail end in terms of revenue and mark-up/margin. Indeed, it is not uncommon to find individual branches of large chains, in particular, turning over many millions of Euros/Pounds.

The challenge comes for lower-turnover stores covering expensive overheads, which include significant staff costs especially in relation to professionals (i.e. Ophthalmic and Dispensing Opticians) as well as expensive equipment. By being integrated vertically, as in the case of Luxottica, and, to some degree GrandVision, they have the ability to control every aspect of value across the supply chain. This gives the ability to shift power between subsidiaries according to their market and competitive needs, as well as share common goals and create synergies.

The questions posed will encourage students to think about corporate strategies in a neatly defined, yet highly diverse, industry. Whilst they are weighted towards GrandVision, understanding their arms-length relationship with frame supplier Safilo, through their parent company HAL Holdings, is an important dynamic. The detail on their larger and more profitable rival Luxottica, and, their recent merger with lens giant Essilor, gives context to GrandVision’s future strategic moves in a growing market.

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This case can also be considered in relation to the industry case (Vision Express), which provides further industry context in relation to one of GrandVision’s major subsidiaries, Vision Express.

Together, students could also be encouraged to consider other themes in relation to macroenvironmental factors, resources, culture, international growth, leadership and CSR. Question 1: With reference to Ansoff’s matrix, show how Luxottica and GrandVision have evolved over time. What can you conclude from each?

A key aspect of this case revolves around the way in which both Luxottica and GrandVision have expanded over time, which signals their strategic choices in relation to each aspect of Ansoff’s matrix.

This also helps to provide clues as to their future approaches to growth. It is particularly important for students to consider what aspects are market developments in terms of new geographical markets as well as new markets within their existing business units.

If this question is used by student groups, it could work well to split groups in order to answer the questions in relation to Luxottica and GrandVision.

Luxottica

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Market Penetration and Development (and some consolidation): Luxottica roots stem from manufacturing frames and it has continued to increase sales across global markets as well as expand the number of proprietary and licensed brands it provides. However, its growth has not always focused on selling more units. Rather, they have adopted a strategy of selective, and, in many instances exclusive, distribution by restricting the number of stores that sell their products (as in the case of Ray-Ban and Chanel) in order increase their exclusivity and respective brand value. This then relates to market development as Luxottica have shifted brand perceptions in order to appeal to the more fashion-conscious as well as affluent market segments.

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Product Development: The range of brands and the huge number of models (currently over 27,000) is testament to Luxottica’s commitment to product development. In each case, they have also looked to improve product quality and raise brand value through fashion. Notably their biggest success was the transformation of the Ray-Ban sunglasses brand which they purchased from Bausch & Lomb. The dramatic improvement in product quality as well as focus on brand image has turned this into the world’s most valuable glasses brand, which they then developed into a successful ophthalmic range as well. They have continued to acquire other suitable fashion and leisure brands with Oakley being the other high-profile acquisition.

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Diversification: Luxottica has adopted a relatively consistent position for the products it manufactures with main diversification coming from the vertical integration of its business into retail. This has largely been driven through acquisition (such as through Lenscrafters) but Luxottica are also trying to increase their global retail presence through existing brands such as David Clulow and Sunglasses Hut as well as through new optical store models such as John Lewis Opticians. The merger with Essilor will also now give Luxottica a more diversified portfolio with cross-platform selling opportunities across its own and other retail outlets.

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Luxottica Conclusions: •

Luxottica have a strong track record of growth providing them with both economies of scale and distribution efficiency. They have continually looked to develop geographical reach as was in the case with the acquisition of Lenscrafters in the United States, which instantly enabled them to further increase their product sales. The merger with Essilor will give them yet further growth potential in both new and existing products and markets.

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It appears that this growth and brand exclusivity has given Luxottica significant competitive advantage and domination in the designer brand market. They appear to take on a sustainable differentiation strategy that is quality and brand-led. Whilst their products are sold widely, careful control of supply and increasing customer demand through brand enhancements ensures that customers will seek out their products.

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There is a focus on in-house control of every element of the production process which ensures that they are able to provide consistent quality, a key strategic priority. Luxottica have thus far avoided outsourcing where control is reduced, and potential business processes may be copied.

Luxottica are not easily distracted by business they deem as non-core and potentially valuedestroying. Their purchase of US Shoe appeared to be a way of acquiring the largest US optical retailer, so they quickly sold off all non-optical parts of the business.

The merger with Essilor also demonstrates the importance of technology to Luxottica, which looks to further enhance both its resources and capabilities. Essilor is a market-leader in spectacle lens R&D and it seems likely that Luxottica wishes to benefit from not just the cross-selling opportunities but the cross-learning potential as well.

GrandVision GrandVision itself is largely the amalgamation of a number of optical chains that have enjoyed steady year-on-year growth, which has come from opportunities in existing and new markets.

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Market Penetration: Although GrandVision does manufacture some products, their core focus is upon retail, which arguably makes them more vulnerable in the context of the current retail environment (see Vision Express Industry Case). Notably, GrandVision try to develop and further penetrate their markets through driving more sales through existing stores and trying to integrate acquisitions and extend their reach within existing markets. For example, from the 19 branches, they acquired from Conlons Opticians, they merged 7 into existing Vision Express Stores and converted the other 12 into the Vision Express brand.

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Market Development: Not only have GrandVision been successful in penetrating its existing markets, but it has also widened its global reach evidenced by its M&A activity outlined in Figure 2. For example, they have expanded into markets they were not previously represented in, such as through Atasun in Turkey, Red Store in China, For Eyes in the United States and Walmart in Mexica. Whilst not shown in the case, they have also increased their online e-commerce including the contact lens online provider Lenstore in the United Kingdom.

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Product Development: GrandVision have a significant portfolio of licensed and proprietary spectacle brands that they are continually developing in terms of range, style and quality.

However, GrandVision’s core business is retail, and in this area, GrandVision appears to focus on enhancing their professional services around eye-health. (This is particularly evident from the Vision Express cases where they are continually investing in new technologies to enhance and broaden their capabilities and services.)

• Limited diversification: Whilst GrandVision’s portfolio shows a spectrum of products and services that have been sold across a range of markets, GrandVision’s strategy has remained heavily weighted to optical health and the selling of products through its retail business. Their growth strategy is to enhance what they have now and look for opportunities for further expansion rather than look to further diversify their portfolio. That said, they are acutely aware of the changes in the marketplace and they will be keeping a close eye on technological changes and competitive moves by Luxottica in particular.

GrandVision Conclusions: •

The majority of GrandVision’s recent growth has been through Market Penetration and Market Development even though they are inherently diversified (e.g. retail, spectacle frames, lenses, contact lenses).

• Whilst GrandVision have a good range of their own frame brands and limited prescription lenses and contact lenses, their growth has been focused upon acquisitions within existing and new markets. This, in turn, helps to drive sales of their own products as well as the designer frames from their sibling company Safilo.

A key point of difference between the two companies is that Luxottica is more integrated than GrandVision, which is focused predominantly around retail. Whilst GrandVision creates significant value across its portfolio through synergies, Luxottica appears to be a stronger position in terms of strength of designer brands and direct relationship into its own retail outlets. Furthermore, the inclusion of Essilor as a mainstream branded lens manufacturer merging with Luxottica greatly widens the scope of Luxottica’s capabilities and markets, and, thus, creates a challenge for GrandVision.

The combinations of Safilo and GrandVision would be more similar to its rival but the existing armslength separation means that GrandVision cannot capitalise on synergies within its value chain to the same extent. It is worth noting how Luxottica and GrandVision share a similar preference of control and ownership and appear to keep their support and primary activities in-house in order to keep ownership of quality control.

Question 2: How does GrandVision compete in its market?

In order to answer this question, students should firstly recognise that GrandVision completes through both its differentiated position within the industry as well as the capabilities that it possesses, which together provide sufficient value to enable it to compete in its disparate markets. Notably, it is its scale economies that help to drive group and subsidiary costs lower through process synergies and buying efficiencies, but also through linkages from its own and sibling manufacturing to its global retail network.

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It is worth noting that GrandVision has not harmonised its global brand across all its stores retaining local brand value as well as local knowledge in diverse markets. Indeed, the GrandVision brand is not well known across markets whereas the brands of which it operates both across manufacturing and retail alike, hold significant value in their markets, which relate to quality, fashion, reliability and professionalism. Vision Express CEO, Jonathan Lawson, implies that there is a dominant logic applied across the varying business geographies and units and best practices are shared across markets when deemed appropriate (see Section 8.3). Chiefly, a drive for professional service and quality brands is a common theme amongst its retail operations. Students who are aware of GrandVision’s retail brands (such as Vision Express in the United Kingdom, Apollo-Optik in Germany and Grand Optical in France) will be able to bring their own perceptions and insights regarding their positioning in their respective markets.

In terms of Porter’s five forces, the industry power has continuously shifted from retail to suppliers as the number of suppliers reduces. However, GrandVision’s own supply as well as their sibling company Safilo gives them significant power across the supply chain in an industry where recommendation by the professional has significant weight in customer decision-making.

It is also helpful here to consider GrandVision’s own perception of how it creates value within its markets.

GrandVision’s value model

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If you consider GrandVision’s competitive advantage in relation to environmental factors, GrandVision has and continues to be well positioned to take advantage of favourable demographics in terms of growing and aging populations, affluence and greater demand for corrective vision. It considers these structural changes as well as how advancement in technology can enhance both its product and service offerings.

“Technical innovation, consolidation and deregulation are transforming the customer journeys with the increasing need for large scale technology and supply chain platforms. Major consumer trends such as greater health and lifestyle awareness, fashion consciousness, functional expectations and the shift to the convenience of omni-channel solutions, also favour our business model and strategy.”

Theo Kiesselbach, CEO GrandVision (2018) Whilst GrandVision provides considerable global capabilities, it appears focused on supporting its subsidiaries where it can leverage efficiencies and, value-added services, whilst still empowering them to complete how each sees best in their respective markets. GrandVision’s core objective appears to revolve around driving strong cash generation and comparable growth, which they seek to achieve through their ‘5 Global Strategic Priorities’ in Figure 3. Notably, they seek to encourage further local economies of scale and expand within existing network through the funding of bolt-on acquisitions (like Tesco Opticians to Vision Express in the United Kingdom) as well as enter new markets to increase their global footprint.

Together with Safilo, GrandVision’s main competitor focus will be on Luxottica which arguably has the bigger product brands and the largest optical retailer in the United States. This question could also be applied to Luxottica and would yield a similar answer in terms of scale and value although Luxottica appears even more ruthless in its drive to increase its market share in the optics market.

Furthermore, its manufacturing and retail operations are more heavily controlled and integrated creating reciprocal benefits for both sides. Indeed, whilst there is a clear link between GrandVision and Safilo through ownership and the sale of Safilo’s brands through GrandVision’s store, they remain technically at arms-length. One reason for this is may be because Safilo sell to many of GrandVision’s competitors, so this can damage relationships for them when it is these customers who are the ultimate gatekeepers to dispensing products including designer eyewear brands. Luxottica, however, appears to ignore this issue and sells its brands to its retail competitors with the attitude that the brands are what the consumer wants so they will want to have them in stock anyway or lose sales.

Students may wish to consider the relative power between big product brands, such as Ray-Ban, and consumer loyalty to their optician.

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Question 3: How do you think that GrandVision adds or destroys value for its portfolio?

GrandVision currently operates in over 40 countries across Europe, North & Latin America and Asia.

A map showing their global offices can be found at www.grandvision.com/about-us/global-presence.

Students should consider the aspects within 8.6.1 in relation to value adding and value destroying activities. GrandVision’s role as a corporate parent is to provide each subsidiary the greatest support it can to gain competitive advantages and network effects in their respective markets whilst taking a longer-term perspective.

It is evident from the previous questions that GrandVision adds value through its scale economies in terms of buying potential but also through streamlined processes and sharing of best practices.

Furthermore, it has a strong track record of continually increasing these economies of scale and processes through continued growth in new and existing regulated markets as highlighted through its 5 global strategic priorities in Figure 3. Students should consider the impact of GrandVision on each of these (entering new markets, strengthening and delaying global capabilities, driving further comparable growth, optimising the existing store network, expanding into current markets also through bolt-on acquisitions) and how this adds value to each subsidiary and business unit.

From the case, it appears that GrandVision is hands-on where it fulfils the corporate objectives (e.g. providing capital to Vision Express incorporated Tesco Opticians, Conlons Opticians, Crowne Optical and Rayners) but hands-off where the local market is best placed to make decisions suited to their market (e.g. marketing and local regulation). As their mode of growth is focused on acquisition, the challenge for GrandVision is when new detached business units are incorporated into their portfolio. Where acquisitions are integrated into existing businesses, the challenge rests with the individual unit, which GrandVision as parent can only advise upon and monitor.

In addition to optical brands that GrandVision provides its stores globally, it appears that it also provides additional access to a wide range of other brands from its sibling supplier Safilo, which offers a broader and stronger portfolio of designer frame and sunglasses brands. However, whilst these benefits are significant, students should recognise that this buying centralisation can restrict purchasing and merchandising as other potential options may be removed (e.g. designer brands, lens choices etc.).

GrandVision also provides structured and centralised corporate governance to ensure all it meets its own governance, risk and audit objectives as well as its subsidiaries. Students can view their approach to central governance online (http://investors.grandvision.com/) and view roles and members of the board, the duties of its committee (Audit, Nomination and Remuneration), compliance, policies and investor information.

Perhaps one of the most notable characteristics of the global retail optical market is that each country has evolved slightly differently due in large part to the regulator variations between countries. There are few synergistic ‘brand’ benefits as GrandVision is not a well-known brand. Rather, it is a corporate parent to many strong retail brands across different markets which are broadly of a similar differentiated competitive positioning. Comments provided by Vision Express CEO, Jonathan Lawson, provides helpful insight here as it appears that GrandVision recongnise the value of local brands and knowledge, which it has never been tempted to convert into a homogeneous brand and dispose of the inherent brand value in local markets. It is also worth noting that GrandVision does 119

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not constrain each subsidiary brand to their own markets. Indeed, Vision Express, for example, have expanded internationally with notable recent growth in India and now have over 160 stores in 30 cities (https://www.visionexpress.in and click on ‘About Us’.).

Students should consider where GrandVision sits in relation to Figure 8.5 (Chapter 8). GrandVision looks for synergistic benefits across its portfolio by seeking to enhance value for its disparate retail entities. The synergies are notably strong due to the consistent activities of business units that relate directly to the core business. GrandVision is well placed to provide common purpose, encourage cooperation across business and provide central services and resources. Its role as corporate parent is then to ‘envision’ and ‘support’ rather than ‘interfere’ so as to allow each business to deliver to its own market. This is achieved through its purchasing power of product but also through processes and systems, which are refined and improved according to global best practices across GrandVision’s retail network.

In relation to value destroying activities, (8.6.1), GrandVision’s challenges will be around management costs and bureaucratic complexity which they attempt to outweigh by the benefits in scale economies and cooperation. Whether or not GrandVision can demonstrate that it creates more value than it costs is difficult to determine but the signs of continued growth across the business as well as its ready-made brands suggests that it does. Furthermore, the variation in markets and some diversification across optical products and retail services helps dilute risk across the business as well as provide greater control over the supply chain. Indeed, GrandVision’s greatest competitor Luxottica is having great success in growing vertically and horizontally through acquisitions so GrandVision is helping to put its subsidiaries in a more level playing field than they would otherwise experience in the face of such a power global competitive force.

With consideration of the parenting matrix (Figure 8.8), GrandVision are well experienced in their markets and are positioned to provide good feel and understanding for its businesses in their markets positioning their around ‘Heartland businesses’. The benefits provided by GrandVision are mostly around financial backing, support of the strategic position of each business and the sharing of experience across units.

Question 4: With the creation of EssilorLuxottica, what would you recommend for GrandVision’s future strategy?

This question is designed to reflect upon the dynamics of this industry and the impact of two of the biggest players coming together to create a super-power. This merger gives EssilorLuxottica not just control of the biggest brands in the world, and significant retail supply, but also the component of glasses that has easily the largest mark-up, the lenses (as highlighted in the Vision Express case). The network effects from this could be considerable as cross-selling as well as distribution synergies could both increase demand opportunities but also improve operation efficiencies and costs. This control could also encourage their competition to increase exclusivity and potentially restrict supply to rival stores. This presents a problem for GrandVision (and Safilo), which allows students to consider GrandVision’s options in a growing market.

Students should be encouraged to make further research and consider future development in relation to the structural challenges (e.g. the internet) and opportunities (e.g. aging populations) as well as the growth prospects for the market. This market is expected to grow 7.4% each year until 2023 to around $167bn (£125bn/EUR142bn). GrandVision’s forecast is a little more conservative but still points to continued growth.

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Global eyewear growth (GrandVision)

Students should also consider what GrandVision does well and what options are open to them. They may wish to complete a SWOT analysis in the light of the change in competitor position. It is evident that GrandVision has significant economies of scale and has achieved year on year growth for decades. However, their relative market share could shrink with the recent merger of Essilor Luxottica.

GrandVision are likely to continue trying to penetrate the market in order to: •

build on established strategic capabilities;

•

lead to greater market share and increased power vis-à-vis buyers and suppliers and

•

provide greater economies of scale and experience curve benefits.

Some of the considerations for GrandVision’s future strategy may include one or more of the following: •

Do nothing for now. GrandVision has a clear strategy and should not react too quickly to the change of competitor configuration. It could be content as a strong number 2 in the market.

GrandVision has few optical product brands that compete head-to-head with EssilorLuxottica. Safilo on the other hand has the more comparable designer labels. Also, GrandVision’s retailers hold significant brand equity in their markets and they are ultimately the gatekeepers of dispensing eye-wear. If EssilorLuxottica change the terms of the sale of their products to significant detriment, GrandVision could look to shift the weight of their 121 .

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brands further towards Safilo although this could lead the loss of customers who demand the world’s strongest brands, Ray-Ban and Oakley, both of which now belong to EssilorLuxottica. Coming from very different roots, there may also be cultural issues for EssilorLuxottica so this could lead to issues of compatibility, which could impact the success of the merger and its economies.

•

Establish new channels: GrandVision states that they consider pure-play online propositions, if and when there is added value for their customers or synergies with the existing business, and service and quality levels are not compromised. Indeed, in recent years, GrandVision’s response to the changing needs and priorities of our customers has led to the accelerated development of omni-channel capabilities. GrandVision could look to new propositions that enable them to deliver an extended, and deeper customer journey across all channels, including new, digitally powered innovations.

•

Look to accelerate growth-plans further. GrandVision has already embarked upon an aggressive growth strategy and could be ambitious by trying to merge with other large chains (e.g. Boots or Specsavers in the United Kingdom). It could look to further accelerate this both within existing markets through the purchase of more optical chains or acquisition of smaller successful opticians, as well as identify markets they are currently not represented within.

Indeed, most national optical retail markets are still highly fragmented, with a significant proportion of independent retailers operating either as single stores or relatively small chains.

This provides the opportunity to expand through bolt-on acquisitions in existing markets, and to integrate these businesses into their existing network. Unlike EssilorLuxottica, Grandvision are not represented in Africa and this is a market that is forecast to grow in the long-term.

•

•

•

Consider merging with a lens manufacture or other supporting optical product: The benefits around economies and network effect of merging with a lens manufacturer are potentially significant. There are a number of other highly reputable lens manufacturers which could fit well into terms of brand synergy and lead to access to new markets and customers. Indeed, whilst all significantly smaller than Essilor, manufacturers such as Hoya, Zeiss, Nikon and Shamir might make suitable targets to diversify their portfolio. It may also give them new transferable competences. Indeed, Essilor have over 8,000 patents which are likely to have a positive impact on Luxottica as well.

Diversify into related or allied health products or services. GrandVision could consider integrating with one of the major contact-lens manufacturers, or allied services, such as laser eye-surgery operators or even hearing care. This would help to diversify GrandVision and spread risk. This would give a reasonable level of ‘Related limited diversification’ as per Figure 8.3, which should improve performance. Students should consider the drivers on diversification provided in 8.3 (Exploiting economies of scope; Stretch corporate management competences; Exploiting superior internal processes; Increasing market power).

Diversification in this case should create value and therefore synergies from the network effects from cross-selling and distribution efficiencies.

Merge with Safilo. GrandVision already share the same parent company as Safilo. The two companies could achieve further economies and efficiencies by merging together to increase

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their competitive strength supporting a Resource-based view (RBV). There would be

•

considerations as to how other customers of Safilo may respond but Luxottica also supplies competitors of its retail operations due to the strength of their designer brands. Safilo brands are also strong so they could also chose to tighten supply to increase brand exclusivity.

Look for more optical brands. GrandVision (or Safilo) could also look at other designer

•

Future merger with EssilorLuxottica. The frame component of the industry appears to have

brands to suit changing consumer preferences and demographics in both new and existing market segments. changed from a state of healthy competition to Oligopoly and could now be heading for a Duopoly. Ultimately GrandVision could consider merging with EssilorLuxottica in the future. It is likely that there would be significant competitive regulatory barriers that would likely prevent such a deal happening at this time. However, the global coverage and power across the supply chain would be immense providing them with opportunities for cost reductions, streamlining resources and processes and an unprecedently global reach and customer-base.

Students may suggest outsourcing although it is unlikely GrandVision would wish to outsource much of their capabilities. Like Luxottica, they prefer to ensure quality control is in-house.

Whilst students may wish to consider the BCG matrix (Figure 8.6), there is not sufficient information from the case itself to allocate the elements of its business into quadrants. However, students could be tasked with further research from GrandVision’s website about the performance of its business units as well as consider its strategic brands of itself or sibling frame company Safilo.

CSR considerations Students could also consider the CSR implications of the merger. Whilst the global eyewear market is highly profitable, there are still around 2.5bn people globally who need glasses but are without, making ‘vision’ perhaps the largest untreated disability in the world, far greater than hearing loss.

Most large optical manufacturers have CSR strategies in place, which attempt to partially address the issue and GrandVision is no exception and says on its website: https://www.grandvision.com/sustainability/2016-csr-report “With a global leading role in eye care comes also responsibility. GrandVision recognises the responsibility to develop the business and provide the eye care services and products in an always sustainable and ethical way.”

EssilorLuxottica now have the power to influence how billions of people to see as well as the amount they will pay for this. This level of power has implications for their own CSR strategy and sustainability, whether it will be used to further penetrate those who cannot see or afford to see sufficiently well, or alternatively could be used to control supply and increase prices. Spectacle lens manufacturers have typically taken a lead on improving access to corrective lenses with Zeiss, Rodenstock, Hoya and Essilor having strong programs in place. However, Essilor’s €200m R&D budget is three times the size of the rest of the industry combined and, within this, it has a division called 2.5 New Vision Generation. Jean Carrier, Chief Operating Officer of Essilor says “We have one goal: to push back the frontiers of poor vision worldwide.” (McCormick, 2016 - AOP Website).

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Whilst it may be a medical need that helps to fulfil CSR objectives; key targeted areas, including Africa, China and India, are expected to undergo economic growth at a time when there is stagnation in mature markets. Indeed, perhaps we are already seeing signs that fashion is important in these markets. In 2012, the World Health Organisation advised charities to stop providing second-hand glasses from richer countries because those in need did not want to wear old-fashioned designs.

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CHAPTER 9

International strategy

The entry mode discussion and Section 9.5.3 has been expanded and a new overview and table of diverse entry mode strategies has been introduced; see Table 9.1. The globalisation discussion has been further balanced with the latest increase in tariffs and trade barriers. The discussion on liability of foreignness is made more explicit and the discussion of the important role of institutions has been further strengthened (see Section 9.5.1). Moreover, the new Illustration 9.3 on Tomra’s internationalisation is focused on how both formal and informal institutions can be the most important hurdle for an internationalising company. Thinking Differently at the very end continues the discussion of the importance of institutions for international strategy.

Illustration 9.1 Walmart: international successes and failures 1. What are the internationalisation drivers Walmart International has struggled with?

This illustration thus allows students to review the importance of internationalisation drivers.

There are several general drivers behind Walmart’s international strategy: cost drivers like scale economies, market drivers include increasing customer needs and transferable marketing, in government drivers there are beneficial trade policies and host government policies and competitive drivers include responses to competitor’s global strategies. The question, however, invites students to think about drivers of internationalisation that Walmart has struggled with in various markets. The question thus requires students to consider that even though these drivers may be significant for internationalisation they can still be challenging and above all they may differ between diverse international markets. Hence, not all international markets display the same drivers of internationalisation and they may not necessarily all be going in the same direction. For example, even if customer needs are increasingly the same in many international markets they are not exactly the same.

The advantages of Walmart’s strategy lie in the potential scale economies that will come from standardisation of purchasing and distribution systems, which is consistent with its cost leadership strategy. This strategy has been considered more problematic internationally compared to in the huge and relatively homogenous US home market. Internationally, competitors have often achieved larger economies of scale in their local market, like Aldi, Lidl and other competitors in Germany. Another cost driver that has been challenging in some markets is logistics including lack of favourable infrastructure and differences between countries, which prevents seamless logistical systems. For market drivers, Walmart has struggled with differences in customer needs not only between different countries, but even within large countries like China, which prevent them from pursuing their low-cost strategy. Their marketing techniques have not always proven transferable either, for example, in Brazil their ‘everyday low prices’ model has not been particularly successful. While competitive drivers including global 125 .

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competitor’s strategies have pressured Walmart to internationalise, they have also encountered stiff competition from these competitors. For example, Carrefour has been more successful than Walmart in several markets, like Brazil and China. The lowering of barriers of trade and investment within the government drivers have generally been beneficial for Walmart. However, they have also struggled with local regulations in China, for example, and foreign investment rules in India.

2. What might be the dangers for a large Western retailer in staying out of emerging markets?

One obvious danger for a Walmart staying out of emerging markets is simply the missed growth opportunity of these large and growing markets. Brazil, China, India and other emerging markets thus offers huge opportunities. Students, however, should recognise at least two more subtle points. In the first place, retailers with the vast scale of, for example, the Chinese market should be able to achieve purchasing economies that they can transfer to other markets; in other words, the lower costs obtained through participation in the Chinese market may be leveraged into creating competitive advantage in other markets. Second, referring to the competitive drivers in Yip’s model (Section 9.2), rivals may use (eventual) profits from the Chinese market to crosssubsidise attacks into other markets, and, without a presence in the Chinese market, defending that companies may be limited in their ability to retaliate. These rivals might even include Chinese-based retailers such as GOME, who could start attacking Western retailers in markets they once regarded as their own.

Illustration 9.2 The international ‘Joint Effort Enterprise’ 1. What internationalisation drivers (Figure 9.2) do you think were most important for Blue Skies’ decision to enter its specific markets?

For the first question on the internationalisation drivers, Section 9.2 and Figure 9.2 provide some leads. There are several aspects of internationalisation drivers that students may pick up, but for Blue Skies cost drivers and market drivers are the most prominent. First, there clearly are cost advantages in locating both purchasing and processing in Africa and South America. Labour is of course considerably cheaper in these countries and there most certainly are scale economies in purchasing, production and logistics when supplying large retailers all over Europe. Second, Blue Skies can take advantage of common international customer needs and tastes for fresh-cut juice products produced locally based on specific ethical and sustainability standards. Market drivers thus include not only an increased and similar demand for fresh juice, but ethically produced products. In this respect, Blue Skies can also take advantage of common marketing ingredients across Europe. Competitive drivers play a relatively smaller role although Blue Skies faces global competitors for which being internationally dispersed and integrated helps. For example, integrating and coordinating activities across their countries of production and markets may help counter the benefits of huge global competitors. Government drivers work both ways for Blue Skies. On the one hand, extant international trade agreements have helped the company in their internationalisation efforts. On the other hand, local regulations and policies sometimes work against this as agriculture often is particular sensitive for local restrictions and standards. In addition, local government sometimes cause problems through lack of cooperation or corruption.

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For example, despite that Ghana is a democracy there is a fear among authorities and communities that Blue Skies culture of employing men and women from any cast means they have more control over their own lives.

2. How does Blue Skies’ strategy fit into a broader international value system including suppliers, channels and customers (see also Figure 4.5)?

The second question encourages students to attempt an analysis of how Blue Skies fit into a broader international value system (Section 9.3.2). This refers back to Chapter 4 and how the value chains of suppliers, channels and customers relate to the organisation’s own value chain (Section 4.4.2 and Figure 4.5). Blue Skies build on geographical advantages achieved through their dispersion across three continents. For example, there are local cost advantages from cooperation and integrated value chains with local suppliers in Africa and South America. They can also take advantage from having buyer partnerships and thus value chain integration with some of the larger European food retailers like Waitrose in the United Kingdom, Albert Heijn in the Netherlands and Monoprix in France. In the case of Blue Skies, there is also an additional interesting aspect as the company is integrated with the local communities’ value chains through their employees and in this way provide advantages not only for them, but also for the company as it benefits from access to skilled local labour and being able to differentiate their products based on ethical standards and sustainability. One example of this (not in the illustration) is that Blue Skies have taken great positive advantage of the plethora of integral population willing to work for a company that gives them a shower on arrival (many do not have running water), get fed at lunchtime, work in a clean environment, get training and earn a reliable honest living.

3. To what extent is JEE key to Blue Skies’ international strategy and competitive advantage or rather a social entrepreneurship effort?

This question extends the illustration by asking students to think about the JEE foundation and philosophy on which the company is based (see also Section 9.5.3). It highlights the interesting mix of Blue Skies’ objectives. From the illustration, students can see that the Joint Effort Enterprise (JEE) identifies profit as the engine block of a successful business in the developing world but qualifies this objective by saying that profit should not be achieved at any cost. Indeed, the making of profit, the JEE way, involves respect of the Blue Skies culture, its people, those it deals with, and the environment. People who really want to be employed by a successful enterprise in the midst of their community help to set the standards of the business and turn out higher quality products which lead to more sales and more profit. In brief, the company has a clear vision of how business growth can lead to community development in terms of wealth and social aspirations, and how such advances feed back into the business itself through reputation and pride.

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Illustration 9.3 Tomra’s institutional challenges 1. What are the most important elements of the CAGE framework for Tomra’s different strategies?

This question encourages students to engage with the CAGE framework – see Section 9.5.1 – and think about how different firms in different markets may have to deal with different aspects of this framework. ‘A’ is of obvious importance for a deposit strategy. ‘A’ as in Administrative distance could be manifested through priorities set by policymakers, such as environmental goals, resource reuse or labour costs in recycling. Legal distance may be observed as an absence of fees that make a non-deposit strategy viable, or an existing efficient system presenting barriers for the changes needed to introduce reverse vending machines. Political distance is again related to the perceived importance of environmentalism – it is not uncommon for politicians to promise deposit laws or recycling targets in election cycles, amidst heavy lobbying from proponents and opponents alike.

Beneath the surface of administrative and political distance lies cultural distance. While religion, language and ethnicity are of less important for Tomra, much of their struggles can be boiled down to underlying social norms related to recycling. Reverse vending machines can only take off if beverage consumers are motivated to bring their empty bottles to machines. While a deposit may act as a financial motivator, those grounded in social norms are just as – if not more – important. Negative perceptions of the aesthetic aspects of littering or the environmental aspects of micro plastics or animal safety may act as motivators. The act of returning one’s bottles may give a morale boost, if not for the above reasons then for the intrinsic value of following agreedupon norms. These norms do not change easily or quickly, but by lobbying and collaborating with related actors, such as environmentalist NGOs and teacher organisations, Tomra can nudge and accelerate ongoing change to bridge cultural distance.

Economic distance has been a challenge for Tomra, whose traditional strategy was designed to cater for wealthy markets in Northern Europe. The material value of plastic containers could be key for introducing non-deposit reverse vending machines to emerging markets. As for geographical distance, country size is important in the sense that it is not worth it for Tomra to spend resources on administrative, political and cultural work if the unlocked markets do not consume or recycle enough bottles. Considering that recycling loops are mostly contained within national borders, quality of infrastructure and sea-access are of less importance issues for Tomra.

2. What would be suitable countries for Tomra to enter for deposit and non-deposit solutions, respectively?

Here, students gain from contrasting and debating the pros and cons of two rather different strategies and Section 9.5.1 is of relevance here too. For deposit solutions, there are several ways forward. One is to continue Tomra’s traditional strategy by focusing on countries with an advanced debate on deposit laws. Tomra could use market intelligence to identify wealthy countries with political debate on littering and environmentalism and popular support for deposit laws. Another route for deposit systems is to target authoritarian countries, where the government has the power to forcefully introduce nation-wide deposit laws. Lately, Tomra opened up a Chinese subsidiary to be able to capitalise on this possible future scenario.

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Tomra’s attempts at non-deposit solutions have generated some learnings. One is the importance and salience of social norms. Japan is the only market where non-deposit solutions have worked for Tomra, and that is largely due to strong societal norms regarding recycling as one of many practices that responsible members of society are expected to partake in. Other countries where citizens are bound by similar collectivistic bonds, such as South Korea, could be suitable options.

Another way forward for non-deposit solutions is in developing markets, where the material value of recyclable material is the main reason for individual usage of reverse vending machines. In light of Tomra’s non-deposit struggles, it may be a good idea to shrink distance by collaborating with local partners. In addition to sharing risk, local partners are more rooted in local nuances that make or break the case for reverse vending machines.

3. Are there other examples where local institutional differences may be more important than traditional market issues of price, competition and technology?

This question opens up class discussions for the larger picture and aims to bring in students’ own experiences and reflections of how Tomra’s case illuminates international strategy. First, any industry that is perceived to be part of the societal infrastructure, rather than the market, is prone to run into similar challenges. This is even more pronounced for products of services related to the daily non-consumer activities of individuals, such as banking and transportation.

Organisations that in some places are part of the public sector, such as health care, education, transportation, corrections and power are all relecant for the CAGE framework (see 9.5.1) and local norms. Second, the controversy generated when products or services go against local norms often take precedence over traditional market factors. This includes drugs (both medical and recreational) and products or services related to human or animal health or environmental pollution. Third, innovative ‘disruptors’ of agreed-upon ways of doing business often stir up controversy. Uber, Airbnb, Spotify and many others have gained extensive publicity not only related to how they answer to consumer needs, but also how they relate to rivals and other stakeholders in society.

Illustration 9.4 Base of the pyramid strategies The point of this illustration is to challenge the old ‘life cycle’ model of internationalisation where products, especially last-generation products, would be simply dumped in developing markets.

Question 2 indeed suggests a reverse-direction of thinking.

1. Can you imagine any risks or dangers that Western companies might face in pursuing base of the pyramid strategies?

The main risk might lie in the challenge of maintaining clear market segmentation, internationally and within countries too. Cheap products designed for the base of the pyramid in, for example, India could affect the market for more mainstream products marketed at the prosperous Indian middle class. With huge international travel and internet marketing, such cheap products could also rebound back to richer geographical markets also – though that could be an opportunity as well. Companies also need to be rather careful when it comes to pricing and targeting as the base of the pyramid model sometimes has been accused for being ‘exploitative’ and ‘imperialistic’, 129 .

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and for viewing the poor only as consumers (see, for example: Aneel Karnani, ‘Fortune at the Bottom of the Pyramid: A Mirage’, California Management Review, vol. 49, no 4, 2007).

2. Is there anything that Western companies might learn from base of the pyramid strategies in emerging markets that might be valuable in their home markets?

Jeffrey Immelt (former CEO of General Electric) has an interesting article on ‘How GE Is Disrupting Itself’, Harvard Business Review, October, 2009, which describes the process of ‘reverse innovation’; here, companies take ideas that they have developed for developing country markets and bring them back to wealthier markets. For example, GE is bringing cheap medical imaging machines developed for India back for usage in the United States. Conventional ultrasounds developed for the West costs $100,000; simple, portable ultrasounds developed for China costs $15,000; at that price, they could be attractive to many local clinics in America as well. GE now talks of 50% solutions at 15% prices, relevant in all geographies around the world.

Thinking Differently An institution-based view of strategy This Thinking Differently emphasises the increasing focus on institutions in international business including local economic, regulative, normative, political and cultural-cognitive institutions.

Institutions have attracted attention in practice, where, for example, Uber and Airbnb internationally have struggled considerably with local laws, regulations and norms, and in international business research. The question requires students to think about institutions in the context of emerging economies: Why would institutions be of particular importance for strategy in emerging economies?

Students should here consider what is exceptional with institutions in emerging economies. There are two primary issues to consider here. First, institutions in emerging economies are likely to be quite different from the ones in the home country of the internationalising organisation. Laws and regulations, norms and worldviews are likely to differ quite considerably. This suggests that it may not be enough for an organisation to have an advantageous competitive position and unique capabilities. It must also carefully consider its strategy in relation to economic, regulative, normative, political and cultural-cognitive institutions. It could possibly be argued that this would be a smaller problem for organisations internationalising from emerging markets themselves. However, there are often considerably differences in institutional infrastructures between different emerging markets (see Section 9.5.1). This also relates to the second point to consider: emerging market institutions are emerging. Hence, regulatory systems, contract and law enforcement mechanisms and political institutions are under development and often there is simply a lack of important institutions like these.

In brief, organisations also need to consider their strategic responses in relation to institutions especially in emerging markets as they are likely to be vastly different and emerging, besides considering their competitive strategy and unique resources and capabilities.

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Assignment 9.1 Yip’s drivers This assignment should reinforce the points that (i) not all industries or markets face the same pressures for internationalisation and (ii) that the drivers for such internationalisation are many and not necessarily all going in the same direction, to the same extent. Plotting relative positions on a simple ‘questionnaire’ device as below can reinforce these points:

In the case of the two industries above, the ‘tick’ industry has strong cost drivers for internationalisation (except logistics), whereas the ‘star’ industry has strong market drivers. However, neither industry is strong across all drivers, and so this will introduce difficult choices and trade-offs for managers. You might also ask students to compare their industries over time – today and five years from now. You might also ask them to consider the implications in terms of international strategy (for instance, the tick business might suit an ‘export’ strategy; the star business might suit a ‘global strategy’).

Assignment 9.2 International strategies This will be a somewhat demanding assignment, but likely quite engaging. It should help reinforce the important idea that there are several forms of international strategy (Section 9.4, Figure 9.4).

Multinational corporations seldom adopt one pure international strategy and they also commonly gradually shift their international strategies depending on environmental changes. However, each of the corporations mentioned in the question can be linked to one primary strategy. ABB was pointed out as corporation with a transnational strategy when Bartlett and Ghoshal (1989) first developed this concept that combines pressures for both integration and responsiveness. Today the company has moved somewhat towards a global strategy, but its primary strategy is still considered to be transnational. On the opposite end, we have Louis Vuitton’s export strategy where the pressures for both responsiveness and integration are relatively weaker. Lenovo adopts a global strategy as they try 131

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to respond to integration pressures, but of course, they need to locally adapt regarding some local specific aspects including keyboards, character recognition software, etc. Finally, Nestlé has more of a multidomestic strategy in responding to pressures for responsiveness from local markets, but they too try to globally integrate as long as it does not sacrifice the local adaptations. The analysis could end up locking something like below and could open up for discussions about possible changes in strategies as indicated by the arrows. ABB as clearly retracted from their original position while both IKEA and Louis Vuitton have become more responsive to their international customers compared to historically.

Assignment 9.3 CAGE This assignment should help reinforce the important point that markets are not just attractive for their size or growth. For an American multinational, China is a very difficult context; for a Chinese multinational, so can be America. See the Wanda end-of-chapter case example for examples of distances between a Chinese firm and the US market.

Assignment 9.4 Entry mode strategies In this assignment, students should be able to identify what diverse international entry modes various multinational corporations use. It relates to Table 9.1 (not Figure 9.7). An examination of the entry modes of H&M, Tesco and SABMiller/Megabrew will make explicit a whole range of entry modes (see these cases and their Teaching Notes). H&M primarily uses wholly owned subsidiaries and enter through organic growth or ‘greenfields’. Tesco in contrast has normally entered through acquisitions when internationalising, but in the United States they chose to set up their own stores through organic growth. The latter, however, proved rather unsuccessful and Tesco was forced to withdraw. SABMiller often enters through wholly owned subsidiaries via acquisitions, but they sometimes go into licence agreements with other breweries in foreign markets and often also use joint ventures. Similarly, AB Inbev has used acquisitions as their bid for SABMiller in the Megabrew case shows.

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Assignment 9.5 The benefits (and drawbacks) of globalisation This question allows students to discuss globalisation on a more general level in light of the extensive debate involving globalisation proponents and sceptics. The focus in this question, however, is if globalisation most often is beneficial specifically for companies. Often globalisation is generally considered to be good for the well-being of companies, but harmful in other ways (climate change, consumption of the planet’s resources, sweatshops, etc.). However, this need not be so for all companies. For example, local companies are often outcompeted or acquired by globalised giants and for these companies globalisation may not seem positive. Critics would also argue that globalisation may in fact also harm larger corporations. The globalisation of financial markets contributed to the global financial crises that started in 2008 and it was detrimental not only for smaller companies, but for huge financial institutions and large corporations. More recent debates of how globalisation hurts workers in well-developed companies as their multinational corporations internationalise could also be raised in this discussion.

Assignment 9.6 Public and not-for-profit

Many not-for-profit sectors, such as aid charities, are inherently international and others have been for a very long time. For the public sector (apart from the armed forces and the diplomatic service), internationalisation is often more novel and challenging for their thinking. Internationalisation can affect not just the sorts of clients (children from overseas, patients with non-local illness patterns) but also the supply of labour (teachers, doctors, nurses, etc. from abroad), location (treatment overseas), competition (alternative treatments overseas), collaboration (partnerships with schools overseas) and so on. All of these raise new issues for management.

Integrative assignment 9.7 One important theme in Chapter 14 is that ‘structure should follow strategy’, ideally anyway. In terms of the four international strategies (see Figure 9.4), the following fits are likely (see also Figure 14.5):

•Export strategy: This would generally work with a basic functional structure of some kind, where production and R&D are centralised in the home country in order to take maximum advantage of economies of scale and with the international operations organised in a separate international division.

• Multi-domestic strategy: A geographical divisional structure including local subsidiaries would work here, with each country as a separate ‘division’; but note that in practice most large companies aggregate their national subsidiaries into regional divisions (e.g. Europe and Middle East, America, Asia, etc.).

•Global strategy: A global product division’s structure that allows for some functional centralisation of production and R&D works here, while at the same time ensuring coordination of marketing and thus generates integration and economies of scale benefits.

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•

Transnational strategy: This strategy is classically suited to Bartlett and Ghoshal’s ‘transnational’ matrix structure, which aims to combine local responsiveness and global coordination.

Note that it is not always possible to find a clear organisation chart. Where these are absent, there may be clues to the organisational structure in the way the company reports its financial results (e.g. turnover and profits reported by geographical area suggests a geographical divisional structure) or from the job titles and described responsibilities of senior executives (e.g. a Director/EVP of Manufacturing or Sales suggests there is a strong functional element, though note that Directors of R&D, Finance and Human Resources are compatible with a multi-divisional structure).

Case Example

China goes to Hollywood – Wanda’s move into the US movie industry Chinese Wanda’s moves into the US movie industry are a good illustration of an emerging country multinational. The AMC acquisition was the biggest Chinese acquisition of a US company ever and the subsequent acquisition of Legendary stretched right into the heart of US entertainment and culture.

Much more will be heard of emerging country multinationals in the coming years, but prominent ones from China include Haier, Geely Automobiles and PetroChina as well as Lenovo, while leading Indian multinationals include Tata, Wipro and Ranbaxy. Discussing the questions: 1. Considering Yip’s globalisation framework (Figure 9.2), what drivers of internatio nalisation do you think were most important when Wanda entered the US market through its AMC and Legendary acquisitions?

All internationalisation drivers (see Section 9.2 and Figure 9.2) play some role in the case. First, market drivers are important as the Chinese increasingly watch foreign movies and thus share similar customer needs and tastes with American customers. This also suggests that distribution and marketing are increasingly transferable. When it comes to cost drivers, it is not likely that Wanda can build much on the traditional low labour cost advantages of China. Cost drivers rather include economies of scale in buying movie distribution rights and in distribution and marketing generally. Government drivers also played a role for the Wanda’s entry into the United States.

China became a member of WTO in 2011 and one year later the country liberalised its cinema regulations and agreed to open up its cinemas to more American films. An important competitive driver is the continued globalisation of the whole film and cinema business. Wanda naturally intends to be part of this and the deal is ‘a springboard to expand Wanda’s global cinema presence’ and considered to make them a significant player globally. In addition, with its strong foothold in the United States Wanda is now more likely to secure Hollywood movies for distribution in China. Moreover, the acquisition is considered to be a platform for Wanda’s main business and thus the development of commercial property, hotels and shopping malls in the United States.

2. What national sources of competitive advantage might Wanda draw from its Chinese base?

What disadvantages derive from its Chinese base?

Apart from access to capital and resources (AMC has been in repeated financial troubles), there are not many apparent national sources of competitive advantages and some potential disadvantages.

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As indicated above, the common cost advantages of China is not likely to play a major role in Wanda’s case. One possible source of advantage, however, is Wanda’s close access to and knowledge of the largest Hollywood film market outside the United States. Another advantage may be China’s commitment to investments in the culture and entertainment business generally. However, Chinese films and culture as such is not likely to be marketable in the United States and China demonstrating their ‘soft power’ in these respects may rather turn out to become a disadvantage. For example, the Chinese history of censoring films and the internet may actually harm the US market as customers there may not approve of this.

3. In the light of the CAGE framework, what challenges may Wanda meet as it enters the US market?

According to the CAGE framework, the differences between China and the United States seem to be rather challenging for Wanda’s entry into the United States.

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Cultural: Language is obviously a key problem, but there are also clear issues with differences in managerial behaviour (Americans talking more, being wedded to strict schedule and aim of meetings, possibly not having the same standards of politeness, etc.). On the Chinese consumer side, there seem to be fewer problems as they increasingly are attracted to US films and there are probably not huge differences in customer taste as regards cinema building designs. However, it may prove troublesome for the US market that Wanda’s originates in a society that censors politically controversial movies and that has the explicit ambition to strengthen its soft power abroad.

• Administrative and political: Wanda’s main owner, the Chairman and President Mr Wang is a Communist Party member, sits on China’s top advisory council and has a long history in the Chinese military. This is of course in sharp contrast to the cadre of US headquarters, managers and administrators being located in the US heartland in Kansas City. This suggests that there are clear differences in political and administrative traditions that may prove rather challenging.

• Geography: The US market is of course a very long way from Wanda’s home base and there may be challenges in coordination and control due to extensive travels, but otherwise there are not many geographical obstacles.

•Economic: There are clearly market differences between China and the United States, but it is not conceivable that these will be a major obstacle for Wanda.

The CAGE factors indicate that the most serious challenges are likely to be of a cultural and political nature and they become particular transparent within a cultural and media business such as cinema. These problems relate both to the integration of the AMC and Legendary operations and managers into the Wanda corporation and to the relationship with US customers. While the chairman of Wanda assures that his company will not interfere and that ‘the only thing that changed is the boss’ the cultural and political distances not only depend on Wanda’s own actions, but on those of Chinese authorities. Many of the CAGE challenges are, however, likely to be more transitional as the two corporations learn to work together and reconcile their differences.

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CHAPTER 10

Entrepreneurship and innovation

Introduction This chapter was changed in the last edition and name ‘Entrepreneurship and innovation’ as the entrepreneurial section 10.2 was significantly extended and placed up front with a focus on strategic entrepreneurship and key issues facing entrepreneurs (opportunity recognition and steps in an entrepreneurial process, stages of entrepreneurial growth and social entrepreneurs). Section 10.5 of innovators and imitators now discusses and emphasises network effects as an important first or early mover advantage. Ecosystems are more extensively discussed in this edition, in Section 10.2.3. In addition, the new Illustration 10.4 provides an overview of ARM’s open innovation ecosystem. The end-of-chapter case example ‘Rovio’s Angry Birds: The Evolution of a Global Entertainment Empire’ now more significantly illustrates and discusses Rovio’s long entrepreneurial journey from nothing to successes to failures back to success.

Illustration 10.1 Entrepreneurs, teams and external relationships

Even if entrepreneurship for many is about independence and working for oneself, most entrepreneurial ventures involve teams and external relationships, which some students don’t realise. This illustration shows how this has played out for some well-known entrepreneurs; how their prior experiences, partners and external relationships were essential for the development of their companies.

1. Based on the experiences of HP, Apple and Facebook what elements of skills and expertise do you think a new venture requires?

This question encourages students to think about various sources of skills, resources and expertise needed for opportunity recognition and becoming an entrepreneur. Building on Section 10.2.1, it should be clear that while entrepreneurs play a central role in spotting trends and market gaps and in coordinating resources and capabilities, they are seldom alone. All three elements of entrepreneurial opportunity recognition emphasise the involvement of others. Apart from the illustration, students should be guided by Figure 10.2 and Section 10.2.1 to consider the importance of entrepreneurial teams and external relationships: • More often than not entrepreneurship involves teams of individuals that complement each other; for example, some in the team may have more of technical skills and expertise while others have more of sales and marketing ones (evident from all three companies mentioned).

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The identification of trends and market gaps often involve more than a single entrepreneur,

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like in the cases of Hewlett and Packard and Jobs and Wozniak.

Not least as regards resources and capabilities, it is evident that entrepreneurial relationships are of importance. As indicated in the prior points above, ventures often draw upon knowledge, experiences and competences beyond one single entrepreneur. In addition, even though entrepreneurs often build on their own experiences these often emanate from other, often larger, organisations that they continue to collaborate with (as seen in the cases of HP and Apple). Ecosystems involving multiple and different organisations around larger companies often contribute to entrepreneurship too (see Section 10.2.3).

2. How would you form a venture team if you set up your own start-up?

This question allows students to think creatively about how they would form their own venture and venture team. Many universities encourage entrepreneurship and have set up entrepreneurship labs and societies. Some students may thus already be involved in commercial or social entrepreneurial projects. Students should think carefully about their own friends, networks and relationships and how they possible could be of assistance in an entrepreneurial venture. This may thus inspire class discussions about how students themselves may want to set up start-ups or possibly already have done so and who they would involve or have involved and what skills, expertise and capabilities they bring to their ventures.

Illustration 10.2 Almost Facebook and nearly billionaires Hopefully, readers will feel sympathetic with these two fellow-students who nearly struck very rich.

But their mistakes are salutary.

1. What do you learn from the experience of Goldberg and Ting which could be useful to launching a new enterprise?

Learning from the Goldberg and Ting experience: the primary thing to learn is the danger of getting fixated by the technology, a common problem for engineering or scientific entrepreneurs. By putting in a lot of unneeded functionality, the two entrepreneurs fell into the trap of ‘technology push’ (Section 10.3.1). A second point is the importance of moving fast, especially with products subject to network effects where tipping points can suddenly leave behind slow movers (Section 10.4.2). Goldberg and Ting were also too complacent and over-confident of how different and superior their technology was to Facebook’s. Finally, they were too independent, spurning the advances of venture capitalists and advertisers who might have helped them scale up faster. A strong theme in Section 10.2 is the importance of relationships for entrepreneurs in opportunity recognition (Section 10.2.1) and the entrepreneurial process (Section 10.2.2). The importance of entrepreneurial teams and external relationships is also displayed in Illustration 10.1.

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2. Are there any unmet needs in your community, at college or elsewhere that could be turned into a business opportunity?

Unmet needs in your community: almost all universities now have entrepreneurship societies, and equally business schools have their own entrepreneurship courses. Entrepreneurs are typically most successful in addressing needs that they are deeply familiar with, as in their own communities. This illustration could help to inspire students further along the entrepreneurial path, and generate in-class discussion of alternative opportunities. Section 10.2.1 and Figures 10.1 and 10.2 will be of help in inspiring and structuring this discussion.

Illustration 10.3 Frugal sanitary towels In 2018, the Muruganantham’s sanitary towel and social entrepreneurship story became a Bollywood music film, ‘Pad Man’. If some students have seen the movie this could help starting off a discussion about frugal innovation.

1. Identify the various features of Muruganantham’s approach that make his sanitary towel business a typical or not so typical ‘frugal innovation’.

Typical frugal innovation? On the one hand, there is a great deal that is typical about frugal innovation in Muruganantham’s approach. He is clearly very low budget in terms of marketing and R&D, and his final business set up (producing machines for local manufacture) exemplifies the frugal characteristics of low cost, simplicity and easy maintenance. There is one interesting twist though, and that is typically the frugal innovator will work closely with the poor consumers that form the target market. Here the women do not interact with Muruganantham at all, and he loses his wife and becomes socially excluded. In this sense, these frugal sanitary towels have an element of ‘push’ innovation rather than simply ‘pull’ in the conventional sense. Muruganantham followed his hunch, not the voice of the consumer.

2. Could a large company such as Procter & Gamble imitate this strategy?

Procter & Gamble imitation: At first glance, it should be easy for P&G to imitate this strategy, as the manufacturing technology is not complex. However, Muruganantham’s business set up is completely different to P&Gs. P&G manufactures its products itself; it then markets them with heavy branding; it relies on retailers to distribute them. Each of these stages entails costs; even if P&G could manufacture equally cheap towels, it would still have to give a margin to the retailers, who would no doubt demand marketing support. If P&G chose to go direct through some kind of local women dealer network, as Muruganantham has done, it would only alienate the retailers who would be selling branded towels through their stores; every towel sold through the dealers would be one less for the retailers.

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Illustration 10.4 ARM’s Extensive Ecosystem 1. How can ARM attract and manage so many ecosystem partners?

ARM’s ecosystem is built and sustained based on their comprehensive web-based developer site including technical support and consultancy, partner forums and blogs, documentations, textbooks, education and research support. It is marketed via social media and conferences and connects individuals across a wide range of organisations and includes a series of virtual communities. Students can be encouraged to check out ARM’s web site, which gives a good view of how they interact and cooperate with their wide range of partners in their ecosystem.

ARM’s partners are thus complementors on their innovation platform. It provides the fundamental processor core architecture and instruction set on top of which others can innovate.

Not only ARM benefits from the large group of complementors, but all complementors too benefit from other complementors. Hence, all participants benefit from a growing ecosystem and its output. In brief, ARM’s processor cores and the development site and tools they provide complementors with attract partners and the more partners or complementors they attract the more other partners or complementors are attracted to the innovation platform and ecosystems.

2. Can you identify other technology platform companies and their ecosystem partners?

Students will most probably think about Apple and Microsoft, which are good examples. In fact, Microsoft can be considered a pioneer in building an ecosystem around their Windows operation system innovation platform already in the 1980/90s. Most software and hardware companies like IBM, SAP and Ericsson have ecosystems around them and nurture complementors to cooperate on their platforms. However, several other platform companies too have developed technological platforms around their products and services over time. Facebook, Google and Amazon have built innovation platforms and ecosystems around them. They started as transaction platforms but have thus developed into ‘hybrid platforms’ including both transaction and innovation platforms. See Chapter 7 and Section 7.4 on multi-sided platforms for a discussion of platforms.

Thinking Differently Entrepreneurship: discovery or creation?

The focus here is on two competing views in entrepreneurship: the discovery versus creation view of opportunities. The question invites students to think about them in relation to Google’s entrepreneurial activities: Google, now Alphabet, is often celebrated as a highly entrepreneurial and innovative company.

To what degree do you think they have relied on discovering or creating opportunities?

The question should force students to engage with the two opponent views and consider to what extent they are different and how. They can also make internet searches in trying to establish what type of entrepreneurship and innovation process Google/Alphabet may have. The Google/Alphabet end-of-

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chapter case in Chapter 13 may also be of help. It’s a somewhat tricky question, but put in the practical context of Google and Alphabet students should be able to discuss and see the differences between the two views: •

If entrepreneurship is all about discovering opportunities generated by external shocks, then Alphabet and Google should systematically monitor developments in the environment; technological, regulatory or social changes in particular. They should carefully collect and analyse information and cautiously make predictions and decisions concerning product potentials already out there in the environment.

•

If entrepreneurship rather concerns opportunity creation, then Alphabet and Google would rather

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encourage independent entrepreneurs and their exploration processes. Their focus would be on individual entrepreneurs within Alphabet and Google and their understanding of, engagement with and generation of new potential products and services.

To the extent that Alphabet and Google relies on the discovery view, they would have quite structured processes for entrepreneurial discovery similar to traditional step-by-step forms of strategic planning and decision-making. If they rely on the creation view, they would rather allow for entrepreneurship to develop in a considerable more complex process where entrepreneurs experiment and adapt their thoughts around potential new products.

While Alphabet and Google certainly have structured ways of analysing developments in the environment, the new Alphabet organisation including a separation of the Google search business from other (entrepreneurial) businesses seems to suggests that they are prone to rely relatively more on a creation approach (see also Chapter 13 end-of-chapter case). The question also allows for more advanced assignments where students research these two views and what theoretical arguments and empirical examples that supports them.

Assignment 10.1

Opportunity recognition

This question refers to the three core elements of opportunity recognition and students should be helped by Section 10.2.1 and Figure 10.2 in considering their characteristics for the cases. The cases display the three elements rather clearly although there is no explicit reference to all. The takeaway for students, however, is to discuss these and think carefully about the foundation of entrepreneurial opportunities: entrepreneur/team, trends/gaps and resources/capabilities.

This assignment can also be extended by asking students about the entrepreneurial process steps following opportunity recognition as displayed in Figure 10.3 (see Section 10.2.2).

Assignment 10.2

Entrepreneurial life cycle As often with textbook models, reality will not fit perfectly and there will be room for different interpretations with each of these cases. The value is in getting students to discuss the issues and be 140

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explicit about their choices. Even disagreement with the framework can be helpful, if the students are clear about why. The point, of course, is to get students into the habit of using frameworks to help think clearly about the future.

Assignment 10.3 Social entrepreneurship Students are increasingly interested in social enterprise. Useful websites with many inspiring stories include the following: www.skollfoundation.org; www.changemakers.com; www.ashoka.org. These websites all include interesting and informative examples and stories about social entrepreneurship from around the world.

Assignment 10.4 New product or service This question refers to the three introductory dilemmas of Section 10.3 and will typically require no more than some basic research (for those without easy access to proprietary information sources, www.bbcnews.com and www.businessweek.com are surprisingly informative on new technologies; the companies’ own websites will be useful too).

In practice, the dilemmas are rarely as sharp as they appear in Section 10.3: the frugal sanitary towels in Illustration 10.3 draws on both market pull and technology push. The question here is, therefore, posed in terms of more or less, rather than either/or. This will help the students too, as they may not be able to get on the inside track of all innovations, but they should be able to make intelligent suppositions about the relative balance of forces with respect to these three dilemmas.

The point of the question, of course, is to get students to recognise both sides of the innovation equation with respect to each dilemma, and to challenge simplistic views that innovation is ‘just’ about technology, or the market or products and so on.

Assignment 10.5 Web traffic trends This question addresses the issue of diffusion, as in Section 10.4.2. The research should be easy for students on alexa.com.

You should ask students to look out for tipping points, plateau points and tripping points, and try to explain the timing of these in terms of network effects and limits to diffusion (see Section 10.4).

Websites, of course, are likely to benefit from network effects more than many other sorts of innovations, and it would be worthwhile checking with students that they understand why, and the implications for growth.

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Assignment 10.6 Incumbent response Again, this should involve no more than basic research via the same kinds of sources as in Assignment 10.4. Innovations that people are following are, for example, various mobile apps (Snapchat, Pinterest, TicToc, etc.), virtual reality gadgets, on-demand transportation (ride-hailing/sharing) and food delivery services. Some of these challenge leading incumbents like Facebook and Uber. Apple is another incumbent struggling to defend its position versus the challenge of Android-based smartphones such as Samsung’s and Huawei’s. Again, simple places to review recent popular technological innovations are the BBC and Business Week sites (see Assignment 10.4 above).

Integrative assignment 10.7 Strategic plan Given student interest in entrepreneurship today, this should be a motivating assignment for many. It can be done at different levels; here, the assignment presumes that students will only make a start on building the plan and become aware of the considerable extra work they would need to do in order to build up the required information. Of course, the plan should build on considerations in this chapter, but also considerations raised in the first strategic position section of the book (see Section 10.2.2).

Case Example Rovio’s Angry Birds: The Evolution of a Global Entertainment Empire This case should be attractive as it involves product-types that almost all students will be familiar with and offering an inspiring approach to the entrepreneurially ambitious. There are also very real issues about entrepreneurial challenges and the ups and downs of entrepreneurial developments.

1. What contributed to Rovio identifying their business opportunity?

The founders had been creating and selling games for other companies since 2003. They had the experience of developing games for others before they decided to create their own IP to take to the world. They knew other gaming companies had strong distribution channels, so competing with them would have been very difficult if they had decided to do so in the early 2000s. They spotted an opportunity with the launch of the App Store by Apple, which allowed global distribution of apps. They focused solely on creating a mobile game, abandoning other platforms such as PC, consoles etc., where distribution was much harder. The founders of Rovio had patience in developing 51 games until they came up with Angry Birds, and the timing of launching the game plays an important role in the global reach they achieved. They had the right team, the resources and capabilities, and they also spotted a new opportunity in the games industry. When Apple introduced the iPhone in 2007, it opened a whole new market for mobile games developers, and the Hed cousins seized that opportunity. In addition, the Hed cousins had a strong vision before they even created Angry Birds. They had the ambition to build a global entertainment empire, comparable to Disney. That strong vision kept them going for 8 years, until 142 .

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the timing was right – they had the right distribution channel – the App Store, a strategy – to become the top ranking app on local markets, and the right IP that would win the hearts of the public.

2. Rovio has shifted their products between games, activity parks, movies, licensing etc., how have they handled different steps in the entrepreneurial process?

After developing Angry Birds, Rovio started to grow massively – both in financial terms, and also in the number of employees. They went from being almost bankrupt in 2009, to generating over 160 million in total operating profit by the end of 2013. The company grew from 40 to 800 employees in just 4 years. In attempts to build a global entertainment brand, they partnered with hundreds of brand partners that helped them reach new geographic markets and industries beyond gaming. They started new ventures based on the Angry Birds IP, such as activity parks, books, and movies. However, the rapid growth and shifting their product offering beyond the mobile game, took a toll on the company that had lost its entrepreneurial agility. They admitted they lost focus and tried to do too many things. The decision to divide their operations up to two units – games and licensing – helped them to regain focus. When the mobile games industry moved to the freemium business model, Rovio failed to respond quickly, causing chaos in the company, resulting in extensive layoffs and having to completely redesign the games, spinning off business ventures and an operating loss in 2015. It was a lesson that brought Rovio back to their entrepreneurial roots and to their core capability, creating games. Despite having to change their business model and streamlining business units, Rovio did not give up on their grand vision. The new CEO said they still have the ambition to be a leading entertainment company, with mobile games at their heart.

3. How has Rovio changed their business model over time? What are the advantages and disadvantages of a freemium business model?

Rovio’s Angry Birds game was originally designed as a pay-to-download game, meaning the game was purchased with a one-time payment and could then be played uninterrupted by ads or waiting times. By 2013, freemium became the dominant business model in the mobile games industry. Games such as Candy Crush and Clash of Clans exceeded the popularity of Angry Birds and Rovio thus had to tackle the new business model. Rovio then committed to changing their business model to a freemium model which meant completely redesigning the way they monetised from the games. The official sequel to the 2009 original hit title, Angry Birds 2 was built as a freemium game. The massive launch of Angry Birds 2 did not meet the company’s expectations, but they did not give up on the game or new business model. Rovio had to redesign the entire game logic and learn how to develop freemium, since they had never designed freemium games before. They continued to improve the game with new features and it eventually paid off. They were at one point falling behind from all the other mobile games developers who started off with the freemium model, but they eventually mastered the freemium model, as Angry Birds 2 is now their most profitable game.

The advantages of a freemium business model: -

Potential to unlock viral growth for the app because it is free to download

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Increase audience size without any barriers to entry

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New revenue streams – advertising and upselling inside the app

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Recurring revenues versus a one-time payment from the user

The disadvantages of a freemium business model: -

Low free user to paid customer conversions rates – meaning a high percentage of free users never convert (the average conversion rate for an iPhone game app is 2–4%) High competition in the App Store/Play Store – users have hundreds of thousands of free apps to choose from When apps are free, users are more likely to ‘throw away’ apps that they just download to try out once The games have to provide enough value to keep the user coming back to the app, but also persuade upgrading at some point, to create the balance is not easy. Users might turn away if there are too many ads or too many waiting times that disrupts the game play Incremental overhead and performance problems – support for freemium users can potentially be

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a large expense

4. How has Rovio evolved through the stages of entrepreneurial growth? At what stage of the entrepreneurial life cycle (see 10.2.3) is Rovio currently? Do you agree that the company is ready for their next phase of growth?

In 2009–2010, the company was in the start-up stage. The growth stage came quickly, they grew considerably in 2011 and 2012, as seen in the first figure in the case (Revenue & Operating profit).

There were management issues and problems with the business model that led to a decline in profits from 2013 to 2015. The release of the movie helped Rovio to start their second phase of growth. This time, the entrepreneurs handled the growth stage better, which led to the IPO in 2017. The founders exited and the leadership within the new management team is following the strategic foundation laid out by the founders, they are still building an entertainment company, with mobile games at its heart.

The previous growth cycle was closely related to the movie, which attracted new fans and new players to their games, so it is possible that the next phase of growth comes together with the movie sequel.

In addition, Rovio is keenly aware of the changes in the gaming industry and wants to be among the first innovators. The future of the gaming industry at the moment seems to be augmented/virtual reality and eSports, Rovio is already one of the first mobile game brands to actively explore and participate in both of these areas.

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CHAPTER 11

Mergers, acquisitions and alliances

Introduction There have been a few changes to this chapter. Section 11.3 has been restructured so that there are new sections; 11.3.1 Defining M&A and 11.3.2 M&A Contexts, and Section 11.3.3 has been relabelled as M&A Strategies. There is a new Illustration, 11.4, that describes the difficulties being experienced at the Renault Nissan alliance, and Figure 11.6, Buy, Ally or DIY matrix has now been replaced with a decision tree.

Illustration 11.1 Strategies clash in a contested bid

1. How do the bidders’ acquisition motives differ?

For Marriott, this deal appears to be a consolidation strategy. It enables the group to remove a direct competitor in the market and to increase its bargaining power over customers and suppliers.

There should be economies of scale economies that allow Marriott to create additional value for its shareholders. Although the case does not give details, it is possible that there are also extension and capabilities motives. It maybe that Starwood has resorts and hotels in different geographic locations to Marriott that would be complimentary to the group. It may also have some capabilities that Marriott would value, but these are likely to be much less important than the consolidation advantages. There could also be financial motivation in that an enlarged Marriott might be able to raise funds more cheaply than before, and there may also be personal motivations in the background. Anbang, as a Chinese acquirer, may perceive Starwood rather differently.

Although they already own some hotels in the United States, their footprint is far smaller than Marriott, so the advantages of consolidation are far less clear. Superficially the motivation may be about market extension – increasing its access to the US market. Also, unlike Marriott, Anbang’s actions (in not spending much time on due diligence) suggest that integration of its hotel assets might not be a high priority. Therefore, Anbang’s intention may be just to acquire assets to further the group’s overall ambition to be larger in the United States. This may be a hedge against potential slow-down in the Chinese economy and a use of surplus cash generated in China. These would be financial motives. There could be personal motivation and the case hints at the closeness in relationships between the head of Anbang and the Chinese government, suggesting that there may be political motivations for the deal as well as financial.

2. What are the strategic and organisational fit implications of both bids?

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value and there would likely be a degree of standardisation across the group to ensure consistent service and quality throughout. This would mean alignment of management practices, culture and staff characteristics. Through integration, efficiencies should be possible.

Although there could be consolidation between Anbang’s US hotels and Starwood, it is more likely that Starwood would be held as a new independent asset. Anbang has little hotel experience so this extension acquisition would probably remain standalone with its management practices, culture and staff characteristics left largely untouched. With very different types of organisation, Anbang is in insurance and is Chinese, its practices and culture are very different to Starwood, so attempts at integration would be very difficult. It is also highly unlikely that there are synergy possibilities between Anbang’s insurance activities and Starwood’s operations. Possibly over time there might be attempts to integrate Anbang’s hotel holdings but it is equally likely that these assets could be divested, depending upon the motivation for acquisition. For instance, should the Chinese economy recover strongly and the US economy stagnate, or the political incentives for overseas expansion change, Anbang might revise its acquisition strategy.

Illustration 11.2 Money can't buy everything 1. Using the post-acquisition integration matrix, Figure 11.3 compares Google’s early style of acquisition management with the integration of Nest.

The case observes that in the early days ‘Google did not set a priority on fit between its target companies and its own organisation. Acquisitions were simply ways to enter new markets, gain talent or give Google a stronger foothold where its own efforts had failed’. In terms of the post-acquisition integration matrix, Google may have initially told entrepreneurs they wished to acquire that their approach to integration strategy would be Preservation, with entrepreneurs being allowed to run their own show and with Google handling some of the back office processing. However, it is clear that the high level of autonomy originally promised and the limited extent to which resources and capabilities were shared would soon change, so that the acquired businesses were Re-oriented, with tight market and administrative integration. Tighter control allowed Google to rationalise hundreds of acquisitions, but the loss of autonomy in particular and the possibility that the acquired business could soon move from Reorientation to Absorption, in order to achieve greater synergy value for Google, was a process that many entrepreneurs didn’t like, causing them to quit.

Nest was different however, probably because it was larger than earlier acquisitions, at $3.2bn and because founder Fadell negotiated skillfully, being aware of the problems for founders of earlier acquisitions. It would seem that Nest was managed in a Symbiotic way, with Nest being able to retain its autonomy and yet share certain resources and capabilities in an effort to develop Google’s smart home initiative. Through this Symbiotic integration strategy, Google and Nest have been able to achieve new things neither company could have achieved on its own otherwise.

Fadell’s autonomy kept him engaged in the process and his retention also allowed him to protect his business.

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2. How has Google managed to be successful in retaining entrepreneurial talent?

The interesting aspect of this case is that Google does not pay the highest prices for its acquisitions. Therefore, they must offer other benefits that entrepreneurs see as valuable. One important thing that Google offers to entrepreneurs is to see their innovation being used immediately by vastly more users than they could hope to achieve on their own. This would appeal to the pride of entrepreneurs. Also, entrepreneurs new to the group would have space to innovate and many like-minded people would surround them. In other words, the innovative culture within Google may feel comfortable to new hires. Using a Preservation style at the outset of acquisition would be attractive and the later use of the Symbiotic style with Nest provides a precedent for a better integration approach. There might also be a degree of pride for entrepreneurs now working for Google as a world-class tech company.

Probably not distinctive to Google is corporate’s willingness to take on a lot of back office work that entrepreneurs often felt distracted them from their primary interests. Of course, as the case mentions, some entrepreneurs left because they did not want to become corporate employees, but this was also the case for other high tech acquirers.

Illustration 11.3 Apple’s iPad advantage 1. What are the pros and cons of Apple’s tight control of licensing?

Students may have strong opinions on Apple’s licensing policies. Tight control gives Apple the ability to manage quality and consistency of feel throughout the Apple range. This supports its powerful market position and assists it as it extends its range of products. On the other hand, it may restrict its ability to establish itself as a secure industry standard, as, for example, Microsoft did during the 1990s. There is a danger for Apple, so far avoided, of being returned to the niche position that it had in computers in the last century. There are powerful companies, not least Microsoft and Google, who are pursuing more open licensing strategies in order to challenge Apple’s dominance. Apple has, however, been more open in its encouragement of apps producers for its iPad. 2. What role has ‘ecosystem’ played in Apple’s competitive advantage?

The hands-off relationship with companies such as Griffin and Logitech allows it to foster competition and thereby hopefully promote the widest possible range of accessories. The market will select the most successful, and Apple’s brand may be protected from failures. On the other hand, working more closely with companies such as Griffin might help Apple develop new ranges of accessories faster and better, something that might be very helpful as companies compete in terms of ecosystems. This also applies to the ecosystem of content suppliers providing streaming – key to successful competition in the consumer market. Opening up iOS to developers has been a key way in stimulating innovation for the iPad and has given it an advantage over comparable products, although competitors are now also seeking to achieve the same ‘collaborative advantage’ (Section 11.4). The recent decline in iPad sales may result from growing challenges from competitors such as Google, Samsung, Microsoft and Amazon who are also working on utilising competing ecosystems.

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Illustration 11.4 All good things come to an end?

1. Why is the Renault Nissan alliance in trouble?

There are multiple reasons for alliance breakdown and often these relate to falling performance.

However, in the case of Renault Nissan this cannot be said as the alliance has been hugely successful in solving strategic problems at both companies (pre alliance) and with sales greater than any other carmaker in the first six months of 2018. However, there are several aspects that may have caused this crisis (1) differential growth (2) the pain of change (3) political tensions.

1) Differential growth: the huge success of the alliance has not resulted in equal evolution, as Nissan has grown strongly, relative to Renault in both volume and profits, to the extent that it could now easily afford to acquire Renault. This exposes the inequity of the share arrangements as shown in the illustration.

2) It is likely that Nissan harbours resentment at the brutal way in which Carlos Goshn turned the company around with 20,000 redundancies in a country that prides itself on long-term employment. Now that Nissan is the more successful of the two companies, there may be a wish to ‘hit back’.

3) The unequal share arrangement, linked to French and European policies, that disadvantage the Japanese, is a source of tension. It is also likely that the French Government would prevent Nissan from taking over Renault. Also, it is unlikely the French would want to relinquish their shares in Nissan as the alliance is doing well.

All of these pressures can be said to have eroded trust between the two companies, exemplified by the arrest of Carlos Goshn, where it is not clear whether he has really acted unlawfully or whether his arrest is part of a larger political game.

Overall, the alliance has evolved but in this case, success and differential benefits may be leading to the tensions that are causing the crisis – thus causing the principle of equality to be difficult to uphold.

2. What would you propose for the future of the alliance?

History cannot be undone, so maybe the resentment of Nissan towards Carlos Goshn is understandable. However, the alliance has been hugely successful and both companies could continue to benefit from it continuing. Therefore, co-evolution would be a good thing, but first it is important to being to regain trust through negotiation. Maybe a more equitable equity split may have the right effect. Also, it is possible that with Governments involved, and the closer trading links between Japan and Europe, pressure upon the companies may allow a solution to be found, but it will be a long time before trust is restored. If it cannot, then a break up will need to be negotiated which will be expensive and ultimately may undermine both organisations competitive position.

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Thinking differently From acquiring capabilities to acquiring as capability?

Question: What are the arguments for and against using an M&A function in post-acquisition integration?

The weight of empirical evidence suggests that most M&A fail. One reason often cited for failure is acquirer’s not paying enough attention to post acquisition integration – focusing more on the wedding than the marriage. Therefore, developing a capability that is skilled at post acquisition integration may serve to improve M&A performance – and there is some evidence in related types of transactions, such as alliances, that this may work.

Conceptually an M&A function enables a firm’s M&A knowledge and accumulated experience to be captured. M&A capabilities are developed through articulation, codification, sharing and internalising M&A learning. Through experience, a post acquisition integration team may be able to avoid some of the pitfalls encountered previously and there are some early indications from research that this may be the case.

Although in general terms an M&A function would be beneficial in post-acquisition integration there are a number of caveats. The first is that this function would not be cheap and therefore would be hard to justify for a company that carried out few, or infrequent M&A. In this circumstance, it might be better to hire consultants as and when they are needed. A second caveat is the way in which an acquisition is to be integrated. Where the acquisition is purely taking control of an asset with no intention to engage in organisational integration, then a post-acquisition integration team is unnecessary. Or if the acquired company is to remain independent of the parent, in a Preservation type of integration, then the need for a post acquisition integration team is greatly reduced.

However, one message throughout the chapter is that M&A is a process and that better acquisitions should occur if the whole process is managed coherently rather than segmenting it into phases.

Therefore, if there is a M&A team for the identification of acquisitions and for transacting of deals, then this team ought to remain with the acquisition in the post acquisition phase in order to make sure that the strategic intent behind the deal is realised in subsequent integration decisions.

Assignment 11.1 Public and private sector M&A

One of the main points of this assignment is for students to show awareness of the advantages and disadvantages of growing through M&A compared with other organic and non-organic methods. This may encompass issues of speed of expansion, risk, flexibility and performance.

Another point of this assignment is to reinforce the relevance – and in many ways similarities – of mergers and acquisitions in both public and private sectors.

Reference to Section 11.3.3 provides a useful template for this question. The three strategic motives of extension, consolidation and capabilities can all apply across both sectors, though the details may 149

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differ somewhat (e.g. market power). The two managerial motives of personal ambition and bandwagon effects may apply too, though it is likely to be governmental initiatives that set off the merger waves in the first place. The financial benefits may be less obvious: tax, asset-stripping and balance sheet benefits are unlikely, though in some cases variation on these may be relevant.

In general, though, the benefits of mergers in the public sector are often more elusive than in the private sector, because of constraints on workforce or service reductions, and the absence of opportunities for financial or tax efficiency.

Assignment 11.2 This question requires students to track a ‘bidder’ and a targets stock price over time. Stock price reactions (to not only bids but also other events such as major innovations, reorganisations or alliances) are useful metrics for how investors evaluate strategies (see Chapter 12). The underlying theoretical position is that few bids are strongly positive for the acquiring firms’ investors; the investors of the target firm reap most of the benefits in the price paid by the acquirer.

Accordingly, the target company’s price usually goes up with the bid news, often quite substantially (reflecting the ‘premium for control’) (see Section 11.3.4). Generally, the bidder’s price goes down by a small amount. A fall in the bidder’s price indicates that investors do not have much confidence in the future value of the strategy behind the bid. A fall in the target’s price might reflect fear that the bid might not be successful (no premium to be paid). A further rise in the target’s price would reflect expectations that the bidder will pay more than initially expected, or that a further bidder has entered the fray, and is likely to pay more.

The students should choose two quoted companies (as in SABMiller and ABInBev in the Megabrew case) in order to be able to track both share-prices (where it involves the acquisition of a business within a larger portfolio, the stock price will be less easy to ‘read’). It is sensible to track the stocks over a longish period of time, for example, a month or so before the bid, as companies are often regarded as ‘in play’ for some time before the formal announcement and the stock price is likely to reflect that. It might also be useful to encourage the students to compare the price movements against a relevant stock-market index (typically available on either www.bigcharts.com or www.yahoo finance.com). These sites will also mark major events (bid announcement, etc.) on the timeline for the stock. Students could be encouraged to read the financial press regarding the bid in order to pick up analysts’ and journalists’ comments on the rationale for the bid.

Assignment 11.3

The purpose of this assignment is for students to use the case example as a way of exploring the strengths and weaknesses of different post acquisition integration styles in the Angwin and Meadows matrix (Figure 11.3). The Preservation integration strategy has the advantage of leaving the acquired company alone so there is little risk of the acquired business being damaged. The disadvantage is that there is little room for inter-organisational synergy benefits to be achieved which raises the question of how the acquirer will therefore recover any premium paid. The hope is that there may be some learning effects, but often these do not materialise. The strength of the Absorption style is fairly rapid integration of businesses to achieve efficiency gains. These cost savings may reassure investors that

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the acquirer can recover the premium paid. The potential disadvantage of this integration approach is damaging the acquired business, by substantial restructuring, and even the parent organisation. The Symbiotic approach may enable both organisations to co-evolve to achieve classic 2 + 2 = 5 synergies, but this process can take a lot of time and frustrate investors and managers. Intensive care can be an effective approach to post acquisition management if the acquired company is performing badly. It allows rapid restructuring where value may be gained, but these acquisitions are not integrated into the parent to avoid any destruction of value. Reorientation can be an attractive strategy if the acquired company is well run but can benefit from being reoriented externally with the help of the acquirer to gain new customers. This approach assumes that the operations of the acquired company are in good condition and can be left largely to their own devices.

Assignment 11.4

The main reasons for pursuing M&A over alliances is when the assets and resources cannot be accessed and fully controlled by other means and where contracts do not function effectively. In some institutional contexts, alliances can result in knowledge spill-overs and so the loss of value, which would have been better protected with M&A. A further reason is to prevent a third party making an acquisition of one of the alliance parties, thus denying the other party future access to valuable assets. There is no doubt that Alliances can create mutual value for companies but the failure rates for alliances are comparable to M&A, so students should not assume more value would be created this way. Also, Alliances tend to be more of a short- to medium-term strategy with many dissolving in 5– 7 years. A more important aspect of difference is that alliance gives greater flexibility than M&A, that is, to dissolve an alliance is generally less costly than to dispose of an M&A, so giving the parties greater strategic flexibility. Relating these observations to the Sainsbury acquisition of Argos one can say that Argos’s assets were not freely traded on the market and they would not have been amenable to a joint venture as this would have diluted their value through sharing. The same applies to the acquisitions of Starwood and intended acquisition of SABMiller.

Assignment 11.5 Family-owned companies are likely to prefer organic development to acquisitions or alliances because:

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acquisitions typically require substantial capital, often obliging the acquirer to raise money

•

externally through the issue of more shares (diluting family control) or through bank debt (again, liable to reduce family control, especially where there is a risk of not being able to meet inflexible interest rates or repayment terms); acquisitions are likely to involve companies with very different cultures, something that family

•

alliances involve the sharing of control, something that family companies, which are very often

companies (often with distinctive and coherent corporate cultures of their own: see Chapter 6) are likely to find difficult to digest; highly centralised, may find uncongenial.

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Integrative assignment 11.6 Many M&A fail, so students should consider the alternatives. This will quickly lead to a discussion of the nature of the resources and assets that are required, their availability and the speed with which they are needed. Other factors will be the level of perceived risk of different expansion options and the financial and managerial costs associated with their choice. Also in performance terms, other nonorganic means of expansion have similar failure rates. These factors are summarised in Figure 11.6.

The range of stakeholders affected by M&A is substantial which may not be the case for other expansion options. By affecting all stakeholders M&A can cause widespread uncertainty and differing prospects of loss and gain, in financial, commercial and psychological terms. This may mean instability and dissatisfaction for some and potential for political manoevering.

End-of-chapter case Future-proofing business? Sainsbury acquires Argos 1. Why did Sainsbury bid for Argos?

To understand why Sainsbury bid for Argos one needs to consider the situation of both companies.

Sainsbury It is useful to consider the influences of contextual pressures upon Sainsbury. Assessing the macro-Environment with a Pestle analysis would reveal that consumer habits are changing with the rise of online purchases. In terms of the industry environment, the food retailing industry is slow growth, thus posing a general challenge of growth for competitors, as the only way to expand rapidly is mostly at the expense of other competitors – a red ocean situation. Within the industry, there are differences in competitive position and Sainsbury faces a significant threat from the rise of discounters (Aldi and Lidl). Also, there are now new entrants (Amazon in particular who will provide online food retail).

Referring to Porter’s Generic Strategy Matrix one might conclude that Sainsbury fears being stuck in the middle (in a slow growth industry), with customers being attracted to the broad lowcost competitors (Aldi and Lidl) and to clear differentiators (M&S and Waitrose). There is also a potentially serious risk of a new delivery channel becoming effective with Amazon’s entry that might also steal customers away. To avoid being stuck in the middle Sainsbury needs to continue to invest in differentiation, as it cannot win as a low-cost competitor. Although it is one of the most profitable of supermarkets, the downwards pressure on profits suggests that it needs to act now while it has the resources to do so.

Using a business policy matrix one can see that Sainsbury would be classified as having a strong position in a low attractive industry (based on growth rate) and the recommendation would be a concentric growth strategy, such as acquiring Argos – which has complementary products. It is highly unlikely that the regulatory would allow Sainsbury to acquire another large supermarket chain on the grounds that this might lead to a monopoly situation. A deal with Argos may allow cross selling of products and the deployment of a more efficient online distribution system.

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Essentially, there are opportunities for economies of scale and scope. In terms of Joseph Bower’s M&A strategies, one could make a case for this deal being a convergence deal – the convergence of non-food and food retailing industries.

Argos Argos is vulnerable to takeover due to its weak performance. It could be attractive to acquirers such as Sainsbury as it is the largest non-food retailer in the United Kingdom. It also has multiple distribution channels and good online technology that might be applied in some way to Sainsbury’s food business. The complementarity of its products and the potential for using its distribution capability may be attractive to Sainsbury as they try to address the threat of Amazon.

Other issues Despite a tough industry, Sainsbury’s share price is high and Argos’ is low, thus giving Sainsbury purchasing power.

We also have to consider what would happen if Sainsbury had not acquired Argos? It would probably be purchased by a competitor, which could disadvantage Sainsbury in the future, particularly as creating one’s own on-line food distribution business would be expense, risky and take a long time (see below).

The fact that Sainsbury paid a high premium of 73% for Argos (when an average premium would be around 23%) means they either (i) believe there are a lot of revenue synergies possible (through the Argos distribution system being applied to food retail and the capture of more customers because of convenience, plus cross selling) rather than cost synergies, estimated at just £140m in the case (probably through land disposal and redundancies – although this is probably understated), or (ii) they are affected by cognitive and psychological issues of fear or overoptimism. Fear is more likely, that their strategic advantage might be eroded in the future, and soon, by Amazon’s intervention, and there are few sources of differentiation left to them as a standalone supermarket chain operating in conventional ways. On this basis, the deal looks risky and this is what many analysts believe.

2. With reference to the post acquisition integration matrix (see Figure 11.3) consider how Sainsbury might best integrate Argos?

A case can be made for Sainsbury to use all of the integration styles in the matrix. Some will focus on the cultural differences between the two companies and so feel Argos should either be preserved or the deal should be symbiotic to protect the culture and the distinctive technology.

However, Argos does not seem to be doing well and both of those styles of integration generally require good quality target companies. One could argue that the people and culture of Argos are not so important to its competitive advantage as this seems to rest almost entirely on technology, so provide the technical employees are protected the rest could be restructured towards Sainsbury’s superior customer service values. Others will, therefore, suggest restructuring either as Isolation or Subjugation. Intensive Care is probably too harsh as Argos is not close to failure.

This also would not allow integration of IT. Absorption would, therefore, be preferred as it would allow rapid restructuring of assets (the real estate needs quick management), and the redeployment and downsizing of Argos employees (if their stores are to be folded into Sainsbury,

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for instance – and where their service quality would need to be improved to prevent reduction in Sainsbury standards and brand). Absorption would result in the loss of Argos culture, which may not be a bad thing, and the loss of its top management – although key technical employees would be protected. In theory, Re-orientation of Argos would make sense if Sainsbury could reorient Argos technology to engage effectively with Sainsbury customers and products. However, in practical terms, Sainsbury would be left with an intact Argos culture that is at odds with its own, and which might cause damage to the combined operation.

This discussion also hinges on the importance of speed of integration. Faster integration allows for quicker returns and reduces uncertainty amongst employees and other stakeholders. In terms of competitive threat, speed might be attractive although a warning note could be the differences between Argos and Sainsbury’s businesses.

So the issue of which integration strategy to follow boils down to what is the main strategic reason for the acquisition and how to realise its value for the new group. Although there are real estate synergies, product extension opportunities and additions to the banking business for Sainsbury, the key value in the deal is the deployment of Argos’ distribution technology for Sainsbury’s products. If the view is taken that this is a relatively simple conversion process, then Absorption is the most attractive integration approach as it will integrate Argos quickly into Sainsbury and this approach is also appropriate for culturally low intensity resources (including banking and real estate). However, if significant differences are detected between technologies and expertise, such that integration is very difficult, and there is some prior evidence that this might be the case, then a slower more collaborative integration, using a Symbiotic strategy, would be best, even though this might allow Amazon to gain a greater foothold in the meantime. Going too fast on integrating the key capability could result in significant value destruction.

3. With reference to the ‘buy, ally or DIY’ decision tree (see Figure 11.6) consider whether the acquisition of Argos is the best strategy for Sainsbury?

I am sure that Sainsbury would have considered other options than outright acquisition of the capabilities it needs to address its weakening strategic position and the general trend of consumers towards online purchasing and instant delivery. Ideally, Sainsbury would develop its own distribution capability, as this would be compatible with its own culture. However, this is risky, and others have shown it to be difficult, and it would take a lot of time – Ocado took 15 years.

An alliance would reduce risk and would be a quicker solution. Ideally, Sainsbury might have asked Argos if it could have an alliance with just its distribution operations, but it is unlikely that this aspect of the business is separable from the rest. Also, if this is Argos’s main asset, then they would be unlikely to want to trade.

It is likely that Sainsbury perceives its situation to require urgent action before Amazon becomes too established and before its own profits are eroded. This may have precipitated the acquisition.

How one perceives the distribution capability of Argos as largely hardware or software will give different levels of comfort about the extent to which this may be successfully integrated into Sainsbury. The businesses are very different in terms of customers, strategies pursued (high volume low-cost versus high-volume differentiator), different locations, largely different products, different cultures, different ethos. None of these bode particularly well for Sainsbury and the higher the ‘soft’ component of Argos’s asset, the more concerned one might be.

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On the basis of this discussion whilst, organic development might be ‘best’ and an alliance a second best option, in practical terms, acquisition is the right way to proceed based upon Sainsbury’s perceptions of its strategic situation.

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PART III

Strategy in action

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CHAPTER 12

Evaluating strategies

Introduction There have been a significant number of changes to this chapter including a more extensive list of key terms than before. In Section 12.2.1, Performance measures, the Du Pont model has been introduced (Figure 12.2) in order to allow students to make a structured analysis of a company’s ROCE so they can work out which components add or subtract value from the whole with greater emphasis placed on evaluating the sustainability of performance in Section 12.2.1. In the section on performance effectiveness, more space is now devoted to the balanced score card to underscore the importance of multiple measures of performance. There is now a new Illustration 12.1 ‘Britain’s oldest and worst retailer – WHSmith?’ which shows how different measures of performance leads to conflicting results.

In Section 12.3, we have adjusted our SAFE criteria to be SAFE (see Table 12.1) with the final term E (Evaluation – see Section 12.6) standing for an evaluation process of all the criteria. Illustration 12.2 ‘Refreshing Heineken’ has been adjusted so that the table listing strategic options and key strategic factors has been reduced. Through teaching the case, we found that it is better for students to try to identify the options rather than have them identified already. There is also a new Illustration 12.3, ‘How to decide among strategy options at a family business’, which allows students to try using and evaluating a decision tree. Section 12.4 has been restructured to emphasise the importance of return before considering risk and stakeholder reaction.

Illustration 12.1

Britain’s oldest and worst retailer – WHSmith?

This illustration raises issues about multiple and conflicting measures of performance. 1. In your views, is WHSmith a successful company?

The title of the case, the picture and the text of the case steer students strongly towards the judgement that WHSmith is clearly a terrible company. From a customer perspective, it is a shop to be avoided, with high prices when consumers have little choice, terrible store conditions and demotivated staff. However, the quantitative data shows a different picture, with strong share performance, consistent increase in operating margin and improving group revenue, although High Street revenue shows continued decline. From this, one can conclude that WHSmith performs well on financial measures and this is achieved through brutal cost control and the ability to restrict consumer choice. Indeed with the British High Street under serious threat, through online retailers, cost control is vital for survival and WHSmith also illustrates that it is possible to achieve sustained profitability, even in a declining industry.

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2. What metrics do you use to support your conclusions?

The purpose of this question is to alert students to the importance of using all the data supplied in a case. Often times, there are students who will only read the text and will ignore the statistics.

Also, it should spark a debate over which metrics are the ‘right ones’ and this should lead to a conversation of ‘from which perspective’, that is, the consumer, the shareholder, top management. It could also lead to a discussion about the timeframe of performance and sustainability.

Illustration 12.2 ‘Refreshing’ Heineken 1. Are there other options or factors Heineken should consider? 2. How could you improve the ranking analysis? 3. Consider the most favoured option in terms of acceptability and feasibility criteria. The options presented in the grid for students to use, is now less than in the previous edition of the book. This means that they need to extract further options from the case material, which should be very easy to do, but it may also cause more able students to think a little more critically of what other options there might be.

There is an overriding issue that should be worked into the discussion about this illustration: students need to realise that ‘an answer’ will not emerge from a simple tick and cross exercise (or indeed a scoring exercise). This form of screening is designed to encourage students’ thinking and discussion about strategic options: so its value should be demonstrable in terms of the extent to which they can argue a good case for a strategy on the basis of it.

This point should also emerge via the questions that are posed. For example:

•

•

Question 1: Students may consider other options and especially other factors than those included in the illustration. However, these may also emerge during a scoring exercise. So, it is worth pointing out that in undertaking the analysis, the analysis itself may throw up other options and factors.

Question 2 asks the students to consider how they could improve the analysis. They may argue that a greater range of factors would be important to include. The point that needs to be made, however, is that the difficulty of undertaking the analysis increases (and value diminishes) dramatically with the number of factors included. So, prior analysis should aim to identify the factors that matter most. Another way of considering improvements is to ask the students to use a scoring method rather than ticks and crosses (e.g. see the SWOT analysis at the end of Chapter 4). If this is done, then factors that emerge as being of prime importance can also be weighted as a sensitivity test on the suitability of strategies.

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•

Question 3 asks the students to consider the favoured option in terms of acceptability and feasibility criteria. The point to notice is that the favoured option may need to be refined in some way after considering acceptability and feasibility. It is also possible that the most suitable option is not acceptable or feasible, which will mean a further re-evaluation of options, Indeed, sometimes identifying a strategic option to pursue maybe an exercise in finding any option that is suitable, acceptable and feasible. This may lead to a discussion about Evaluation.

Illustration 12.3 How to decide among strategy options at a family business – a decision tree analysis?

1. Try reversing the sequence of the key criteria, redraw the tree and see if this results in a different set of strategic outcomes?

2. Claudia subsequently found out that the CEO was also wondering about whether to expand within the same business area or to diversify into a new one. Redraw the tree with this new fourth criteria and see what 16 strategic options you generate.

Decision trees can be useful, provided students understand that (looking at this example): • •

The same eight options would be generated irrespective of sequence of criteria (remember, of course, that these are not the only eight options available to the firm).

A fourth parameter (internal development or acquisition) will create a total of 16 options.

The current eight will each create two. For example, number 4 ‘diversification?’ would divide into: (a) Expand within existing area (b) Diversify into different business

Illustration 12.4 Real options evaluation for developing premium beers in India 1. What are the advantages of the real options approach to this evaluation over other approaches (a) to building the brewery; and (b) to other ideas being considered?

This illustration provides a basis upon which students can understand and discuss some of the espoused benefits of a real options approach, such as encouraging managers to: •

consider the possible benefit of other options that may arise from the consideration of a given

•

option (the opening up of the brewery in itself opens up other options); consider the danger that a traditional discounted cash flow (DCF) approach can, therefore, undervalue projects because it does not take into account the value of options that can be opened up by that project; 159 .

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realise that costs and benefits are unlikely to be clear at the beginning of a project and may become clearer as it progresses. Therefore, a real options approach may reduce the risk of the need to build too many upfront assumptions into the financial evaluation of strategies.

(Also, see the notes below on the key debate on SIDs (strategic investment decisions).)

Illustration 12.5 Sensitivity analysis What should the company do if its marketing campaigns fail to stop real price erosion: 1. Push to achieve more sales volume/capacity fill? 2. Reduce unit costs of production? 3. Something else?

Students find sensitivity analysis a user-friendly technique. This illustration allows them to see an analysis and test out how it might be used to inform strategic decisions.

Sensitivity analysis is perhaps most beneficial in unearthing the key factors/assumptions on which the success or failure of a strategy hangs. It is useful for students to think through conceptually (rather than analytically) what these factors might be since this should improve their understanding of the basis of an organisation’s competitive strategy.

Illustration 12.6

Using break-even analysis to examine strategic options 1. Which option would you choose? Why? 2. What would be the main risks attached to that option and how would you attempt to minimise

these risks?

3. Create another option (strategy C) and explain the kind of break-even profile which would be needed to make it more attractive than either strategy A or strategy B. Break-even analysis is a basic, ‘quick and dirty’ but useful technique that can help provide useful, if not definitive, insights into possible strategic options.

With regard to Questions 1 and 2, a significant question for decision makers is whether entering a market with the expectation or target of achieving a 20% market share is feasible without considerable backlash.

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It might be easier to enter with strategy B (a common entry point for new entrants).

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But there are some likely dangers here too. For example: a. Corporate image may suffer (e.g. with spill over into other products?) b. Does the company have the expertise and infrastructure to service the retail trade directly?

The value of Question 3 is to encourage students to ‘play with’ different options and their associated cost structures to see if they can find a more attractive option.

Thinking Differently

Misrepresenting strategic projects Question: If you do not trust the numbers for a strategic option, what strategic fundamentals would you consider?

The main consideration has to be the value that the strategic project is deemed to achieve and for whom. This could be evaluated critically through scenario analysis in order to ascertain how robust the project might be under different conditions, derived from PESTLE analysis. Thought should also be given to the future options that may arise as a consequence of the project. For businesses, it should be clear how the project will enhance the bases of strategic advantage. Overall, the project should be evaluated using the SAFE criteria in this chapter.

Financial markets and institutional investors, however, require financial bases of appraisal. It would seem prudent to compare similar projects with their actual cost overruns as a check upon the proposed project. However, strategic fundamentals need to be considered and these should not be in conflict, as they should complement strategic analysis (Barwise, Marsh and Wensley, 1989). Therefore, financial analysis should take into account good strategy analysis, to avoid bias towards short-term measures, underestimating or overestimating discount rates where DCF is used. In particular to avoid understating costs;

•

Ensure thorough and visible analysis of the underlying rationales for strategic options, so that

•

decision makers can ensure sensible assumptions are built into the financial analyses.

Employ sensitivity testing that vary the assumptions; build into the financial analyses.

• •

Use complementary methods of evaluation that do not rely on financial analyses alone, but use other techniques such as those explained in this chapter.

Adopt a real options approach.

Nonetheless, there are many decisions, which are subject to fundamental uncertainty, especially in highly dynamic or innovative domains. In the case of such uncertainty, financial evaluation is unlikely to be helpful, putting too much emphasis on the quantifiable, and liable to underestimate the importance of the unquantifiable. Sometimes, therefore, managers may need to go with their gut 161 .

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(e.g. Apple’s current experimentation with an iWatch, for which it can only make the most sketchy estimates of final demand). There are other decisions such as structural choice where it may be easy to define some financial elements (the savings of a management layer, the additional cost of a regional headquarters) but very hard to estimate other effects (increased accountability without the extra management layer, greater responsiveness due to the regional headquarters). Decisions are liable to be biased if only the financially quantifiable are included in the calculation. Some other types of decision are highly difficult to evaluate a priori, but that does not mean they should not be attempted: thus, the costs and benefits of culture change programmes would be almost impossible to estimate.

In short, it is important to underline to students that many strategic decisions are not reducible to financial evaluation and it can be dangerous to try to do so.

P. Barwise, P. Marsh and R. Wensley, ‘Must finance and strategy clash?’, Harvard Business Review, September-October (1989) pp. 85–90.

Assignment 12.1

Share price performance This is a useful exercise to promote students’ financial literacy and knowledge of financial websites. Most websites of this kind identify the relevant index for a particular company and at least some of the relevant competitors. Comparisons of this sort are very important for assessing how well a company is performing. Underperforming vis-à-vis competitors suggest a weak strategy. Underperforming vis-à-vis the relevant stock market index suggests likely problems in raising capital to support the strategy (for instance, to fund acquisitions). For large companies, students may run into the problem of multiple listings on various stock markets: they should be guided to the listing on the home market (easily identified via Wikipedia, for instance). Students may wonder what the right time period for comparison is: except where recently appointed, one relevant period is since the start in office of the current CEO. Different time periods may yield different impressions of performance, but in general, the longer the time period, the more informative. Five years for most companies is easily accessible, and sometimes longer.

Assignment 12.2 Ranking Students could use the table in Illustration 12.2 as a model against which they could undertake a ranking exercise. Issues to look for are the following:

•

The need to identify a manageable list of factors to build into the exercise by prior analysis of the

•

strategic position of the organisation concerned.

A recognition that the major benefit of such an exercise is to ‘screen’ options against key strategic factors and not to produce a single preferred strategy. It helps cast light on the relative merits of the various strategies.

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•

The avoidance of a reliance on the scores, not as a basis for decisions, but rather as a basis of

•

discussion and as a way of informing judgement.

Some students may try a more complex scoring process such as scoring and weighting of factors.

Students can be asked about their opinion on whether, this added sophistication would improve the usefulness of the approach that improves the debate. The danger is the risk of creating a degree of ‘pseudo-science’ that is neither justifiable nor helpful.

Assignment 12.3 SAFE The important lesson from this assignment is to distinguish between the bases of evaluation. The criteria for suitability should arise from the students’ understanding of the strategic position of the organisation, especially in terms of the forces at work in its environment and the strategic capabilities it has. In a sense, the task here is to identify which strategic options mostly build on strategic capabilities and take advantages of opportunities and threats in the environment.

However, assessing suitability does not, by itself, inform the manager about the acceptability of the strategy to stakeholders. This should be informed by an understanding of the expectations of stakeholders. What are these expectations and which strategic options are most likely to meet them?

Feasibility requires the students to think through how an option would be to put into operation. This might require a consideration of financial planning and project planning, for example.

In effect, the exercise should take the form of an increasing funnelling of strategic options from what might be many, to an eventual strategic choice.

Assignment 12.4 Risk assessment

A significant issue with regard to acceptability is the level of risk associated with different strategic options. This assignment encourages students to look at this systematically. This could be for an organisation of their choice or for an allocated case study, perhaps the ‘Where should the beds go?’ case again.

Students may be familiar with risk assessment tools. These vary in the extent of not only their complexity and detail but also their level of application. So many risk assessment tools are associated with highly operational matters. Here, the aim is to encourage students to look at major strategic options in terms of risk assessment.

A base line analysis would require students to try to identify all the major risks associated with each option being considered. It is likely that many of these would have been identified anyway within, for example, a SWOT analysis. So, the aim should be to identify, for example:

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• Which perceived strengths might diminish or not provide advantage?

• Which weaknesses may be especially significant and why?

• Which perceived opportunities might not come about and why?

• Which threats might be especially important and why?

In all of these cases, it might be helpful to ‘force’ students to rank their considerations in terms of the likely probability of any of these risks occurring and the likely impact of these. In this way, it might be possible to identify the key areas of risk that students should use in considering the extent of risk acceptable to key stakeholders.

In addition, it may then be possible to use these key areas of risks to undertake a sensitivity analysis along the lines of those shown in Illustration 12.4.

Assignment 12.5 Sources of funding

This assignment encourages students to consider the feasibility of funding strategies in terms of the guidelines provided in Section 12.5.1 (and Table 12.4). Clearly, the danger here is that students will simply repeat the points made in Section 12.5.1. This may be overcome by providing students with specific strategies for them to consider. For example, ‘live’ strategies being pursued or considered by organisations could be taken from the financial press such that students need to propose appropriate sources of funding or evaluate the sources of funding being proposed by the companies. If this approach is taken, then it is helpful to choose a range of strategies for companies in different phases of their life cycles.

Assignment 12.6 Strategic choice This is an in-depth assignment for students. It allows them to understand that managers’ motives for preferring specific options are, at least partially, subjective. This is why an attempt to be more ‘objective’ through the systematic use of success criteria can be valuable. You should be looking for students to argue and justify the case that, strategic choice should be a blend between the outcomes of analytical concepts and frameworks and management judgement. As we indicate in the text, perhaps the role of concepts and frameworks should be to raise the level of debate when judgements are being made. More specifically, you should expect the following points to be covered:

•

Perhaps an important shortcoming of the strategic choice process in many organisations is that it is ill-informed. So more use of concepts and frameworks, in general, should be helpful to the decision process.

•

The danger is that concepts and frameworks are allowed to take over the decision process by being presented as analytical techniques and managers have unrealistic expectations of these techniques producing the ‘right answer’.

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•

Another concern is that frameworks concentrate on those factors that lend themselves to analysis

•

and ignore the ‘softer’ factors. This is the classic problem of allowing financial analyses (as illustrated in the chapter) to dominate the decision process. Students should be reminded that there are frameworks to assist with the softer factors – stakeholder mapping would be an example.

Management judgement is likely to remain a key element of good strategic decision-making.

Integrative assignment 12.7 The purposes of an organisation clearly dictate the way that success criteria might be applied in different sectors. Here are a few pointers: •

•

Suitability links strategic choices to the major factors in an organisation’s strategic position (Chapters 3–6). First, there are clearly different ‘emphases’ in the business environment for public sector organisations that students should be able to identify. For example, the heightened importance of the political environment. In turn, this leads to a different spread of power between stakeholders. Both of these factors would tend to mean that suitability needs to be measured more pluralistically in the public sector.

Acceptability is all about stakeholders (Section 5.3). Again, the main difference is the wider set of stakeholders with direct influence on strategy and the wider criteria of success in the public sector.

•

Feasibility is about capability. Here, the sector differences may not be as great as many students

•

Evaluation will be a synthesis of the results from the other categories.

imagine. Lack of resources and low levels of competence will make strategy delivery difficult in any organisation. These problems exist in both the private and public sectors.

End-of–chapter case: ‘ITV: BUY, DIY or Ally?’1 Q1. Identify the main strategic issues facing ITV. From the SWOT analysis contained in the case the main strategic issues facing ITV include: •

A slow growth UK TV market where ITV is mostly focused

•

A major shift in viewers and advertisers from TV to internet delivery platforms where ITV is underperforming Strong content demand internationally, where ITV is strong

•

1

With thanks to Ana Jesus, Yun-Chin Lee, Caitlin Ormiston, Prateek Singh, MBA students of Lancaster

University Management School, for their help in preparing this case study analysis.

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•

The rise of subscription only global competitors

•

The rise of non-studio content

•

A potential change in Government policy potentially making the BBC a large commercial competitor

Q2. Suggest a number of strategic options that ITV might pursue.

The following is not an exhaustive list but strategic options could include: 1. Organic development of ITV Hub and a new subscription based online platform 2. Exclusive VOD partnership with Netflix 3. Acquire a direct UK television competitor 4. Acquire major VOD player Hulu Q3. Create tables to assess the SAFE of your strategic options (refer to Table 12.1).

The following table compares the strategic issues listed above (Q1) against the strategic options proposed (Q2).

Suitability Table Options | Key Strategic Issues

1.

Organic development of ITV Hub and a new subscription based online platform.

2. Exclusive VOD partnership with Netflix.

3. Acquire a direct UK television competitor.

A slow growth UK TV market

✔

✔ ✔

Strong content demand

A major shift in viewers and advertisers from TV to internet delivery platforms.

The rise of subscription only global competitors

The rise of nonstudio content

✔

✔

x

x

✔

✔

x

✔

x

x

x

x

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✔

✔ ✔

= 4 − 22

5−= 23

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4. Acquire major VOD player Hulu.

✔x✔✔x

✔

= 5 − 23

Partnership with Netflix and acquisition of Hulu are the most suitable options. They would address the growing significance of the online platform and allow international distribution. It would also strengthen ITV’s position should the BBC be privatised.

Acceptability Table Options | Key Strategic Issues

Level of risk

1. Organic development of ITV Hub and a new subscription based online platform.

2.

✔

Exclusive VOD partnership with Netflix.

3. Acquire a

x

direct UK television competitor.

4. Acquire major VOD player Hulu

Is level of return acceptable?

Will stakeholder reactions be positive?

Ranking

✔

2

x

1

1

✔

✔

✔ ✔

x

x

?

3

1

Note: ITVs main stakeholders are the shareholders, the regulator and employees (creative and operations talent).

Organic development is acceptable as it is low risk and should generate an improved return, although students may feel that the return may not be so high. There is risk that a partnership with Netflix would cannibalise ITV’s own VOD efforts and it seems returns would be low.

Shareholders might welcome the commitment to online but may not be so happy with low returns.

Acquiring a direct UK TV competitor addresses stakeholder perception that ITV is strategically vulnerable and would represent a step change in size. Acquiring Hulu would be perceived as a big risk and it is not clear that the return would be sufficient to justify the vast cost. However, it would be a major commitment to the growing online market that stakeholders would welcome.

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Feasibility Table Options | Key Strategic Issues 1. Organic development of ITV Hub and a new subscription based online platform.

2. Exclusive VOD partnership with Netflix.

3. Acquire a direct UK television competitor.

Financial

People and skills availability

✔

✔

?

✔

✔ ✔ ✔

x

Can the resources be obtained and integrated?

Ranking

✔

3–0=3

?

1

✔

3

x 1 – 2 = –1

4. Acquire major VOD player Hulu.

The most feasible option is organic growth as it draws upon existing resources and capabilities and is affordable. The partnership with Netflix might be work in practice as Netflix needs content and ITV’s content is excellent – although from Netflix’s point of view it might be too restrictive. It might also be too expensive for ITV to obtain an exclusive partnership deal. Although ITV probably has the right people and capabilities in place, trying to work with Netflix, a very different sort of organisation, could be very challenging. Acquiring a direct UK TV company is probably affordable and ITV does have the right skills for this to work out. The companies could be integrated, so this appears a feasible option. Acquiring Hulu is unlikely to be feasible as it will cost more than ITV can afford. ITV does have the necessary skills in part for this acquisition but integrating the two companies could be problematic as they are very different in nature. This latter option is therefore ruled out.

For Evaluation, see Q4 suggestions.

Q4 Rank your strategic options and recommend a strategy for ITV to pursue.

In terms of evaluation by looking across the criteria of Suitability, Acceptability and Feasibility, it is clear that if an option is not suitable, attracting a zero or negative score it would not be pursued further. For acceptability and feasibility, a negative score may also have the same affect although it is then worth considering whether actions might be taken to overcome the problem.

For instance, if an option is not feasible due to lack of talent, maybe quality managers could be hired.

However, for the sake of completeness based on the data in the case, the following is a summary table of results.

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Strategic options ranking table Options | Key Strategic Issues

SUITABLE

ACCEPTABLE

FEASIBLE

Total Score

1. Organic development of ITV Hub and a new subscription based online platform.

2. Exclusive VOD partnership with Netflix.

3. Acquire a direct UK television competitor.

4. Acquire major VOD player Hulu.

2

2

3

7

3

1

1

5

3

3

0

1

3

−1

6 3

On this basis, the best strategic option is to pursue organic development of the ITV Hub and a new subscription based online platform. However, this analysis assumes that each option is separate. As the cost of pursuing Option 1 is relatively small, other options could be considered simultaneously. The next best options are to acquire a direct UK TV competitor and try to negotiate an exclusive partnership with Netflix. However, the Netflix option would cannibalise Option 1. Therefore, the best combination is likely to be pursuing Options 1 and 2, organic growth and making a bid for another UK TV company such as Channel 4.

The analysis could be refined in many ways, not least ascribing more detail to the calculations to better indicate the scale and costs of the options. For instance, the tables above assume each strategic issue category is of similar importance, whereas a case could be made for some being more important than others. There could be other strategic options including the sale of the business, which had been predicted by some analysts who felt that the old business model was floundering. Shareholders would undoubtedly realise a substantial premium in 2016 for their shares. More radical might be to concentrate purely upon the most value adding part of the business, the Studios, responsible for content creation for which there is substantial international demand, and let the distribution business, which may become very competitive in the future, go.

The choice, therefore, would be either to continue to build ITV’s ecosystem with multiple platforms, a vertically integrated model and a diverse range of suppliers, or to specialise on what it does best – the creation of excellent content.

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CHAPTER 13

Strategy development processes

Introduction The Chapter 13 opening organising framework is a figure (Figure 13.1) based on the Mintzberg and Waters explanation of strategy development as ‘deliberate’ and ‘emergent’. The rest of the chapter is structured around those two explanations and now includes three perspectives within each. Section 13.2 and deliberate strategy includes strategic leadership, strategic planning systems and externally imposed strategy and Section 13.3 and emergent strategy includes logical incrementalism, political processes and organisational structures and systems. The implications for managing strategy development (Section 13.4) have also partly been changed and the end-of-chapter case example (Alphabet) is substantially updated.

Illustration 13.1 The influence of strategic leaders 1. Can you provide other examples of founders’ or chief executives’ influence on strategy? 2. What else would you emphasise as an important contribution CEOs make to strategy

development?

The idea of this illustration is to generate a discussion amongst students about the role of CEOs (but also other strategic leaders such as founders) in strategy development.

Question 1 invites students to think not only about the influence of Amazon’s Jeff Bezos, Teslas’ Elon Musk, Unilever’s Paul Polman and NHS England’s Simon Stevens, but other strategic leaders.

In doing so, they should be encouraged to consider, not just who such people are, but what influence they have had. The examples in the illustration demonstrate diverse types of strategic leadership influence. Even if students can be encouraged to draw on other high profile examples, they might also be encouraged to draw on examples from their own personal experience – certainly possible for post experience classes.

The illustration here emphasises influences on governance and purpose, vision, strategic focus and the business portfolio. Question 2 asks students to consider other contributions CEOs make to strategy development. For example, some may emphasise strategic analysis, others the importance of communication and others the past experience or strategic orientation of the CEO personally. In considering Question 2, one of the things that might be pointed out is that there is no mention in the illustration (and perhaps few CEOs and strategic leaders more widely) that emphasise emergent strategy. Most strategy is seen as coming down from the top. But the evidence is that strategies do emerge in organisations. What then is the role of the CEO, for example, in making sense and moulding

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the ideas that come from below? In this respect, it might be worth encouraging students to consider the lessons about the role of top management in terms of the variety lens in the Commentary.

Illustration 13.2

Strategic planning at Siemens 1. What types of strategic issues are likely to be most significant at each stage and level of the

planning process?

This illustration shows the planning calendar of Siemens and the questions are designed to get students to think through a planning cycle of a major corporation. It’s important to note, however, that the illustration shows the planning calendar of Siemens in 2018 and that the company currently is undergoing some major changes (and, hence, parts of the calendar may have changed recently).

Question 1 encourages them to think about the issues likely at each stage and level. The corporate level is likely to be concerned with overall market developments, objectives and expectations – not least financial. Here, the corporation identifies key issues that need to be considered by division and businesses. The divisions are likely to be concerned with translating these expectations into specifics for that division, and for coordinating the planning activities of the different businesses. The businesses will be primarily concerned with competitive strategy in local markets.

2. How might a planning process differ in other types of organisation (e.g. local government or a university)?

Question 2 invites students to think about how planning calendars or cycles will differ by different organisations. For example, a local government or university plan does not have the diversity of location as for a multinational corporation; but it does have very diverse units within it – different services for local government and different subjects/departments for universities. So, creating a coherent and coordinated plan out of such diversity is also challenging. They are also likely to have a more diverse set of stakeholder groups that seek to influence the strategy. So, mechanisms for consultation may need to be different – and sometimes may be time consuming and unwieldy.

3. How do other processes of strategy development explained in this chapter relate to this planning calendar?

Students may see a planning calendar in terms of a deliberate and designed view of strategy.

However, via Question 3, they should be able to see that the processes explained in the chapter with regard to emergent strategy are just as appropriate here. Within any of these levels there are, quite possibly, processes associated with emergent strategy that are going on and are then made sense of through the planning calendar.

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Illustration 13.3 An incrementalist view of strategic management 1. With reference to these views of strategy development, what are the main advantages of developing strategies incrementally? Are there disadvantages or dangers?

2. Is incremental strategy development bound to result in strategic drift (see Section 6.4)? How might this be avoided?

3. Under what conditions may these approaches to strategy work best?

The quotes in Illustration 13.3 are, on the whole, positive descriptions of incremental strategy development. Students may see that there are potential advantages in such an approach: The organisation is building on what it knows and is taking a cautious approach to strategy development. In this respect, managers are not only learning from what they know but also adjusting to new situations.

•

Rather than taking risks or major changes in direction, small-scale ‘experiments’ might be possible; the organisation ‘tests the water’, advances further if the experiment works, but can pull out if it does not.

•

So, incrementalism may be seen as a more flexible approach to strategy development rather than

•

one-off major decisions and commitment of investment.

It could be that strategy development is made in such ways that there is more involvement in the

•

strategy development process and hence a greater commitment to evolving strategy.

If the organisation is sensitive enough to its environment, through small-scale adjustments of an incremental nature, it may be capable of coping with change.

However, students should see that there are risks associated with such an approach and Question 2 prompts them to consider if it is bound to result in strategic drift.

•

The organisation may see itself changing incrementally, when in fact it is stuck in its old way of doing things, interpreting changes in the environment according to such ways of doing things and, therefore, drifting (see Chapter 6).

•

Small-scale changes described as incremental strategy development may actually result from political and cultural processes, which ensure that there is a continuity of strategy – that changes are not made which ‘rock the boat’ too much – again contributing to strategic drift.

•

Can incremental change cope with major environmental changes or jolts? Is there a danger that when such processes become established there is insufficient challenge or questioning of the strategy to adjust to such significant changes?

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Questions 2 and 3 also prompt thinking about how such drift might be avoided. This discussion could usefully draw upon the Strategy Lenses (see Commentary on Part II): •

Is a design approach, perhaps through a formal strategic planning system or the encouragement

•

of planned strategies through, for example, strategy workshops, able to avoid drift? The danger is that managers are able to undertake careful analysis and evaluation of strategies, but organisational ways of doing things persist and can too easily override such analytic approaches.

Increasingly, strategic planning is being seen as a means of coordinating/controlling rather than changing things.

The experience lens suggests that such drift might be overcome by continual challenges to ‘ways

•

The variety lens suggests that much more freedom and scope should be given to the diversity of

•

what it signals. So in this context, is the language about continuity, stability, ‘steady as we go’ or about challenge, flexibility and change?

we do things around here’. Is this feasible and if so, who is responsible for doing it? Some argue that this is the role of the senior management, at least in their change agency capacity. ideas that exists within organisations. But are not such ideas based on the experience of individuals within organisational settings? Are they not, therefore, inevitably ‘bounded’ and likely to result in such drift? The variety lens suggests that, despite this, there will be variety, that it is vital that this be encouraged if drift does not occur and that in doing so there has to be tolerance of deviation from norms and, indeed, things ‘going wrong’.

The discourse lens suggests that managers have to pay attention to the language they employ and

Illustration 13.4 A classic case: Honda entering the US motorcycle market This illustration consists of extracts from one of the most widely cited cases and papers on strategy development processes ever written. The purpose of the original paper by Richard Pascale was to show two quite different explanations of the same event: one based on BCG and Harvard reports and the other based on accounts by the executives themselves. It is useful to read that original case and paper. Subsequent to the publication of that paper, it has been referred to by many other writers who have interpreted it in different ways. In addition to the papers referred to in the illustration, there is a third which provides still further insights: Mair, A. (1999) Learning from Honda, Journal of Management Studies, vol 36, no. 1.

1. Are the different accounts mutually exclusive?

On the face of it, the case represents two quite different views; one is an essentially rational, economic explanation of the basis of a successful strategy. The inference, students will suggest, is that this was all carefully designed. Pascale suggests that the other account by the executives shows the importance of sensitivity to context, improvisation and adaptability within a culture which allows for this and a concept of strategy more to do with overall mission than strict guidelines. Students may interpret the executives’ account as a matter of being in the right place at the right time and luck.

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It might be useful to challenge students who think there are quite different accounts here. The consultants’ report does not actually explain how the strategy came about. It describes the logic of the strategy. The executives, on the other hand, are focusing on a description of how things happened, at least from their point of view. The extent of incompatibility between the two accounts is not that great if the consultants’ report is recognised for what it is: a retrospective post rationalisation of what was going on. Is this so unusual in organisations? Students should perhaps understand that not all strategic decision-making is as logical as it might appear after the event.

Indeed, this is often what formal statements of strategy are based on, as in annual reports.

There is another dimension to this case which contributes to all the above. If the tutor or the student reads the paper by Mair, they will see that he argues that many interpretations of the Honda story are biased and somewhat selective in the data they present. Authors have chosen to present the events in particular ways to support their perspectives on strategy making and strategy development processes. In other words, they are looking through particular lenses which colour the argument that they make and the data that they present.

Also, data relevant to the period under question were missing from the consultants’ reports and the executive explanations. Commentators who have drawn on the success of the Honda strategy have also missed out relevant data that shed different light on the events. For example, it is not made clear that Honda already had experience in making large numbers of small motor cycles; they had also pioneered new distribution systems through bicycle shops in Japan; the cost difference between a large motorcycle engine and a small motor cycle engine was also relatively low. In short, the difference between the Japanese market experience and US market experience was a good deal less than the cases suggest. If the information presented in the paper by Mair is added to what we know from the cases, they become even more compatible.

2. What different insights can the two accounts provide? How can they be useful?

A case can be made for many of the processes described in this chapter. We do not know that a more formalised strategic planning approach did not exist. It may have done. It simply is not explained in the accounts provided by Pascale. It is, however, unlikely because Japanese firms of that time did not tend to have highly formalised strategic plans; and the articles by Pascale and Mair make this point. However, as Mair intimates, there may well have been more logical analysis going on than Pascale’s article suggests. Indeed, it is quite likely that the Honda executives, living and working together in the United States, were continually analysing and re-analysing what was going on either formally or informally. Arguably, this was akin to an on-the-job and lengthy workshop, or a process of logical incrementalism, or organisational learning. It does also appear that the culture of Honda played a significant part in the whole process as did the political influence of Mr Honda and the resource allocation processes at the Honda centre that determined the resources made available for the US launch and operation. In other words, many of the processes explained in the chapter are there, though most are better able to explain the phenomenon of emergent rather than intended strategy. In brief, both descriptions can provide insights for strategy. BCG’s account for formalising and making explicit cost advantage mechanisms behind Honda’s success, but not for providing a proper description of how the strategy development actually happened. Pascale’s version gives a better description of the strategy development and the important role of learning, culture and serendipity.

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3. Do you think Honda would have been more or less successful if it had adopted a more formalised strategic planning approach to the launch?

It can, of course, be argued that a formal plan could well have prevented the sort of responsiveness by the Honda executives described here and have, therefore, been harmful. It would be useful to discuss in class what sort of plan would not have been restrictive. Presumably, one that emphasised overall intent rather than specifying detailed action might or one that set out a way of thinking through a course of action as distinct from a plan dictating such action.

Thinking Differently Different strategy development styles Pick three different industries and environments. What different strategy development styles (classical, adaptive, shaping or visionary) would be appropriate in them?

This Thinking Differently is based on an article from Harvard Business Review that has attracted a lot of attention (M. Reeves, C. Love and P. Tillmanns, ‘Your strategy needs a strategy’, Harvard Business Review, 90(9), 2012, 76–83). Students should be encouraged to pick very different industries ranging from new and developing industries like the ride- hailing/sharing taxi industry to old and mature industries like the cement industry. By choosing vastly different types of industries, it will become apparent for students that there are some strategy development styles that are more appropriate than others for different industries and situations. Note, however, that they are more or less appropriate and that there may be more than one style that is applicable to an industry and environment. In addition, it should be noted that industries mature over time and that styles that were appropriate during an industry’s inception may not be so a few years later. This can be illustrated by discussing an industry that has evolved quickly during the last decade, like the smartphone industry.

Assignment 13.1 Deliberate and realised strategies

The purpose of this assignment is to get students to understand the distinction between deliberate strategy as, for example, stated in the annual report of a company (or perhaps in a strategic plan) and the realised strategy of the company – that which is observably happening. Arguably, the best way of doing this is to choose a context that the students know well, where they can use their own experience to describe the strategy of the organisation. The suggestion here is that this might be a retailer (examples might be a fashion retailer or the Co-Op perhaps) and a transport company (a rail company, a long-distance coach company, an airline, etc.). All of these will have annual reports that will have statements about the strategy of their organisation. They may use the sort of words in this book, or they may use their own terminology, which students will have to ‘translate’ into the concepts of this book. Very likely, those organisations will make claims about being clearly differentiated, or perhaps offering lower prices than everyone else, or perhaps targeting particular markets. They may also go into much more detail about how they say they will deliver such strategies in terms of benefits to the customer. Encourage the students to compare this with the way they and others experience the same services.

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The questions that arise from this may be as follows: • •

•

To what extent differences are there between the statements of deliberate strategy in the annual reports and the experienced realised strategy?

If there are differences, how is this to be explained? Is it that top management does not mean what they say? Is it that the plans are simply being badly implemented? Is it that the realised strategy is actually being driven by some other mechanism than the planning, for example, the culture of the organisation? Is it that all annual reports tend to say the same sort of things?

If a manager is appointed to manage the strategy of such an organisation, what is it most important to concentrate on: changing the deliberate strategy (as stated), or the realised strategy (as experienced by customers), or both? Which is more difficult? Hopefully, students will see the need for both, but realise that it certainly is not enough to concentrate on changing the deliberate strategy. Students should also see that managing (and changing) the realised strategy is likely to be more difficult than creating a new deliberate strategy. This does, of course, give rise to the question about how strategic change might be achieved (see Chapter 15).

Assignment 13.2 Strategy development processes This assignment provides students with the opportunity to understand the following: • Most of the strategy development processes explained in the chapter are discernible in most organisations.

However, different organisations tend to exhibit some processes to a greater extent than others.

• So, for example, the following three organisations are identified in the assignment: •

Alphabet/Google: the case example at the end of this chapter discusses this in detail.

•

Siemens is a firm that has been quite strongly influenced by outside financial activists recently especially as concern their corporate strategy and thus what businesses to focus on and keep in their portfolio and what business to divest from. This can lead to a discussion about how external actors may influence strategy as they emerge.

• Mormor Magda’s strategy has emerged incrementally over time, but there is also evidence of planning. Its strategy development has been influenced by the original public business plan, but also by external pressures, by prior decisions that have been taken and of course by the founder Angela Hafström.

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Assignment 13.3 Planning systems This assignment requires students to consider the value of planning systems. Section 13.2.2 discusses some of the benefits and problems that can occur with planning systems and the assignment encourages students to consider which of these apply in particular contexts. The instructor can, therefore, challenge the extent to which the students have thought through the practical benefits of planning. For example: •

Is planning actually to do with making strategic decisions? For example, in the public sector,

•

many of the decisions have been imposed or strongly influenced by the government, the strategy of not-for-profit organisations by major donors and the strategy of many major businesses by the vision of their CEOs. Yet in all these situations, strategic planning may exist.

In all three contexts of public sector, not-for-profit and multinationals planning is likely to play

•

Planning systems can, however, be seen as remote from the operational concerns of people in

the roles of coordinating different views throughout organisations and communicating with different stakeholders. organisations. For example, staff within the public sector NHS has seen specialists brought in to help draw up strategic plans or set up planning systems. As such, they may see strategic planning as removed from their day-to-day reality. Conversely, planning systems may be used to try and involve people in the development of strategy. Yet, where this has occurred in the NHS staff has argued that it detracts from their prime role of caring for patients.

There is also the danger that strategic planning can become ritualised: a procedure that the managers go through, contributing to some overall plan that they do not see themselves part of. This is often the case in multinational corporations or large conglomerates in which the various parts of the organisation are distant from the centre and see themselves fulfilling a ritualised planning need of the centre.

Students might also be encouraged to consider to what extent the benefits and dangers of planning systems vary by context. For example, is planning more likely to contribute to strategic decisionmaking in stable environments but to have more of coordinating and control role in complex organisations or those facing very dynamic environments?

Assignment 13.4

Incremental strategy development

See the notes on Illustration 13.3 above.

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Assignment 13.5 Appropriateness of different strategy development processes This assignment relates to and builds on Assignment 13.2. It is important for students to understand that different processes of strategy development are likely to be found in most organisations. The next step is to ask whether or not multiple processes (see Section 13.4.1) make more or less sense in different contexts. The examples cited in this assignment are as follows: •

•

•

A traditional university places a great deal of emphasis on the individual skills and knowledge of researchers and professors. Traditionally, this has been allowed to flourish by allowing a great deal of latitude for their own personal development in pursuit of their own academic interests. This could not have been done if there was heavy-handed direction from the top – for example, in the form of a rigid strategic plan. Nonetheless, there is need for an overall view about what the organisation is about and sufficient planning to allocate resources around it. It would be unrealistic to expect an organisation built around such potential egos not to have a political dimension, and it matters that either the collective of academics or, perhaps, a vice chancellor is able to maintain the sort of culture that allows collective learning. This description clearly runs counter to the notion of centralised government policies being imposed on universities or the heavy-handed direction of strategy that some academics currently see happening in universities.

A diversified multinational is in some respects similar in terms of its devolved structure. So, the likelihood of negotiated strategies emerging from within the organisation remains.

However, there is likely to be more emphasis on presenting a coordinated view of corporate level strategy to achieve financial objectives assuming that ownership is in the hands of major shareholders. A fashion retailer is presumably about creativity on one hand (e.g. in terms of the products itself), while on the other hand it has to run a tight and efficient retail operation.

This is a potential conflict. Some retailers have overcome this by focusing on one or other of those aspects. The retailer that opts for planning and control is likely to outsource its design (or buy in merchandise designed by others). The retailer that focuses on design is likely to aim at a less price-conscious market segment and maybe have to accept the inefficiencies of some of its systems. In other words, it builds ‘slack’ into its systems to cope with ideas and creativity.

A high-technology company is likely to face a fast-changing environment. It is unlikely to find rigid centralised planning and control conducive to such change (indeed, some high- tech pharmaceutical and high-technology companies have suffered from this). Studies of hightechnology companies in Silicon Valley suggest that all such companies have to tread a careful line between over-control and too high a degree of devolved latitude for innovation within their organisation.

Integrative assignment 13.6 The minimum that can be expected of students here is that they should be able to draw on the different chapters throughout the book to identify some of the key questions that would be asked to identify strategic issues that might explain the problems of decline faced by this company. However, a student should be expected to go further than this. There is a particular context specified here: a long 178 .

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established, once successful, major multinational business that has experienced managers. So, rather than looking for a simple check list drawing from the book, it might be expected that the students consider what, in particular, are likely to be the courses of decline in a business such as this. That might highlight the following, for example: •

Have there been significant changes in the markets or wider environment context this business faces? If so, why had the managers not (a) identified these; or (b) if they have, failed to take action to address these issues?

•

Have the managers failed to develop the organisational capabilities to meet the needs of a

•

changing environment?

In both these cases, the implication is that it is not simply a changing external environment or

•

•

a lack of resources and capabilities that may be the central issue, but the extent to which managers are not addressing these. In other words, there is the problem of ‘strategic drift’ that is raised in Chapter 6.

Could it be that there have been major strategic decisions taken that have not been successful?

Perhaps, acquisitions that have performed badly or major product launches that have not fulfilled expectations? But again, if so, how did those decisions come about and on what basis were they taken?

Is the structure of the organisation such that new ideas or challenges to old ideas do not emerge either from the bottom or from the top?

So, the emphasis in the assignment should be to encourage students to ‘get underneath’ the basic check list of questions that arises in the book, to look for issues of managerial process that might explain and account for why an organisation is in decline.

This then leads on to the question of how should strategy be developed in such circumstances. What would the role of strategic planning be in a declining multinational business? Is this just one of coordination and control or could planning become a way of questioning and challenging the basis of the business? What should be the role of the chief executive in such circumstances? Again, is this top-down direction or the encouragement of questioning and challenging? Or both? In a major multinational corporation, the politics of decision-making are likely to be significant. Is this something that can be used for positive effect – for example, to challenge the basis of the current strategy – or will it necessarily lead to problems of strategy development? Has the influence of past decisions become so strong that there is a ‘path-dependent’ inevitability about the strategy development? If so, the cultural resistance to new ideas may be strong. How is this to be broken?

So, the opportunity here is to get students to think about how the different strategy processes explained in this chapter might be employed in such circumstances.

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Case Example Alphabet – who and what drives the strategy?

1. Explain how Alphabet’s/ Google’s strategy has been developed over the years. 2. What are the strengths and weaknesses of its approach? The main learning objective for this case is to provide students with a context in which they can identify and understand different strategy development processes.

All students will be familiar with Alphabet and Google, but this case study provides them with the opportunity to think through how a clearly successful strategy has developed and in what ways it might need to change in the future giving its increasing size and complexity. In doing so, it would be useful to get them to consider the different explanations of strategy provided in this chapter and the extent to which they relate to Google and Alphabet.

In terms of Questions 1 and 2, for example, to what extent have the following been evident and with what consequences?

•

Strategic leadership in terms of: •

command, that is, direct control of strategy from the top;

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vision, that is, an intent that motivates others and helps shape (but not dictate) organisational

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strategy; decision-making, that is, reconciling different views throughout the organisation.

In the case, the influence of Page and Brin was evident in the early days of Google. They were assertive in how they chose to carry out Google’s IPO and in giving notice to the markets that they intended Google to be a different type of organisation. Brin is a brilliant mathematician, so maths is everywhere in Google. They narrate their influence of their leadership as though it is fairly laissez faire. However, decisions were made somewhere; the decision to pull out of China was attributed to the team at the top (largely Brin) in the press at the time. Schmidt’s influence was different; if Brin and Page provide the vision, the inspiration as ‘transformational leaders’, then Schmidt was the guy who got the job done (a ‘transactional leader’). Yet similarly to Page and Brin, he narrated his style as non-interventionist and played down his own importance. It would be sensible to encourage the students to explore the difference between what the leaders of Alphabet and Google say and what they do: was their influence really so limited? Later their influence actually became more clearly evident in Larry Page taking the role of CEO of Alphabet and with Sergey Brin as President (while Sundar Pichai became the CEO of Google). It might be worth asking if this apparent change stifled or encouraged the sort of innovation on which Google and Alphabet built its success in the past. Note, however, that in December 2019, Alphabet CEO Larry Page and president Sergey Brin stepped down from their leadership roles at Alphabet and Google CEO Sundar Pichai was suggested to take over as the chief executive of Alphabet.

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•

•

•

Planning systems: To what extent is there evidence of formal planning taking place within Alphabet and Google? If so, what role does it play? The case is written on the basis of information about Alphabet and Google that is in the public domain: and this suggests that formal planning is not something that they have prioritised or to which they have devoted much energy and resource in the past. Proponents of planning could argue that there may be some corroboration of this evident in their slippages: for example, non-renewal of its domain name in Germany in 2007 and failure to represent itself in a Belgian lawsuit. Again, more recently there seem to be changes in respect of the visibility of planning systems – or at least strategic planners – within the organisation. What role do students think they play; for example, do they direct strategy or coordinate emergent strategy?

To what extent is strategy externally imposed, for example, by government or external forces that Google cannot control? Interestingly, Google seems to have displayed an ability to dictate its environment rather than the other way around. They broke the mould with their IPO (Initial Public Offering), they dictated an unusual governance structure and they changed the way that advertisers on search engines pay for their adverts. They pioneered and created their own market conditions. However, the China issue was a challenge to Google. They made a big judgement call in terms of their initial collaboration with China in agreeing to offer a censored version of their search function, but it could be argued that they got a shock when China did not keep their end of the bargain. In addition, the formation of Alphabet was partly triggered by making the structure of the company clearer for outside investors. The fines imposed on Alphabet and Google from competition authorities both in Europe and the United States during the last decade may also have influenced strategy formation.

Is strategy better described as logically incremental, that is developed through experimentation and learning? This does seem to have been particularly pertinent to Google. Indeed, its mode of beta product launch and trial and error form of innovation is an ideal example. The interesting question is whether and how this can be preserved given Google’s changed circumstances, for example, its size and increasing organisational complexity and its apparent increase in centralised direction from Page. It’s certainly true that one of the main reasons for restructuring into Alphabet was to allow the independent businesses to pursue their own strategies independently from Google and central administration. The aim were ‘moonshots’ like the more recent healthcare company Verily, internet service provider Fiber, and self-driving car company Waymo.

Is strategy the outcome of political processes, and if so what form does this take? All

•

•

organisations are political arenas; they simply manifest this differently and more or less overtly.

Google seem to want to present a de-politicised version of themselves in the public domain.

However, instituting quality control via peer review opens the door very wide to political manoeuvring. It would be interesting to see inside that system from an employee’s perspective and if the restructuring into Alphabet may have depoliticised resource allocation, for example.

Is strategy informed by prior decisions and emerge on the basis of these? Undoubtedly, Google is the product of its past. If so, is it consciously managed continuity building on prior decisions?

Is it because initial events long ago set a path that is difficult to break; path dependency? Or is it because the organisational culture is such that it tends to determine what the strategy is in the organisation?

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•

To what extent is strategy the product of organisational systems: in other words, are there systems which exist in the organisation which, of themselves, tend to determine what the strategy looks like? Clearly, the peer review comes to mind here. The HR approach is also an example: strict recruitment criteria continually reiterating, strict processes of quality, control via peer review, rules in terms of group sizes and so on. The systems, although focused in some and not other areas of the business, are hugely influential. A system that measures everything eventually ends up as a tightly controlled environment.

•

Or is it a mixture of all of these? If so, have some processes tended to be more pronounced at different times in Google’s and Alphabet’s development.

3. In what ways should Alphabet’s/Google’s approach to strategy development change in the future?

Question 3 invites students to consider what the strategy development processes should be in the future. This should pose them with the challenge of reconciling the need for innovation with the need for coordination and control in a hugely complex organisation and the need to ensure organisational efficiency in an increasingly competitive environment. This seems to suggest that there needs to be a balance between (a) a variety of experience, devolution of decision-making and organisational learning, (b) planning systems that can coordinate emergent ideas and strategies and (c) sufficient central strategic direction to avoid chaos. This seems to approximate to the need for ‘adaptive tension’ described in the variety lens and proposed by complexity theorists. But it is acknowledged that this is hugely difficult to achieve. The danger is that the bias is too much towards central control or too much towards the potential chaos of devolved experimentation. On the one hand, the formation of Alphabet appears to be a step towards more central control with the role of the founders Page and Brin becoming more prominent. On the other hand, the separation of Google from the other business is intended to provide for more independence for those and an encouragement of even more ‘moonshots’. Finally, outsiders including shareholders may start to question what strategy holds the diverse portfolio together as indicated by the last quote in the case example: ‘Projecting a looser corporate structure, meanwhile, will raise the question of why Alphabet’s collection of businesses belongs together. If the only things they share in common are the group’s ample money and ambition, will this be enough to hold it together’?

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CHAPTER 14

Organising and strategy

This chapter goes beyond the traditional topics of structure and systems to introduce the concepts of resilience and agility, both increasingly important in this unpredictable current climate.

Illustration 14.1 Elon Musk reorganises Tesla: time to shower?

Elon Musk will be well known to many students, controversial to some, possibly a kind of hero to others. You will find plenty of YouTube videos of him speaking very directly to his audiences: try, for example, ‘Best of Elon Musk 2018’.

1. In the terms of Section 14.3, what kind of structure did Tesla have?

The basic structure of Tesla was a functional one, with functional heads such as Global Sales, Production, Engineering, Technology and Design. This sat in the middle of something that looks a bit like a holding structure (14.2.2), a loose set of other businesses connected apparently largely through Elon Musk himself: for example, SpaceX and The Boring Company (details are unclear here).

2. Given its strategic challenges, do you agree that for Tesla a flatter organisation was the right way to go?

As Musk ramps up to produce at volume the Model 3 mass-market car, and complains that he has no time to go home and get a shower, he actually flattens the organisation’s structure, even getting rid of three senior managers (the Chief People Officer, the VP for Global Sales and the SVP for Engineering). Arguably, fewer management layers and senior managers may free up time by reducing unnecessary meetings and bureaucracy. Given that Musk is so stretched, however, it sounds like Musk needs more structure and management rather than less. Alternatively, recalling the wisdom of Chandler’s ‘structure follows strategy’, Musk could simplify the strategy by focusing his group more on its core business of electric cars, spinning off distracting peripheral activities such as The Boring Company. A simpler strategy would allow Musk to have a simpler structure.

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Illustration 14.2 Alphabet’s $29bn new structure 1. In what respects is the change consistent with Alfred Chandler’s phrase, ‘structure follows strategy’?

This is a classic case of structure following strategy. The strategy had changed: Google had moved from an internet search company funded by advertising, to a diversified conglomerate including Nest home automation and Calico health, funded in all kinds of different ways.

Structure followed this change. As the strategy shifted from undiversified to diversified, Google has altered its structure to a multidivisional organisation structure not very different to the companies (DuPont and General Motors) of a hundred years ago that had inspired Chandler’s original historical writing.

2. Why do investors think that the new Alphabet structure is worth an extra $29 billion?

If students think that formal structure is boring and irrelevant, then this figure is one to put in front of them: a change in structure added $29 billion to the value of the company. The first reason may clearly be that the multidivisional structure fits the diversified strategy better than the old one, just as explained above.

There are two more subtle points to add, though. Firstly, the multidivisional structure imposes more accountability for performance, both internally and externally: results for each business will no longer be consolidated, so everybody will know about success and failure. The new businesses are consequently less likely to be treated as hobbies of Page and Brin, the founders; the named CEOs would be better motivated to perform. Secondly, as standalone divisions, the new businesses would be easier to dispose of, perhaps sold to rivals. Again, this reinforces how the status of the divisions is conditional on performance. Alphabet is signalling that is another corporation thinks they could manage these businesses better (i.e. with parenting advantage) they could make an acquisition bid, so releasing more value for Alphabet.

Illustration 14.3 Call fire, police and ambulance 1. Consider the kinds of cultural and performance targeting systems the police, fire and ambulance services are each likely to have. How compatible are they?

Culturally, the police and the ambulance service are particularly distinct: the first is a uniformed service, with a quasi-military structure; the second is non-uniformed and sees itself as part of the caring professions. The fire service is somewhat in between.

In terms of performance targeting, the police and to an extent the fire service have ongoing responsibilities: one to keep crime low on a day-to-day basis, the other to prevent fire on a day-to-day basis. The ambulances have more of an episodic responsibility, responding to particular needs, especially emergencies, as they arise. They are not responsible for the reduction 184 .

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of illness in their community, as the police and fire services are responsible for reducing crime and fires respectively.

The police are also accountable for performance in a distinctive way, responding to elected Police and Crime Commissioners. The fire service is responsible to local authorities, with distinct accountability. The ambulance service is accountable to local health authorities in a much less distinct way. Overall, in terms of culture, performance targets and systems of accountability, the three are very different, with the police and ambulance services particularly far apart.

2. Would you agree with Matt Wrack that the more obvious links are between ambulance and fire services?

On the analysis above, one would probably conclude that fire and ambulance are more linked than police and ambulance. Both ambulance and fire services particularly rely on the trust of local people, in a way that the police have historically found it difficult to engender. They are also more orientated to emergencies (fires, accidents) than the police, for whom a large part of their work is routine patrols, investigations and working with the local community.

Illustration 14.4 God’s Work in Malaysia You may have some Malaysian students in your class. This would be a good time to get them involved by asking them for their views and for any further information on this controversial case.

1. In this account, how did Goldman Sachs’ systems support the growth strategy and in what respects did they fail with regard to the Malaysian business and more generally?

Section 14.3 highlights cultural systems, performance targeting systems and planning systems.

•

•

•

The performance-targeting system was bonus-driven: on the one hand, generous bonuses (allowing the flaunting of Maseratis) incentivised growth; on the other hand, they may have encouraged excessive risk-taking and unethical behaviour (the $600bn was excessive by a factor of about ten, and was a clear warning of possible corrupt practices).

The planning systems were inadequate, if one includes the capital and client suitability committees. Regional committees are influenced by the presence of exactly those Goldman Sachs employees they are supposed to supervise. Regional committees also have weak central representation, and are co-chaired by regional bosses (here Leissner) with incentives towards permissiveness.

Cultural systems promoted risk-taking and poor ethics. The culture is notoriously aggressive.

Leissner’s concealment of facts from internal compliance and legal officers is described as ‘very much in line with the culture’. Successful deal-makers (like Vella) were treated like ‘rock stars’, beyond challenge.

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2. What reforms to these systems would you recommend? What downsides to these reforms might there be?

Having identified the performance-targeting, planning and cultural systems as at fault, then reforms might be proposed across all three fronts.

•

Remuneration should be less highly geared with local and short-term performance, perhaps more linked to the longer-term performance of Goldman Sachs as a whole. Connecting remuneration to the performance of Goldman Sachs as a whole would increase the incentives of managers in the various regions to attend more closely to the behaviours of managers in other regions (Asia Pacific seemed to operate as a kingdom apart).

•

Planning systems should be tighter, with more supervision from the centre and, perhaps, from

•

other regions.

The culture needs changing, to be more respectful of formal systems and controls and to pay more heed to Goldman Sachs’ overall corporate interests.

Of course, there are downsides to such changes: the diminution of local bonuses, greater bureaucracy and a more cautious culture would no doubt slow Goldman Sachs’ growth, costly given the burgeoning opportunities of the Asian market. To use a term in Chapter 14.4, the result might be a bank with a great deal less ‘agility’.

Thinking Differently Beyond hierarchy?

What types of industry or sector would this model be likely to work best in, and in what types might it not work well at all?

The non-hierarchical, peer-based rule of three seems to work well at Valve, a successful games company many of the students will be familiar with. It is important that it is a project organisation, but it would be worth asking if this approach would apply equally well to all project organisations – for instance, a conference events organisation or a website design company? A crucial additional ingredient is the artistic and technical uncertainty involved in games and the need to harness project members’ enthusiasm and imagination. It is hard in a games company for managers to assess the viability of creative projects and it is likely to undermine motivation if projects and team members are imposed. For more routine projects such as conference events or website design, assessing viability is less of a problem, and project members’ performance can be monitored and incentivised in more standard ways. It might be worth asking whether the similar conditions to gaming apply to another kind of project organisation, strategy consulting (the evidence suggests not).

Further questions to ask are:

•

How important is the strict central control over recruitment and dismissal?

•

How important is the high pay and generous bonus policy?

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How would this work in an organisation that was substantially larger than Valve’s 400 employees?

It is worth speculating that the condition of the non-hierarchical peer-review systems is authoritarian control over organisational membership, inequality in rewards and constraints on growth.

Assignments 14.1 and 14.2 Structural types

These assignments are designed to encourage students to become familiar with the basic structural types as discussed in Section 14.2. More importantly, students need to understand the advantages and disadvantages of the different structures and the circumstances in which they are most likely to be appropriate (see Table 14.1). This is the way in which the discussion in the text is organised, and students should be encouraged to ‘test’ their real organisation against these pure types of structure. It is important not to miss the following key points: • Most organisations will have their own unique blend between the pure types of structure – students need to be able to explain the reasons behind this mix. The possibility of such blends is mentioned in Section 14.2.

The link between the structure and the organisation’s circumstances and strategies needs to be explained and justified. This issue can be pursued in the multidivisional context through Assignment 14.2. Product (or service) divisions are more common nowadays, so a strategic •justification for geographical structures in particular (local adaptation, as in the discussion of the transnational) should be probed critically.

Assignment 14.3 Strategy maps The advantages of strategy maps include the wide range of perspectives or goals that can be incorporated and the way that they are logically linked into a coherent whole. As the discussion in Section 14.3.3 points out, there are still issues of inappropriate target levels and potentially internal competition.

Assignment 14.4 Strategy style

Most students would opt for either the autonomy of financial control or the support of strategic control: by contrast, strategic planning would be felt too smothering. The discussion in Section 14.3.5, however, points to some potential circumstances where these favoured strategy styles would not work so well. For example, financial control might not provide the necessary support for innovation, or responding to aggressive competitor moves; similarly, it might not be a very

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sympathetic environment to work in during a cyclical recession or similar hostile economic trend outside the business unit’s control. Strategic control relies on the centre actually having relevant expertise, something that is easy to over-estimate; it also tends to imply a great deal of negotiation between centre and units, often impeding rapid action in fast-moving competitive environments.

Bringing out the potential downsides of these two styles helps underline for students that none of these styles is perfect, and that each is more appropriate in some conditions than others.

Integrative assignment 14.5 Merger or acquisition

This assignment draws on the discussion of mergers and acquisitions in Section 11.3, the concepts of related and unrelated diversification in Sections 8.2 and 8.4, as well as the various structures discussed in Section 14.2 of this chapter and the styles in Section 14.3.1.

As M&A is a complex area with deals of very many sorts and sizes, it would be well worthwhile offering students a short list of relevant deals to work from; ideally large companies, whose deals took place at least 6–18 months beforehand (in order to give the acquiring firm a chance to have carried out and publicised the integration). Possible deals can be identified through the business media, of course, but other sources are the Institute of Mergers, Acquisitions and Alliances website (www.manda-institute.org/en/) for very large deals over several years; the UK government’s quarterly reports on UK activity at www.statistics.gov.uk; or, especially for European deals, the monthly reviews at www.corpfin.co.uk. Organisation structure charts are not always available (especially for smaller companies), and, going back historically, organisation data are more likely accessed through annual reports (typically archived for several years under investor information at corporate websites) rather than the continuously refreshed main pages of corporate websites. Where there is no formal organisational chart, basic organisational structure can be deduced from the titles of executive directors (e.g. Director or Vice President for Europe and Middle East; Director or Vice President of Cosmetic Products; and so on) or from the operating business reports or the breakdown of the financial figures by business area.

Typically, one would expect more change of structure in the case of (i) related diversification acquisitions (where the benefits depend on integration) than unrelated diversification acquisitions (where the new business can just be tacked on as another division) and (ii) where the ‘strategy style’ is more of strategic planning or strategic control than financial control.

Case Example

Tencent: Third Time Lucky?

Tencent is a company that will be very familiar to Chinese students – this is a good chance to get them involved. It is important for students to realise that multidivisional structures (Section 14.2.2) come in different flavours, and can be reorganised radically within the same basic structural type (‘patchmg’).

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1. Explain the strategic reasons behind each of the reorganisations (2005, 2012 and 2018) undertaken by Tencent.

•

The 2005 reorganisation is a classic case of responding to the limits of a simple centralised

•

structure (implicitly a functional one) in the face of growing scale, diversity and change (see discussion in Chapter 14.2.1). The separation into two independent groups – Business and Platform Development – is a form of divisionalisation.

The 2012 reorganisation is another response to growth and scale, aimed at solving ‘big

•

The 2018 reorganisation reflected a major shift in strategy (‘structure follows strategy’, as

company illness’. Breaking up into seven distinct business groups meant that each could be worked as smaller ‘divisions’. Also, reorganising people and facilities was a kind of ‘patching’ (Chapter 14.2.6), allowing the businesses to be reconfigured to fit changing strategic needs.

Chandler is quoted at the beginning of Section 14.2.6): the challenge now is to serve B2B. The ‘silo’ organisational structure got in the way of coordination across different parts of the business: it was important to connect parts of the business together. Again, there is an organisational patching, thereby reconfiguring organisational resources into new combinations in order to meet this new strategic need. The seven groups are now replaced by six groups, with a lot of resources being shifted between them.

2. How adequate is the 2018 reorganisation to Tencent’s various challenges at that point?

What else might be necessary?

At the final point of the case, it is hard to judge the adequacy of the reorganisation but it is noticeable that investors are not confident: Tencent receives a 10% drop in its share-price after the announcement. The point of this chapter is that structure does not stand-alone; systems are important too. As well as the structural changes, therefore, one would look for announcements about performance-targeting, planning and cultural systems changes. The McKinsey 7S framework (Section 14.4.1) would also suggest the importance of considering Skills, Staff and Style, at least.

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CHAPTER 15

Leadership and strategic change

Introduction After considering what structures and systems are appropriate in Chapter 14, this Chapter addresses how to achieve the change. Leadership tends to be a popular topic too – with some striking individuals to discuss. The topic of Digital Transformation is also an important one: see the La Redoute Illustration 15.3.

Illustration 15.1 Leadership styles 1. Which leaders are more transformational, which more transactional and which situational

(see Section 15.2.1)?

Miki Agrawal at Thinx comes over as highly transactional: she wants to focus on the business, not the people. If they fail in terms of work ethic, attitude and execution, there is no coaching: they are liable to be fired.

Heidi Zak from ThirdLove is more situational. She recognises the role for transformational leadership – inspiration and mentoring – in her earlier positions, but is increasingly recognising that in her situation as CEO she often has to be more transactional: ‘they needed to do it because I was telling them’.

Jack Ma is straightforwardly transformational when he says: ‘A leader should be a visionary and have more foresight than an employee’.

Biz Stones’ citation of Star Trek probably puts him in the transformational category, which is particularly positive for wider business performance when organisations face uncertainty. He says that faced with uncertain situations, good leaders have to offer a sense of direction: ‘Good leadership means being willing to have the confidence to move forward, even if you don’t have all the answers’.

2. Compare the different views of leadership, particularly with regard to knowledge, courage and people. What are the commonalities and differences?

There are some striking themes: •

Ma and Stones seem not to expect leaders to be all knowing. Ma says: ‘A leader should never compare his technical skills with his employee’s. Your employee should have superior technical skills than you’. For Stones, leaders become important precisely when people don’t 190 .

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really know what to do. Knowledge is not core to the leadership role, in these two leaders’ •

•

views.

On courage, Ma and Stones coincide again. Ma says: ‘A leader should have higher grit and tenacity, and be able to endure what the employees can’t’. For Stones, a leader has to have the courage to take a decision even when he or she does not really know what is best to do.

Zak too emphasises the importance sometimes of just ‘going with your gut’.

People are another important theme. Even the transactional Agrawal recognises the importance of people: ‘Hire slow, fire fast’. It is important to bring the right people on board – this deserves a lot of time and care in her view. On the other hand, she believes one has to get rid of misfits as fast as possible.

Illustration 15.2 Challenges of change in Indian banking This illustration uses the change kaleidoscope to explain the context of change in Indian public sector banking. The questions are designed to encourage students to see the importance of understanding context in relation to leading strategic change.

1. In terms of the eight contextual features in the change kaleidoscope (Figure 15.2), how receptive is the context for strategic change?

It is probably safe to say that the context for strategic change is extremely unfavourable. Prime Minister Modi says he wants ‘transformation’, but as a financier comments towards the end, his proposals are no more than ‘incrementalism’. The eight contextual features are as follows: •

Time: despite Modi’s rhetoric, there is probably little sense of urgency. The public banks’ market share is drifting downwards, but it is still about 70%. The slow deterioration is like the famous boiling of the frog: the heat rising so gradually that it never hops out of the water.

•

Scope: this is a vast banking system, with 850,000 employees and 50,000 branches, engaged in a very wide range of banking activities and with highly entrenched traditional practices.

The scope of required change could hardly be larger.

•

Preservation: there are several aspects that Modi wants to preserve, complicating the change task. He himself ‘supports political intervention in the interests of the common people’. He will likely also want to continue support strategic industries.

•

Diversity: although there are 27 public banks, they all seem to be marked by the same

•

practices and weaknesses. There is little effective diversity.

Capacity: there appear to be inadequate resources for change. For example, the reforms propose $1.9 billion new capital, when JP Morgan estimates that the need is for $15 billion.

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Power: the structural mechanisms are weak, given the lack of a single holding company to merge the banks. At the same time, the Prime Minister seems politically weak, having lost local elections recently.

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Capability: managerial capabilities to achieve change must be assumed very weak, given the conservative nature of the banks, especially in the smaller ones which are seen as platforms for careers in the larger ones. It is interesting that McKinsey & Co have got involved, but even this leading consulting firm is unlikely to have sufficient resources to support change of this scale.

•

Readiness: this must be assumed to be very low. Managers throughout the organisation will feel threatened. The workforce is trade unionised and liable to strike.

2. With regard to forcefield analysis (Section 15.3.2), what is the balance between blockers and facilitators of change in Indian banking?

The balance seems in favour of the blockers.

Blockers include: poorly-paid workforce; trade unions; fragmented structure; existing portfolio of loans to economically weak sectors; weak and transient top management; Indian Parliament.

Facilitators include: backing of PM Narenda Modi; private investors (?)

Illustration 15.3 Digital Transformation at La Redoute 1. How many aspects of the business were involved in La Redoute’s digital transformation?

The point about digital transformation is how much is involved – it is not just about digital marketing. At a minimum, digital transformation at La Redoute involved a movement from mailorder to digital sales, a shift to more frequent and shorter catalogues, a more focused product range, operation as a platform for other businesses, geographical shift in sourcing policy, warehouse automation, heavy redundancies and – last but definitely not least – cultural change.

This makes at least eight aspects of change. To this, one might add the shift in ownership to independence and the increase in employee shareholdings, both of which probably supported change. The extent and speed of this change qualify La Redoute’s transformation as a revolution (Section 15.4.3; see also Figure 15.4).s 2. In terms of a forcefield analysis (15.3.2), how did the forces shift in order to allow the radical changes that came after the sale by Kering in 2014?

Several forces had favoured change for some time: for instance, market opportunities, competitive pressures and new technologies. However, there were also blockers of change: protection within the Kering conglomerate, a conservative culture and loyalties to the old mailorder model. The sale to Balla and Courteille in 2014 removed the first blocker from Kering, and enabled the two new owner-managers to address the culture and loyalty blockers vigorously.

Thus, the sale tipped the balance of forces towards radical change.

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Illustration 15.4 Change levers in action 1.

Identify the various change levers (Section 15.5) used by these five leaders.

Hsieh Addington

Barra

Challenge taken for granted

X

x

Change operations/routines

X

Levers: Compelling Case

Carter

Ruimin

Symbolic management

x

Power & politics

x

Timing

x

Short-term wins

x

The table indicates the key levers mentioned principally by the different leaders. It is interesting to see the breadth of different levers they emphasise: each seems very distinct. Nobody mentions change in operational procedures and routines. This may not be because they are unimportant, but simply because these are too mundane and detailed for leaders to highlight.

2. Do you think that a diabetes charity or the US military have anything to teach business organisations about change?

Addington’s points about the importance of a business case, and especially about starting from the concerns of key stakeholders (in switching from immediate research), will generalise widely.

Ash Carter’s point about combining change and tradition might have been relevant to privatesector Barclays under Antony Jenkins (Chapter 6 case example), when he could have drawn upon the bank’s heritage as an ethical Quaker institution.

Thinking Differently Women as leaders Consider two female leaders, in any sphere whether business, politics, education, sport or the arts. How similar are they in style and in what ways is gender important to their style? Could you imagine men leading similarly?

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Greta Thunberg, Jacinda Ardern, and Aung San Suu Kyi, for example. Several examples of prominent businesswomen are offered in the Thinking Differently text itself. Illustration 15.1 offers the contrasting examples of Miki Agrawal and Heidi Zak. It would be hard to place all these characters consistently in one category of leadership style or another, whether transformational, transactional or situational.

Assignment 15.1 Styles of leading change As in the notes to the end-of-chapter case, Rowe at M&S seemed largely transactional, certainly not transformational.

Steve Jobs was famously transformational, and was able to empower designers such as Jonathan Ives to do exceptional work. At the same time, he was notoriously focused on the detail.

It might be useful to reflect on whether good leaders can be ‘ambidextrous’ (Section 15.4.4) as well as organisations. Steve Cook, Jobs’ successor, has had a much more measured and professional style, less transformational (thought it might be unfair to reduce him to merely transactional).

Assignment 15.2 Contextual dimensions influencing change programmes The purpose of this assignment is to encourage students to see how a context of change should influence the design of a change programme. It can be used either taking one context into consideration (e.g. the case example on Steve Rowe at M&S) or by taking a comparative approach by choosing change situations with different contextual features (e.g. the need for rapid change versus more incremental change; or centralised power versus devolved power). Such a contextual analysis might be carried out, but then the student needs to be faced with the question as to how this would influence the design of a strategic change programme.

The key point that students should grasp is that there is no one right way of leading change, but rather that the approach needs to be tailored to the change context.

Assignment 15.3 Forcefield analysis

Students will need to draw on either a suitable case study such as M&S (end-of-chapter case) or the Indian Railways illustration or an organisation with which they are familiar for this assignment. It may also be helpful to build the forcefield analysis on the basis of a cultural web analysis of the chosen organisation.

The challenge for students is not only to identify blockages to change but also to ask the question ‘what can be managed to achieve the required change’? So, in terms of the dimensions in the cultural web:

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•

•

•

•

Structures and control systems are, perhaps, the most readily manageable aspects of the organisation and they may well have an influence on behaviours. However, if the resisting forces are embedded more deeply in the taken-for-grantedness of organisational culture, this may not be enough.

On the face of it organisational routines can be changed. Arguably, this is what techniques such as Business Process Re-engineering (BPR) and Total Quality management (TQM) try to address. However, again, there may be routines that are so embedded in organisational culture that they are very difficult to influence.

Many organisational rituals are capable of being managed, changed, removed or added and can signal significant changes to what is especially valued in the organisation. Arguably, this is one of the main levers for change that George Yip employed at Rotterdam School of Management.

Managers consciously or unconsciously manage symbols. Indeed, arguably, they are themselves symbols. The difficulty, however, is to be able to predict the effect of manipulating such symbols since their influence is dependent on how they are perceived and understood.

Arguably, stories are the most difficult to manage. Managers try to do this by, for example,

•

newsletters but often find that more informal rumour and gossip are more powerful but more difficult to influence.

Assignment 15.4 Change leadership The purpose of this assignment is to assist students in linking concepts about strategic change to the practice of management by considering the activities of leaders of change.

A number of points need emphasising: •

Encourage students to distinguish between what the leaders decide to do and how they set about doing it. Get the students to focus more on the latter for this exercise. Encourage them to read between the lines to interpret what the executives actually did.

•

Also, try to ensure that students systematically and explicitly use concepts and frameworks related to leading change to examine and critique practice, rather than just give a catalogue of actions.

•

Therefore, encourage students to draw on the range of topics covered in Chapter 14 (also

•

Chapters 5, 12 and 13 and the commentaries).

Also, encourage students to use the practical experience of the change leaders as a basis for a critique of the relevance of the concepts and frameworks.

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•

It is also important to consider how the broader aspects of managing strategy relate to leading strategic change. Has a clear understanding of the organisation’s strategic position and clear choice of strategy been established? Have the students taken this inter-relatedness into account in their critique of the leadership of strategic change?

Integrative assignment 15.5 From diversified multi-domestic to a related conglomerate This is a highly complex assignment, but could bring out some excellent work. The question signals some important issues, but it is worthwhile also being away of different institutional environments in different countries (see Chapters 2 and 9) and cultural issues, likely to be highly important and featured in this book both in Chapters 6 and 15.

Case Example Can the Saturday boy change Marks & Spencer?

1. In relation to Section 15.2, how would you describe the leadership style of Steve Rowe?

As in Section 15.2.2, few managers are purely one style or another. The same is true for Steve Rowe. However, his attention to detail (‘encyclopaedic’) and his tough-mindedness (Millwall supporter known as ‘Nails’) suggests a more transactional style. Certainly, he focused more on ‘hard’ aspects of change, starting with job cuts, moves to cheaper locations, store closures, international retreat and pay cuts. The strategy presentation under Archie Norman did not present a ‘transformational’ new vision: indeed, ‘Making M&S Special’ was the last stage of his four stage ‘transformation plan’. There was little sign that he was animated by any inspiring vision of what would make M&S special. He avowedly started with just fire-fighting.

2. Analyse the change context at Marks & Spencer in terms of the change kaleidoscope (Section 15.3.1) at the time of Steve Rowe’s appointment as Chief Executive.

Change seems to be needed fast given threats from traditional and online rivals, but one of the peculiar aspects of the case is the length of time that Rowe gave himself in his four stage transformation plan, which he compared to a ‘marathon’ (he only later said that ‘Accelerated change is the only option’, following new Chairman Archie Norman’s references to a ‘burning platform’). The slow pace might be because of the scope of change required, ranging from digital, through supply chain to cultural change. Change would have to be delicate too: some cultural and marketing elements might need to be preserved, for example, the long heritage epitomised by the constant reference back to 1884, its foundation date. Change is also complex because of the diversity of the company, operation in 58 other countries and with quite distinct clothes and food businesses. On the other hand, change might have been slowed by limitations in capability, capacity and readiness. The conservatism of the company (slow to accept cards and with dull clothing ranges) and the difficulties encountered by initiatives such as the shift from Amazon to the company’s own site do not suggest that these were high at M&S. Finally, there is the issue of power. It is not clear that Steve Rowe was powerful enough, though his in-depth knowledge of

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the business and his reputation as ‘Nails’ suggest that he was. His power was probably diluted by the appointment of Norman as a hands-on Chairman, who clearly wanted to lend impetus to the process of change.

Overall, one suspects that Rowe’s cautious pace was dictated on the one hand by the force of inhibitors such as scope, preservation and diversity, and on the other by the weakness of enablers such as capability, capacity and readiness.

3. Consider the types of strategic change (Section 15.4) employed initially by Steve Rowe and then under the chairmanship of Archie Norman. How appropriate are they given the change context?

It seems that Rowe’s changes are initially at least more like reconstruction or turnaround. The focus is not on a radical change in business model – he retains both the food and the clothing business, and is adding online to his stores business, only closing stores selectively. Similarly, although he mentions culture as one of his six ‘deep-seated issues’, he does not prioritise cultural change in his four stage transformation plan. Early on at least, Rowe is mostly about fairly limited ‘realignment’.

Norman is closer to adopting a revolution type of change. Thus, he compared Marks & Spencer’s position to being on ‘a burning platform’. In his view, the company could not stay in the same place, but must make a daring leap into the future. This implies both greater speed and broader transformation than Rowe initially seemed to commit to.

4. Which of Kotter’s eight steps for change (Section 15.5.1) are exemplified by Steve Rowe’s approaches to change? Which, on the basis of this case, could have been more greatly emphasised?

Disturbingly, Rowe’s approach to change exemplifies very few of the Kotter eight steps. He did attempt some quick wins, with relatively simple moves such as store closures and retreat from certain overseas markets – though even these were not obvious wins, as profits continued to fall.

There was no evident sense of urgency (initially at least) and it is unclear whether he had a powerful coalition (as Norman did, with his new managers): in some ways, he was seen as a surprising appointment. It is striking how slow Rowe was with regard to creating, communicating and then empowering a new vision – this seems to be the last of his four stages. Given the point that Rowe had reached by the end of the case, there was not much to do in terms of consolidation and institutionalisation of change. Overall, one is surprised at Rowe’s desultory approach to change and fearful for his fate under new chairman Archie Norman. As of end-2019, however, both Rowe and Norman are still in their roles, though full recovery at M&S still seems a distant prospect.

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CHAPTER 16

The practice of strategy

Introduction This chapter is inspired by the Strategy-as-Practice perspective in which four of the co-authors have been involved. It features a different kind of material to that of many strategy textbooks, focusing on the practicalities of what strategists actually do. Too many textbooks treat strategy as an abstract matter of economic analysis. We believe that this chapter is an important element in the book, giving undergraduate students a flavour of what a strategy career or role might involve, while offering postexperience students some useful tools for carrying out real strategy work.

There are some additions to the chapter with two new illustrations 16.2 (How open should your strategising be?) and 16.3 (A day in the life of a strategy director.). In addition, Section 16.3.3 on strategic decision-making has been extended to suggest that focusing on cognitive biases is not enough and that strategies should be behaviourally rational.

Illustration 16.1

Wanted: Team member for strategy unit

1. What would be the attractions of this job for you? What would be the disadvantages?

2. What relevant skills and experience do you already have, and what skills and experience would you still need to acquire before you were able to apply for this job?

The point of this illustration, as with Illustration 1.3 about Galina, Chantal and Paul at the beginning of the book, is to remind students that strategy is not just something an organisation has; it is a job that people actually do – one day, it might even be them. In this case, the advertisement is for a Strategy Analyst in a multinational job, but it could equally be a strategy consulting job or a public sector role.

The first question helps students think about the pros and cons of strategy as a full-time role.

Exposure to senior management and teamwork in a multicultural environment may be attractive to many, intimidating to others. The variety of projects (market entries and acquisition targets) and collaborators (at the centre and in business units) would be stimulating. However, it is worth drawing out the possible frustrations of a working life that maybe composed of fairly short projects, and fairly remote from actual implementation, or heavily involved in implementation managing crises.

Frequent travel might soon be wearying. It might be helpful to discuss how a role like this – in the private or public sector – might be a good but transitory step in a career to senior positions in government or business, as indicated in the last line of the advertisement.

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The second question obviously picks up this career planning aspect. This is a perfectly legitimate issue, especially towards the end of the book. After all, our students are mostly learning about strategy to further their careers rather than sheer intellectual interest. What is worthwhile highlighting is how personal skills – communications, teamwork, relationship building, networking and so on – are as important to this strategy role as more technical and analytical skills.

Illustration 16.2 How open should your strategising be?

1. What are the main pros and cons the CEO faces in choosing whether to open up her

strategising process?

There are two important dimensions to this problem: (1) inclusiveness and (2) transparency. In terms of inclusiveness, there are advantages to the CEO in being more open regarding the threat of digitalisation as it would enable her to access a broader range of ideas which may be important when confronted with very new challenges. It could also help her in subsequent implementation by increasing stakeholder understanding, engagement and commitment. However as she observes, it could be a slow process and, in terms of transparency, could result in the leaking of sensitive company information. This would be particularly important in terms of M&A decision, where leaking information would probably affect market prices and could even result in losing the opportunity. Also, as she observes, should she make a decision that differs to those participating in the exercise, this may result in some loss of trust and even alienation.

In short, the M&A decision might be best done with a restricted group of executives so they can act quickly, whereas for issues that are broader, requiring a constant stream of new ideas, the digitalisation threat might be better served with a more open strategy process.

2. For the two strategic initiatives, decide who and how she might want to involve in each decision process (refer to Figure 16.2). Might the dilemmas play out differently for each initiative?

For the digitalisation threat, and referring to Figure 16.2, this might be characterised as a major strategic discontinuity which could result in significant strategic change. The urgency of the threat is a little harder to determine but it is relatively low in comparison with the other strategic issue, a potential M&A. Therefore, it would seem best to go for broad participation – to spread the net to gather as much information from as many sources as possible. As the text suggests, there are many ways this can be done from online collaboration forums to multiple workshops and conferences. The greater the diversity of audience the better in this case as different generations, cultures and socio-economic groupings might have very different perspectives.

For the M&A opportunity, there is clearly a lot of urgency but it might result (depending upon the type of M&A – see Chapter 11) in major strategic change. For this reason, narrow participation would seem sensible with a dedicated project team or task force.

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The dilemmas might play out quite differently as the broad participation approach could result in a strategic decision quite different from anything the CEO had envisaged before the outset of the process. However, with narrow participation it is likely the range of outcomes is very likely to be much narrower.

Illustration 16.3

A day in the life of a strategy director 1. What strategic activities is this strategy director involved in? 2. What skills do you think the strategy director needs to be effective in the role?

This illustration not only prompts a discussion about the role of strategy directors but also encourages students to think about the way in which the strategy development process may have ‘informal’ aspects to it as well as formal aspects.

The strategic activities of this strategy director can be divided into formal and informal ones.

1. Formal: Annual strategy planning process; opening global R&D centre; two-day workshop; recruiting the right people; investing in initiatives; due diligence, data analysis and valuation (DCF), and legal reviews for an acquisition, and making a bid. We might also guess there is some hypothesis testing happening.

2. Informal: Influence and persuade Head Office and Regional Business Units; meeting European Regional Director; multiple ad-hoc phone calls with CEO, lots of travel to meet with key stakeholders in person and/or in groups. It is hard to detect in the illustration but these activities are almost certainly about getting alignment from the CEO throughout the organisation and may also be part of a larger process of building a coalition of supporters. The packed schedule of the strategy director is normal for people in this role and reflects the huge importance of timing for his activities.

Students will no doubt be aware that strategy directors are likely to influence the strategy agenda in formal ways, for example, through the analysis of strategic issues, their strategy planning process and implementation. So why are informal activities useful? Informal activities can be very powerful in enabling the Strategy Director to influence and persuade different interest groups. He can also be far more sensitive and responsive to issues and ideas that may not be clearly articulated, or codified, as well as be better aware of feelings and emotions that may not be detected through formal routes.

Through informal activities, the Strategy Director is likely to be able to build support for initiatives and also to be acutely aware of stakeholder attitudes. These discussions are likely to occur in relatively informal settings where people are more relaxed. These ‘liminal’ settings ‘being betwixt and between’ are likely to encourage people to talk more openly (provided they see the setting as ‘legitimate’).

Such liminal settings are, then, useful if open debate is to be encouraged.

Question 2 asks, What skills do you think the strategy director needs to be effective in the role?

The Strategy Director needs to possess a wide range of technical and social skills. However, student focus may be upon the analytic skills that the Strategy Director needs and overlook, or minimise the crucial role-played by social and influencing skills. Indeed as the article, ‘Connecting up 200 .

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Strategy: Are Senior Strategy Directors (SSDs) a missing link?’ California Management Review, 51 (3): 74–94. Spring by Angwin, D. N., Paroutis, S. and Mitson, S. (2009), reveals, often times it is the social skills that Strategy Directors believe are more important than the technical ones, needing excellent influencing skills in order to get things done. The Illustration reveals just how much travelling and meetings the Strategy Director also needs to do, often under serious time pressure, in order to fulfil the role.

Illustration 16.4

A tale of two workshops 1. Evaluate the design of the two workshops in terms of the guidelines in Section 16.4.1.

2. If you were a facilitator, how would you have organised the workshops differently?

3. What benefits (or disadvantages) might such workshops have in comparison with other

approaches to strategy development for such an organisation?

The workshops at Hotelco illustrate well some of the issues raised in Section 16.4.1. These were workshops with the intention of raising questions and challenges and developing new strategies (especially the first workshop). The first workshop was relatively successful in this regard: it employed appropriate concepts, had a specialist facilitator who encouraged open discussion and helped diminish the normal strict hierarchy that prevailed. It was also apparently supported by the CEO. The problem seems to be that it was so different from what was normal in the organisation that it created a reaction afterwards which meant that the second workshop, at which the CEO was decidedly unsupportive, went wrong badly.

Question 2 asks, What students might have done differently if they had been planning the events?

Presumably, they would argue that a key issue is to make sure the CEO was visibly supportive at both events. They might also argue that it would have been helpful if the first workshop was not so dramatically different from the second (e.g. in terms of venue). They might also see that it would be important for the facilitator to be more closely aware of what was going on outside the workshops (not least in between the two workshops) if he (or she) was going to be successful within them.

Question 3 asks the student to consider workshops in the context of a wider strategy development process. They might, for example, see that workshops potentially have the advantage of creating time for managers to have open discussions about strategy. They might also see that, if conducted appropriately, such workshops might provide a context within which there might be more free exchange of ideas than would happen in ‘the office’. You might prompt students to consider why this might be so; for example, a different location symbolising removal from the everyday issues, perhaps a facilitator to ensure that hierarchy is broken down and ensure that the concepts of strategy are employed, rather the event being just a focus on everyday issues. But the perceptive student might also see that the potential downside could be that the greater the difference from the everyday issues, the more it might be difficult to reconcile the output of the workshops with everyday reality. Research has shown that this is indeed a problem; the greater the difference, the greater the problem of integration with the everyday issues.

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Illustration 16.5 Hypothesis testing at a bank 1. Identify the hypothesis testing steps in the illustration. The case centers on a stock market trader who realises that something is not quite right with his trading system. His first hypothesis was that the problem lay with the introduction of a new bank trading system. However, when speaking with developers he ruled out this explanation. His next hypothesis was that ‘the exchanges were not bundling all the orders they received at a given price but were sequencing them in some way so that people might cancel their orders when he submitted his’. To test this hypothesis and prove that these phantom orders were taking place, ‘Brad’s team sent its orders to just one stock exchange, but were surprised when they were always 100% fulfilled’. The hypothesis was incorrect. However, they did observe that ‘when they sent them to many exchanges the percentage of fulfilled orders decreased with the number of exchanges contacted’. His team then came up with another hypothesis that ‘the distance from their screens to the different stock markets mattered’. To test this hypothesis, ‘they wrote a program that built delayed orders to the nearest exchanges so all orders would arrive simultaneously. It worked – all orders were fulfilled’. In other words, they had proved that other operators (high frequency traders) on the stock exchanges were able to exploit time differences between orders to make a profit. After some trial and error, Brad and his team had created a descriptive hypothesis that was now confirmed. This then allowed them to create prescriptive hypotheses about what they should do next. Although these are not detailed specifically in the case, they underlie the final observations about firms investing heavily in direct optical fibre links and microwave towers to increase their dealing speed capability – the prescriptive hypothesis being that those controlling the fastest routes to markets can make the most money. Interestingly, Brad chose not to follow this line of thinking and instead created prescriptive hypotheses about how a new exchange that controlled for the effects of distance would remove the arbitrage that high-speed traders were exploiting.

2. Select an important strategic issue for an organisation you are familiar with and generate some descriptive hypotheses. What data could you collect to test this hypothesis?

Asking the students to define the problem themselves is in many ways more challenging and realistic than spoon-feeding them with pre-defined questions; this might be particularly effective for students towards the end of their course.

Asking students to think about the data needed to test their hypotheses reminds them to be practical and that in the real world data has to be collected, and is not going to be pre-packed and condensed in the pages of a case study. There may be useful links here to students’ marketing, operations management or management accounting courses.

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Thinking differently Rethinking the role of strategists Q. What skills and experiences should a recruiter look for in hiring each of five types of strategist identified above?

The main purpose of this section is to show that there is greater variety in the nature of strategists work than has hitherto been recognised. This has implications for the skills and experiences that are necessary. This may be helpful for students considering a possible career as a strategist and serve to correct some illusions as to the glamour and influence that strategists seem to have.

For an Architect position, it is essential that the candidate should have excellent analytic skills.

Candidates will have to be comfortable with being able to analyse financial accounts, carry out economic analyses and in some sectors be experts in regulation. This is largely an internally facing role and may be suitable for current employees or similar industrial backgrounds.

A mobiliser candidate on the other hand will need very strong social skills as negotiators and persuaders. They will have to be able to run a wide variety of meetings and workshops that will depend upon their communications skills. Their biggest challenge is to be taken seriously by senior executives in different parts of the business, so they need strong personal skills that will come from previous leadership positions.

A candidate for a visionary strategy position is likely to be an industry leader or practice leader in a consultancy where they already have deep insights into industry trends. They will need to be able to analyse and synthesise a great deal of macro and competitive data as well as be fully aware of regulations and regulatory changes. As forecasters, they will be experts in using particular types of statistical techniques to analyse big data so that sensitive estimates of future prospects can be estimated.

The candidate for a Scanner position will be strongly networked outside of the organisation in order to detect trends at multiple levels of interaction. They will need to be comfortable dealing with lobbyists, politicians, regulators and policy makers.

The Fund Manager candidate is likely to be expert in finance and accounting as techniques for evaluating the performance of a portfolio of businesses. In particular, they will be able to focus upon risk and return characteristics of the business units. This candidate might have a prior background in an accountancy firm or a bank.

Assignment 16.1

Researching a strategy career

This assignment is, again, designed to reinforce the sense that strategy is a kind of work some people actually do, and not just top-level executives. Some students might well fancy themselves as strategy consultants. The companies’ case studies of previous engagements will give students a good sense of the range of strategy work in practice.

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The consulting firms’ websites are of course designed to attract. They are full of good-looking young people, talking about ‘cool’ work, with social projects (e.g. with schools or developing countries) quite prominent. ‘CEO impact’ is a common phrase, while diversity and team camaraderie are also emphasised. However, a careful reading of the examples will also bring out the importance of analytical skills (one BCG consultant talks about becoming a ‘regression guru’), the very demanding range of work that a young consultant might have to apply themselves to, and the long hours and frequent travel away from home (BCG mentions 70–80 hour weeks sometimes). This kind of strategy work is certainly not for everybody!

Assignment 16.2

Communicating strategy Most organisations now have some kind of strategy statement. An example is provided in Illustration 1.2. Indeed, the students’ own university is likely to provide a good basis for commentary. Both students and teachers may have plenty to say about the reality of this strategy! With regard to the issues raised in Section 16.3.4, many public statements of strategy lose impact because they are trying to say too much (or too little) to all the many audiences that may access it. You might ask the question: which stakeholders are most likely to be most satisfied, and which least satisfied, by the strategy communications on the website?

Assignment 16.3 Designing a strategy workshop This assignment relates to the discussion of participation in Section 16.2.5 and workshops in Section 16.4.1. In the first case of a major strategic threat, Figure 16.2 suggests a taskforce, perhaps beginning with a workshop, with few people involved at the highest level – the top executive team in all likelihood. In the case of commitment to a long-term strategic change, then Figure 16.2 suggests a more inclusive, open process, similar to the Barclays Jam described in Illustration 16.2.

Assignment 16.4 Generating hypotheses and designing research

Here it would be good to guide students to the more extensive cases in the text and cases edition, such as CRH and Handelsbanken cases. See also the instructor’s notes to Illustration 16.5 on hypothesis testing.

Assignment 16.5 Business plans

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appreciate the strengths and weaknesses of particular plans by inviting them to compare different ones together.

The University of Maryland’s website, www.businessplanarchive.org, involves a very simple registration process. It provides access to thousands of companies’ real strategy documents (plans, presentations, official filings and emails), though it should be noted that many have restricted access and there is a bias to (failed!) North American internet start-ups. Nonetheless, this is a unique and valuable site, with two particularly useful sections: what we can learn, an analysis of Webvan’s strategic plan emphasising core assumptions, market assumptions and competitive advantage, and, in the Research Corner, a section on using the archive in the classroom.

Because students might easily get lost – and frustrated by limited access – it would be useful to offer them some guidance about the Maryland archive. For example, they should browse by ‘business plan’ (rather than sector) and tick the ‘unrestricted documents only’ box (even this is not fail-safe).

Companies with several documents available (‘two dots’) are most likely to be useful. You might want to point students in the direction of specific companies with extensive business plans available: examples include 1-800-PartyShop, ActiveOutdoors and Fastchain.

Outside the archive, business and strategic plans can often be found for public organisations. Quite extensive plans publicly available at the time of writing include those for the University of Strathclyde (at www.strathclyde.ac.uk) and the Lloyds Markets Association (at www.lloyds.com).

Unlike most of those on the Maryland archive, however, publicly available plans are often light on financial numbers.

Integrative assignment 16.6 Writing a strategic plan

This strategic plan exercise should consolidate learning from throughout the book, and is, therefore, an appropriate one to finish with. Of course, data will be missing, but, as in the discussion of Illustration 16.4 (on hypothesis testing), part of the skill of the strategist is being good at deciding what you need to find out and how you are going to do so. The assignment also highlights the importance of different audiences for strategy: here investors and employees. You might ask what other kind of audiences would be important for a large retailer, for instance, or for a company such as Microsoft which is a ‘platform leader’ in the games ecosystem (see Section 10.3.2). What parts of the strategy will be important for each audience and how should they communicate it?

End-of-chapter case study Participative strategy in the city of Vaasa Marko Kohtamäki & Suvi Einola This teaching case focuses on a strategy development process that was implemented in the city of Vaasa, Finland. The example highlights how strategy work can be structured in a public sector organisation: in this case, the strategy process concept was applied using three main tools: strategic

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capabilities’ analysis (based on the resource-based view); the value curve (based on Blue Ocean Strategy); and the strategy map (based on the Balanced Scorecard). In particular, the case illustrates how it is possible to make the process participative – rather than being just a top-down management exercise – through the application of these tools across a complex divisional organisation, such as a municipality.

The case links to content in this chapter by illustrating how participative strategy work can be planned and executed through the application of recognised strategy tools. The case illustrates the facilitating role of strategists in a city organisation’s strategy process. In addition, it describes the materialisation of strategy as presented in this chapter. The case invites students to consider how city strategy work should be implemented, and what types of practices are required to link the strategy work at different levels of a divisional organisation.

The case is intended to teach how a participative strategy process in the context of a city organisation might be structured. The case illustrates how the three strategy tools can be applied, and what issues should be considered in the particular context. The case encourages students to consider the participative nature of strategy work, and how the process can be structured to involve multiple organisational levels in a divisional organisation. Therefore, the case can be utilised to teach the structuring of strategy work in any large organisation, even though the example is most pertinent to the context of public and/or non-profit organisations.

1. Using the pyramid of strategy practice (Figure 16.1), describe strategy making in the city of Vaasa.

The pyramid of strategy practice (Figure 16.1) highlights the role of strategists, strategising activities, and strategising methodologies. In the city of Vaasa case, middle managers, city directors, politicians and development planners were considered to be the strategists. Although strategising activities (Section 16.3) are usually viewed as consisting of strategic analysis, issueselling, decision-making, and finally strategy communication, in the city of Vaasa a more participative, interconnected and iterative strategy process was developed. Participative strategy work took place through more than a hundred strategy workshops, facilitated by the city development planners. These strategy workshops (16.4.1) are one example of many strategy methodologies available to strategists to facilitate strategising.

2. Comment on the strategy process being followed at Vaasa. What are the advantages and disadvantages of the tools used in this strategy process?

In stark contrast to the historical strategy making process in the city of Vaasa, the newly developed model described in the case underlined participation, facilitation and the role of middle management. City development planners facilitated over 100 strategy workshops that were conducted across the Vaasa city organisation, ensuring a broad level of participation. Whereas, strategy workshops typically involve an organisation’s top management and executives (see section 16.4.1.), the city of Vaasa case emphasised the role of middle management as well.

Nevertheless, the directors of the city organisation, who derive their authority from the municipality government, retained responsibility for steering the strategy process throughout the implementation project. In addition, the newly developed strategy process employed the three main concepts (strategic capabilities, the value curve, a strategy map plus targets, measures, initiatives), along with an annual ‘clock’, and aimed to reduce the number of measures/KPIs

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across the city organisation by aligning and implementing the same package of tools in each division (previously, no such common package had existed). Case studies have often revealed that organisations find strategy implementation particularly difficult, and that was also the case in Vaasa, although the extensive participation successfully fostered the use of a shared language around the strategy concepts.

Finally, the new model led to the city organisation adopting the practice of annually reformulating its strategy. Previously, the city of Vaasa relied on five-year plans formulated by top management in accordance with strategic planning objectives. The city administration realised that reformulating the strategy annually would lead to a more agile and effective decision-making process, particularly when supported by extensive participation and a shared strategy discourse.

In terms of the tools used, the city of Vaasa used: (1) strategic capabilities (see Chapter 4); (2) the value curve; (3) the strategy map (see Chapter 14). The concept was developed to ensure strategy tools complement each other and their usage spurs the step-by-step development of a shared understanding. Finally, the strategy map embeds components from the customer value curve, and capabilities (resources, competences plus processes). The strategy concept and the three tools were designed to support the creation of a shared language of city strategy, and hence a common understanding of the future steps to be taken.

On the other hand, the use of these tools could have restricted some discussion that might have been important in developing the city of Vaasa. There are a range of other strategic management tools and frameworks that might have been employed in Vaasa city or elsewhere: a different mix of such tools may be more appropriate in another case. Another disadvantage could be that, without proper facilitation and comprehensive knowledge of the several strategy tools, learning about them might prove a distraction for non-expert participants, leading them to lose some of their focus on the key content of the strategy. However, the concept was developed to be as simple as possible.

3. Reflect upon the public-sector context of this case – in what ways might there be similarities and differences with how strategy is practiced in ‘for-profit’ contexts?

Although traditional ways of thinking highlight the differences between public and private organisations, there seem to be more similarities than is often supposed: capabilities, customer orientation and segmentation, value propositions, and the strategy map are applicable not only in commercial companies, but also in public and third sector organisations.

Regarding the differences between private and public organisations, whereas companies may primarily seek improvement in profit and market value, public organisations seek to serve citizens effectively and, with regard to decision-making, to apply the principles of equality and democracy. Therefore, public organisations such as the Vaasa municipality, inevitably have to struggle with the tensions between productivity, effectiveness, equality and democracy. Measures of ‘success’ are thus likely to be different – with a different set of KPIs and alternative Balanced Scorecard being employed. The decision-making model of a public sector entity, such as a city organisation, is described as dualistic, meaning that there are two levels of decision-making in a municipality: the operational decisions and the policy decisions. Often in a public organisation, the demand for services is greater than the resources available, which requires prioritisation

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actions. This is challenging in the context where the policy makers are democratically elected, and officials have to balance productivity and customer service demands. Officials often find themselves balancing productivity and politics, not least in response to stakeholder power and interest (as Chapter 5).

Q4. How would you craft the process of strategy work in a multi-divisional organisation? Consider how would you organise the strategy work in practice: What tools would you use and in which order? Who would you involve in the strategy work and why? How many workshops would you organise?

Crafting a strategy process in a large multi-divisional organisation is challenging. As such, this question is broader, providing an opportunity to consider what type of tools should be used during the strategy work, and in which order. What would be an appropriate process and what characteristics should the process should have? The tools presented in this case example offer one possible approach to the process and strategy concept. The interesting question is what other concept types could be created, and how the different constellations of strategy tools influence the usability of the concept – and how the complexities around the chosen strategy concept influence their usability. On the other hand, a very simple concept may prove too restrictive.

Here, we would encourage problematisation around a strategy concept, to help students to create their own perspectives and eventually their own design. Thus, these questions are intentionally broad, providing an opportunity for interaction and discussion around strategy work.

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Glastonbury – from hippy weekend to international festival Steve Henderson

1. Introduction This case study provides students with the opportunity to consider an entertainment area where many will feel comfortable in having some knowledge. Yet, they are unlikely to have considered the strategic implications that pervade such an area. Firstly, note that this case is driven by cultural events that, unlike typical consumer goods, have a short shelf life and ought to be broadly seen as services.

Secondly, the case focuses on more recent activity in this market but highlights some of the history of the event. Naturally, the strategic environment varies across the period and students may find this change across time slightly distracting. Thirdly, within this case lie the sustainability issues that will challenge managers going forward. In other words, whilst some seek profit, others seek to conserve the resources of the planet or be fair to its people. Finally, 2018 sees the festival at something of a crossroads in that not only are the audiences faced with lots of entertainment choices and the artists gaining in power but also Glastonbury’s management are planning the development of a new festival.

2. Position of the case Originally used within the opening chapter of Exploring Strategy and intended as an introduction to strategy, this case has been revised in a way that allows it to be used in the wider context of strategy teaching that gets covered in the book.

3. Learning objectives The issues raised in the Introduction section above are areas that might be explored with students as a pointer to key areas for their own strategic management understanding. Some specific areas of learning include the increasing importance of services, rapidly changing environments, sustainable development and the importance of strategic choice. As you’ll recognise, the case is intended to be widely useful in the teaching of strategy as described below.

4. Teaching scheme Unlike some cases, there is no intention that the wider learning described above is addressed in a single classroom session. Instead, you might find it useful to use the case in a number of ways as highlighted by the questions below. Note here how these options for wider learning allow you to build a teaching scheme around several classroom sessions as you move between strategy topics. The questions set out in the following section are intended to allow you to develop such a teaching scheme.

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5. Questions Used as a case to introduce the students to strategic thinking, the following could be used based on material in Chapter 1: Q1. What strategy statement would you propose for the Glastonbury Festival?

Q2. Carry out a ‘three horizons’ analysis of the Glastonbury Festival, in terms of both existing activities and possible future ones. How might this analysis affect their future strategic direction?

Q3. Using the headings of environment, strategic capability, strategic purpose and culture seen in Chapter 1, identify key positioning issues for the Glastonbury Festival and consider their relative importance.

Used as a case to consider market attractiveness using material from Chapter 2: Q4. Like many areas of entertainment, music festivals can appear an attractive prospect to those with a passion for that specific entertainment form. How would you define this sector and its attractiveness?

Used as a case to look at strategic options and converting strategic thinking into action using material from Chapters 6 to 11 where each of the questions can form part of different classroom sessions.

Q5. What alternative strategies do you see for the Glastonbury Festival?

Q6. The management team at Glastonbury seems to have decided on developing another festival – critically consider this option’s strategic fit externally and internally compared with any other options identified in Q5.

Q7. Converting good strategic thinking into action can be a challenge: evaluate the strategic options from Q5 and Q6 to identify not only the outcomes but also the obstacles that might restrict their achievement.

6. Case analysis

Below there are some suggestions on how answers to the above questions may work out. As ever with strategy, the answers are open to subjective choices around the internal and external environments and their matching. However, the general gist of the case is that all is not as simple and carefree as joyful as the reaction of Glastonbury attendees may suggest.

Q1. Students need to recognise the importance of clear goals for organisations and the dangers of not addressing this. Consideration of Collis and Rukstad from Chapter 1 reveals the following points of discussion: •

In terms of the goals of Glastonbury, these are clearly stated at the outset in the sense of a ‘social mission’ though they need to be financially viable too;

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•

A narrow geographical scope for the event itself may be considered as a limitation to their

•

approach though an international audience might be seen as an untapped opportunity; Their advantage may be seen in their position as one of the most varied and high quality festival experiences, or using that much abused term, their place as an iconic event.

Q2. Students need to have some understanding that organisation goals not only need to be clear but realistic and time bound. Also, they should recognise how certain sectors are subject to fast changing environments (e.g. rapid advances in technology) that disrupt this thinking. Below are the points related to this case: •

It might be claimed that Glastonbury has been short sighted and purely focussed on the first

•

horizon of day-to-day activities; Other festival organisers have been more focussed on the second horizon with a portfolio

•

events and ticketing included in their approach; Notice how some of the festivals in the figure are gaining scale economies by operating across

•

two sites on the same festival dates; A third horizon encompassing wider aspects of entertainment might be considered too.

Q3. This question is meant to get students thinking about the relevance of both external and internal issues of which the case offers a range to consider. Some are set out below: •

A wide range of external environment issues emerge with opportunities such as sponsorship

•

and threats such as increased competitors; Issues such as the increasing legislation around events show how a threat to Glastonbury can

•

become an opportunity for suppliers/partners; Glastonbury seems to have some excellent resources but has needed others to fully develop

•

capability; Strategic purpose is mixed in consideration of the strategy statement with ‘social mission’

•

being important but a need for financial success too (see Q1); The hippy culture back at the start of Glastonbury’s history has a clear impact on its ability to become financially sustainable. Indeed, it might be suggested that the rejection of more corporate elements could send them back to this problem without careful management.

Q4. Students need to recognise that strategic intentions must be scoped by defining an industry or a specific sector and that some models are intended to work based on that definition of scope. Using Porter’s Five Forces framework and material generally found in Chapter 2, the case can be seen to have a number of tricky issues to address:

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•

The scope of the case sector is viewed broadly as festivals below but has the potential for

•

discussion of alternative definitions with students; Competitors are numerous and there are limited ways in which to differentiate from each other as buyers look mainly to the programme of entertainment or the ability to socialise as their main motivations to attend;

• •

Suppliers in the form of headlining acts are gaining power as they appear to be not only reducing in number but also have a number of other options to consider; Buyers are also faced with a variety of choices with more options to entertain themselves at

•

other festivals. The buyers themselves also vary in their demographics and taste; Potential entrants face some barriers to entry in terms of their ability to attract suitable

•

headline names and manage events of this scale; Substitutes are numerous if this market is purely viewed as the festivals market with other live entertainment or even a holiday presenting ways to satisfy the underlying need to relax away from work; Overall, a number of the five forces seem quite high and make the sector look unattractive to

•

a newcomer.

Q5. Students addressing this question and Q6 should ideally already have looked at this case, possibly using the previous questions, as it needs them to draw on that understanding and the material available in Chapters 6 through to 10 as it begins to question Glastonbury’s ability to be different in the face of wide ranging competition. Other options might include: •

Leveraging the brand to create other festivals outside of the United Kingdom might be

•

considered; Diversification into other products such as merchandise, records, artist management,

•

broadcasting, etc. might be discussed; As Glastonbury is not part of a larger festival or music promotion portfolio as with some

•

competitors, the elements above become even more important; Glastonbury’s lack of resource outside of brand name suggests that merger and alliance may prove more fruitful than acquisition or internal growth.

Q6. Students addressing this question may have already considered a new festival as part of their response to Q5. However, the point of this question is to get students thinking about each option’s strategic fit with the external market and their internal resources and capabilities. A number of issues may arise, as follows: • With their new festival idea, Glastonbury seems to have a good fit to the internal environment though seems not to be leveraging the Glastonbury brand name to its full extent. Externally,

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there is thinking to be considered around if and/or how the new festival is differentiated from •

Glastonbury; If students consider leveraging the brand by developing festivals outside the United

•

If students consider expansion into other music related areas, there are challenges in being

Kingdom, the main issue is likely to be their internal fit and how they develop capabilities in another country. clear on the resources and capabilities on which they build this new income stream and which opportunities in the external market are to be pursued.

Q7. Evaluating the strategic options from Q5 and Q6 using the material in Chapter 11, students should reveal a number that are suitable, feasible and acceptable as well as limitations such as follows: •

Their future strategic direction cannot be developed without the co-operation of others;

•

Glastonbury itself appears to be very reactive and their strategy is emergent;

•

Clearly, the nature of these large-scale events and the range of capabilities brought in for their

•

successful management highlights a wide distribution of power amongst those involved; Though he appears to be a figurehead for Glastonbury, it is clear that future leadership and change management may not come from Michael Eavis but may need to be driven from elsewhere within the family.

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The global pharmaceutical industry – harnessing the whirlwind

Sarah Holland

1. Introduction The case describes the evolution of the industry and its unusual strategic environment. Attention is drawn to environmental pressures from regulators and payers. Key forces driving the industry are discussed, including addressing unmet medical need, the importance of innovation and time to market, and globalisation. The case illustrates an increasingly hostile environment, where only truly game-changing innovation is funded by payers, who have become the ‘strategic customer’.

As better understanding of disease results in treatments targeted to smaller, more defined populations, the value of economies of scale has eroded, with small and mid-sized companies growing fast and dominating certain segments. The pace of change has become dizzying, with products rapidly superseded and rendered obsolete. Regulators have approved the first gene and cell therapies with truly curative potential. These require a whole new business model, and global pharma players are also threatened by disruptive entrants from sectors such as electronics and digital. On a global level, the historical supremacy of the US is starting to be challenged by China, now the second largest global market and an emerging source of innovation. The case also examines issues around corporate social responsibility.

2. Position of the case The case study is primarily concerned with business environment analysis on a global level. The case is designed to facilitate teaching of analysis frameworks including PESTEL, Porter’s Five Forces, the concept of the ‘strategic customer’, industry strategic groups and critical success factors. Students can use the case to analyse different company strategic responses to the tough industry environment. It may also be used for stakeholder analysis and as a basis for discussion of social responsibility. Given the importance of industry analysis and its position at the beginning of most strategy courses, the case might well feature early in a teaching programme. The case could also precede a discussion of the Teva case study, focused on internationalisation and use of inorganic strategic growth methods, notably M&A, in the pharmaceutical industry.

3. Learning objectives The case is designed to help students undertake structured analysis of an industry’s business environment, using analysis frameworks such as given below:

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PESTEL analysis and scenario analysis (Section 2.2 and Section 2.4)

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Porter’s Five Forces and industry life cycle analysis (Section 3.2 and Section 3.3)

•

Strategic groups within the industry and strategic choices made by specific players (Section 3.4)

•

The ‘strategic customer’ and industry critical success factors (Section 3.4)

Students can map industry stakeholders (Chapter 5) and gain an understanding that public opinion and the media, legislators, regulators, lawyers and powerful public and private sector payers may have significant influence on an industry. The pharmaceutical industry faces interesting questions of corporate social responsibility. Students can assess the stance of the industry and consider its effectiveness at engaging with stakeholders.

The case can be used by students to understand drivers of strategic choices. For example, to compare a cost leadership strategy for a generics company versus an R&D-based differentiation strategy for a global pharma and the associated profit margins (Chapter 7). Students can discover for themselves that the most successful biotechs and small pharmas have stable leadership teams who focus narrowly on a few areas where they develop deep expertise, an example of focused franchise strategy.

Further objectives relate to corporate strategy and diversification (Chapter 8). Students can identify alternative strategy options, ranging from a pure innovation focus to an emphasis on emerging markets, to diversification, and elucidate the underlying drivers. They can also identify the strong trend towards outsourcing, understand what is behind this and consider the risks and benefits. The case can also help students understand drivers towards the globalisation of an industry and the opportunities and threats involved (Chapter 9).

4. Teaching scheme

The case study may be used as the basis for plenary discussion, for small group work or individual assignments. For example, the tutor could lead the class through a PESTEL analysis and then break the class into groups to undertake scenario planning. If time allows (or indeed another session is utilised), the case lends itself to an examination of Porter’s Five Forces analysis – again this works as both a plenary session or as small group work. There is sufficient detail in the case for it to be used as an assessment.

5. Questions for discussion 1. Identify the main environmental forces currently affecting the global pharmaceutical industry.

2. Use scenario planning techniques to consider the various environmental influences which may affect the global pharmaceutical industry in the future.

3. Analyse with the Five Forces framework, to identify environmental forces affecting the global pharmaceutical industry? Do these forces differ by industry sector and where would you place the different sectors in the industry life cycle?

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4. How has the ‘strategic customer’ evolved over time for global pharmaceutical companies? What is the impact on industry critical success factors? (Could ask specifically whether economies of scale are still important.)

5. Identify strategic groups within the ethical pharmaceutical industry. Describe the strategic choices made by GlaxoSmithKline from 2019 onwards and comment on what may have been the drivers behind these choices.

Supplementary questions 6. What is the prevalent ‘ethical stance’ in the pharmaceutical industry? Create a stakeholder map for the pharmaceutical industry and consider what actions the industry could take to engage more effectively with its stakeholders.

7. Research, compare and contrast the activities of leading industry players in one of Brazil, Russia, India or China.

6. Case analysis 1. Identify the main environmental forces that affect the global pharmaceutical industry.

Students will be expected to address all aspects of a PESTEL analysis. Illustrative points are given here, but this is by no means exhaustive.

Political – governments’ focus on the industry as an easy target in the drive to control healthcare expenditure; changes to how healthcare is funded; public outcry over drug prices; public pressure to fund cancer medicines.

Economic – pharmaceutical sales correlate closely with GDP, especially in countries where funding comes from the public purse; the critical importance of payers as decision makers who demand evidence that new therapies offer value for money; in some countries, patients are paying a greater proportion of drug costs themselves, linking sales with income levels and driving many to bankruptcy; the availability of venture and debt finance to support biotech innovation.

Social – ageing populations drive increased healthcare costs but also increase demand for medicines; pressure to act ethically rather than purely for profit; better-informed patients with rising expectations; continued global convergence in medical practice; public acceptance of new technologies such as genetic testing, genetically modified cells and gene therapy; philanthropy as a source of R&D funding; in the context of networks, healthy ecosystems are critical to create innovation hotspots around the globe.

Technological – scientific and medical innovation driving a resurgence in R&D productivity; shift towards more personalised healthcare as diseases are better understood and sub-classified on a biological or molecular basis; approval of truly curative therapies based on new modalities such as genetically modified cells and gene therapy; impact of information and mobile technology such as more well-informed and empowered patients supported by health monitoring apps; the first purely digital therapies; e-prescribing, real-world studies tapping into ‘big data’.

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Ecological – emphasis on sustainability by investors and employees; ethical concerns about new technologies such as gene editing.

Legal – increased regulatory focus on drug manufacturing safety and on industry sales and marketing practices; growth in liability claims particularly in the United States; threat of counterfeit medicines; regulatory framework established to allow entry of biosimilars.

A key trend that students should highlight is the emphasis on cost containment and value for money. Students should be encouraged to develop their points – explaining why they are important and what impact they would have on the firms in the industry. Extra merit could be given for the mention and identification of key inflection points in the evolution of the industry environment.

2. Use scenario planning techniques to consider the key drivers of change which will affect the global pharmaceutical industry in the future.

Students should prioritise the forces identified in Question 1. The key forces should be categorised according to expected impact (high, medium and low) and certainty of impact (high, medium and low). Two forces that are both high impact and high uncertainty can be used to create four different future scenarios. All four scenarios will feature the high impact and high uncertainty forces at work.

Students could work in four groups, each considering one future scenario. Because drug R&D lead times are so long, they should think about a relatively long-time horizon such as 10–20 years into the future. Students can be asked to give their scenario an entertaining and descriptive name and to describe how this future might look. How is a patient diagnosed and treated in this future, what sorts of therapies are used and why and how are they funded? Where are the threats and opportunities globally?

Students can then review the scenarios as a class and try to identify company strategies that may be robust across a range of future scenarios.

3. Analyse with the Five Forces framework, to identify environmental forces affecting the global pharmaceutical industry. Do these forces differ by industry sector and where would you place the different sectors in the industry life cycle?

Students will be expected to address all aspects of a Five Forces analysis and discuss how these forces have changed over time. Illustrative points are given here, but this is by no means exhaustive.

Threat of new entrants – the industry has historically had high barriers to entry, but these are dramatically lowered at patent expiry with generic entrants. Generics companies have become major global players, and non-traditional players such as Samsung and Celltrion have entered aggressively with biosimilars. A greater focus on premium priced niche products for high unmet disease has led to rapid growth of biotech companies such as Gilead, Biogen and Celgene. A strong focus on healthcare from tech giants Google, Apple and Microsoft suggests even more disruption is looming.

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Power of buyers – buying power is concentrated in a small number of payers – primarily public sector bodies and insurance companies – with a major impact on market dynamics. Where similar or identical products exist, such as in generics, tenders may be used to drive down prices.

Power of substitutes – increased emphasis on generics being ‘good enough’ for common conditions and shrinking use of branded innovative drugs; biosimilars entering as substitutes for high priced biologics.

Power of suppliers – historically low, but declining R&D productivity and the emergence of successful global biotechs with deep pockets has substantially increased the price tag on truly breakthrough licensing and acquisition opportunities.

Competitive rivalry – rivalry within specific product classes has always been intense and can be leveraged by payers to force competition on price; first-launch products are ever more rapidly superseded by superior in class competitors; emergence of biotech companies, generics and regional players as serious global competitors; increasing industry consolidation.

Students should appreciate that the generic, OTC and vaccine sectors are relatively mature, the ethical pharmaceutical sector is arguably heading from growth towards shake-out, while the biotech sector is still in growth phase, especially the cell and gene therapy sub-sector.

4. How has the ‘strategic customer’ evolved over time for global pharmaceutical companies?

What is the impact on industry critical success factors?

Students would be expected to identify that decision-making power has shifted from the medical practitioner to the payer. Past critical success factors included R&D to introduce new products, supported by effective marketing and large sales forces to undertake customer ‘detailing’. Brands that offered modest advances in tolerability or convenience could become market leaders. In a payer-dominated world, innovation becomes more critical as new products must offer significant and unique benefits for diseases with high unmet need, in order to justify premium pricing and funding. Personalised healthcare may become important as payers demand to know which patients will benefit from a new medicine. Sales force sizes have fallen dramatically and there is far more emphasis on addressing payer needs.

5. Identify strategic groups within the global ethical pharmaceutical industry. Describe the strategic choices made by GSK from 2019 onwards and comment on what may have been the drivers behind these choices and how successful they were.

Based on the case, students should be able to identify five broad types of industry player: ethical, generic, biotech, OTC and vaccine companies. They may also identify digital health companies as a new group, and cell and gene therapy companies as a very distinct biotech segment. Each requires different strategic capabilities. Producers of branded prescription drugs require strong R&D and global sales and marketing infrastructure. Generics companies focus on speed to market and manufacturing cost leadership. Biotechs must create and defend intellectual property in specialised research fields, attract funding and make successful deals. Branded OTC drugs demand direct-to-consumer marketing capability.

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Many multinational companies operate in more than one of these sectors, and a strategic grouping can also be made on the basis of diversification versus focus. Highly diversified companies such as Johnson & Johnson encompass completely different sectors such as consumer brands, medical devices or veterinary products. Other leading companies are more narrowly diversified across conventional medicines, biologics, vaccines and in some cases, generics. A few believe the key to success is an unwavering focus on innovation. By specialising and dominating a niche, a few biotechs have become major global players – examples are Gilead with fixed dose combination drugs for infectious diseases, and Celgene with therapies for blood related cancers.

When Emma Walmsley arrived as CEO at GSK, the company exemplified a fairly diversified strategy, with consumer health and vaccines alongside conventional pharmaceuticals. By August 2019 (after the case was written), the consumer healthcare business had been moved into a joint venture with Pfizer and GSK had the declared intention to demerge it completely within three years. The cost savings were to be ploughed back into innovation, such as GSKs growing portfolio of cell and gene therapies, marking a clear strategic shift.

Supplementary Questions: 6. What is the prevalent ‘ethical stance’ in the pharmaceutical industry? Create a stakeholder map for the pharmaceutical industry and consider what actions the industry could take to engage more effectively with its stakeholders.

Students are likely to characterise the pharmaceutical industry stance as ‘enlightened self-interest’. Some companies have pioneered initiatives to undertake ‘at-cost’ research, donate medicines or support charitable activities, but others have been caught out in unethical practices and fined large sums.

Students can be invited to identify key stakeholders and their potential impact on industry fortunes. Stakeholders identified should include patients and their families; healthcare practitioners; charities, employees and shareholders; regulators, public and private payers; various sectors within government including politicians as well as the bureaucrats responsible for finance, health and social welfare; in some countries, employers; the general public, the financial and lay press, etc. Students can be asked what steps industry leaders could take to move the industry towards more effective interaction with its stakeholders and what overall costs and benefits this would have.

7. Research, compare and contrast the activities of leading industry players in one of Brazil, Russia, India or China This question could be an interesting individual or group assignment for students to undertake using their own research.

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CASE TEACHING NOTES

Siemens A:exploring the future Gerry Johnson

1. Introduction This case study focuses on Siemens environmental scanning exercise, Strategic Foresight, the identification of environmental trends and megatrends that informed the 2015 strategy, Vision 2020 and the subsequent scanning that took place that informed later strategy development. It, therefore, provides a basis for students’ consideration and understanding of the importance of environmental scanning in strategy development.

2. Position of the case Since the case study is primarily concerned with environmental scanning, the topics covered in chapter 2 of Exploring Strategy are the most relevant to the case. These topics include PESTEL, the identification and impact of key drivers, megatrends and scenario building. It is likely, then, that the case would be taught early in a Strategy course.

There is also a Siemens B case study that focuses on strategy implementation by Siemens’ of their Vision 2020 (launched in 2015) and Vision 2020+ (launched 2018) strategies. This A case provides useful background information for that case.

3. Learning objectives The key learning objectives for students are to: •

develop their understanding of the impact of macro environmental forces on the strategy of a

•

major corporation and develop skills in PESTEL analysis, the identification of key environmental forces and the building of scenarios.

4. Teaching scheme Pre-reading: it is suggested that students read Chapter 2 of Exploring Strategy on Macro-Environment Analysis prior to using the case study.

The case study lends itself to different teaching approaches as follows: •

As an illustration of macro-environmental analysis.

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As a PESTEL exercise leading to the identification of key environmental drivers, megatrends and

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the building of scenarios.

To consider the challenges posed to strategists in seeking to develop views of the future

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environment and its impact on strategy.

As background to the teaching of the Siemens B case study on strategy implementation and change.

5. Questions If the case study is used for illustrative purposes, questions for students might be: 1. What were the main steps Siemens corporate strategists took in their Strategic Foresight environmental scanning exercises?

2. How did these differ in the period 2015–2018 from the 2012 exercise?

If it is used as a basis for student analysis, questions or assignments might be: 1. Are there other megatrends than those identified that might be important for Siemens?

2. Using the trends identified by Siemens in Table 1 (or other environmental forces you consider important) which would you consider to be key drivers for change for Siemens and why?

3. Construct (5 or 10 year) scenarios for Siemens.

4. Using the identification of megatrends and/or scenarios consider the potential impact of future environmental forces on (selected) Siemens businesses in terms of both threats and opportunities.

6. Case analysis Using the case for illustrative purposes: Especially if used as an illustration, it is important to be clear on how the processes adopted by Siemens in their Strategic Foresight exercise relate to the concepts discussed in Chapter 2 of Exploring Strategy. These processes can also inform a more analytic approach by students if that is how the case is used.

In Exploring Strategy the PESTEL framework is explained as a means by which environmental factors can be categorised. In their scanning exercises, Siemens strategists did not employ a framework such as PESTEL, but they identified very many environmental factors that could affect Siemens. The point that needs to be made here, as in the text, is that very long lists of such forces can be generated. It is necessary to reduce these to a useful and manageable number: but how? In the first Foresight exercise explained in the case they were consolidated by the Siemens strategists in discussion with a range of people within the firm and with consultants to produce a list of 57 ‘trends’ (see Table 1 in the case). Nonetheless 57 is still a large number, so identifying which of these is most important – which are the key drivers – became the challenge.

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Reviewing the early (2006, 2012–2015) Foresight exercises is a useful way of illustrating a pretty thorough, even elegant approach to environmental analysis.

Megatrends are defined in Exploring Strategy as large-scale political, economic, social, technological, ecological or legal movements, typically slow to form, but which influence many other activities and views, possibly over decades. A megatrend typically sets the direction for other factors.

In their 2006 environmental scanning exercise, four of these megatrends were identified by Siemens: demographic change, climate change, global warming and urbanisation. These were used as a basis for the scenario building illustrated in Table 2. A fifth, digitalisation, was added in the 2015 exercise.

Section 2.2.7 of Exploring Strategy introduces the concept of key drivers for change, that is: the environmental factors likely to have a high impact on industries and sectors, and the success or failure of strategies within them. In the 2015 exercise, Siemens did this by examining both how each trend might impact on markets and Siemens businesses and how a number of the trends, together (which they termed ‘themes’) might do so. They referred to this as ‘deep dives’. The ‘deep dives’ showed trends associated with digitalisation were likely to be of importance across a wide number of business units. Thematic scenarios (e) were then developed which pulled together the future implications of the thematic deep dives so as to provide broader storylines that strategists and executives could consider in developing strategy. The thematic deep dives and the thematic scenarios were then the bases upon which Strategic Foresight was used to consider the possible macro environmental impact of the portfolio and, in turn, Siemens’ future strategy.

The example below is of what one identified trend (‘individualised manufacturing’) means and how it might impact on Siemens markets. The narrative on this was developed by the strategists in consultation with executives within Siemens and industry experts. It can be used in class if required to enhance the illustration of the Siemens approach at that time.

Whilst this approach to scenario building and foresight is not the same as that explained in Exploring Strategy, the point can be made to students that there are many ways of developing scenarios and that this ‘theme-based’ approach is one such.

The emphasis on scenarios from broad environmental scanning (bottom up as it were) did not continue in the later Foresight exercise in 2016 that informed Vision 2020+. Whilst there was an exercise in environmental scanning, the themes selected for exploration were those perceived to be relevant based on the experience emerging from the ongoing progress of the Vision 2020 strategy. It was these that were then subject to the ‘deep dives’ that considered their impact on businesses as well as on the competitive arena in which they operated. Further, there was more emphasis on following through this analysis in practical ways in businesses. For example, through pilot projects. Figures 3, 4 and 5 in the case provide an example of this process as it relates to the theme of artificial intelligence.

The reason for this change of approach given in the case is worth discussing in class: ‘…we have shifted the focus away from basic trends towards the key themes and their implications for Siemens and from scenarios to a ‘Siemens relevant’ picture of the future. Managers had difficulty seeing the relevance of the scenarios. By better understanding the themes, their implications for Siemens, anchoring them in the organisation in practical ways and coming up with clear recommendations, it is much easier to trigger actions, and secure impact on our strategy. The process we now have is more grounded’.

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In short, managers viewed the scenarios as too abstract: not clearly enough related to running business operations. This observation can be the basis of a discussion of the usefulness of scenarios in general and, if they are seen as valuable, how they can be ‘grounded’ in ways useful to managers.

Using the case study for analytical purposes.

For teaching purposes, an amalgamation of the approaches adopted by Siemens might prove a useful way of getting students to work through a scanning and scenario building exercise as suggested by the questions suggested in Section 5 above. This section considers the sort of analyses that students might undertake as a whole or in part on the basis of the questions.

Question 1: Are there other megatrends that might be important for Siemens?

This question prompts students to consider if there are any other underlying fundamental forces at work in the macro-environment that could, in turn, create other key drivers for change. This could simply be an invitation for students to ‘think big’ but the question could also be used to invite students to examine the 57 trends identified by Siemens and ask if there are other underlying forces these suggest, or underlying forces that they seem to ignore. Considering this in relation to a PESTEL framework might, for example, suggest an absence of much explicit reference to political or regulatory/legal factors. How, for example, would a fundamental shift in the balance not only of economic but also political power in the world impact on Siemens?

Question 2: Using the trends identified by Siemens in Figure 1 (or other environmental forces you consider important) which would you consider to be key drivers for change for Siemens and why?

The emphasis here is how to get students to appreciate the importance of identifying key drivers as distinct from (though informed by) a potentially long list of environmental forces. One way to do this is to use list of 57 ‘trends’ shown in Table 1. Students might then employ the same sort of approach adopted by Siemens, as explained in the case study in relation to the decentralisation of power generation and supply. This would require students ‘testing out’ the impact of a given force or cluster of forces (a theme) on given businesses. If this approach is used it is, of course, important that you (or the students) choose trends and businesses that would be relatively familiar to students. It might be reasonable to expect an understanding of many of the trends in Table 1 and sufficient familiarity with businesses involved in, for example, rail systems, wind turbines or perhaps healthcare.

Question 3. Construct (5 or 10 year) scenarios for Siemens.

Section 2.4 in Exploring Strategy deals with scenario analysis and planning. Whilst it acknowledges that there are many ways of developing scenarios it explains one in particular that employs two key drivers which have (i) high potential impact; (ii) high uncertainty and (iii) independence from each other. It then shows how these can be used to develop four different but internally consistent scenarios. If such an approach were to be used with the Siemens case, the list of Siemens trends in Table 1 could be used as a basis for identifying such dimensions. Or the more limited number of themes identifies in 2016 could be used. Indeed, the example in the case concerned with power generation provides a potential basis for this. The possibility of ‘storage for renewable energy’ was seen as having a high impact but ‘low likelihood’ possibility. Given this and the uncertainty to do with ‘resource scarcity’ in the context of energy supply there are two ready dimensions on which to build the four scenarios as explained in Section 2.4 of the book. Students could be asked to develop 223

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narratives of scenarios that have a bearing on a business such as Siemens within each of the four boxes below.

Within 10 years

Some reduction in availability of (e.g. energy) resources

Dramatic reduction in availability of (e.g. energy) resources

Storage for renewable energy becomes widely and economically available.

Storage for renewable energy not available.

Question 4: Using the identification of megatrends and/or scenarios consider the potential impact of future environmental forces on (selected) Siemens businesses in terms of both threats and opportunities.

Students might be asked to consider the impact of the scenarios they have built or different trends and megatrends, as identified by Siemens or by themselves, on Siemens business activities with which they have or could reasonably develop an understanding (e.g. transport, wind power, healthcare).

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CASE TEACHING NOTES

Relocation, Relocation, Relocation: evolving strategies to deal with shifting shopping patterns at Vision Express Peter Barton

1. Introduction It is likely that most students will have had some first-hand experience of the optics market even if they have so far never required corrective prescription. Most will have had their eyes tested, bought sunglasses and few would have avoided the barrage of mainstream advertising and social media from the optical retailers, such as Specsavers in those counties where they operate. Combined with typically high levels of familiarity with retailing, through shopping, and, often, working, this awareness will help to stimulate understanding of the case as well as wider debate when used in a group setting.

This case exposes the complexity of the regulated UK optics market and reveals how the industry survivors and leaders have reshaped themselves through constantly evolving strategies and adapting their channels to market. In particular, it shows how changing shopping patterns have required Vision Express to adapt their strategies to a fast-changing market place in to order for them to be successful.

Mirroring a global trend, the market has seen major changes to the high-street and a significant level of consolidation leading to clearly definable strategic groups (Chapter 3).

2. Position of the case This case is focused largely around strategic positioning in an industry context. It also permits evaluation of strategic choices made by a well-known organisation and allows students to make their own recommendations for future actions.

The key themes of this case link well with Chapter 3 of Exploring Strategy. This is because it presents a suitable context for students to discuss the competitive nature and life cycles of industries and apply competitive theories and examples to apply chapter learnings. It also allows students to analyse competitive positions in terms of strategic groups, market segments and apply the strategy canvas.

Moreover, the case could be used to deepen understanding of competitive position (Chapter 7) and how organisations must be aware of their sector environment (relating to Chapter 2) This case can also be considered in the context the wider global environment, which is analysed in the case ‘Grand strategies in vision’ at the end of Chapter 8. Used together, this provides clear opportunities for students to analyse the ways in which a corporate parent can add or destroy value for its portfolio of business units, as well as consider the key strategic motives for mergers and acquisitions and strategic alliances.

3. Learning objectives Core Learning Objectives (Chapter 3): •

Use Porter’s competitive five forces framework to analyse industries or sectors: rivalry, threat of entrants, substitute threats, customer’s power and supplier power.

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On the basis of the five competitive forces and complementors and network effects define

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industry attractiveness and identify ways of managing these.

Understand different industry types and how industries develop and change in industry life cycles and how to make five force analyses dynamic through comparative industry structure analysis. Analyse strategic and competitor positions in terms of strategic groups, market

• •

segments and the strategy canvas.

Use these various concepts and techniques together with those from Chapter 2 in order to recognise threats and opportunities in the industry and marketplace.

Other Learning Objectives: • • • •

(C2) How to analyse an organisation’s position in the external environment – both macroenvironment and industry or sector environment.

(C6) Identify organisations which may be experiencing the symptoms of strategic drift.

(C7) Assess business strategy in terms of the generic strategies of cost leadership, differentiation, focus and hybrid strategy.

(C8) In relation to the ‘Grand strategies in vision’ case – Identify alternative strategy options, including market penetration, product development, market development and diversification.

• •

(C8) In relation to the ‘Grand strategies in vision’ case – Analyse the ways in which a corporate parent can add or destroy value for its portfolio of business units.

(C11) Related to the ‘Grand strategies in vision’ case but also specific to the UK market – Identify the key strategic motives for mergers and acquisitions and strategic alliances.

4. Teaching scheme(s) This Industry case is suitable for both undergraduate and postgraduate students or groups of managers attending executive learning programs. It can be used for two-hour small group discussion sessions on industries. Although not an especially long case, students will be expected to have studied the case prior to the sessions. They should also be encouraged to find recent updates or developments about the optics industry as well as the broader retail sector. Ideally, this case works best with students earlier on through a course on strategic management. It is also recommended that students are divided into groups of two or more people to evaluate different perspectives of the various strategic groups and stakeholders.

5. Questions Environment: 1. Assess the changing macro-economic factors that impact the optics market using PESTEL analysis and show how they have helped drive consolidation within the market.

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Industry: 2. Analyse the competitive forces within UK optics industry in relation to Illustration 3.3 and consider its attractiveness.

3. Using Strategic Group Analysis, identify which groups are likely to succeed, and, why, as the optics market continues to change.

4. As a manager of an independent optician in a competitive location, what competitive position and interactive strategies would you recommend?

Scenario analysis and growth: 5. How might the retail optics industry develop over the next five years and do you think Vision Express should adapt to avoid strategic drift?

6. Case analysis Environment: 1. Assess the changing macro-economic factors that impact the optics market using PESTEL analysis and show how they have helped drive consolidation within the market.

As with most industry case studies, it is helpful to begin with an environmental analysis. The optical industry is unique yet includes the majority of the commonplace factors applicable to retail in general.

However, the market provides one of the most complex retail environments not just due to the range of products across a variety of categories, but also due to the mix of professional, and, selling aspects across a complex dispensing process, where fashion and style are also relevant. The two have to work hand-in-hand yet there are potential conflicts of interest where professional advice and recommendation can result in different purchasing outcomes. It is well-worth students relating opportunities and risks for each of the PESTEL factors. Below are some of the pertinent factors more specific to the optical industry.

Political Factors • National Health Service (NHS) contracts: In England and Wales, opticians receive a fee from the NHS for the provision of NHS eye-tests and glasses. Many opticians argue that this fee is below the cost of provision, but it acts as a stable income and contribution to overheads and the potential of upgrades as well and related non-NHS customers and sales.

•Opportunities: More eye assessments and procedures typically done in hospitals are being contracted out to the private sectors.

•Risks: Reduction in the fee for eye-care vouchers. Political pressures to change legislation.

Economic Factors •

Consumer spending: As a medical need, the optics market has not traditionally been as impacted as other retail sectors during difficult economic conditions. However, it still suffers 227 .

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and benefits from economic cycles as consumers are more likely to upgrade their frames •

and/or lenses if they feel less pressure on their personal finances.

Interest rate risk can influence the costs paid and prices charged for products and it has been

increasingly difficult to pass on costs to consumers. Market-leaders Specsavers have managed to minimise price increases through cost economies and consumers pay increases has lagged behind inflation until more recently.

• Whilst plenty of finished products are still made within the United Kingdom, many are ultimately imported, especially for designer frames and contact lenses. This exposes products to exchange rate fluctuations, which show more volatility during uncertain periods, such as during the Brexit transition in the United Kingdom.

Social Factors •

The requirement for prescriptive correction greatly increases with age. Similar to many other western geographies, the UK population is aging (see Figure 3), which in itself is perhaps the greatest contributor to the forecasted increase in market growth shown in Figure 2. An

•

increased concern for fashion has led to increased demand for more expensive eye-wear.

Furthermore, new demand for, and uses of, materials such as titanium, and demand for more expensive styles, such as rimless glasses (e.g. Silhouette and Lindberg), have helped increase order values.

• Whilst everyone in the United Kingdom can receive an eye-test either for free through the NHS or at a low price, eye care in some less developed counties is more limited. There is an increasingly responsibility for large suppliers but also opticians to try and provide additional support for these countries, which is likely to lead to new profitable markets as their economies develop.

•The change in consumer shopping patterns, partially driven by technological and social change, is a consistent theme within this case study. This tends to favour a growth in online and decline in high-street sales across retail although the case demonstrates that there are barriers to the sale of online prescription products, which have eased this impact.

Technological Factors •

New technologies to help provide additional tests within the eye-test are helping to add-value to eye-tests as well as increase costs from new technologies (e.g. retinal photography) and the time spent to conduct an eye-test. There have been improvements in production processes

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including within retail. Opticians often glaze their own frames within store and the introduction of ‘remote-edging’ of lenses enables opticians to speed up the making up of the glasses. New materials, including for

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contact lenses (such as silicone hydrogel) have improved vision and adoption rate.

Students will also be likely to pick up on other retail advances in-store and online, such as

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augmented reality.

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Environmental Factors •

The chief environmental impact upon retail including optical retail is the weather. Extremes in terms of cold, wet and heat all tend to increase the number of missed eye-test appointments, which is a significant cost to opticians. However, the sunshine has a significant impact upon the sale of sunglasses.

Legal Factors •

In addition to UK’s Sale of Goods and Services Act, The UK optical sector is subject to the rules and regulations of the Opticians Act 1989. This ensures that certain standards are maintained but also creates a barrier for the sale of optical services and products by nonequalified optical retailers. Notably, the eye-test much be carried out by a qualified Ophthalmic Optician and the sale of complex prescriptions, partially sighted and children must be conducted by either a qualified Ophthalmic Optician or Dispensing Optician.

The UK optics industry has seen significant consolidation with a huge shift towards the large multiples. Having originally been made up of mostly small independent providers, the market is now dominated by just three large opticians that now make up over 70% of the UK market. The biggest spur of this change came from a change in regulation chiefly through the updated Optician Act 1989.

This act lifted many of the inhibitors of consolidation, especially around marketing. The market has continued to consolidate ever since with smaller providers failing to gain previous competitive advantages, and invest in technology, and ultimately succumbed to closure or acquisition.

Furthermore, the economies of scale, particularly through purchasing and percentage overhead, has encourage expanding companies to be more aggressive in their approach to their acquisition targets.

Indeed, the sharing of costs through consolidation, but also buying groups, has helped to keep costs, and, in turn, prices, down. This has also been been fuelled through an increase in vertical integration, with retailers such as Vision Express and its managers, under pressure to continue to grow year on year.

Stakeholders This is also a good point for teachers to consider stakeholder analysis as there are a great number of stakeholders, which may impact upon the environmental factors and consolidation. It is also important to consider other external industry specific stakeholders such as NHS, FODO, ABDO, WCSM and GOC. Industry: 2. Analyse the competitive forces within UK optics Industry in relation to Illustration 3.3 and consider its attractiveness.

It is recommended that students use the Illustration 3.3 as the steps in an industry analysis.

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1. Define the industry clearly: •

•

•

Opticians are at the customer-facing stage of the supply chain and incorporate all aspects of the value chain’s primary and supporting activities. The retailers have a strong degree of overlap between their buyers, suppliers, entry barriers and substitutes. However, there is a noticeable difference between Specsavers, which tends to supply different designer brands (some exclusive) to the more expensive Italian and US designer labels that are available through suppliers, such as Luxottica and Safilo. Many of the quality independents have a great overlap in the supply of designer frames, which will often be available through Vision Express and Boots as well.

The scope of activities varies but all opticians have eye-testing, glasses and usually varying degree of contact lenses. Some have links to laser eye-Surgury (such as Optical Express) and Specsavers, Boots and many independents offer a hearing aid service.

There is a growing global context within the optics market as demonstrated within the end-of-chapter case study in Chapter 8. However, Specsavers have tended to focus on growth internationally in predominantly English-speaking countries including Australia and New Zealand, although they have also expanded into Denmark. Boots has now come under the ownership of Walgreens from the United States but its optics remains nationally focused within the United Kingdom. Vision Express is a part of GrandVision, which has retail subsidiaries across the globe. Medium-sized chains, such as Leightons, Black and Lizzars, and Scrivens tend to be regional. Smaller independents try to capitalise upon the benefits of being locally based including marketing and servicing to the local community.

2. Identify the actors of each force and groups: •

•

Competitive rivalry (intense): There is intense rivalry among three main players (Specsavers, Boots and Vision Express) but also against the independent/small chain groups and rising, yet, small impact of online. Their power varies greatly according to their link to suppliers, with the larger chains having direct financial affiliation and ownership with suppliers. Smaller chains and independents fail to benefit from these relationships and can easily be put at a disadvantage. Online retailers, such as glassesdirect and lenstore, compete with the main optics market as well as their own submarket.

Buyers (medium): Plenty of power due to typically wide choice and online offering, with buyers benefiting from the generally low price for their eye-test. However, in practice, there is either loyalty, inertia or perceived lock-in from the holding of record cards (similar to dentistry), that means there is limited shopping around for alternative in this industry. Uptake of buying glasses online has been slow. The NHS (as well as some corporate schemes) alters the buying dynamic, with significant reduced margins for a greater volume of steady business. This market also needs to consider ‘non-buyers’ who have a need for prescription eye-wear. Indeed, many millions of those living in the United Kingdom do not get their eyes tested regularly yet many have a need for corrective prescriptions.

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Suppliers (strong): Consolidation of suppliers is reducing choice to retailers.

Furthermore, increasing horizontal integration means that the big providers with sibling companies supplying them big brands and mainstream products (e.g. GrandVision to Vision Express, Luxottica to Sunglasses Hut, David Clulow and Lenscrafter in the United States). Specsavers controls some of its own supply (e.g. lenses) and have sufficient volume to negotiate good deals. Smaller providers have less negotiating power. There are a handful of spectacle lens manufacturers with most opticians/groups choosing one main supplier and perhaps an alternative for certain lenses. The contact lens market is an oligopoly with J&J having around 42% of the market share, Ciba Vision 25%, CooperVision 22%, Bausch & Lomb 10% and others making up just around 2% (e.g. see www.contactlensspectrum.com).

•

Substitutes (weak): Eye-correction such as laser eye-surgery is a clear substitution.

Contact lenses are an alternative to glasses, but, although most opticians do provide these, they vary greatly in their success. Also, there are also substitutes in terms of location delivery such as through online and increased domiciliary care especially with an aging population.

•

Threats of New-Entrants (weak): Other than changes to purchasing channels (online and domiciliary provision), the case highlights an owner-driver model being embarked upon by the Hakim Group. The intention here is to gain the key scale economies from process and purchasing centralisation, whilst maintaining the benefits of being driven locally by an independent owner. Supermarkets have been involved for some time (although Tesco exited in 2017) but there are also new providers, especially department stores (e.g. John Lewis recently set up). The threat from Mee Healthcare (1-stop health care stop) has now gone as they went into administration in 2015.

Other considerations:

•

o Potential Exits: There have been a number of exits from the market in recent years from smaller independent opticians who have failed to adapt to the market. Most of their record cards have been adopted by bigger providers who have greatly benefited from the additional custom where loyalty is linked to the holding of record cards. It could also be considered that there have been a number of exits due to the volume of M&A activity. For example, whilst Vision Express rebranded a number of its acquired stores, it closed and merged many into a nearby Vision Express store, thereby reducing the number of opticians on the high-street. o Complementors: There is clear complementarity of the eye-test of prescription products and services, with the eye-test being performed by a qualified professional in the United Kingdom, often acting as a loss-leader. Externally, a notable complementor is the link between opticians and eye-charities, such as the RNIB and Guide Dogs for the Blind. Vision Express closely support The Macular Society and Glaucoma Association, which helps raise their chartable profile and raise awareness of the importance of eye-care. Students might also notice that other shops on the high-street complement each other and can lead to significant network effects with regard to shopping as an activity.

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o Strategic Lock-in: There is a certain amount of strategic lock-in in that the optician holds all customer record cards and must do by law. Whilst customers can ask for a copy of their records, few do as there is a benefit in maintaining previous records in one place in order to identify changes in eye-health (e.g. retina health through retinal photography).

3. Determine the underlying factors and total strength of each force: •

The relative strength of each force is highlighted above in 2. It is evident that the most notable factor relates to market power which varies considerably according to scale, and, in the case of industry rivalry, the closeness of their links to suppliers.

• Another key factor is regulation. Whilst regulation is crucial in protecting consumers in a health market, a side-effect is that it creates barriers to entry and limits the ease of which new players can enter the market. Indeed, whilst there are non-qualified ‘optical’ stores, selling optical goods, these providers are not allowed to call themselves ‘opticians’ and have limitations in their services such as in the provision of children’s and complex prescriptions. Their advantage, however, is there focus upon a high-margin product without the high professional costs that opticians incur.

4. Assess the overall industry structure and attractiveness: •

Competitive rivalry: The structure of the optical industry highlighted above shows a complex link between all players. For large relaters, such as Vision Express, market power and links to suppliers, are sufficient to give significant and, somewhat sustainable, competitive advantage. Smaller companies that are able to provide value to customers can still thrive but do face continued pressure on price and, increasingly, overheads, such as technology upgrades for eye-testing.

•

Buyers: Despite considerable power at the supplier end of the supply chain, as well as

•

•

regulation having a potential impact upon the number of providers, most buyers still have great power in most locations with most UK high-streets having both large chain and independent presence.

Suppliers: The existing major suppliers are in a strong position with increasing links into retail. Whilst there are still some niche manufacturers and there is reasonable brand loyalty, it is difficult to make a significant impact into the market without investment in brand enhancement.

Substitutes: The key alternative to glasses and contact lenses is Laser Surgury, which is expensive and comes with some risk. Whilst there have been significant advances in technology and resulting improvements, the players in this market have struggled, making it a challenging market. Ultralase was a notable casualty in this sector. The other key industry substitute is the purchasing medium of online. Whilst it promises like-forlike cost savings, the disconnect to the professional eye-test as well as the expensive cost of returns for glasses, due to customisation, make this an equally challenging market.

Contact lenses online appears to be more attractive as the product is commoditised, but this makes price the dominant aspect of competition and existing players already command significant cost economies, making it a very difficult market to enter.

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•

Threats of New-Entrants: Historically, new entrants have been attracted to the optics industry due to its high product margins. However, a number of providers have struggled to build up a sufficient customer-base quick enough and have under-estimated the highoverheads relating to the provision of professional services in addition to more common retail costs on the high-street. Although not highlighted in the case, the hairdresser, Tony & Guy, attempted to build up an optician’s presence but failed on the high-street. It does, however, continue its online offering.

5. Asses recent and expected future changes for each force: •

The fundamental backdrop of growth driven in large part through an aging-population (see Figures 2 and 3) makes this a vibrant and exciting market, especially when compared to many other retail providers. However, depending upon established resources and capabilities as well as competitive positioning (for providers), the market still has plenty of challenges that can counteract overall industry growth.

•

Retailers appear to continue to merge and grow but it is likely there will be a market for smaller providers for some time yet who provide sufficient value to customer who prefer a more personalised and local service.

• •

The Chapter 8 Corporate Strategy case provides strong evidence that suppliers continue to consolidate and focus more upon supply chain efficiencies and fashion brands.

Despite power shifting back towards suppliers, buyers will continue to wield great power as there is still sufficient choice within the market place and pressure from lower margin online retailers.

•

New entrants are limited due to regulatory and customer base barriers. Most threats here are around technology impacting the eye-test/correction, retail format (e.g. product printing) and alternative options online. For example, eye-test online could have a dramatic impact upon the high-street although regulation may be adapted to encourage people to have full eye-tests by a qualified optician.

•

The key substitutes are around corrective surgery, which is only likely to threaten other parts of the industry if it can improve in terms of long-term effectiveness of surgery as well as reduce associated risks, as well as cut the cost of treatment.

6. Determine how to position Vision Express in relation to the five forces: •

This part is partly considered in Question 5 below. CEO Jonathan Lawson appears to have recognised the need to differentiate itself from lower-cost providers such as Specsavers and leverage its scale economies to dominate the eye-care and quality eyewear market. Whilst they compete with many other independent opticians in this space, they are concerned with a broad market where they can continue to leverage cost economies and share best practice with other subsidiaries. This makes it increasingly difficult for a smaller provider to complete with them of price and quality and build up in size.

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•

By using their corporate parent, GrandVision, Vision Express can continue to increase

•

quality and reduce price. Furthermore, investment in technology and store processes puts further pressure on the independent market. This could lead to further acquisition opportunities.

Vision Express need to continue to monitor the impact of laser eye-surgery as a substitute.

•

Vision Express’s drive to help raise the profile of the importance of the eye-test as their main call-to-action can help to further drive growth across their business.

3. Using Strategic Group Analysis, identify which groups are likely to succeed, and, why, as the optics market continues to change.

Strategic groups are commonly defined by size within the optics industry. This is indeed an important aspect due to the clear scale economies that derive. Another interesting variable is in their business investments, particularly in relation to technology use (e.g. online, equipment), but also in relation to modern shop-fitting and stores operations (e.g. dispensing software). For example:

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•

Online: Whilst most of the online providers are small and do not gain significant scale-

•

economies, there overheads tend to be lower due to savings in store investments.

Although there are still costs through investment on websites, online providers are typically able to work to lower product margins providing they have sufficient volume.

This is not a given, and, the market is made up of few truly successful providers, which students may wish to explore themselves. Aside from achieving sufficient sales-volumes, the online glasses market is challenging as glasses are bespoke and typically cannot be resold in the event of a return. Whilst there is no legal requirement to accept returned online custom-made products if customers simply changes their mind, customers expect to be able to return products as they do for non-customised purchases. This creates a dilemma for online providers as one returned product might wipe out the profit margin made on the sale of 2 or 3 other products sold. Contact lenses are more suitable for online sales due to their size, and lower return rate, but their commoditisation makes it a very price sensitive market. There is also a legal requirement to verify prescriptions which is sometimes difficult as customers usually have to request their contact-lens prescription, some many feel embarrassed to do, as if their optician will likely suspect they are taking their business elsewhere. Some of these will still go online but make their purchase through a company based outside of the United Kingdom.

Independents: The forces working against independent opticians have been increasing

•

•

for some time. However, those that offer a good service and range of suitable products to their market can compete without scale economies providing they provide sufficient value. However, whilst much is placed around the professional service customers receive from their optician, it is necessary for them to also provide up-to-date equipment to satisfy their customers.

Supermarkets: Supermarkets have often looked to expand the products and services they provide within stores in an attempt to increase overall purchase sales. The optics market is an attractive market to them given the unusually highly margins compared with more commoditised products. However, most visits to the optician are planned so they are unlikely to get the same level of impulse sales as they do for other products sold. The supermarkets have sought to leverage their scale to complete more on price, in direct competition with Specsavers. It is difficult to analyse their success as there accounts do not separate optical sales. However, it appears that Asda and Tesco in particular had built up significant scale, but Tesco has now been acquired by Vision Express. Asda has reportedly been successful on commoditised products such as contact lenses but has had mixed success in the sale of glasses. Multiples: The multiples have all leveraged their scale economies to ensure they can compete on price or value, whilst maintaining a sufficient profit. Their intense drive for market share perhaps explains why they have increased their collective share of the retail market. To achieve this, all three appear to appreciate the need for a professional eye-test and the use of up-to-date technology.

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Other strategic groups could also be created such as in relation to scale and diversification.

4. As a manager of an independent optician in a competitive location, what competitive position and interactive strategies would you recommend?

This question is designed to encourage students to consider how they would compete as an independent optician. Their challenge stems from the knowledge that they will be unable to benefit from the cost economies that the multiples have, and, whilst they may be gaps in some local markets, Specsavers, who dominate this low-price division, have a long reach. An independent optician will need to find other ways to derive value at a profit. Although students may be aware of small local opticians that pitch themselves as price-leaders but it is likely they will be heavily focused on upgrades to more profitable products.

Students could initially consider their own local high-street and who the competitors are and what positioning and mechanisms they use to compete. Left with higher operating costs than the multiples, students are likely to recognise that they will need to complete on a professional eye-test, personal service delivery (as identified in the case by Jonathan Lawson) and the sale of glasses brands and lenses that have bigger margins. Indeed, it is important that students consider the basis by which customers seek eye-care and purchase eyewear, the relative product category margins, and implication for business modelling and competitive positioning. Whilst the eye-test is often used a loss leader, high price is sometimes associated with perceived higher quality and, therefore, students may wish to consider other forms of differentiation.

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Students may also recognise the opportunity to diversify into other products, markets or both, such as through the provision of hearing aids. They could also consider other growth options such as around setting up another store, going online, or acquiring another local competitor.

Scenario analysis and growth: 5. How might the retail optics industry develop over the next five years and do you think Vision Express should adapt to avoid strategic drift?

“Optics is really exciting as there are other sectors of retail that are not even considering growth as a strategy but we are.” Jonathan Lawson, CEO, Vision Express.

In terms of the industry life cycle in Figure 3.4, the optics industry appears to be at the mature phase.

It is, however, difficult to establish whether it is early within the mature stage and may still have growth, as forecasts predict, or if an unexpected disruptive technology redefines the industry in its current form and causes it to decline, as it has done for so many other retailers (e.g. bookstores). This question enables students to consider different futures for the optics industry using scenario analysis and consider options, especially around growth horizons, for Vision Express.

It seems almost certain that the demand for corrective prescription is set to grow within and across populations. However, the current market structure and competitive models may shift as new technologies streamline the professional and retails aspects of this industry.

Likely scenarios for the optics industry might include although are not limited to: •

Continued consolidation of suppliers and retailers alike.

•

Increased globalisation of supply and market provision.

•

Significant growth of emerging markets (supplier impact).

•

Increased demand for quality and fashion products in developed economies.

•

Increased technological changes impacting eye-test approach (e.g. online) as well as the means of product provision (e.g. digital printing of products).

Relaxing (or tightening) of regulation with regard to technological changes (national

•

level).

When considering growth options, it is important to reflect upon Vision Express’s existing competitive position as a differentiator to a broad market, and, whether this is the right strategy for the future. It is notable how Vision Express has had success from shifting its focus to be a provider of health services from which they retail from, rather than the other way around. As Jonathon Lawson notes, it is this mindset has allowed them to make sense of every aspect of their value chain. For example, in marketing, Vision Express’s call to action is for consumers to get an eye-test, in order to start the sales interaction, rather than simply entice consumers with low-prices or attractive products.

That is, they are focused on solutions and benefits of corrective prescription rather than product features, which are marketed at the dispensing stage. This explains why CEO, Johnathon Lawson, adapted Vision Express’s brand slogan to ‘Vision taken seriously’, which was a clear difference to the humous perspective from Specsavers.

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Whilst Vision Express faces competition from within the industry in relation to price and quality, it holds significant market share through a differentiated value proposition. It could be argued that Vision Express’s slightly more premium positioning likely restricts its reach and possibly deters some consumers from using them, particularly in comparison with Boots Opticians, and more so, Specsavers. Vision Express’ acquisition of Tesco’s Opticians may not be altering perceptions, with the possibility of making the brand appear more accessible. Therefore, Vision Express will need to be careful that its positioning Furthermore, continues to meet the demands of its market place in the face of more affordable alternatives. whilst the high-street remains an important environment, we have seen the relocation of optician’s services to out of town shopping centres, supermarkets and increasingly direct to consumer’s home through both domically care and online selling. These adaptations have in part been customer-led but the technological empowered of the internet is changing the way products, and increasingly, services, are accessed and purchased. However, it is important to note that the various product categories within optics have different facilitators and barriers to online sales. Whilst not in the case, CEO of Vision Express, Johnathon Lawson says: “The contact lens purchase journey is made for online because you have a customer segment that value convenience, speed and hassle-free interaction more than any other segments within the optics market. The product also works brilliantly for online because it goes through the letterbox. It has all the economic components to work from a customer and service delivery point of view. I believe that ophthalmic (e.g., glasses) is fundamentally harder. You need to have a customer journey that can deliver a highly competitive product in a highly convenient method quickly. The part that falls-down is the involvement of the optician in the decision-making process and fit, which results in a high returns rate and a dissatisfied customer. Returns take out the convenience and damages the economic model because, unlike a clothing retailer who has a reusable product, glasses are bespoke.”

Suggestions for Vision Express’s future strategy to avoid strategic drift will depend upon the scenarios outlined and the opportunities and threats they present. It would be helpful here if students consider an ‘applied’ SWOT, where internal strengths and weaknesses are matched against external opportunities and threats. For example, how might Vision Express’s scale help it to take advantage of acquisition opportunities, as well as overcome the threat of new entrants, such as John Lewis.

Students could also discuss what the CSFs for Vision Express will be in five years’ time. From here, it is possible to map out where they see Vision Express’s performance across these CSFs using the Strategy Canvas, and, identify if there are any blue oceans. CSFs for a company such as Vision Express, may include, although not limited to: •

Professional eye-test;

•

Dispensing and sales;

•

Product quality and range;

•

Price (and cost);

•

After-sales.

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From here, students may recognise suitable options available to them to take advantage of points of differentiation. For example, an increased demand for eye health-care linked to an aging population and struggling NHS, presents opportunities for expanding into a wider range of eye-services, which other competitors have so far ignored. Vision Express are already heavily focused around the quality and thoroughness of a quality eye-test, so this would demonstrate logical strategic fit. Students may consider the extent of existing diversification of Vision Express and consider whether they stay focused on what they do well or diversify into other areas, such as Hearing Care.

Another interesting quote by the Vision Express CEO, Jonathan Lawson, that was not included within the case shows the importance of health as a differentiator in order to remain sustainable in the optics market: “The future of optical retailing on a sustainability basis needs to push itself far more as a health provider rather than retailer of health products. From a strategic perspective, you have to ask yourself ‘what are the pushes and what are the pulls’. If all we are is a retailer on the high-street then, in effect, we are exposed to the same head-winds that most other retailers face. If you are selling a product that can be commoditised and compared on price that can be sold on the internet with lower overheads, then there is no defense and you are left wide-open.” Jonathan Lawson, CEO, Vision Express.

In relation to assess sustainability of options considered, it could also be helpful to consider the VRIO framework by Barney (1991), as well as the SAF framework to consider the fittingness, to Vision Express. Other growth concepts that could be considered in relation to this question include the Portfolio Analysis, Ansoff Matrix, Innovation, Internationalisation as well as mergers & acquisitions.

Additional notes: •

‘Glasses’ (or spectacles) are referred to as ‘eye-glasses’ in the United States.

•

Jonathon Lawson is stepping down at the end of the year – https://www.aop.org. uk/ot/industry/high-street/2018/08/10/vision-express-ceo-steps-down. New CEO Onur Köksal.

Teachers might wish to consider ‘challenges in the future for the new CEO’.

•

This case is related to the Chapter 8 Corporate Strategy case example: ‘Grand strategies in vision’. Teachers may wish to consider these two cases together.

Teachers might suggest students research local casualties in their own retail markets. For example: •

CBINSIGHTS RESEARCH BRIEFS (2018), ‘A list of major retail bankruptcies from 2015

to today’, https://www.cbinsights.com/research/retail-apocalypse-timeline-infographic/, 17th October, 2018.

• Center for Retail Research (2018), ‘Who’s Gone Bust in Retailing 2010-18?’, http://www.retailresearch.org/whosegonebust.php, September 2018.

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Students may also identify which retailers are succeeding and why: •

Vandevelde, M. (2018), ‘UK retailers tell tale of two high streets’, FT, https:// www.ft.com/content/187cb4fc-f215-11e7-b220-857e26d1aca4, 6th January, 2018.

There is an opportunity for discussion of other changes and intervention. For example, in the United Kingdom, Chancellor Philip Hammond has announced a £1.5bn boost to small High Street UK retailers in the Budget. The financial package will include £900m in business rates relief for nearly 500,000 small businesses and a pot of £650m to rejuvenate high streets and their transport links. https://www.bbc.co.uk/news/business-45998550.

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CASE TEACHING NOTES

Ricoh Canada Inc. Jonathan Fast and Prescott C. Ensign

1. Introduction and Synopsis Ricoh Canada Inc. (RCI), headquartered in Mississauga, Canada, was a fully owned subsidiary of Japanese technology company Ricoh Company, Ltd. The core problem in this case is how RCI can grow and position itself in the services market as its traditional industry, printing and copying machines and maintenance, contracts. RCI had long relied on this market and become known as the printer guys but now must shed this appearance and transition to the services market. RCI had to decide where to invest the strong cash flow from its legacy business to ensure returns for the future.

While services such as IT support and document management have large growth potential, the question of how to compete in the services industry has no clear answer.

Glenn Laverty, President and CEO of Ricoh Canada Inc. and Senior Vice President of Marketing at Ricoh Americas Corporation, aware of the changing market dynamics, made it his team’s objective to create a services strategy. He said it best with this quote: ‘The market is shifting towards services and we must not be left behind. We know that figuring this out raises more questions than answers. But the important question is still “How can we grow in the area of services?” We must examine our strengths and come up with a sustainable growth strategy, one that we can put in place that will move us forward over the next three years’.

2. Position of the Case This case is designed for use in an undergraduate or MBA strategic management course. The prevailing theme in this case is the challenges faced by an organisation when technological innovation and changes in consumer behaviour reduce demand for its products and services. This is relevant to the modern marketplace as technological innovation continues at a dramatic pace and destroys existing business models. For RCI, it is the impact of digital file sharing technologies on demand for its printing and copying machines and after-sale maintenance services. In response to the decline in demand, RCI intends to use the cash flows from its legacy business to invest in the large and growing services industry. The services industry includes a broad collection of offerings and the questions of how much, into what areas, and how to manage the change require analysis and recommendation.

The case was written to be open-ended and to simulate real-world decision making. Operating from the same position as Glenn Laverty, students should identify attractive market segments and create appropriate implementation plans. This may trigger discussions of process innovation and entrepreneurial action. Since the time frame of the case is early 2019, it is still unclear whether RCI will be successful in its expansion into the services industry. With that said, participating in strategic planning gives students insight into managerial decision making at the highest level. Many of the key concepts from ES Chapters 2 and 3 are relevant for this case.

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3. Learning Objectives 1. Identify macro-environmental trends that impact the viability of a business model using PESTEL 2.

Apply Porter’s Five Forces model and elaborate on the competitive forces in an industry 3. Describe the impact of product and technological life cycles on industries and sectors 4. Describe the impact of external factors on an organisation’s performance and strategic planning

4. Case Teaching Plan This case is best used as part of an open-ended project where students are expected to do some amount of external research. This is because the case presents a snapshot of RCI’s current situation but does not provide explicit alternatives to choose between. Although, an instructor could use this case on its own to discuss and illustrate key strategic management concepts. The project given to students should include the assignment questions listed on the next page.

The value of this case as a teaching tool is in the use of frameworks to analyse RCI’s current situation.

These frameworks include: PESTEL, Porter’s Five Forces, and SWOT. These frameworks provide a systematic way of evaluating the macro-environment, RCI’s traditional industry and the services industry, and RCI’s internal capabilities. Based on the conclusions drawn from using these frameworks, several courses of action could be recommended so long as they are in line with the analysis.

The appropriate starting point when discussing the case in a classroom is to examine RCI’s current situation and industry. It is recommended that the frameworks previously mentioned be used. It should be clear that RCI is competing in an unattractive industry and that macro-environmental trends suggest long-term decline. Next, students should assess and discuss the attractiveness of the services industry and its different segments. Finally, students can offer recommendations for the markets that RCI should enter and how it should position itself in those markets. This teaching note provides the strategy that RCI formulated using similar information. However, this strategy cannot be taken as the correct answer because it is unclear how successful RCI’s strategy will be.

5. Assignment Questions 1. What was RCI’s business model in the past, and why is it no longer viable?

2. What competitive forces are likely to impact profitability in the services industry?

3. How should RCI enter and compete in the services industry?

1. What was RCI’s business model in the past, and why is it no longer viable?

RCI’s traditional business model was called the lease and service model. The revenue structure of this model was leasing equipment on a term period and providing maintenance services during this period. This allowed RCI to maintain cash flow between hardware cycles with maintenance services and then up-sell clients to new technology at the end of lease periods. While RCI’s customers included a broad range of small, medium and large organisations, an important 242 .

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segment was large governmental, educational and medical (GEM) organisations. RCI’s main costs were purchasing the equipment it leased to customers and the operational expenses of the technical team responsible for maintenance of the machines. RCI was in a strategic group with Xerox and Canon because these organisations offered similar products and services and targeted similar customers.

The viability of this model was threatened because the printing and copying industry was in the decline phase of its industry life cycle. This meant that there was reduced demand for printing and copying hardware and the subsequent maintenance services. It was unlikely that this industry would be reinvigorated by a technological breakthrough in the near term because potential radical innovations, such as widespread commercial use of 3D printers, were decades away. Analytical frameworks provide a more detailed and systematic snapshot of the situation.

PESTEL

Political

-Liberal federal government has reduced middle-class taxes, introduced a carbon tax and expanded the immigration system -ITAC (Information Technology Association of Canada) is actively promoting and supporting the expansion of the IT services industry -Conservative provincial government in Ontario is committed to reducing spending and taxes -Key elections in 2019 are the federal election and provincial election in Alberta

Economic

-GDP growth of 1.8% in 2018 -Moderate rebound in oil prices from the lows in 2016 -Weak growth and business investment in western Canada (oil sector traditionally represents about 1/3 of private sector investment in Canada) -Poor performance of the Canadian dollar relative to the US dollar in 2018 increases the cost of importing -Renegotiation of NAFTA resulted in agreement on a new deal called USMCA

Social

-Government surveillance programs and technology companies’ practices are increasing concerns about privacy -Consumers desire one-stop shop solutions and compatible networks -Consumers are better informed when making investments in technology and purchasing services (57% are well informed)

Technological

-Increasing demand for cloud technology, mobile device networks and remote applications -Platforms are becoming more open and supporting integration with third-party applications 243 .

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-Organisations are using digital document workflow solutions instead of transporting and storing physical documents Environmental

-Provincial governments are divided on their commitment to green initiatives with several, including Ontario, opposing and challenging a federal carbon tax -Federal government is taking a strong stance on climate change and environmental protection with investments in green technology

Legal

-PIPEDA (Personal Information Protection and Electronic Documents Act) mandates strict use of personal information by organisations engaged in private sector commercial activity -Canada’s Anti-Spam Legislation (CASL) imposes strict rules for email and text messages to potential customers

Source: Internal company documents.

Porter’s Five Forces—Printing and Copying Machines and Maintenance

Threat of Entry: Low

Threat of Substitutes: High Supplier Bargaining Power: Low

-Long duration customer relationships -Large proportion of revenue from repeat customers -High upfront capital costs to manufacture high-end products at a reasonable cost -Core competitors have high brand awareness and a strong tradition of success in the industry -Core competitors have large and sophisticated research and development programs -Market size is moderate (US$5B) and contracting at 3% annually -Organisations are moving towards paperless offices using cloud technology and digital documents -Inputs into manufacturing are largely unspecialised components -Manufacturers have many options and almost no switching costs -Subcontracting stages of manufacturing may increase switching costs if the subcontractor makes highly specialised components

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-Suppliers are unlikely to forward integrate because they do not possess the knowledge and capabilities required for manufacturing Buyer Bargaining Power: Moderate

Competitive Rivalry: High

-Small differences in technology between core competitors reduce switching costs -Bundled maintenance services marginally increase switching costs -Large and diverse buyer market that is shrinking as companies reduce paper use -Customers demand products that address basic printing and copying needs and are highly price sensitive -Market size is declining for the foreseeable future -Customers do not value innovation as much as they did in the past -Difficult to gain a competitive advantage through innovation -Small number of core competitors and no clear industry leader -Differentiation between products is apparent but relatively subtle -Competitors are solidifying customer relationships to protect cash flows

SWOT

Strengths

Weaknesses

-Strong net promoter scores -Management turnover reduces organisational inertia by removing some cognitive biases -Concept of kaizen (continuous improvement) is widely shared and believed -Competent sales force that maintains relationships with a diverse portfolio of customers -Well-trained technical field team with competencies in networking -Strong cash flows and financial position -Strong brand awareness throughout Canada -RCI brand is associated with being the printer guys -Heavily dependent on the legacy business (80% of revenue) -Diversification is limited and scattered across many offerings

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-Management did not proactively respond to a changing market -Dependent on head office for manufactured products -Independent dealer network is resistant to selling services -Recent acquisitions (CL and Graycon) are not fully integrated Opportunities

Threats

-Rapidly expanding IT and services market -Use reputation for providing quality products in new markets -Expand offerings through acquisitions, partnerships or alliances -Large but highly competitive personal printer and copier market -Cost-cutting initiatives to preserve operating profit -Demand for high-end printing and copying machines is declining -Traditional industry has strong competitive forces that limit profitability -Fierce rivalry with Canon and Xerox -Organisations with superior resources compete in IT and services (e.g.

Amazon, Microsoft and Google)

2. What competitive forces are likely to impact profitability in the services industry?

Porter’s Five Forces—IT and Services

Threat of Entry: Moderate

Threat of Substitutes: Low Supplier Bargaining Power: Moderate

Buyer Bargaining Power: Moderate

-High upfront costs for technology development -Lots of repeat business because of incompatible systems -Complicated intellectual property rules -Relatively short product life cycles -Market size is large (US$24B) and expanding rapidly (some segments have growth rates over 20%) -It is unlikely an organisation would forgo this technology and store and transport physical documents -Computing hardware is largely commodified, reducing the costs of changing components -Recruiting talented knowledge workers is difficult because of the number of firms with substantial resources competing for their services -Large companies such as Google, Amazon and Microsoft offer attractive benefit packages and on-the-job perks -Many possible providers of IT and services -High switching costs for different systems 246 .

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-Switching costs grow over time as systems become larger and more interdependent -Customers are unlikely to make IT tools in-house because it is an inefficient use of firm resources -Large and diverse population of buyers Competitive Rivalry: Moderate

-Several large competitors that possess significant market share and strong product development capabilities (e.g.

Google, Amazon, Microsoft and IBM) -Many organisations want to diversify by entering and growing their presence in this industry (e.g. RCI, HP, Xerox and Canon) -Rapid technological change erodes competitive advantages -Reverse engineering and imitation limit sustainability of competitive advantages -Many different high-growth segments and unique products and services

RCI defined services as a combination of on-site and off-site solutions that supported business operations. For simplicity, we establish industry boundaries based on this definition. This industry includes IT and professional services and legal and managed services.

Several competitive forces likely limit profitability in the IT and services industry. One important force is competitive rivalry because of the number of resource rich competitors and rate of technological innovation. This means that any competitive advantage is likely to be short-lived and innovative products are at risk of being quickly reverse engineered. So, in order to sustain a competitive advantage, an organisation can develop superior research and development capabilities that allow it to continuously create new and innovative products. Alternatively, it may develop superior capabilities at identifying, acquiring and integrating smaller companies that have valuable technology.

This competitive force is partially mitigating by the industry’s large size and high-growth rates (e.g. cloud computing). Further, the broad range of offerings means that there continues to be attractive positions within this industry that face weaker competitive pressure. These profitable niches are termed ‘Blue Ocean’ areas because an organisation entering them faces little competition and could quickly gain traction and establish entry barriers. These attractive regions may disappear as technologies converge and dominant designs take root.

3. How should RCI enter and compete in the services industry?

The logic behind RCI’s services strategy is well expressed by Glenn Laverty: ‘We are trying to integrate services that are a natural progression of our legacy business. We are not trying to uproot something like IBM’s server business. If anything, we would want to partner with them to provide a platform for our software’.

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RCI has several resources that can ease its expansion into services. To begin, RCI has a valuable brand and a reputation for positive interactions with customers. This can reduce uncertainty for buyers concerned about their provider’s quality and continued functionality. Further, RCI maintains positive relationships with many of its customers that were nurtured over years of working in a business-tobusiness sales environment. These customers are ideal targets for initial services offerings because RCI has internal contacts and a history of valued interactions with each of them. Selling services to existing customers would also allow RCI to gain a swift and solid foothold in the industry.

RCI is expanding its presence in services through a combination of acquisition integration, focused sales force effort and expanded offerings. To begin, Graycon is no longer an autonomous division and is now operating under the RCI brand name. This facilitates the cross-selling of IT infrastructure to customers outside western Canada. The targets for cross-selling are small- and medium-sized businesses needing support in systems back up, security and remote monitoring. Further, RCI is targeting customers in healthcare because it is historically paper intensive and quickly transitioning to digital documents. Hospitals and other health organisations are already late adopters of digital database technologies and need a provider to digitise documents and create a platform for storing and retrieving those documents. RCI can use its technology and capabilities in creating digital databases and workflows to satisfy this need. An additional benefit of targeting healthcare organisations is that they are likely familiar with RCI after years of using printing and copying hardware. Finally, RCI is developing technology to optimise the processing of accounts receivable and accounts payable. The current process in many organisations is slow and labour-intensive as employees must collect cheques, manually update company records and then cash cheques. RCI’s future offering will streamline this process by collecting cheques and then scanning them to automatically update company records and execute transactions.

RCI’s executive management team targeted overall revenue growth of 9.82% and operating profit growth of 3.23% in 2019. The important services segments, IT and professional services and legal and managed services, were predicted to grow at 55.14% and 16%, respectively. RCI also established a goal for revenue of $750m in 2021 with 32% coming from the combined contributions of IT and professional services and legal and managed services.

RCI’s 2019 financial forecasts were as follows:

Income Statement

2019

Year over Year Growth

Revenue Hardware Sales

201,818

11.32%

Key and Geographic Accounts Major Accounts

90,979

5.50%

75,065

16.80%

Strategic Accounts

15,223

11.24%

Dealer Sales

20,551

20.07%

Rental, Affiliate and Other

10,999

-9.21%

Parts, Supplies and Paper

42,672

-0.77%

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Technical Service

177,452

-2.00%

IT and Professional Services

75,710

55.14%

Legal and Managed Services

64,463

16.00%

Total Revenue

573,114

9.82%

Total Gross Profit

178,266

6.47%

Sales

62,580

6.25%

IT and professional services

17,464

21.69%

Legal and managed services

4,994

10.63%

Dealer

3,580

9.86%

Marketing

11,377

17.45%

Other

47,871

1.24%

Total Expenses

147,866

7.16%

Operating Profit

30,400

3.23%

Expenses

Financial Results:FY2019, Ricoh

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CASE TEACHING NOTES

H&M in fast fashion: Continued success?

Patrick Regnér and H. Emre Yildiz

1. Introduction This case describes H&M’s resources and capabilities and enables students to evaluate to what extent the company has competitive advantages derived from these resources and capabilities and if they can be sustained. It raises key issues to consider when evaluating competitive advantage and the sustainability of competitiveness. The case allows students to analyse and think carefully about the criteria for organisational resources and capabilities to provide for sustained competitive advantage.

Apart from a general case update, it has specifically been updated on the industry’s digitalisation and ecommerce side and thus on new significant online competitors such as Zalando and Asos.

The case begins with a brief description of the apparel industry including a description of H&M’s main competitors. From this, it is apparent that the industry is extremely competitive (competitive/ five force analysis would reveal that all five forces are strong) and that there are some serious competitors to H&M, of which Inditex/Zara is the strongest, but where the new online players pose an increasing threat as well. This section serves as a basis for comparison of H&M with their rivals in terms of both their positioning and business models and their financials (Figures 1 and 2). This is helpful in the further evaluation of H&M’s resources and capabilities (this can be expanded to encourage students to use online resources to gain deeper idea about the competitor’s resources and capabilities). Next the philosophy and culture of H&M is described including the company’s history, values and culture. The bulk of the case then describes H&M’s functions and activities along its value chain. Finally, the last section describes H&M’s international and online expansion.

2. Position of the case This case outlines H&M’s resources and capabilities and is designed to introduce the evaluation of competitive advantage and its sustainability (Chapter 4 in Exploring Strategy). It allows for a careful evaluation of resources and capabilities in different functions of H&M and an analysis of possible competitive advantages in these.

The case can be used both as an introduction to the evaluation of resources and capabilities and competitive advantage, but also as a basis for learning the intricacies of various techniques that help categorise and analyse competitive advantages (Section 4.2.1, Table 4.1; Section 4.2.2, Table 4.2; Section 4.3, Figures 4.2 and 4.3, Table 4.2 and Section 4.4.2, Figures 4.4 and 4.5). The emphasis is not only on individual resources and capabilities but also on linkages in between various functions of the company and with other actors in the value system. In addition, H&M’s rapid internationalisation process is also described in the case and can be used to understand and apply international strategy concepts (Chapter 9).

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Overall, the case describes how H&M’s unique concept, business model and ability to combine elegant designs with affordable prices have been instrumental for this Swedish fashion retailer to enjoy competitive advantage over its rivals. Nevertheless, the case also describes how some of these resources and capabilities have been imitated and even superseded by H&M’s competitors. Besides large multinational competitors, new online retailers pose a real threat. The aim then is to evaluate to what extent H&M still has a competitive advantage, in what functions/activities this advantage is located, whether it can be sustained and what H&M can do to respond to the competitors that are catching up.

3. Learning Objectives The case is designed to help students to: •

understand what resources and capabilities are and the fundamentals of competitive advantage;

•

evaluate competitive advantages, their sources and to what extent they can be sustained;

•

comprehend how competitive advantages can be evaluated through various techniques;

•

undertake an analysis based on the VRIO framework and appraise the sustainability of competitive advantages based on this analysis; explore how a company can develop and protect its competitive advantage(s) and

•

•

examine and assess the basis for international strategy.

4. Teaching Scheme This case can be used as a basis for classroom discussion in a plenary session or as a basis for group work. The approach naturally depends on the context and time availability. It can be used as an early introduction to resources and capabilities and competitive advantage, but the case is also detailed enough to be used as the basis for more advanced work and assignments. As indicated above, the case can be used together with additional material like web-based information on H&M’s competitors or other case studies.

One way to teach the case is to divide the class into groups so that each group can evaluate one function or area of H&M in detail (e.g. the different sections/functions in the case). This can be done through group work and presentations and maybe hand-ins. In this way, all of H&M’s resources and capabilities and functions would be carefully scrutinised and yet the whole class would get an overview of how to evaluate each part. However, it is essential to emphasise that H&M does not have competitive advantages in all functions. Equally important is the point that H&M may not be able to sustain its competitive position even where it has an advantage vis-à-vis its competitors.

An alternative approach is to divide the class into two groups in a role-playing exercise. One group could assume the role of H&M corporate management and defend the competitive advantages in their resources and capabilities whereas the other group could act as investors and analysts (or alternatively Inditex/Zara, as the main competitor and/or Zalando and Asos as online competitors) and try to challenge the other group’s position in the light of Inditex’s/Zara’s and/or online player’s recent success.

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5. Questions for Discussion 1. In which areas does H&M have significant resources and capabilities, and what are they? What are H&M’s threshold and distinctive resources and capabilities? What are the implications of these resources and capabilities for H&Ms international strategy?

2. In what areas and functions does H&M’s resources and capabilities provide for competitive advantage? To what extent can they be sustained? To what extent can other fashion retailers be successful in imitating H&M’s success? Which competitor(s) is/are/will be a real threat to H&M (brick and mortar and online)? Why? 3. What should H&M and CEO Karl-Johan Persson do to sustain and further strengthen H&M’s competitive advantage? What should they do about areas with only temporary advantages and competitive parity? Are there areas where H&M need to develop further capabilities, for example online, and, if so, in which areas/functions?

6. Case analysis 6.1 Synopsis of H&M’s strategy and competitive position An initial step in the class discussion is to get the students to realise the real competitive threats H&M is exposed to. The company has been tremendously successful in fast fashion and has a range of resources and capabilities. However, H&M now also faces some challenges that need to be evaluated.

An important point here is to make clear that resources and capabilities and their competitive advantage are evaluated relative to competitors (see Figures 1–2 in the case). The key points of H&M’s success and the company’s challenges are outlined below: •

The roots of the H&M ‘spirit’ can be traced back to 1940s when the first store was opened

by Erling Persson, whose legacy and philosophy for keeping business simple is still influential in the corporate culture.

•

H&M relentlessly continues to emphasise the long-term view and expansion story. In that regard, successful replication of its business model is key to the survival of the Swedish fashion retailer.

•

The business model, commonly referred to as fast fashion or ‘cheap-and-chic’, emphasises

•

high fashion at prices significantly under those of competitors. While H&M pays special attention to having the right design team to capture and respond to the market trends, the cost advantage is getting threatened by rising input prices and rivals with lower cost structures.

The flat and simple organisational structure has also been more challenging to preserve due

•

to H&M’s tremendous growth.

Another possible challenge is that H&M is lagging behind its main competitor in key emerging markets in Asia and South America, which contributed to H&M falling behind Zara in terms of market capitalisation.

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•

The threat from new pure online retailers such as Zalando, Asos, Amazon and Alibaba is also

•

a serious potential challenge.

Thanks to its long-term advertising campaigns with high-profile celebrities, H&M enjoys a clear brand recognition and reputation advantage over its major rivals like Zara and Gap. Conceivably, however, this is something that rivals could copy.

From the points highlighted above (and explained in detail in the case), students should be able to grasp the way H&M has positioned itself vis-à-vis its competitors. The crucial question is the extent to which this position is defendable and sustainable in the long term.

6.2 Assessment of H&M’s resources and capabilities (Question 1) Based on the distinction between resources and capabilities (Table 4.1), students can distinguish H&M’s resources and capabilities. The overview below includes some of the resources and capabilities that may come up in a discussion. The following can be considered resources possessed

by H&M: •

Physical facilities – These include, for example, production offices (which are primarily responsible for coordinating with commissioned and approved suppliers and factories across the globe), distribution centres and warehouses. As noted in the case, H&M does not own any of its stores and the company always outsources its production to approved apparel manufacturers.

•

Intangible assets – These include the H&M brand name, which has strong reputation/equity, and IT systems, which are continuously improved in order to ensure supply and demand match and to monitor customer needs and preferences based on sales patterns.

•

Human resources – These include strong leadership, that is, three generations of the Persson

•

family whose legacy and influence is key to H&M’s culture, as well as committed and highly motivated workforce, whose personal qualities matter much more than formal qualifications and credentials.

Financial – The long-term commitment by and majority ownership of the Persson family provide a strong financial foundation for H&M. In addition, the financial results and ratios still look positive although some shareholders complain about decrease in total shareholder returns (see Tables 1 and 2).

H&M also has the following capabilities: •

•

Culture – The business model of H&M is aimed to deliver latest fashion at best price, in a simple way and through committed workforce. To deliver this, H&M relies on its strong culture where values and norms such as employee involvement, experimentation, pace, informality, initiative taking and decentralisation are highly encouraged and praised.

Replication – As far as H&M’s growth strategy is concerned, replication is the most important competence the company relies upon. In order to open up sufficient number of new

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stores each year, H&M minimises the use of formal rules and procedures and instead prefers

• •

to equip its employees with tacit skills via experiential learning in the field. This way, the ‘spirit’ is replicated at a faster pace with minimum variability. H&M has tried a similar approach online, but with different skills.

Design – Centralised design activity not only enables faster response to ever-changing market trends in fashion but also ensures that H&M can remain novel and original.

Store concept – H&M always prefers to have its stores at the best business locations and makes sure that the window displays are periodically changed and updated to receive continuous customer attention. Furthermore, internal design of the store is arranged in a way to give to most convenient in-store experience for customers. Besides new online stores (47 markets in 2018), they have lately also experimented with in-house coffeehouses and tailors, rental fashion, second-hand and vintage clothes and ‘upcycling’ and recycling.

Marketing and CSR – H&M uses conventional marketing channels to create high brand

•

awareness as well as social media to follow and collect customer feedback and suggestions.

Corporate social responsibility is a key competence for H&M, given that the textile/apparel industry is under constant public scrutiny and that H&M is one of the more visible actors in this market.

The classification above is important and useful to understand H&M’s resources and capabilities, that is, separately identifying the resources and capabilities. Following this, students need to appraise the importance of these resources and capabilities. This includes a thorough evaluation regarding the extent to which H&M’s resources and capabilities yield superior position compared to its competitors. An initial approach is to distinguish between threshold and distinctive capabilities (Section 4.2.3). The overview below shows a listing in this respect of H&M’s resources and capabilities. It is essential at this stage to start to consider the relative strength of H&M’s resources and capabilities and to what extent they do things differently compared to their main competitors.

Resources

Capabilities

Threshold Resources

Threshold Capabilities

• Required to be able to • compete in a market (same as competitors’/easy to imitate)

Required to achieve competitive advantage (better than competitors’/difficult to imitate)

Physical facilities Financial

• • • •

Distinctive Resources • Intangible assets • Human resources

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Distinctive Capabilities • Culture • Replication

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6.3 H&M’s sustainable competitive advantages (Question 2) Even though resources and capabilities have been listed in terms of resources and capabilities and have been evaluated through the lens of their threshold and distinctive character, there are more specific ways to analyse competitive advantages and to what extent they can be sustained. To that end, the VRIO framework (Section 4.3, Table 4.2 and Figure 4.2) can be used as an effective tool. It is important here to evaluate resources and capabilities at the right level of analysis. While bits and pieces of resources and capabilities may be imitable, it is the linkages between them that render these resources and capabilities unique and inimitable. This suggests that the focus should not be on minor individual parts, but on how diverse activities and processes are related and combined and form resources and capabilities that are protected from imitation and thus provide basis for sustained competitive advantage.

Several central and interrelated questions should be raised here: Why is H&M superior in a particular functional area compared to competitors? Why do they have sustained competitive advantage in this area despite the extreme competition? How come they achieved this superior capability in the first place? What practices, activities and linkages is it based on?

Major resources and capabilities and functional areas of H&M are assessed using the VRIO framework in Table 1 below. It is important to re-emphasise the importance of the relative nature of competitive advantages and a VRIO evaluation should always be done relative to competitors. The comparison can be made in various ways. For example, students can assess the overall competitive position of H&M generally vis-à-vis all its possible competitors worldwide or specifically relative to all the main competitors covered in the case (i.e. Zara, Gap, Uniqlo and online retailers Zalando and Asos; Tables 1 and 2). Alternatively, students can be asked to conduct a more focused analysis by assessing the competitive position of H&M compared to only one key competitor (e.g. Zara) or one pure online competitor (e.g. Zalando). The more specific this comparison gets in relation to the leading competitor the more likely that H&M’s position will appear weaker.

Strategic Capability/

Valuable?

Rare?

Supported by the Costly to Imitate? Organization?

Yes

Function Culture and leadership HRM

Replication/ Internationalisation Brand and Market position

Competitive Implications

Yes

Yes

Yes

Sustained

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

Yes

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Competitive Advantage Sustained Competitive Advantage Sustained Competitive Advantage Sustained Competitive Advantage

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Design

Yes

Yes

No

Yes

Purchasing

Yes

Yes

No

Yes

Store operations

Yes

Yes

No

Yes

Supply Chain Management Finance

Yes

No

-

Yes

Yes

No

-

Yes

Temporary Competitive Advantage Temporary Competitive Advantage Temporary Competitive Advantage Competitive Parity Competitive Parity

Table 1. The VRIO framework and analysis The key points in this VRIO assessment can be summarised as follows: •

H&M derives much of its sustained competitive advantage from its unique organisational culture and related human resource management, its ability to replicate the same store concept worldwide and its overall strong brand and market position. All of these areas are deeply embedded in H&M’s business model, have a rich historical background and date back to the very beginning of the company. For example, the organisational culture in H&M is heavily influenced by the strong personality of founder Erling Persson and became inherited as he was succeeded by second- and third-generation CEOs from the same family. These leaders managed to uniquely position the H&M brand as being equal to high fashion with quality at low prices; virtually redefining the fast fashion segment of the apparel industry. The H&M spirit and values developed by these leaders are central in recruiting and training new employees around the world. H&M is thus able to successfully replicate its culture and business concept in different stores around the globe, which enables the company to grow at a steady rate. Hence, there are clear linkages between culture and leadership, HRM, the brand and market position and replication. All this makes these capabilities rare and difficult to imitate. The track record of H&M also attests to the fact that its unique culture, leadership and the HR practices of H&M are valuable resources and capabilities, which give the company a sustainable strategic edge.

•

There are also some other areas in which H&M enjoys competitive advantage over its rivals, but where long-term sustainability of its position is only temporary. For example, both their particular and flexible store layout and their unique design collections are valuable and rare resources and capabilities. However, H&M’s competitors (e.g. especially Zara) have similar capabilities for catching/shaping fashion trends as well as opening up stores in popular locations and designing window displays and interior layouts in a way that provides a convenient and appealing shopping experience to the customers. Purchasing is another area in which the competitive advantage of H&M can be regarded as temporary. While H&M still has buying power thanks to the huge size of its purchases, similar sized and larger competitors receive the same benefits. Also, today it is relatively easier to build smart IT systems to coordinate global value chain purchasing activities. Furthermore, the large number of small256 .

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and medium-sized vendors and suppliers enable fashion retailers of various sizes to have buying power during negotiations. Similarly, increasing input costs (e.g. cotton) affect fashion companies equally.

•

In certain support functions, H&M is at competitive parity with its competitors. These include supply chain management (SCM) and finance. For instance, H&M has a sophisticated SCM system, which makes it a valuable resource. However, the resources that SCM is built upon (i.e. IT systems, warehousing facilities and logistics systems) are readily available for anyone to acquire. The capabilities required to effectively run the SCM system are also increasingly available from IT companies and SCM specialists even though it may take some time to build them. Some also claim that Zara’s SCM system is in fact superior to H&M’s. Although the Persson family provides financial stability, this is also the case for H&M competitors. In brief, these are resources and capabilities where H&M is on a par with competitors, and it is difficult to see how they would be able to get ahead and gain a competitive advantage. The marginal benefit of making additional investment into these capabilities would be minimal.

The VRIO exercise will show that there are some instances where it is difficult to make the exact distinction between what is sustainable or temporary, or between what is a temporary advantage or competitive parity. For such instances, the focus should rather be on what the primary tendency is. For example, in store operations, H&M has a temporary advantage, but as competitors are catching up this strategic capability gets closer to competitive parity. Similarly, H&M still has sustained competitive advantages as regards brand and market position, but as competitors become stronger, this moves towards more of a temporary advantage. In fact, the diverse resources and capabilities in Table 1 above are ranked in order of competitive advantage. One way to approach this is to have students include two adjacent steps in the VRIO framework for these marginal cases and explain their reasoning (see an example of this in the Instructors Manual; the case example in Chapter 4 – Rocket Internet). For online resources and capabilities, the jury is still out even if H&M has been quite remarkable in rolling out online globally and with surprising profitability compared to the main online rivals. The online question could thus be discussed more openly and hypothetically with students building on their own experiences and thoughts.

6.4 The future of H&M’s competitiveness (Question 3) Following the assessment of H&M’s competitive advantages, students need to consider how H&M and its CEO Karl-Johan Persson can sustain and further strengthen the resources and capabilities where the company has competitive advantages. The main question, however, is how H&M can turn its temporary competitive advantage (and the areas of competitive parity) into a more advantageous and sustainable position. In that regard, students can be asked to find ways with which H&M can mitigate risks associated with the erosion of competitive advantage due to imitation.

However, it is important to emphasise that H&M’s competitive position not only depends on its own management of resources and capabilities but also what their competitors do and how the environment changes, for example, online retailing. In this respect, students could consider new possible resources and capabilities H&M can develop new or new ways of managing existing resources and capabilities, maybe online resources and capabilities. H&M started out as a small player with creative and imaginative ideas about the fashion industry and shaped new and unprecedented resources and capabilities in this industry. As a final exercise, it can be discussed if H&M could possibly do this 257 .

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today and what those novel capabilities might look like. For example, their experimentation with inhouse coffeehouses and tailors, rental fashion, second-hand and vintage clothes and ‘upcycling’ and recycling clothes could be discussed – will these be a success and what are the required resources and capabilities behind these and can H&M build competitive advantage in them? H&M’s pioneering resources and capabilities also raises the question whether sustained competitive advantages (culture, HRM, market positioning, etc.) were created based on strategic analysis/insights or if they were the result of serendipitous events (this issue is also related to Chapter 13 and strategy development).

6.5 The value chain and value system Depending on the availability of time, students could also be asked to draw a value chain for H&M and identify its primary and support activities (Section 4.4.2, Figure 4.4). Students should know that this exercise needs to cover all primary activities (i.e. inbound logistics, operations, outbound logistics, marketing and sales and service) and an assessment of the relative importance of each of these for H&M’s operations. For example, students might be asked to think about which of these primary activities represent the ‘weakest link’ for H&M’s global value chain. Accordingly, students can discuss possible ways for improvement in areas where H&M only has temporary advantages or is at par with competitors. A similar exercise could also be done for support activities (i.e. firm infrastructure, human resource management, technology development and procurement). Here, students could be asked to assess which of these support activities are imperative for H&M and which others play a minimal/indirect role. In particular, the linkages between various activities, not the least between support and primary activities could be analysed.

As a next step, the whole value system could be evaluated (Figure 4.5). This analysis is particularly interesting in the light of H&M’s competitive parity as regards supply chain management.

6.6 H&M’s international strategy The primary focus of this case is to analyse resources and capabilities and their potential competitive advantage. However, internationalisation into foreign markets and replication play a central role in H&M’s overall strategy. This suggests that this case can also be used in evaluating and discussing international strategy (Chapter 9, Section 9.4). For example, the four types of international strategy (export, multidomestic, global and transnational, Figure 9.4) can be discussed and, in particular, what strategy H&M pursues.

‘Cheap-and-chic’ is an essential element in H&M’s overall business model. Therefore, the company is under constant pressure to keep its cost structure under control. Pressures for economising are getting even stronger with increased competition coming from companies from emerging economies.

In order to lower costs, H&M centralises much of supply chain management, purchasing and procurement systems. In addition to that, the company uses standardised design collections, store concept and HRM practices across the globe. All of these are successfully used to minimise costs and implement international replication.

Thus, it is clear that H&M defines its strategy based on high pressures for cost minimisation and low pressure for local responsiveness. Students can be asked to question the viability of this and the extent to which ‘global strategy’ can successfully be pursued in the long term. Several themes/questions can be brought up in order to stimulate in-class discussion:

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•

•

•

H&M is still yet to establish full presence in Asian markets, where additional adjustments and adaptations to domestic demand preferences in terms of design collections might be required. Thus, H&M might start to feel stronger pressures for local adaptation, and this may render ‘global strategy’ a less viable option in the future. If that becomes the case, how should H&M redefine its approach to offering standardised collections to global markets? Would sub-collections designed and offered at regional level be a feasible solution?

The flat and non-hierarchical organisational structure of H&M makes it possible to grant higher autonomy to different subsidiaries and stores all around the world. This higher autonomy is often considered an essential prerequisite for higher local responsiveness. Thus, H&M has what it takes to be more locally responsive but is it viable to go after this possibility at the expense of integration benefits?

Growth through replication is central to H&M’s business model. What are the limits to that?

To what extent can the same business concept be successfully replicated across different countries with different cultural values and institutional contexts? These questions are especially valid since markets in which H&M is doing business are getting more and more heterogeneous. Also, to what extent can they build on extant resources and capabilities for online replication and does H&M have a competitive advantage in these compared to competitors and local players?

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Strategic Capability/ Function

Supported Valuable?

Rare?

Yes

Yes

Culture and leadership

Costly to Imitate?

by the Organisation ?

Competitive Implications

Yes

Yes

Sustained Competitive Advantage

HRM

Yes

Yes

Yes

Yes

Sustained Competitive Advantage

Yes

Yes

Yes

Yes

Sustained Competitive Advantage

Yes

Yes

Yes

Yes

Sustained Competitive Advantage

Yes

Yes

No

Yes

Temporary Competitive Advantage

Purchasing

Yes

Yes

No

Yes

Store operations

Yes

Yes

No

Yes

Temporary Competitive Advantage

Supply Chain Management Finance

Yes

No

-

Yes

Yes

No

-

Yes

Competitive Parity Competitive

Replication/ Internationalisation Brand and Market position Design

Temporary Competitive Advantage

Parity

Table 1. The VRIO framework and analysis

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CASE TEACHING NOTES

The Formula 1 Constructors Mark Jenkins

1.

Introduction

This case enables students to explore sources of competitive advantage using the context of Formula One (F1) motorsport. The case highlights the ways in which five particular F1 teams created situations of competitive dominance for a sustained period. It allows the students to consider individual teams and the generic issues needed to succeed in this specialised context. The case is organised into seven parts. The first is a brief overview designed to give those unfamiliar with F1 some understanding of its history and structure. This is followed by five detailed descriptions of particular periods of dominance by an F1 team. The case concludes with a section summarising some of the key questions and challenges facing the teams going forward.

The introduction to the case describes the overall nature of Formula One motorsport and its origin in Europe after World War II. It identifies some of the central aspects of being an F1 constructor, such as the need to generate sponsor revenues through increasingly sophisticated marketing strategies, and also the need to design, develop, manufacture and race open-wheel single-seat racing cars. (Note: the term ‘constructor’ differentiates F1 from other racing series in which race teams compete with bought-in racing cars.) F1 constructors are effectively in the business of designing and constructing prototypes – each car being unique to each constructor but within a set of pre-defined rules that cover weight, dimensions and other basic parameters. The introduction also makes reference to the nature of the motorsport cluster in the UK, a phenomenon similar to that of Silicon Valley in California. In 2018, eight of the ten F1 teams had operations located within this specialised cluster, all within a 50-mile radius of Oxford in the UK. This provides an opportunity to connect to issues of location and national/regional competitive advantage.

This is followed by five accounts of sustained competitive advantage (here we define sustained as three or more consecutive years of dominance) featuring McLaren in the late 1980s, Williams in the mid-1990s, Ferrari from 1999 to 2004, Red Bull Racing 2010–2013 and Mercedes AMG F1 2014– 2018. Each account explores the background to the constructor, from the formation of these entrepreneurial businesses through to their development into a world-class organisation. The focus is on the build-up to their period of competitive advantage, but each case also then relates to the loss of the advantage for the constructor in this period, where the discussion may usefully be directed as to what may cause the loss of competitive advantage. The final section of the case summarised some of key strategic questions raised by the cases.

2.

Position of the case

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competitive advantage, that is, that the resource-based view requires a constant reference to the resources and competence of competitors in order to define competitive advantage. These issues are examined in Exploring Strategy, Chapter 3.

The case was designed to be used on an MBA programme where students consider the application of the resource-based view in order to ‘unpack’ sources of advantage. The case has also been successfully used on final-year undergraduate programmes and also for executive development in helping managers explore the nature and location of sources of advantage.

3.

Learning objectives

The overall learning objectives can be summarised as follows:

•

To understand that although strategy can be seen as generic at a high level, it will always be idiosyncratic at the organisational level, even where organisations are in the same industry and all have the same goal. Therefore, strategic management has to focus on the idiosyncratic characteristics of every organisation in order to develop a strategy that will work in this context.

•

Strategies that are based on highly mobile resources (e.g. individual drivers, designers or engine suppliers) need to focus either on finding ways of locking in these resources, or on building competence to allow them to continually find and acquire new ones.

•

While highly complex and idiosyncratic resources are particularly difficult to imitate (e.g.

Ferrari) they are also difficult to manage and vulnerable to changes in the environment or a loss in any of the elements.

•

•

Sustained advantage is often achieved through the linkages between resources rather than the resources themselves (e.g. the way drivers link with the design engineers).

A shift in the environment can suddenly change the value of particular resources; an external view is therefore fundamental to sustaining advantage.

It can also raise the point that advantage can be created by luck: a fortuitous combination of resources or a lucky event in the environment. This can be used to develop the debate about whether managers influence strategy or just post-rationalise their luck in strategic terms.

4.

Teaching process

•

There are a number of different ways in which the case can be used. It works particularly well in situations where the participants spend some time in group work before discussing the case, such as an MBA programme. The usual way to apply the case would be to allocate separate syndicate groups to consider one of the five teams and their competitive advantage. A series of questions are used to guide the way in which the students approach the case.

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The recommended approach is to start with each syndicate presenting their responses to the case questions (see below). At the end of each syndicate, the instructor would summarise the key points on the board, using four columns, one for each account of sustained competitive advantage. As each group presents, the instructor will finish up with a quite distinctive set of key words under each. This enables the session to move on to the learning points. The way this is handled will depend on learning maturity, but it is best to simply ask the plenary session what similarities and differences they see between the five accounts. Put these up on the board and then go on to ask what conclusions they would draw from these. This will take the discussion into the notion that while at a high level strategy might be generic, at a management level – in terms of the resources that managers actually focus on – it is highly idiosyncratic and organisation specific.

5. Questions for discussion

1. What do you need in order to succeed in Formula One? 2. Why you think your team were successful during this period?

3. Why were they unable to sustain this success? What could they have done to sustain their success further?

6.

Case analysis

This section offers a number of suggestions for discussing the above questions and exploring related issues.

Relevant sections in Exploring Strategy are indicated in brackets.

6.1 What do you need in order to succeed in Formula One? This question is intended to get the students to identify the generic model needed to succeed in this industry. At a very simplistic level, this can be described as having unique resources [see Section 3.2.1] such as the best driver, the best car (achieved by bringing together the chassis design and engine technology) and the best supporting team, which provides race tactics, pit stops etc. All of this is supported by finance, which comes from the ability to attract and retain sponsors (this is less important for Ferrari, who are owned by Fiat). This discussion can be developed by discussion as to what ‘best’ means, and how this is created. It raises issues about separating the causes for success from the effects of success: was Ron Dennis the cause of success for McLaren? Or is this a perception created by the fact that he happens to manage a successful team?

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6.2 Why you think your team were successful during this period?

We now move from the generic level of success to consider the specifics of each team. The issues raised will be attributed to personalities, but it should also be about the ways in which different teams approach the task of winning the championship.

McLaren and Honda domination in the late 1980s McLaren team were successful because they were able to put together the best of everything. They secured exclusive use of the Honda engine at a time when it was the most powerful and reliable; they were also able to secure the services of the best drivers at the time (Senna and Prost). This was due to the high level of funds made available by sponsor Philip Morris. Another issue that often comes up is the commercial and leadership skills of Ron Dennis.

An interesting area for discussion here is their decision to recruit the two best drivers. Was this a good idea or did it create more problems than benefits? It raises the question of locking in resources not just to maximise your own team’s performance but also to deny your competitors access to them.

Williams and the technological revolution: the mid nineties Williams’ success was due to their engineering focus, which enabled them to take many of the innovations developed by other teams and turn these into a car that was both fast and very reliable.

This engineering focus can be attributed to the long-standing partnership of Frank Williams and Patrick Head. Williams were notable in their disregard for drivers and their attention to building a wide-ranging relationship with their engine supplier Renault.

This discussion raises issue around the different choices which firms have in terms of the kinds of resources on which they focus. From one aspect, Williams’ strategy makes a great deal of sense in that they are more able to appropriate the benefit of engineering resources, whereas driver resources are highly mobile.

Ferrari: the return to glory: 1999–2004 This account is in marked contrast to the Williams approach in that Ferrari based their resource strategy primarily around driver Michael Schumacher. The usual conclusion here is that it is all down to Schumacher, but closer examination reveals this not to be the case. Whilst Schumacher was undoubtedly a key element in the success, he probably would not have achieved it without the rebuilding of the technical team and their close partnership with Bridgestone tyres.

An interesting area for discussion is to compare how Ferrari’s success in this period is different from their previous period of success (mid-1970s). This draws out the importance of being able to implement change as being a key part of competitive success.

Red Bull Racing: A new formula for success: 2010–2013 One of the interesting aspects of the Red Bull story is that they took over one of the most expensive and least successful F1 teams of all time – Jaguar Racing. It is worth a discussion as to what the class 264 .

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feels was different about the way Red Bull went about doing things, and in particular, the way the Red Bull Brand underpinned their approach to F1.

One of the critical areas that Red Bull have always focused on is driver talent, going right back to the Red Bull Juniors where young drivers are supported at an early stage in their career. Interestingly Red Bull were doing this before they acquired the F1 team, and it seems like their main focus was developing talent, and the racing team was simply a means to do this. Another key aspect to the Red Bull success is the recruitment of Adrian Newey. It underlines the importance of timing in that while at Jaguar Racing Bobby Rahal was unsuccessful in getting Newey to join the team, but Red Bull was.

It is also worth noting the speed at which they could respond to his demands, with Horner getting an instant response from Mateschitz. A question would be whether or not this could have been matched

by Jaguar Racing, and if not, why not?

Mercedes AMG F1: Building on the Ferrari model: 2014–2018 The Mercedes approach is interesting in that it effectively is a direct copy of the Ferrari philosophy, the focus is very much on ensuring that all the areas of the car work together in order to create a dominant situation. There are a number of areas for discussion here: •

Should McLaren have allowed Brawn to use Mercedes Power Units in 2009? If they had not, they would probably not have been able to compete and therefore would not have been purchased

by Mercedes and become such a dominant force, while with the loss of Mercedes power McLaren have faded to the back of the grid.

• Was it a good thing that both Toto Wolff and Niki Lauda took at 40% share in the new team?

What impact would this have on their motivation and relationship with Daimler – who had the remaining 60%?

• Why was Ferrari not able to beat Mercedes at this approach? The answer appears to be partly around the potency of the Mercedes power unit, which was superior to that of Ferrari, but although other teams had the same power unit they weren’t able to provide the complete package that Mercedes became.

How important was Lewis Hamilton who left McLaren to join the (then) less-successful Mercedes • team, but clearly he made a good decision and was himself able to contribute to the performance of Mercedes in recent years.

6.3

Why were they unable to sustain this success? What could they have done to sustain their success further?

Here the students will focus on the reason why the advantage was removed. This also allows them to consider whether or not anything could have been done to prevent this loss of advantage.

McLaren and Honda domination in the late 1980s The reasons for McLaren’s demise were very simple. Honda pulled out of Formula One. This in turn broke the virtuous circle that attracted the best drivers, and Ayrton Senna moved to Williams.

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This raised the question of what value McLaren themselves generated, as the key to success seemed clearly to reside in Honda engines and the skills of Ayrton Senna, both of which were relatively mobile resources.

In terms of what they could have done, there is certainly evidence to suggest that McLaren chief Ron Dennis should have considered the possibility of a Honda withdrawal more seriously. It illustrates how phenomenal success can blind management to the possibility of change.

Williams and the technological revolution: the mid nineties In the case of Williams, their advantage was eroded through a series of events: first the loss of exclusive access to the Renault engine when Renault decided to provide engines to the Benetton team; second, the leakage of some of their know-how through their junior designers moving to other teams – mainly because they would be unable to gain a senior position in Williams as long as Patrick Head was there; and third, the recruitment of superior drivers (specifically, Michael Schumacher to Benetton) leading to the Williams car’s advantage being eroded.

However, it could also be argued that Williams were still in a position to dominate. When Michael Schumacher left Benetton to join Ferrari, the Benetton team failed to sustain their advantage, and Williams once again became dominant. A discussion could be developed around some of these issues.

Ferrari: the return to glory: 1999–2004 While Ferrari was still a leading contender for the F1 Championship in 2005 and 2006, they were unable to secure the title. This situation is perhaps less clear cut than the preceding examples as Ferrari’s drop in results has been marginal, but it does underline the importance of ‘relative’ performance. In other words, Ferrari were still doing a good job in 2005 and 2006, but Renault just did it better. It is perhaps the best example of the difficultly of sustaining the best competitive performances, even when the best people are still there, and all the resources are in place. It is also worth noting that Renault’s performance was achieved with a far lower budget than that enjoyed by Ferrari in 2005 and 2006.

One interpretation of this situation is that Ferrari would have to refresh some of the people and roles in the organisation in order to keep at the front of the competitive spectrum. Such changes bring risks and therefore underline the natural tendency for successful firms to continue beyond the point at which changes should have been made. The interesting question is to look at Ferrari’s progress in 2007 having made a number of major changes at the senior levels in the organisation.

It also raises an interesting question for debate – is there really such a thing as a sustainable competitive advantage?

Red Bull Racing: A new formula for success: 2010–2013 Red Bull Racing’s run of world championships came to an end in 2013. The main reason for this was a shift in technical regulations, as outlined in the case. This meant that engine (or power unit) performance became a key competitive differentiator, whereas before this, the focus was on chassis and aerodynamics, the areas where the brilliance of Adrian Newey brought Red Bull Racing a clear competitive advantage.

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The interesting point is that Christian Horner clearly feared the new regulations having this kind of effect, and yet he was unable to do anything to prevent this, as the other teams were in favour of the new regulations. This lack of competitiveness saw Sebastian Vettel leave to join Ferrari in 2015. Red Bull Racing was clearly frustrated with the lack of competitiveness of the Renault power unit, compared to that of the Mercedes. This led to much public criticism of Renault by the Red Bull Racing senior management.

An interesting question to consider is whether organisations should behave like this with strategic partners? How do they work together to create future success? How do other suppliers react? If they supplied Red Bull, would they also be treated in this manner? In 2015 and 2016, Red Bull have been able to improve their competitiveness through performance improvement in the car and the Renault power unit (although Red Bull are still maintaining that it is inferior to the Mercedes and Ferrari units), but as yet they are not in a position to challenge for the world championship. In 2016, they continued to focus on bringing on new driver talent and promoted 18-year-old Max Versteppen from their Toro Rosso team (also owned by Dietrich Mateschitz). He moved into the team in May to compete in the Spanish Grand Prix. He won his first race with Red Bull and became the youngest driver ever to win a Formula One Grand Prix. The previous record having been 20 years old and held

by Sebastian Vettel.

Mercedes AMG F1: Building on the Ferrari model: 2014–2018 So far, Mercedes have been able to sustain their success, although Ferrari probably came closer to beating them in 2018 than they have so far. The Ferrari power unit was improving at a faster rate than Mercedes in the first part of the season, but in the second part, Mercedes pulled back the performance advantage and a succession of mistakes by Ferrari driver, Sebastian Vettel, allowed Hamilton and Mercedes to take the World Championships for the fifth success time. Mercedes are clearly focused on beating Ferrari’s record of six successive Championships, so 2019 and 2020 will be interesting.

Their ability to lobby the Fédération Internationale de l'Automobile (FIA) and influence future regulations will be of critical importance as there is increasing pressure to remove the financial advantages that Mercedes, Ferrari and Red Bull enjoy and to ‘level the playing field’ to give the smaller teams a greater chance of success.

The Changing Face of Formula 1 This final section is designed to be used to generate a discussion around the role of the external environment or firm level capabilities in creating change and shifting the basis of competitive advantage. New regulations are being developed for the 2021 season, which will place more emphasis on allowing overtaking – by reducing the reliance on aerodynamics for race performance and, perhaps most importantly, reducing the budgets of the larger teams so that the smaller teams have more chance of winning. Previous budget cap initiatives have ended in failure, it will be interesting to see how the politics plays out as the 2021 regulations are finalised.

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‘Access to Healthcare’: integrating a CSR programme in Coloplast Christina Berg Johansen

1. Introduction This case study offers students a basis for discussion of and reflections upon: a) corporate social responsibility stances; b) challenges and opportunities of integrating CSR with business strategies; c) the attention and effects of stakeholders – particularly internal stakeholders – on CSR activities and d) the multiplicity and ambiguity of goals in CSR creation.

2. Position of the case This case provides an inside perspective on CSR, by revealing the ambiguous micro processes entailed in its becoming. It is positioned between the phenomenon CSR and the theoretical fields working with strategy and processes, respectively. It portrays CSR as an ambiguous practice with strategic difficulties. By following the development of a CSR initiative over 10 years, the case reveals that translating CSR visions to a more pragmatic, ‘enlightened self-interest’ stance (see ES Chapter 5 Stakeholders & Governance, including Section 5.4.1 CSR), is no straightforward matter. There are numerous managerial challenges and actions that fundamentally demonstrate how CSR is still a novel managerial practice, with which managers have yet to come to terms. The case is suited to both undergraduate and master-level courses in strategy, sustainability, organisational processes and emerging market developments.

3. Learning objectives Study of the case involves students in understanding:

•

How Corporate Social Responsibility [CSR] and ethics relate to strategy (ES Section 5.4). How the

•

trends towards strategic CSR (‘enlightened self-interest’) is in practice more challenging than it instinctively sounds: In a micro perspective, existing corporate strategic practices are not designed for CSR and managers must experiment with the opportunities that the novel CSR practices may bring – making strategic a CSR messy, emerging and ambiguous affair. (ES

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Chapter 5 Stakeholders & Governance, including CSR; Chapter 13 Strategy Development •

•

•

•

Processes, including planned versus emergent strategy) The importance of strong internal stakeholders in CSR development, and the risk of creating a weak position for CSR activities because they are not core to strategy nor critical to any internal stakeholders beyond the immediate owners of the activities (ES Chapter 5, Stakeholders & Governance, including CSR).

How conflicts between short-term profit goals and non-core, long-term activities play out in actual micro practice, and how the long term can be translated to fit profit goals, for example, the link of Access to Healthcare with reimbursement strategies in emerging markets.

The different roles in CSR development, which leaders can apply – spanning from the projectinitiating CEO’s visionary role and the role of the CFO, to the roles and strategic decisions of the three different project managers. Also, roles and needs in emerging markets may be discussed.

(ES Chapter 5 Stakeholders & Governance, including CSR; Chapter 16 Practice of Strategy) The opportunities that CSR can bring to new/emerging markets as a knowledge and relationship building tool, as well as the difficulties in involving company subsidiaries in non-commercial activities (ES Chapter 9 International Strategy)

4. Teaching scheme The case can be taught as a class discussion; particularly on the topic of CSR and emergent strategy. It may serve as a counterpart to other cases and descriptions of successful CSR projects, prompting students to reflect on the strategic and cultural changes that companies need to go through in order to pursue strategic integration of CSR. Also, it could invite exercises of CSR definitions and discussions of CSR stances (Table 5.3 in Chapter 5) – the underlying story is that the Access to Healthcare programme went from a ‘Forum for stakeholder interaction’ stance to an ‘Enlightened self-interest’ stance, but this could be further unpacked and discussed. As students have been exposed to different types of CSR, and come up with different definitions, they can discuss why it is so apparently difficult for Coloplast to decide on what their new CSR programme should contain and aim for. Finally, the case can be used to discuss ideas of strategic emergence, hereunder whether there is something to be gained from an emergent over a planned way of developing novel practices in organisations.

5. Questions The case provides an opportunity to discuss the challenges of CSR development and integration, but also offers insight into concerns of strategy development (Chapter 13) and leadership (Chapter 15). It also opens up for reflections on strategy as a daily, emergent and distributed practice (Chapter 16). The questions below are roughly divided in two parts; questions 1–9 relating mostly to Chapter 5 on CSR in the context of Stakeholders and Governance; and questions 10–12 focusing more on strategic discussions, though they can also be used for deepening an understanding of CSR and governance.

1. Why was Access to Healthcare [ATH] created? Identify and discuss the different motivations.

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2. Consider the integration of the Access to Healthcare programme with the organisational structure.

What effect does it have for CSR integration that the programme starts off as the CEO’s ‘own’ project with no departmental anchoring? How does this position change over the years – and does it make any difference?

3. Which different understandings of CSR can you identify in and throughout the case?

4. How is the programme integrated with existing strategic practices in the organisation? Do you agree that this integration makes sense – and why/not? Which challenges lie ahead for Access to Healthcare in its newer ‘partnership’ and public affairs form?

5. Is Access to Healthcare, in its new design as a public affairs tool, good CSR? Discuss what would define ‘good CSR’ in Emerging Markets. Also, decide on whether the programme is CSR or not, and why so.

6. How can companies get ‘results’ from projects that are not commercially oriented? Discuss whether this is possible and if so, how. Also, consider how progress can be ensured in projects that are not core to business and exist outside the normal organisational structure.

7. Which types of power and attention practices do you see in Access to Healthcare – for example, how do the different programme managers try to make ATH relevant to internal stakeholders?

Use the power-attention matrix Figure 5.3 in Chapter 5.

8. Which external stakeholders can you identify in Access to Healthcare? Consider the role of the different stakeholders in the early model and the later ‘partnership model’, as well as their importance to the company’s strategy and aims.

9. Which are the advantages and disadvantages that the ATH programme experiences in being decoupled from existing processes and structures?

10. What is the strategy of ATH, and how does it develop over time? Which are the pivotal developments in the strategy, and who are their key endorsers? What are the performance criteria?

11. Who are the internal stakeholders and strategists in Access to Healthcare, and how do they influence the development of the programme? Hereunder: a. What is the role of top management in strategy formulation and implementation, and how does this compare to the role of the strategic leader as you see it presented in Chapter 15 (Leadership and Strategic Change)? b. How do the middle managers (hereunder the program manager) in the case try to influence strategy? Which strategy roles do they play? c. How do the three different ATH programme managers engage in ‘strategic issue-selling’?

12. How does leadership of the programme work? Do you have suggestions for a different leadership structure, and/or different leader types and capabilities involved with the programme?

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6. Case analysis The case, longitudinal and micro-focused as it is, gives students and opportunity to approach CSR from an organisational perspective rather than a moral or strategic-normative angle. The case is written so that students need to question how the CSR initiative developed, and which actors and events were parts of these developments. This is not explicit in the case, so a fair amount of reflection and analytical probing is needed on the side of the students. The case, at first glance, tells the messy story of the Access to Healthcare programme’s change from philanthropy to strategic CSR. However, the deeper and core discussions revolve around corporate adaptation of novel types of practice, such as CSR, around the understanding of strategy as emergent practice, and the need for corporations to balance short- and long-term needs and strategies.

6.1 CSR as a novel practice The case views strategic CSR as a type of practice still new to corporations. Though CSR has been parts of most large corporations’ daily work for the last 5–15 years, actually using CSR in business strategy is still rather new territory. CSR is based on many different assumptions about how corporations should engage with society, but it has not traditionally been part of the core purposes of corporations. The premise of strategic CSR is that by engaging with and helping the company’s stakeholders, and by improving local conditions (infrastructural, educational, labour needs etc.), the company can create unique knowledge and a unique market position for itself. Though this seems intuitively sensible, it is challenging. The core competencies in companies revolve around sales, product development and marketing to customers that are willing to pay the designated price for this.

The ultimate measure of success in these practices is increased sales, to put it simply. Although managers are generally sympathetic to the social and environmental concerns of CSR, these do not fit well with the logics behind sales. Thus, there is a general discrepancy between the logics of CSR and logics of business/sales. The lack of knowledge about how CSR can support the business makes it a strange practice, and the time and resource investment in making it work seems too high for many managers to truly implement it.

Also, the case shows how CSR as an overarching concept is so broad that it may mean entirely different things, depending on its application. A great deal of CSR has emotional appeal, as we see in some of the discussions around Access to healthcare: Helping poor people and engaging with the UN’s ‘Millennium Development Goals’ are expressions of empathy and compassion. Another part of CSR is concerned with branding and media attention (positive and negative), and yet another with using stakeholder engagement as a business driver. In the case, we see how managers struggle with understanding what their new CSR programme is and should be, and this struggle goes on throughout the 10 years that the case spans. Some of the focus points that could be drawn out for students’ discussions are: 1) The first CEO in the case is inspired by the CSR that he observes in his surroundings, particularly the World Diabetes Foundation. This kind of mimesis shows how ambiguously CSR decisions can emerge. The CEO decides on a foundation like his ‘peers’, which in practice does not match the size or the needs of Coloplast. You can here discuss why the CEO is so keen on the foundation model, and what it means for Access to Healthcare that it starts of in this way. One of the main drawbacks is, obviously, that it creates an arm’s length to business approach, which does not serve the strategic side of the programme well.

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2) The corporate lack of knowledge about CSR means that the involved managers do not agree on what the programme’s purpose is. Instead, they incorporate many diverging objectives in the programme, such as philanthropy (arm’s length to business), marketing, being a global corporate citizen, gaining knowledge, engaging with stakeholders, etc. At the time when the programme is still at a conceptual level, divergent objectives are still possible, but as it begins practical implementation, friction arises.

3) There is little or no reflection amongst the CEO and involved managers – at any point in time – that the programme with its different logics and objectives, could benefit from external validation.

An interesting classroom discussion could take place around the fact that the programme managers are all internally located (and the two first of them are marketing professionals), and that NGO partners are not involved in the making of the programme. The Access to Healthcare Board initially involves prominent nurses and doctors’ associations, but their activity is remarkably isolated from the life of the programme.

4) From the outset, the programme is driven by the CEO and just a few managers. It is located as a strategic satellite to the CEO, and has no structural or process integration in the organisation.

Thereby, the programme is isolated and does not support existing work in the organisation. This on one hand shields the programme from having to create results and report them like other units in the business. But on the other hand, it makes the programme of no or marginal interest to existing activities in the organisation. This position of the programme could be analysed by students and parallels drawn to innovation labs and other peripheral practices in business organisations.

6.2 Emergent strategy and the roles of actors Devoting more attention to emerging markets is a trend that many international, Western-based companies have experienced over the last 5–10 years. Before that, offshoring production, for example, to China was one of the key drivers in engaging with emerging markets, combined with sales offices in specific location.

In Coloplast, Emerging Markets were strategically peripheral to core European markets, and therefore, their KPIs were mainly sales related. Corporate support to emerging markets was limited – there were, for example, no marketing or innovation efforts directed at these markets. As the core markets matured, and the financial crisis made its impact on European and American business growth, Emerging Markets were increasingly understood as the new frontier for the company’s longer-term survival. Thus, attention changed from merely selling in these markets, to also growing them. Helping markets grow and mature meant helping them get better health care systems, stronger organisation of relevant interest groups, better education of doctors and nurses and alliances with core stakeholders, not least politicians.

These developments were taking place both parallel to, and in ambiguous interaction with, the developing Access to Healthcare projects. Some emerging market managers had seen this trend before it became a corporate priority, and had, among other things, used Access to Healthcare as a means for building projects that could help grow their markets. Thus, local experimentation with noncommercial projects that Access to Healthcare could provide, and headquarter stabilisation and ensuing quest for new market opportunities, turned out to both pull in the same direction.

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The appointment of the Public Affairs director as the third Access to Healthcare programme manager substantiates the company’s interest in growing emerging markets. For the Public Affairs director, there is a clear match between the stakeholder opportunities in Access to Healthcare and the reimbursement imperatives of the company, and he instinctively interprets the social aims of the programme as something to be solved on a policy/national level – offering yet another version of CSR, but one which both fits corporate needs and is well timed.

There are two main issues to be discussed in this trajectory: •

One is how strategies are not only a top-down game but sometimes arise from lengthy experimentation, external developments (financial crisis and emerging markets rising power) and new corporate needs.

•

Another is how the multiplicity of actors surrounding different practices – in this case, the CSR programme Access to Healthcare – can impact strategic development in subtle but effective ways.

The networking of the Access to Healthcare manager, the needs for resources beyond those supporting sales that we observe with the emerging market managers, the successful turnaround and need for new market creation as seen from top management, the policy interests of the third programme manager – all impact the developments of the specific CSR initiative, to make it finally integrate and support necessary business practices.

6.3 Short-term versus Long-term issues Though only indicated in the case story, the friction between short- and long-term concerns is worth considering for classroom or assignment discussion. This pertains also to the larger discussions of balancing ‘exploitation’ and ‘exploration’ in corporate strategy.

Before the crisis in Coloplast, the Access to Healthcare programme is an expression of a non-strategic exploration of opportunities and interests for the company. When the financial crisis and an internal business crisis coincide and call for actions of austerity and cost-efficiency, the explorative focus is put to a halt and exploitation of existing business opportunities become the heart of the strategy – noticeably expressed in the short-term strategy tool ‘The Agenda’. After 2–3 years, the new management has managed to trim and renew the business to an extent where the company needs new avenues for growth. Profitability is high, but in order for it to stay so in the future, new markets, products and processes are needed. Top management guides the company in a more explorative direction, and sets new growth-oriented goals. Emerging markets become the prime outlet for this exploration, which is followed up by more strategic investments and targets than the previous explorative phase before the crisis.

As CSR is by nature not easy to reap economic benefits from in the short run, it’s fit with the corporate strategy in times of cost-efficiency and short-term exploitation is non-existing. As the company once again has strategic and economic room for longer-term exploration, investments such as Access to Healthcare begin to make sense. The question is whether it was, then, a good idea to keep Access to Healthcare during the short-term exploitation years, or whether it should have been shut down and something new initiated at the later stage? This depends on how the students position themselves in the ‘emergent strategy’ issue above: If adhering to a belief that a multiplicity of (sometimes divergent) actions is a way of experimenting with relevant ideas and strategies in an organisation, it would make

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sense to keep the Access to Healthcare programme. However, if they believe that corporate strategic development is better off by being more structured, planned and controlled, keeping Access to Healthcare would make less sense. There are, of course, no easy answers because corporate reality is characterised by both planning and experimenting, by needs for both control and flexibility. We also see the short-term/long-term dissonance in the integration of Access to Healthcare with local Coloplast subsidiaries. While many subsidiary managers are interested in the programme and its ability to serve more long-term purposes than sales, it is difficult for them to allocate staff and other resources to the development of such work. In the corporate budgets, there are no funding to subsidiaries for this type of long-term development, rather the subsidiaries must reach sales targets and grow the business this way. As Coloplast’s turnaround is completed and attention is turned to Emerging Markets for growth, the understanding of what is termed ‘market development’ – for example, improving reimbursement structures – emerges. However, this ideal is not matched with financial allocations from headquarters to subsidiaries. Access to Healthcare is framed as a tool in this regard – but local managers still have to allocate time from their existing sales-focused budgets to develop the more uncertain practices of partnerships, public affairs and so forth.

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Manchester United FC: struggling to compete with Europe’s elite clubs Steve Pyle

1. Introduction This case study examines developments at Manchester United after the controversial takeover of the club by the Glazer family and the struggles the club has faced in recent years. The debt faced by the club (and its owners) has caused potentially damaging problems and despite some success Manchester United have found it much tougher in recent seasons. Is their business model sustainable? The current case develops themes introduced in earlier cases featuring Manchester United in this text. Manchester United is one of the most famous football clubs in the world – the brand recognition it enjoys and the media attention it receives all ensure that it is firmly embedded in students’ consciousness. Hence, the case can prove to be potentially very popular and interesting and the students’ collective knowledge of football and Manchester United can be drawn upon as part of an overall teaching strategy with particular relevance to issues in Chapter 5 of the text (and to some extent Chapter 6).

However, competition among the elite clubs of Europe has become more intense. To reflect this, there is an appendix to the case outlining the performance and ownership issues among other elite football clubs in Europe.

The key themes of this case centre on stakeholder expectations, ownership structures, governance issues and organisational purpose. The organisational context has moved on considerably in the last few years. The Glazer’s takeover, whilst controversial from the outset, had seemed to have been accepted by most supporters and key stakeholders with continuing success and premier league wins in 2011 and 2013. The future was looking rosy until Sir Alex Ferguson retired. New managers have been appointed – David Moyes (for only one year) and Louis Van Gaal (for two seasons) but both suffered from only moderate success and were sacked. Jose Mourinho came with a distinguished track record and achieved some limited success in his first two seasons but in December 2018, he too was sacked and replaced by Ole Gunnar Solskjaer (initially on a short-term deal) – an ex-player with a strong attachment to the traditions of the club.

The case gives a brief background and history including the club becoming a publicly listed company.

It focuses in particular on the period from 2005 onwards and chronicles the hostile takeover by the Glazers and some of the financial repercussions of this. The takeover culminated in the organisation being delisted and taken into private ownership but it was also saddled with a large amount of debt.

Manchester United FC’s (MUFC) success in England has been eclipsed by Manchester City and Chelsea in recent seasons – both clubs that enjoy the financial support of billionaire owners. In Europe, Real Madrid and Barcelona have been far more successful than MUFC and both Bayern Munich and PSG are not only becoming dominant in their own domestic leagues but are serious contenders in European competition. UEFA’s financial fair play regulations have had some impact but have done very little to offset the increasing dominance of the elite clubs. The case study can reinforce understanding of 275

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differing stakeholder expectations and be used to introduce several further strategy concepts such as ownership structures and issues in governance. The case is an ideal vehicle for the application of a number of analytic techniques, such as stakeholder mapping and analysis of ethical issues and corporate social responsibility.

2.Position OftheCase This case study provides an ideal context for many of the issues raised in Chapter 5 (and Chapter 6) of Exploring Strategy. The case study should be used to: •

show the importance of identifying stakeholder groups (and there are many within the case);

•

analyse the expectations of the stakeholders in the organisation;

•

analyse the advantages and disadvantages of first becoming a publicly listed company and then

•

being taken over by the Glazer family and becoming a private company; examine the culture of football clubs, and how this relates to both ethical issues and issues of

•

corporate social responsibility and compare and contrast the financial and business models of different elite clubs in Europe.

Sections 5.2, 5.3 and 5.4 of the chapter, in particular, are well served by the case and Figures 5.2 to 5.4/Tables 5.1 to 5.4 provide ready frameworks for case analysis and understanding. The case covers issues that will normally come fairly early in a strategy course and the case lends itself to an early case session. The case should engender interest and discussion. The addition of other clubs in the appendix will help to broaden interest (particularly if there are European students in the group, or supporters of these other teams). There are 4 brief profiles in the case and 9 fuller profiles in this appendix.

3. Learning Objectives The main focus of the case is centred on Strategic Purpose and students should be able to: •

understand key issues in governance, and how they might relate to a football club;

•

evaluate different ownership structures and the advantages and disadvantages of these;

•

analyse issues of ethics and corporate social responsibility in a football club;

•

carry out a stakeholder mapping exercise for MUFC (or other elite football clubs) and analyse how this impacts on strategic purpose; examine the unique culture of MUFC (or another elite club), and how it has evolved and

• •

reach conclusions on how sustainable the current business model of MUFC (or other clubs) really is.

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There is probably enough in the case to do a brief PESTEL analysis but this is not the main purpose of the case, and it should not be used for this purpose if time is short – stakeholder analysis is probably the best focus for the case.

4. Teaching Scheme The teaching approach clearly depends upon the nature and size of the group, the time available and the specific questions to be focused on.

One approach might be to divide the class into groups arguing the case for different ownership structures – private company owned by the Glazers; private company under alternate ownership (e.g. a billionaire, fans) public limited company (plc). Issues of governance, corporate social responsibility and stakeholder interests are bound to emerge.

A second approach might be to divide into sub-groups representing the interests of different stakeholders. These could include (as a minimum) the following:

•

The Glazer family

•

The management and players

•

Supporters

•

UEFA

•

The media

A final approach might be to make use of the appendix by allocating different clubs to different groups of students to answer some or all of the questions. An interesting extension of the case is for groups to do further research on the different clubs – fortunately, there is a wealth of material available. The different clubs do illustrate the differences between stakeholders, aims and objectives, governance and ethical issues.

5. Questions for Discussion Main questions

1. Identify the different forms of ownership that might be adopted by MUFC, and how these might lead to different advantages and disadvantages.

2.

Identify the main stakeholder groups involved in MUFC and using Figure 5.3 map, their power and level of interest. How might the expectations of the various stakeholder groups differ and potentially come into conflict.

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3. Refer to Section 6.3 and decide what you feel are the key cultural characteristics of Manchester United in terms of values, beliefs and taken-for-granted assumptions. What are the implications of these for current and future strategies?

4. Reflect on Table 5.3 and explain how the organisation’s ethical stance and corporate social responsibility stance has shifted.

5. How does the financial structure of MUFC compare with other elite football clubs in Europe?

Which is likely to be the most successful model in a) the short run and b) the long run?

Additional questions 1. Do you feel that the various aspects of corporate governance are appropriate for a football club?

What changes in governance would you like to see at elite football clubs?

2. How has Manchester United aligned itself to the external environmental factors in the football industry? Identify key opportunities and threats commenting on how well placed the club is to exploit the opportunities and deal with the threats.

If the case is going to be used over a number of weeks, it might be worth starting with a brief external analysis to identify key drivers of change but don’t let this dominate the session(s).

6. Case analysis Main questions

Q1. Identify the different forms of ownership that might be adopted by MUFC, and how

these might lead to different advantages and disadvantages.

There are a variety of ownership forms that football clubs can adopt. The majority of British clubs are private companies owned by very rich individuals (like Chelsea, Arsenal or Manchester City) or groups of rich individuals (like Manchester United or Liverpool). An alternative is to adopt public limited company (plc) status that Manchester United did from 1991 to 2005, and many clubs still retain this status (although the majority of the shares may still be owned by a few individuals). A radical alternative is for clubs to be owned by their fans but this is much more common in European leagues than in England (e.g. in Germany and for the big Spanish teams e.g. Barcelona and Real Madrid). Only a few clubs in England (like Portsmouth, Wimbledon or Exeter) have gone down this route, and they have struggled financially. A further alternative is for clubs to be ‘owned’ and ‘sponsored’ by large corporate bodies (e.g. PSV Eindhoven was founded by Philips the Dutch electrical multinational or FC Red Bull Saltzburg, which was bought by the soft drinks giant) but again this is not common in England. It is possible for Government bodies to own and control football clubs – this was not uncommon in communist Russia before 1990 and Local Governments will often own the sports grounds on which teams play (e.g. Stevenage) but again this is not common for larger English clubs.

There are a wide range of issues that can be covered in a debate about the advantages and disadvantages of each form of ownership – most students are likely to see this from a supporter’s perspective, but it is important to also focus on the ‘business’ perspective – a shareholder has

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every right and expectation to receive dividends. The situation can be complicated by the personal objectives of the owners – are they in it for ‘enjoyment’ and a sense of loyalty (as Jack Walker was with his life-long love for Blackburn Rovers) or is it more about making money (as perhaps it is with the Glazers at Manchester United). UEFA became so concerned about the effect of ownership by rich (often non-national) individuals that seem to be leading to non-sustainable business models that they introduced financial fair play regulations to stop clubs spending more than their revenues. This has had an impact on Europe’s biggest clubs and has led to some changes but has not had the dramatic effect anticipated.

The use of the appendix will make it easier to compare MUFC with other elite clubs in Europe.

Many will favour the German approach, which puts more emphasis on the supporter’s interests, or the Spanish elite clubs where the clubs are owned by members (called ‘socios’), but it is important to recognise the disadvantages as well as the advantages.

Table 1 below gives a few points that can be expected to come out of the debate: Ownership Type Private Ownership

Advantages

Disadvantages

1. Easy to make quick decisions.

2. Owners can finance growth without making profits – if they are rich and benevolent enough!

3. Club can keep more of its affairs confidential.

1. Limited funds for investment – unless the owners are especially rich.

2. Club may run up large debts – but financial fair play (FFP) regulations will counteract this.

3. Owners may lose interest and run down the assets of the club.

Public Limited 1. Access to capital markets for 1. Shareholders expect dividends Company (plc) investment funds. whatever the success of the club.

2. Regulated accounting and 2. Poor performance can lead to reporting policies – better unwanted takeovers or even governance. administration.

3. Business success may be more important than playing success.

Fan’s Ownership 1. The legacy and continuation of the club is the overriding objective.

2. More democratic governance.

1. Limited funding unless there are enough rich (and generous) fans.

2. Can lead to poor business decisions – due to over-ambitious fans.

Corporate Ownership

1. Access to company funds for 1. Funding is dependent on the fortunes investment. and policies of the parent company 2. Financial security as long as the 2. Parent company may decide it is no company is successful and longer an important asset. backs the club.

Government Ownership

1. Financial security.

2. Unlikely to incur any debt

1. Unlikely to invest heavily or take risks. problems.

2. Slow to change strategies.

3. Should have an open and fair 3. May suffer from changes in system of governance in place.

Government policies.

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Notes:

1. A rather perceptive quote made before the Glazer takeover: Alan Flitcroft, the head of sports at Ernst & Young, said: ‘Football clubs are not suited to plc status. For a start, promotion and relegation create too much uncertainty. The possible exception is Manchester United, which has a sustainable business model. But there’s a problem with Man U as an investment. Why does Malcolm Glazer [the US sports billionaire who has been stalking the club] want it? The supporters would make his life hell. The supporters are anti-corporate. The only person they would accept is a Man Utd fanatic who’s also a billionaire’.

Source: Telegraph.co.uk (5/12/2004) Q2. Identify the main stakeholder groups involved in MUFC and using Figure 5.3, map their power and level of interest. How might the expectations of the various stakeholder groups differ and potentially come into conflict.

There are a wide variety of stakeholders in Manchester United, and it is useful to start by compiling a list of these to show both the range and type (both internal and external) of stakeholders in such an organisation. It will also become obvious to students that there is a wide range of very different and potentially conflicting expectations among the stakeholders. It is worth noting that some stakeholder groups (e.g. supporters and employees) can be split into subgroups. Clearly, sometimes these expectations can come into conflict – reduced debt and more profit could conflict with higher playing budgets and more reasonably priced tickets. Students should be encouraged to explore a range of such conflicts.

Table 2 gives a summary of some of (but not all) the stakeholders and their expectations: Table 2:

Stakeholder expectations Stakeholders

Expectations/Criteria for Success

The Glazer Family (owners)

Profits/ Return on Capital Invested: reduced debt; Growth Potential; Brand Development and Director’s fees Financial Security with limited debt; long-run growth, sustainable business models for ALL clubs Winning matches/trophies – playing success; investment in star players; affordable tickets ; some sort of say in the club’s future

UEFA Fans/Loyal Supporters

(season ticket holders/mostly local residents) Occasional Supporters

Winning matches/trophies; regular TV coverage; glory, quality branded merchandise Maximum media exposure, enhanced image;

(possibly distant to Manchester, infrequent visits) Sponsors, corporate clients

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with

a

successful

club

Playing

Manager and Staff

success/winning trophies; working with top players – bigger budget for transfers and wages; good facilities.

Chief Executive (Ed Woodwardl) and other executives Players

Business and playing success; finances under control; sustainable development Winning matches/trophies; Good facilities, high financial rewards; recognition Good wages and secure jobs; Working for a successful club Exclusive rights to matches; exciting football; more viewers/subscriptions Compliance with regulations; enhancing the quality

Other Employees Media – especially Sky TV/BT Sport Governing Bodies (FA, Premier League) Government

and appeal of English football

Local Community

Act legally; pay taxes; act ethically and show corporate responsibility Be a good corporate citizen; provide jobs; contribute to the community; enhance reputation of the city.

Stakeholder mapping is a vital tool in understanding stakeholders, but it is important to avoid suggesting that there is one ‘right’ map for any given scenario. The position of the various stakeholders can vary depending on the issue under consideration and indeed stakeholders can change positions.

The great virtue of stakeholder mapping as a technique is that it brings into the open a debate and discussion about the ‘stance’ of different stakeholders. Encourage students to read Section 5.2 of the text for practical advice on how to undertake a stakeholder mapping. It is also useful to bring in the concept of ‘facilitators’ and ‘blockers’ – the tutor can suggest a range of new strategies for MUFC and ask students to consider which stakeholders will support the strategy (‘facilitators’) and which might oppose it (‘blockers’).

One suggested (general) map that assesses stakeholder positions is shown in Table 3 below: Table 3

Stakeholder

Level of interest

Power

The Glazer family

High

High

UEFA

Moderate/Low

High****

Fans

High

Low

Sponsors

Moderate

Moderate

Manager (Ole Gunnar Solskjaer)*

High

Moderate

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CEO

High Moderate

Moderate/High

Players**

High Moderate

Moderate

Employees

Moderate Low

Low

Media***

Moderate/Low

Moderate/High

Governing Bodies

High

The government

High/Moderate

Local Community

Low

Notes: * Generally managers are not very powerful (note how often they get sacked) but Sir Alex was a special case. His replacements (David Moyes/Louis Van Gaal/Jose Mourinho) didn’t last long. ** Players move around clubs (few are ‘loyal’) and don’t have much power except the real stars. *** Media generally have moderate power but Sky and more recently BT Sport are special cases due to the massive payments they make to screen live games. **** UEFA have become more powerful because of the financial fair play regulations.

If the appendix is used and groups chose to analyse other elite clubs, there will be some changes. For example, in Germany, the fans have moderate power (not individually but collectively) and the Spanish giants have very powerful Presidents (at least during their term of office). In all countries, the media are becoming more powerful (due to the extra revenue, they are putting into the game). The power of UEFA is potentially very high but depends on how rigorously they impose the FFP regulations – the signs in 2017/8 were that they were prepared to relax these somewhat. Football clubs tend to have a very wide range of stakeholders with diverse objectives – the debate between football as a ‘business’ v football as a ‘club’ or ‘social enterprise’ might become lively!

Q3. Refer to Section 6.3 and decide what you feel are the key cultural characteristics of Manchester United in terms of values, beliefs and taken-for-granted assumptions. What are the implications of these for current and future strategies?

Get students to identify the key changes in values, beliefs and assumptions between 1990 and now.

Some of these might have emerged from the previous questions but other issues should also surface.

For example: •

Values – have clearly shifted towards a more commercial agenda. The Glazer family clearly want ‘to make money’ from the club. Extra TV money has made the elite clubs much richer but the pressure to succeed also means they are spending a lot more on transfers and player salaries.

•

Beliefs – previously football was a game and Manchester United represented the region.

Management may have been amateurish but did this matter? Today loyalty is a meaningless concept, as is representing a region. The game, like most businesses, is international. Consider

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the actions of Glazer, Gill/Woodward, Ferguson/Moyes/Van Gaal/Mourinho/Solsjkaer, Rooney •

•

and Kenyon. How far do they illustrate loyalty or disloyalty to the club?

Assumptions – get students to list traditional assumptions and whether they still hold. For example: •

Professional football is played primarily for the benefit of supporters.

•

Profit is only a means to an end – that is, reinvestment in the club.

•

Television is not a substitute for the ‘real-thing’ and is of secondary importance.

•

Football should be owned and managed by those with football in their blood and a real attachment to the club.

A reasonable set of alternative assumptions for today could reasonably be postured: •

Professional football is played because it is a core product in a global business.

•

Profit is essential and reinvestment in players/facilities is only justified if it gives longer-term

•

benefits.

Television is an integral part of the game today offering sponsorship and brand recognition

• •

potential and is more powerful than supporters.

Football should be professionally managed. It does not matter who invests in the club so long as they are rich or which players are employed by the club.

Increasingly English Premier League (EPL) clubs are being taken over by foreign owners – frequently billionaires. Does this matter?

Q4. Reflect on Table 5.3 and explain how the organisation’s ethical stance and corporate social responsibility stance has shifted.

This should produce a much-heated debate!

(Remember that the exhibit’s depiction of stereotypes/extremes is only meant to stimulate thinking (and the references to ‘shareholders’ will not apply in quite the same way when the organisation is family owned).

The fear of many is that under control of the Glazer family, the organisation has become like the first stereotype looking for short-term returns at the expense of investment in the playing side.

Others would contend that the Glazer family are committed to the organisation for the long to medium term because (a) it will take this long to recoup their original outlay and (b) they believe in the long-term potential of the organisation to make money. There is also evidence that the family has taken large sums out of the business in the form of Directors’ remuneration. However, in recent years (2013–18) with a decline in success, the Glazers have invested heavily in new players (and managers) to try to restore playing success.

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Manchester United Directors were probably close to the second stereotype (longer-term shareholder interests) when the organisation was a listed company. There is, however, an argument that they also tended towards the third stereotype (multiple stakeholder obligations) in certain respects (see the reference in the case to shareholders, loyal supporters, customers and key commercial partners).

Many stakeholders including supporter groups believe that the stance of the club should be either ‘multiple stakeholder obligations’ or the fourth stereotype (shaper of society) and that in previous eras, the club were nearer these extremes. However, this may be rather unrealistic in the increasingly commercial orientation of football across Europe and especially in England.

Students will certainly have some strong views on ethical issues in football clubs. They are likely to identify several actions as ‘unethical’ – increasing ticket prices (so excluding traditional fans); re-styling football shirts to continuously generate new revenue streams (if parent’s give in to ‘pester power’ in the case of children) but it is worth pointing out that such actions would be common place in a ‘commercial’ business so why should a football club be different. They may also raise concerns about the nature of the new owners in Premier league football in England – the FA has rules to ensure ‘fit and proper persons’ are running football clubs but are these rules effective? There are also issues about community involvement – many clubs do engage with local communities but most students are likely to be unaware of this and in the case of MUFC will assume (perhaps rightly) that the club should be doing more.

There may be concerns about the lack of English owners, managers and players in the Premier league – is this simply the inevitable consequence of modern football? The process has gone further in the United Kingdom than most countries (partly because of the huge revenues in the English league) – should it be controlled?

Will BREXIT make a difference?

This is a big area and the debate could cover a wide variety of issues and stir some strong feelings so there is a need to keep it focused on the learning outcomes.

Q5. How does the financial structure of MUFC compare with other elite football clubs in Europe? Which is likely to be the most successful model in a) the short run and b) the long run?

After the Glazer takeover MUFC converted from a relatively successful plc to a deeply indebted privately owned company. Many were concerned that the level of debt was unsustainable and indeed a number of football clubs have gone bankrupt in recent years both in the United Kingdom and in Europe – hence the motivation for the Financial Fair Play regulations. However, Manchester United’s continuing success in the post-Glazer years under Sir Alex Ferguson (2005– 13) meant that the debt could be serviced and the re-financing in 2010 and share flotation in 2012 have further reduced the burden of debt. After Ferguson’s retirement, MUFC’s playing fortunes have declined and the debt burden could become unsustainable if there were a prolonged period without success (qualification for the ECL being a good benchmark for ‘success’). In the period 2014–19, MUFC have tried four different managers and invested a lot in new players as they desperately search for a successful football formula – if Solskjaer can bring back the success Ferguson achieved then MUFC’s sustainability is assured. Otherwise even a club as mighty as 284 .

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MUFC could struggle. The club does have a fantastic fan base for success and ultimately this should ensure long-term survival and success.

However, MUFC are not unique as many elite clubs, even those that are owned by their members, such as Real Madrid and Barcelona, have very high levels of debt. All these clubs can sustain high debt levels provided they remain successful on the football field. This is easier for Real Madrid and Barcelona as they can almost guarantee entry into the ECL each year. Also, Real Madrid and Barcelona are global giants with the huge fan bases needed for long-term success.

Teams like Manchester City, Chelsea and PSG are in a much more secure position in the short term as they have the huge wealth of their owners to support almost any level of expenditure without worrying about debt. The business models of these clubs are not sustainable without the billionaire backing of their owners so their long-term success depends entirely on how long this backing continues.

Perhaps, the team with the strongest financial model and the most sustainable formula for success is Bayern Munich. Not only are they debt free but they have a dominant position in German domestic football that seems unchallengeable in the short run and this guarantees them entry into the lucrative ECL. The club is well run and well managed – it is hard to see this club being anything but successful in the foreseeable future.

Arsenal is an interesting case. They have been very successful without incurring substantial debt.

They are a well-run and well-managed football club with a sustainable business model. Even so many fans are unsatisfied, despite being competitive every season, they have been unable to win the domestic league title since 2004 and have never won the ECL. Long-serving manager Arsene Wenger was replaced by Unai Emery in May 2018 and did relatively well in his first season but can he take the club to the top?

Additional questions Q6. Do you feel that the various aspects of corporate governance are appropriate for a football club? What changes in governance would you like to see at elite football clubs?

Many will feel that big business and a financially driven ethos are undermining the ‘beautiful game’. Manchester United are undeniably both big and a business. Is football and a big business ethos fundamentally incompatible, or can they have the same ends? This question is designed to provoke a ‘healthy debate’ on whether a profit orientation is an appropriate purpose for a football club. When Manchester United was a public listed company, it had legal obligations to its shareholders. If this meant ‘trading-up’ and disregarding the needs of many traditional supporters, then the directors were at liberty to do so. It is likely that many students will (therefore) come to the view that a plc is not an appropriate form of governance for a football club. However, as the case indicates, this seemed preferable to many including the previous board, the manager and supporters. The current ownership (the Glazer family) seem no less focused on profit – perhaps even more so since they require higher operating profits to service the current debt.

Explore with the students the consequences and likely outcomes under different forms of ownership. Undoubtedly the playing success of Manchester United of late has been built upon the financial muscle that allowed investment in facilities, ground expansion and a payroll and transfer fee kitty sufficient to attract and keep top players – but some are beginning to doubt 285 .

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whether this can be sustained with such a mountain of existing debt. In contrast, some clubs, with apparently supportive owners and the best of intentions, have been forced into administration.

Administration (i.e. when a club is virtually bankrupt) is itself a controversial issue – there have been several examples of clubs reforming immediately after administration but with many creditors losing out.

Capital for ground and other improvements was the big bonus of stock market flotation for many clubs including Manchester United. Are they prepared to return to an era of the dangerous and uninviting ‘slum’ stadia, second-rate training facilities and strict wage controls dictating lower calibre players representing ‘their’ club?

A private company has far fewer restrictions on how it operates and has no outside shareholders to satisfy. However, elite football clubs are now so big (with huge revenues) that the typical local successful businessman (often found in England up to the 1990s) can no longer afford to bank roll a big club (remember the Glazers are very rich but had to borrow heavily to buy MUFC). The exceptions are the mega rich (often foreign) billionaires that have been attracted by the glamour and potential of big football clubs. Is this simply a hobby or vanity project for someone like Roman Abramovich or is there a real opportunity in globalisation of elite clubs?

Students might want to consider the alternative form of Governance found in continental European – countries such as Germany and Spain – interesting insights may be obtained into the form of corporate structures applying to the giant teams of Barcelona and Real Madrid. Ask students to elaborate. Key features include community ownership, an acceptance of debt due to understanding financial intuitions and elections for presidency. Would this work in the United Kingdom?

In addition, it is worth having a discussion about the impact of the financial fair play regulations – how much impact has this had? The aim is to prevent clubs operating with excessive costs (usually going on player’s wages) and encouraging break-even economics and sustainable businesses. Ironically, despite its debts, MUFC is better placed (in regard to the regulations) than Chelsea or Manchester City. MUFC has higher revenues and so can pay more – the only issue for them is the debt interest payments. Chelsea and Manchester City have operated with costs well above revenues – financed by mega rich owners that aren’t even trying to break even. A major Governance issue revolves around Manchester City and PSG – their massive outlays are in danger of breaching FFP rules – both clubs face investigation on breaking the rules with potential sanctions following. Will any such sanctions have real teeth?

Q7. How has Manchester United aligned itself to the external environmental factors in the football industry? Identify key opportunities and threats, commenting on how well placed the club is to exploit the opportunities and deal with the threats?

This isn’t a main theme in the case but if the class needs to put the football industry in a wider environmental context then it is possible to get students to develop a brief PESTEL analysis and in so doing identify some key opportunities and threats.

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Table 3. PESTEL analysis (a few suggested points – there are likely to be many more)

Political

Economic

Sociocultural

Technological

Environmental

Legal

Opportunity: encouragement by some governments to bring business and glamour to the country as a response to popular appeal (e.g. support for World Cup bid).

Threat: tighter financial regulation of the industry by both Governments and Regulatory Bodies (e.g. FA, UEFA and FIFA – limits on ‘foreign’ players has been suggested). Brexit may limit recruitment of European players.

Opportunity: levels of disposable income increasing – more affluent supporters and increasing middle-class supporters.

Opportunity: increasing revenue streams from broadcasting and commercial partners.

Threat/Opportunity: the state of world economies can influence demand (e.g. financial crisis in 2008–12 hit some clubs).

Opportunity: levels of leisure time increasing but tastes may change – will football remain so popular?

Opportunity: profile of football (positive) and Manchester United are a market leader.

Opportunity: increasing importance of branded goods and a merging of fashion, sport and music among the young.

Threat: some evidence of growing discontent with huge salaries and high prices – the threat of a backlash.

Threat : attitudes to big profits, exploitation and remote foreign owners.

Opportunity: internet and mobile technology – potential new revenue streams. Growth of online/phone betting in football.

Opportunity: subscription and pay per view expansion. Clubs like MUFC can exploit their own TV channels more fully.

Threat: can the virtual experience replace the live experience and in so doing, remove the excitement generated by a live crowd?

Threat: football industry under pressure to be more ‘green’.

Threat/Opportunity: football clubs under pressure to engage with local communities. Financial Fair Play regulations.

Interventions by the Competition Commission. EU employment laws (e.g.

Bosman implications), possible wage restrictions/anti-‘bung’ regulations all represent threats rather than opportunities.

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APPPENDIX 1 – Profiles of the elite clubs in Europe (up to 2017–18) Note: These short profiles can be used in group work to allow students to make comparisons between MUFC and other elite clubs. For more extensive analysis (or possibly assessments based on the case), students should be encouraged to research a chosen club more fully – there is plenty of published information on all these elite clubs.

Following the creation of the European Champions League (ECL) in 1992, the top clubs in Europe became even more powerful and dominant. Many of these clubs had been very successful before but the increased revenues from the ECL meant that they had the resources to dominate their own leagues and compete with the elite clubs from across Europe. Most of these elite clubs come from the top five leagues in Europe – the Premier League (England); La Liga (Spain); Bundesliga (Germany); Serie A (Italy) and Ligue 1 (France). Occasionally teams from outside these countries make an impact – but much less often than in previous years. The only teams to have won the ECL from outside these countries are Porto from Portugal (2004) and Ajax from Holland (1995).

The Premier League (England) The EPL dates from 1992 (although of course the English football league which it replaced is the oldest league in the world). It is the most watched league in the world with the highest revenues – the top English teams are among the richest football clubs in Europe ranked by revenue (10 of the top 20 in 2018). Short profiles of three English clubs appear below. Two other clubs that aspire to the elite group are Liverpool and Tottenham Hotspur.

Tottenham are currently ranked 11th in Europe by revenue and have built a new stadium with a capacity of 62,000. Having qualified for the ECL (in 2016, 2017 and 2018) with a young exciting team, they are well managed and securely financed. They are poised to overtake their local rivals (Arsenal).

Liverpool are also an exciting team that are regaining a place among the elite. After a poor decade by their own high standards, Liverpool qualified for the ECL in 2017/8 (reaching the final) and again in 2018/9. Under manager Jurgen Klopp, they have again become a force to be reckoned with in England (where they were leading the EPL in season 2019–20) and Europe.

Chelsea FC It could be argued that Chelsea transformed the way top English clubs operate. Chelsea, located in a trendy part of London, had a long tradition of playing stylish but not particularly successful football-winning occasional cup trophies and just one league championship in the first hundred years of their existence. That all changed in 2003 when Russian billionaire Roman Abramovich bought the club for £140m (and took over £80m debts). The real change came with the vast amount that Abramovich invested in new players – Chelsea aimed to have two top-class players for each position.

Transfer fees and wages rocketed at Chelsea and other clubs, even Manchester United, struggled to match this level of expenditure. Abramovich is notoriously impatient and has hired and fired 14 managers since 2003. The most successful, with two stints in charge, has been Jose Mourinho with three league championships (most recently in 2015). Chelsea have invested heavily in their training facilities and ground but by top-class European standards the ground is relatively small, and this limits the ability of the club to generate revenue. Their average attendance in 2017/8 was 41,282 (placing 288 .

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them 27th in Europe) and the revenue was €505.7 (placing them 8th in Europe). Despite a full ground and high ticket prices, Chelsea need to generate more revenue to compete with the very best – Abramovich does not want to subsidise losses indefinitely. To this end, the club announced plans to totally rebuild their stadium on the current site – making it a much more modern stadium with a capacity of 60,000. However, in May 2018, Chelsea announced that they had put these plans on hold ‘due to the current unfavourable investment climate’. This setback may seriously impede Chelsea’s aspirations to become one of the pre-eminent clubs in Europe.

Because of Abramovich’s investment, Chelsea itself remains debt-free although the parent company (Fordstam), which is completely owned by Abramovich, holds an estimated £709m of debt (all of which is in ‘soft’ interest-free loans to Chelsea FC and payable to Abramovich). The Financial Fair Play regulations have impacted on Chelsea. The early years of Abramovich’s ownership were marked by very large financial losses but since then increased revenues and an attempt to restrain wage costs and transfer spending has enabled Chelsea to stay close to but within the FFP limits. In 2017/18, the club recorded a profit of £62.0m after a successful season (winning the premier league in 2016/7) and a return to the ECL, which ensured their finances improved, together with more sponsorship and TV money. They did not anticipate further problems meeting FFP regulations.

Like other elite clubs in Europe, Chelsea’s finances are heavily dependent on playing success and qualification for the ECL and at the end of 2017/18, their form was poor and they did not qualify.

Antonio Conte’s two years at Chelsea followed a familiar pattern – success in the first year (2016– 17) followed by a poor second season (2017–18) and a parting of the ways with Abramovich. The new manager Maurizio Sarri came with a good reputation as a coach in Italy but, despite the team finishing 3rd in the EPL (and beating Arsenal in the Europe League final), he completed only one season at Chelsea and was replaced by former club star, Frank Lampard in summer 2019.

As long as Roman Abramovich remains committed to the club, their financial future is secure, however in 2018, rumours started to emerge that Abramovich was getting less committed. He has had visa problems with the UK authorities, and there are rumours that he might sell the club – one of Britain’s richest men (Jim Ratcliffe) has reportedly offered £2 billion for the club. This offer was apparently rejected but would Abramovich sell out if an offer that met his valuation (£2.5bn) was received?

Manchester City FC The recent history of Manchester City mirrors that of Chelsea. A middle-ranking EPL club who were transformed by the financial investment of a billionaire to become one of the richest clubs in Europe.

Manchester City were founded in 1880 but the club have struggled to achieve any sustained success.

In 2008, the club was bought by the Abu Dhabi United Group for £200m. City are effectively controlled by Mansour bin Zayed Al Nahyan (Sheikh Mansour) who is a member of the Abu Dhabi royal family and one of the richest men in the world. Since then, several managers have come and gone but Sheikh Mansour has consistently invested vast sums into the players, the ground and training facilities. Manchester City’s ground (the Etihad stadium) is relatively new (having been built for the 2002 Commonwealth Games) and the Etihad campus (training ground) have benefitted from £150 to £200m of investment making them among the best facilities in the world. It took some time for this investment to result in success but Manchester City won the FA Cup in 2011 and the league title in 2012, 2014 and 2018. The club is now regarded as one of the giants of the English game and expect to qualify for the ECL each year. The club have invested heavily in top-class players – spending over 289

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£1.5 billion between 2008 and 2018 – on players like Raheem Sterling (£44m), John Stones (£47.5m), Sergio Aguero (38m), Riyad Mahrez (£61m) and Kevin De Bruyne (£55m). It is estimated that Sheikh Mansour has invested over £2bn in the club. Although these massive outlays have provided playing success, it means that the club also sustained significant losses up until 2014. These losses caused the club to breach the Financial Fair Play regulations and were subject to sanctions in 2014/15 – a large fine, a limit on net transfer spending and a reduced squad for the ECL. However, the sanctions were lifted in July 2015 as the club were able to show a marked improvement in revenues due to increases in sponsorship and commercial revenues. Commentators have questioned how these improvements have been achieved. Much of Manchester City’s sponsorship and commercial revenue comes from Abu Dhabi based companies – are these companies paying an inflated figure (to artificially increase the club’s revenue)? The massive £400m sponsorship of the Etihad stadium is one such deal that has been questioned. In addition, the reduced wage costs (and subsequently lower net losses) result from costs being moved from the Manchester City accounts to those of subsidiary companies. Critics are dubious that this work is properly accounted for. Nonetheless Manchester City have avoided further sanctions. Nevertheless, after more revelations by Der Spiegel (a German newspaper) and other media outlets, UEFA announced that they would investigate Manchester City’s finances for breaches of the FFP regulations. The period 2015–18 has seen further progress on and off the field. In 2017/8, Manchester City’s revenue of €568.4m put them 5th in terms of revenue and with a valuation of $2,474, they were the 5th most valuable club in the world. Pep Guardiola was appointed in 2016 on a three-year contract and was expected to push Manchester City to the pinnacle of European football.

In his first season, they finished third and suffered an early exit from the Champions league but 2017/8 was a record-breaking season winning the league by 19 points, scoring over 100 goals and reaching the quarter-final of the ECL. They again won the EPL in 2018/19, just one point ahead of an impressive Liverpool team. With the immense wealth of Sheikh Mansour, the club is well placed for further success.

Arsenal Although Manchester United and Liverpool might dispute it, Arsenal can claim to be the consistently most successful and celebrated club in English football. Founded in 1886, Arsenal have never been out of the top tier since 1919 and have won the league 13 times (only Manchester United and Liverpool have won more) and have won the FA Cup a record 13 times. Even though Arsenal have not won the EPL since 2004, they qualified for the ECL in 16 successive seasons (from 2001 to 15).

However, 2016–7 and 2017–8 were disappointing seasons (despite winning the FA cup in 2017) and Arsenal dropped out of the ECL. Arsène Wenger (their long-serving manager of 22 years) had overseen a period of both playing and financial success as well as introducing a brand of attractive passing football, but he had come under increasing pressure to resign. In April 2018, it was announced that Wenger was leaving the club – officially he voluntarily stepped down with a year left on his contract but unofficially it seems that he would have been sacked if he hadn’t resigned. Wenger was replaced by Unai Emery who had enjoyed a successful coaching career with Sevilla in Spain and PSG in France. Following Arsène Wenger proved to be a tough task: although early results were good, Arsenal suffered a collapse in form at the end of season 2018–19, missing out on an ECL place by just one point and being well beaten by Chelsea in the Europa League final. That poor run continued into season 2019–20, and Emery was dismissed at the end of November 2019.

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Arsenal moved into their new 60,000 Emirates stadium in 2006 – named after their major sponsor.

This has enabled Arsenal to increase revenues and attendances – in 2017/8, the average attendance was 59,323 – behind only to Manchester United and Tottenham Hotspur* in England and the 8th highest in Europe. Qualification for the Champions league and the increased attendances has ensured healthy revenues – €439.2m in 2017/8 ranking them 4th in England and 9th in Europe. However, failing to qualify for the lucrative ECL again in 2017/8 and 2018/19 will have an adverse impact on their financial position.

The new stadium costs £390m to build, and this caused the club to be relatively frugal in the transfer market and led to significant debt for several years. However, by 2018, net debts were a relatively modest £48m and profit increased to £70.2m. Arsenal are one of very few top European clubs that have consistently made profits and although some critics have suggested that their spending has been too conservative to win trophies, it cannot be denied that Arsenal are well managed and controlled.

They have never been in any danger of breaking the Financial Fair Play rules.

Arsenal’s ownership structure is that of a limited company but its shares are not quoted on the stock exchange. Until August 2018, there were two major shareholders – Stan Kroenke (a US businessman who owned 67%) and Alisher Usmanov (a Russian billionaire who owned 30%). Usamov’s minority share was lucrative but left him with little or no influence (Kroenke even denied him a place on the club’s board), so he decided to sell his share to Kroenke for an estimated £600m (a very healthy profit for the Russian billionaire!). It remains to be seen if this will lead to a more adventurous financial policy.

There is no doubt that Arsenal could be well placed to compete in Europe – they are ranked as the 6th most valuable football club in Europe in 2017 (worth $2,238m) and have the 8th most valued brand in world football. However, their fans have become increasingly frustrated by the lack of recent success – especially in the European competitions (Arsenal have never won the European Cup/Champions league). The key question is how ambitious do they want to be? Do they spend the same vast sums as some of their rivals or do they continue to be financially astute and try to balance the need for playing success with financial responsibility? *Tottenham’s attendance figures were artificially inflated by playing at Wembley on a temporary basis in 2017/8 La Liga (Spain) La Liga is the top division of Spanish football and has 20 teams. The competition dates from 1927 and throughout its history has been dominated by the two giants (Real Madrid and Barcelona) who are profiled below. Aggregate attendances are ranked third (behind the EPL and the Bundesliga).

Because of the continued success of Real Madrid and Barcelona, La Liga is ranked by UEFA as the top league in Europe but it is not as competitive as the EPL as the two giants dominate in most years.

In the early years of La Liga, Athletic Bilbao were a force to be reckoned with and have won the title 8 times (but not since 1984). In recent years, Atlético Madrid have performed well and managed to win the league title in 2014. Atlético have won both the league title and the Spanish cup on 10 occasions (behind only the big two) and have performed well in both the ECL and other European competitions. Since 2014, Atlético have significantly improved their financial position and are now well placed to join the elite clubs in Europe having qualified for the ECL each year since 2013.

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There are other big clubs in La Liga, for example, Valencia, Sevilla, Real Betis, Villareal and Real Sociedad but it is hard to see how any of these clubs will challenge for elite status unless they are taken over by a generous billionaire!

Real Madrid CF Real Madrid are the most famous football club in the world and can match Manchester United in terms of global reputation and fan base – a survey in 2017 suggested they have over 350m followers worldwide. The club is valued at over $4.08bn (2nd most valuable football team in the world) and generated a revenue of $750.9m in 2017/18 (making it the highest earning football club). Real Madrid play in their iconic all white strip and have dominated the Spanish league having won a record 33 titles and won the Spanish Cup 19 times. They are by far the most successful club side in European competitions having won the European Cup/Champions league a record 13 times. Real appointed Zinedine Zidane as their manager in 2016. Zidane was one of the greatest players of his generation who had been a legend at the club while a player and became a coach at the club after retiring. As manager, Zidane achieved success – winning the treble in his first year and retaining the ECL in his second season. It was therefore a shock when Zidane resigned in May 2018 citing the need for change– perhaps losing out to Barcelona (who won the league and cup double in Spain) hurt too much! However, Real Madrid struggled without him, and he was re-appointed less than a year later in March 2019.

Real Madrid are renowned for playing attractive and attacking football and sign many of the best players in the world (‘Los Galácticos’) – examples being David Beckham and Cristiano Renaldo (from Manchester United), Louis Figo, Luka Modric and Gareth Bale as well as many other stars.

Like many top Spanish clubs, Real Madrid is a registered sports association owned by its members – 61,000 members (called socios) – who elect an assembly of delegates (effectively the Governing body) and a club president. The president (Florentino Perez) is responsible for the club’s strategy and managerial appointments. Head coaches come and go regularly as the president, socios and supporters demand continual success. The club is particularly sensitive to being outdone by Barcelona. These two clubs totally dominate Spanish football and the roots of their rivalry go deep into history. Real Madrid represent, not just Madrid, but the region of Castille whereas Barcelona represent the fiercely independent region of Catalan. Matches between the two clubs are known as ‘El Classico’ and some have even seen the games as a symbol of the Spanish civil war!

Real Madrid (like Barcelona) benefit from massive revenues – but these advantages are dependent on continued playing success. Both clubs are also guaranteed large revenues by qualifying for the ECL – both have qualified every year since 2004. Nevertheless Real Madrid are in debt (estimated at €187m in 2017) but this has been significantly reduced in recent seasons due to playing success and a more restrained transfer policy. Real Madrid’s assets and high levels of revenue mean the debts can be serviced and are not a problem. Indeed, Real Madrid are in a much healthier financial state than many Spanish clubs – several are on the verge of bankruptcy. Although Real spend heavily on transfer fees and player wages they have not infringed the Financial Fair Play regulations.

2018/19 was a relatively poor season for Real Madrid. Having sold their talisman (Cristiano Ronaldo) to Juventus they struggled in La Liga – finishing third, eight points behind local rivals Atlético and nineteen behind champions Barcelona. Their run of successes in the ECL was ended when Real were surprisingly beaten by Dutch team, Ajax before reaching the quarter-finals.

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FC Barcelona Barcelona are Real Madrid’s main rivals. Founded in 1899 and proudly representing the Catalan region of Spain, ‘Barça’ have established themselves as a major force in World football. They have won the Spanish league on 25 occasions (second to Real Madrid) and the Spanish cup a record 30 times. They have won the European Cup/Champions League 5 times – most recently in 2014/15.

Because of their success and the large TV revenues earned, they have become one of the most valuable sports teams in the world and the third richest football club in Europe with annual revenue of €690.4m in 2018.

Like Manchester United and Real Madrid, Barcelona have a huge global following. Located in Catalonia, the team is almost like a ‘national’ side for the region, Barcelona play attractive, passing football with a plethora of top players. Their star player Lionel Messi was regarded as the best player in the world from 2010 to 17 with only Real Madrid’s Cristiano Renaldo to rival him. Managers come and go on a regular basis but the trophies keep coming – the domestic league titles of 2014–15; 2015– 16, 2017–8 and 2018–19, plus the domestic cup in four of the last five seasons.

Barcelona is a registered sports association owned by its members (170,000 socios) and controlled by an elected Board of Directors and the club president. Barcelona’s financial position is not completely secure. They had debts of $298m and made a net profit of just €13m in 2017/8. This represented a significant improvement – partly due to their success in achieving the league and cup double as well as the transfer of Neymar to PSG for a record €200m. The debts are manageable and as long as playing success continues, they will have few problems. Barcelona have sailed close to the edge of the Financial Fair play regulations but have avoided breaking the financial limits. However, they did receive a fine and a temporary transfer ban for infringing FIFA’s regulations on the transfer of footballers under 18 years old from foreign countries.

This illustrates how the top clubs are competing intensively to sign the best young players from all around the world. The ban ended in January 2016 and Barcelona immediately responded by signing up many young players for their very impressive (and highly regarded) youth system.

Barcelona were particularly successful from 2008 to 12 under the inspired coaching of Pep Guardiola who guided the club to 14 trophies in this period. Not surprisingly his services were in high demand, and he moved to Bayern Munich in 2013 and then Manchester City in 2016. By winning the ‘double’ in 2015–16 and again in 2017–18, they were once again widely seen as the best club side in Spain, despite Real Madrid winning the ECL in 2018.

Bundesliga (Germany) The Bundesliga was founded in 1963 and has 18 clubs in the top tier. Attendances at Bundesliga matches are the highest in Europe (with reasonably priced tickets). The Bundesliga ranks as the fourth best league in Europe (after Spain, England and Italy). Clubs in the Bundesliga are required to be majority owned by club members (the 50+1 rule) but there are exceptions – for example, Bayer Leverkusen, VfL Wolfsburg and Hoffenheim. There are tight regulations on debt control (that predate the financial fair play regulations) and the majority of the clubs are profitable. Historically, the Bundesliga has been a very competitive league with 12 different winners; however, Bayern Munich have begun to dominate with only Borussia Dortmund putting up a significant challenge to their

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dominance. Other major clubs in Germany are FC Schalke 04, VfB Stuttgart and Borussia Monchengladbach – but none can be expected to compete with Bayern Munich.

FC Bayern Munich Founded in 1900, Bayern Munich are the most successful club in the history of German football and probably the most financially stable and successful club in world football. They have won the German league a record 28 times (including six in succession from 2013 to 18) and the German cup a record 18 times. They have also won the European Cup/Champions League on 5 occasions – second only to Real Madrid and equal to Barcelona and Liverpool.

Like the vast majority of German top flight clubs, Bayern are majority owned (75%) by their members (an astonishing 290,000) who elect an Executive Board and President. Former players like Franz Beckenbauer (past President) and Karl Heinz Rummenigge (Chairman) have been instrumental in guiding the club to success. The other 25% is owned by three large German companies (Adidas, Audi and Allianz) who are also major sponsors. This ownership model has worked well for Bayern as it is one of the very few top flight clubs that is completely debt free – and has made profits for 25 years in a row. Like all German clubs, Bayern pus a high degree of importance on the expectations of supporters. Ticket prices are significantly cheaper than comparative tickets in the English league and supporters have significant influence on the way the club is run. Bayern are rewarded with large crowds (average attendance was 75,000 in 2016/7), and they have 4,327 fan clubs. Bayern are among the top four clubs in Europe in terms of revenue (€587.8m in 2016/7). Bayern’s success has been maintained under Pep Guardiola (2013–16), Carlo Ancelotti (2016–17) and Jupp Heynckes – all of which won the league title. It is an indication of expectations at Bayern that Ancelotti was sacked in September 2017 following a slow but far from disastrous start to the season. It has reached the point where all the best players in Germany want to play for Bayern. Some commentators have warned that Bayern’s total domination of German football risks making the competition a foregone conclusion.

So it was a welcome change for Borussia Dortmund to put up such a good challenge in 2018/9.

One minor concern for the club occurred in 2014 when the club president (former player Uli Hoeness) was convicted of tax evasion and was forced to resign. However, no real stigma attached to the club itself and Hoeness was replaced by the highly respected Karl Hopfner – a former Bayern executive who had done much to improve the club’s finances. In August 2016, after serving a prison sentence, Hoeness stood for re-election as Bayern’s president – he was unopposed and remains in that position.

Perhaps this tells us something about ethics and governance in football!

Needless to say Bayern have no concerns with the Financial Fair Play regulations and seem assured of remaining at the summit of European football for the foreseeable future.

2018/19 was another good year for Bayern as they won a closely contested Bundesliga (narrowly beating their kay rivals Borussia Dortmund) but lost out to Liverpool in the quarter-finals of the ECL. Borussia Dortmund (BVB) Founded in 1909, Borussia Dortmund have become one of the most successful clubs in Germany and are well placed to compete with the best in Europe. Borussia Dortmund have won the German league on 8 occasions (most recently in 2011 and 2012) and have established themselves as the main rivals 294

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to Bayern Munich in Germany. Their stadium is the biggest in Germany, and they attract huge attendances – in 2016/7 their average league attendance was 79,653, which is the highest average in Europe. Borussia Dortmund, like most German clubs, is part of a sports association with 145,000 members who run the football club. However, the football club is part of a two-tier organisation where the other part is a public limited company, which was floated on the German stock exchange in 2000.

Indeed, Borussia Dortmund is the only German club that has adopted this form of ownership.

Between 2003 and 2005, Borussia Dortmund were on the verge of bankruptcy – the share price had plummeted and the club was deeply in debt. At one point, Bayern Munich loaned their rivals €2m in order for the club to pay its players! Gradually the finances improved – partly by increased sponsorship and partly by selling players. However, it was the appointment of Jurgen Klopp as head coach in 2008 that revived the playing fortunes – Borussia won the league twice and were runners up twice between 2010 and 2014 and thereby qualified for the lucrative ECL. The financial position was much improved but Jurgen Klopp left to take up the manager’s job at Liverpool in 2015. In the next few years, Borussia changed their manager on a regular basis – the team did well enough, winning the domestic cup and being runners up in the Bundesliga (in 2018/19 just two points behind Bayern), as well as qualifying for the ECL in three of the next four seasons. However, they have not recaptured the performance levels of the Klopp era.

In September 2014, Borussia Dortmund struck a deal with three of their main sponsors whereby €114m was invested in the club in return for an ownership stake. This cash injection has enabled the club to clear most of its debt and provide funds for investment. In 2016/7, Borussia had revenues of €332.6m (12th highest in Europe and 2nd in Germany). Although it is very difficult to overcome the dominance of Bayern Munich in the German league, Borussia are at least now equipped to give them a run for their money. Realistically a top three finish, a good performance in the domestic cups and qualification for the Champions League represents a successful season for Borussia Dortmund.

Serie A (Italy) Serie A is the top tier of Italian football and has operated since 1929. The league of 20 teams is ranked the third best league by UEFA. The league is popular throughout the world and is both high quality and tactical. Many of the stadiums in Serie A are municipal owned and need modernisation.

Consequently, attendance figures are a cause for concern. Serie A has some of the best-known teams in world football with three outstanding teams – Juventus (who have won the league 34 times and the European Cup twice), AC Milan (18 league titles and 7 European cups) and Internazionale (‘Inter Milan’, 18 league titles and 3 European Cups). No other team has won Serie A since 2001 (Roma) and the other major teams in Italy (Napoli, Lazio and Fiorentina) are struggling to compete. Even in Italy, one team (Juventus) has become a dominant force (7 successive titles between 2012 and 2018).

Juventus FC Founded in 1897 and based in Turin, Juventus are one of the oldest and most celebrated clubs in Italian football. Affectionately known as ‘La vecchia signora (the old lady)’, Juventus have won a record number of Italian league titles (34) and a record number of Italian cups (13) – most recently doing the league and cup double in 2017–8. They have won the European Cup/Champions League twice (as well as the lesser ranking UEFA Cup competition on three occasions).

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Juventus have been a joint stock company since 1967 and became a quoted company on the Italian stock exchange in 2001. 63.8% of the shares are owned by the Agnelli family’s holding company.

The Agnelli family has had a controlling interest in the club since 1923 and the family’s immense wealth (generated by their ownership stake in the Fiat Motor Company as well as a diverse range of other businesses) ensures that the football club is financially secure.

Juventus faced major problems in 2006 when, despite winning the league in two consecutive years, the club was relegated, stripped of its two league titles and fined heavily due to the club’s alleged involvement in a match-fixing scandal. Not only did Juventus lose a lot of money following relegation but they also lost many key players even so they managed to win promotion back to the top tier of Italian football in 2007. Subsequently Juventus appealed against their relegation and the criminal conviction of their general manager – which was partly quashed. Juventus sued the Italian football authorities for compensation. However, in 2015, the Supreme Court released a report confirming that the General Manager was actively involved in sporting fraud and a tribunal subsequently rejected Juventus’ claim for compensation. Despite this setback, Juventus continued to dominate Italian football and won the league title in seven consecutive years (2012–18).

Financially, Juventus were ranked 11th in the world in terms of revenue (€394.9m) in 2016/17 and recorded a net profit of €4.1m. This was a very welcome improvement in revenue and profit from 2014. Average attendance was 38,948 in 2017/8 – ranking only 31st in Europe – but this is due to their relatively modest ground capacity of 41,250. However, unlike many Italian clubs, Juventus own their own ground which is a major asset. In 2017, Juventus had a net debt of €162.5m but this is manageable as long as the club is successful on the field and the Angelli family retain their controlling interest.

Despite significant losses year on year, the club has not breached the FFP regulations and with an improving financial situation they look well placed to compete both financially and on the football field in the coming years. In 2018, Juventus took a calculated risk by paying €112m to sign Cristiano Ronaldo from Real Madrid – despite the resultant short-term reduction in profits this move proved successful, as Ronaldo continued to excel both in the domestic league and in the ECL. Year 2018–19 proved to be another good season for Juventus – winning Serie A by a huge margin and beating Atlético Madrid to reach the quarter-finals of the ECL. Ligue 1 (France) Ligue 1 is the top tier of French football and has 20 clubs. Nineteen clubs have won the league with Saint Etienne (10 titles) being the most successful. However, in 2011, Qatar Sports Investments (QSi) took over Paris Saint-Germain and transformed them into one of the wealthiest clubs in the world.

QSi are essentially backed by the Qatar State and PSG have used massive funding to buy top players and dominate French football winning Ligue 1 for five successive years (2012–13 to 2017–18). As mentioned in the case study, PSG are struggling to comply with the Financial Fair Play Regulations, and this may prevent them establishing the club as one of Europe’s elite.

Although French football has been successful at International level (World Cup winners in 1998 and 2018), they have been much less successful in club football. PSG are desperate to change this and become one of Europe’s top clubs, in 2018, they were ranked 6th in Europe in terms of revenue. The only other French club in the top thirty was Olympique Lyon, and it is hard to see any other French club breaking into Europe’s elite. Generally, attendances, TV deals and revenues are lower in French football than other major European leagues – consequently many top players play outside France.

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Paris Saint-Germain FC (PSG) PSG are a relative newcomer to the elite group of major European clubs. PSG was formed as recently as 1970 when two Paris-based football clubs merged. In their short history, they have won the French league 7 times and the French cup for a record 12 times. In 2017–18, they won the league for the 5th time in 6 years and also won the French cup. PSG are now beginning to dominate French football to such an extent that no other French club can challenge them as PSG go from strength to strength.

Only Monaco have come close to rivalling PSG when they won the league title in 2016–7. What has really lifted PSG (like Chelsea and Manchester City) was the takeover of the club by mega rich owners in 2011– in this case by Qatar Sports Investment. This enabled PSG to sign star players like Zlatan Ibrahimovic and Edison Cavani. The Qataris purchased the club for €100m in total and have subsequently invested over €1 billion in the club. At this stage, it is hard to judge whether the investment will prove to be a financial success – or more of a vanity project for the Qataris. Buying football clubs is not always a financial success but more and more TV money is driving inward investment into European football. PSG play their home games at the Parc des Princes, one of the most famous stadiums in Europe, however, with a capacity of 48,712 it is not especially large.

Average attendance in 2017 was 46,930 placing PSG as number 19 in Europe.

Before the 2011 takeover, PSG had periodic problems with finance involving spiralling debt, subsidies and re-capitalisation. When the Qataris took over the debts (estimated at €15m-€20m), these financial problems were swept away and the club had financial security and funds for investment. In 2017/8, PSG’s revenues were €541.7m making them the 6th highest in Europe. The estimated value of the club is $917m placing them at number 11th in Europe.

Many commentators have expressed scepticism at PSG’s financial accounts – they have spent vast amounts on players without recording massive losses. How is this possible? The main reason seems to be the massive sponsorship deal the club agreed with the Qatar Tourism authority worth €200m per annum (from 2012 to 16). Not surprisingly the commercial value of this deal has been questioned – is this really an attempt by the Qatari owners to artificially inflate the club’s revenues to avoid the FFP regulations? Indeed, that was what UEFA concluded and handed PSG a fine of €60m, limited the size of the ECL squad that PSG could field in 2014/5 and imposed limits on the club’s spending on wages/transfers for two years. Manchester City had received similar sanctions.

Further investigations into PSG’s financial affairs were launched in 2018 but PSG were cleared of wrongdoing, despite continuing suspicion over the financing of transfers.

Consequently, PSG are now well placed to continue to dominate French football but the acid test for the Qatari owners will be whether they can make a significant impact in the ECL – they reached the quarter-finals in 2015–16 but the owners will expect more. What are the long-term aims of the QIA – are they expecting to make a profit or is it a whim/hobby of the Qatari elite? Will the high level of investment we have seen since 2011 continue?

Year 2018/9 was a reasonably good season for PSG as they once again won Ligue 1 by a large margin.

However, they lost a two goal lead to Manchester United in the ECL and went out in the Round of 16.

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Appendix 2 – The elite clubs in Europe (Statistics)

Club

Total Revenue 2018 (€m)

Average Attendance 2017/8

Total Valuation 2018 ($m)

Domestic League Titles

European Titles Win/RU

Manchester United

666.0

74,976

4,123

20

3/2

Manchester City

568.4

53,812

2,474

5

0/0

Chelsea

505.7

41,282

2,062

6

1/1

Arsenal

439.2

59,323

2,238

13

0/1

Liverpool

513.7

53,049

1,944

18

5/3

Real Madrid

750.9

65,027

4,088

33

13/3

Barcelona

690.4

65,731

4,064

25

5/3

Bayern Munich

629.2

75,000

3,063

28

5/5

Borussia Dortmund

317.2

79,496

901

8

1/1

Schalke

243.8

61,297

707

7

0/0

Paris SG

541.7

46,930

917

7

0/0

Juventus

394.9

38,948

1,472

34

2/7

Sources: Deloitte – Football Money League /Forbes – The Business of Soccer/Worldfootball.net/Wikipedia

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CASE TEACHING NOTES

Adnams – A Local Company Julie Verity and Kim Turnbull James

1. Introduction The story is about the long-term evolution of a family-owned, local SME. The core business is brewing, but only a fraction of the employees actually brew ale or distil spirits. The majority of the people in the organisation are engaged in a web of activities linked with relaxation, leisure and community. Strategic decisions are made within a principled framework, which includes considerations of the locale; the landscape, employees, the shareholders and the environment.

This is seen as increasing the resilience of the company which survives in a very tough commercial environment – almost against the odds cf its size and competitors.

The firm manages paradoxes like: being stable and ‘mature’ while being agile and responsive; being profitable (mostly) while investing more relative to competitors; leading in a democratic and open way while being a long-established family firm.

2. Position of the Case This case study is rich with strategic examples and helps to illustrate much of learning from Chapters 1– 7 of the book. Because the company is small but the explanation of its business is broad, it can be taught from different angles. Two are provided in this note. One route – What is Strategy at Adnams? – explores the positioning and influences on the business. The other – How is strategy made at Adnams? – focuses on process.

2.1 Learning Objectives Route 1. What is Strategy at Adnams? i) To understand the strategic positioning of Adnams ii) To understand the external and internal influences impacting and influencing the strategy iii) To challenge the nature of strategy in the face of change Route 2. How is Strategy Made at Adnams?

i.

To understand how strategic decisions and direction are influenced by history, company philosophy, leadership values, company locale and size, as well as competitive pressures.

ii. To gain an appreciation of how SMEs can take risks and be agile to build competitive advantage

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iii. To appreciate that balancing multiple stakeholder and environmental requirements can create [superior] resilience and value. iv. To understand how organisations realise continuous, adaptive change 2.2 Suggested teaching questions Route 1 – What is Strategy at Adnams? i) How would you describe the strategy at Adnams? What is making this company successful (if it is successful)? ii) What influences are at play on the strategy? iii) What should the future Adnams strategy be? iv) If this SME was acquired (by, for example, SABMiller) what might change?

Route 2 – How is Strategy Made at Adnams? i) What do you find surprising about Adnams? ii) Analyse Adnam’s culture using the culture web (Chapter 6) iii) How are strategic decisions made at Adnams? iv) How do the leaders think about the organisation and guide it? [who are the leaders?] What outcomes does this deliver?

3. Analysis 3.1 Route 1 i) How would you describe the strategy at Adnams? What is making this company successful?

Students might describe the Adnams strategy as a Focus strategy – Chapter 7 – targeting a specific niche segment of customers – (i) those who seek food and drink that has provenance and a sense of place (ii) those who know-of or live in East Anglia. Price is less of an issue to these consumers, who are seeking an authentic, local and ethically trustworthy service and brand proposition.

Some students might argue that Adnams are not focussed given its various diversified interests. This would raise an interesting debate as to what exactly a focussed strategy means. Adnams is historically, probably culturally (in that it is taken for granted), and its brand name is most strongly associated in customers’ minds with beer and brewing. However, only a proportion of Adnams’ profits come from the sale of beer. So, it might appear that focus is being lost to diversification. However, focussed differentiation – is a strategy based on customer segments (rather than internal business models or product profiles) and all of Adnams’ products and services focus on a specific set of customer needs – authenticity, provenance, local and sustainable. It is highly likely that (and the strategy is based on) 300 .

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customers who return to drink Adnams beer in their pubs, would also choose to stay in an Adnams hotel, would also choose to buy wine from Adnams and products from their Cellar and Kitchen shops preferentially above competitor brands because of the trust the customer has established in Adnams to please their specific needs and tastes.

We could argue therefore, that Adnams’ strategy is highly focused on this set of customers and the brand is the communication of a standard set of values that the customer is buying. With this appreciation of a ‘focused strategy’, Adnams has greater potential to grow by further diversification of products and services but at the same time taking care to protect the brand and the values it carries.

If students describe Adnams as an organisation that is ‘stuck in the middle’ of the large multinational brewery chains and the micro breweries that populate Suffolk and Norfolk, there is the chance to challenge that Adnams is in the brewing industry at all. ii) What influences are at play on the strategy?

There are many influences: a) Examples from Chapter 2 –

for example: PESTEL forces

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changes in laws affect what they can sell – for example: new products allowed: vodka and gin change in smoking in public places; different tax laws for micro-brewers and the rest

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technology enabling change in the brew stream – which allowed a greater variety of products

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the internet facilitates different marketing scope

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social pressures – the changes in acceptability of drinking alcohol, health issues related to alcohol, the changing experience of eating and drinking together .. etc. DECLINE IN PUB DRINKING/SALES, drinking at home from cans and bottles rather than from the ‘pump’

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changes in how UK families take holidays – more self-catering cottages/houses, AirB&B – type accommodation, second homes. Hotels changing to be up-market boutique offers + spa + other services.

b) competitive forces: – power of smaller and larger players in brewing, in hotels business, in off-trade sales (supermarkets), in retail and leisure generally. c) governance structure: Examples relating to Chapter 5:

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- long-term shareholders personally known and committed to the company - (part) family ownership - local community considerations - ethical framework and commitment to the environment - employees who are long-term and local d) internal capabilities: Examples relating to Chapter 4: - long history of brewing - brand associations with Suffolk (and East Anglia) - established hotels and locations - connections with customer segments and knowledge of them etc… e) history, culture and place As in Chapter 6, for example: - belief in local embeddedness guides thinking and behaviours - personal preferences of family leaders and owners influence investment decisions - narrative about the company influences strategic direction iii) Future direction?

It is likely that students will say a focus strategy should stand given that focus means continuing to bring the brand values to more products and services. [However, the latest financial data which shows the company in the red for the first time at half-year results, might also prompt discussions about focusing on maximising returns from recent investments.]

So, how far can you stretch the brand? How many products and services can this brand carry? For example, one observer of the company criticised Adnams’ leaders for making the company into Disney World in East Anglia. He was a long-time customer of Adnams’ wines and thought that the company was cheapening the brand by moving into multiple ‘leisure activities’. However, if this is turned upside down, Disney has been a hugely successful leisure brand that has managed to move from its home in the United States of America successfully to Japan and Europe. If Adnams did model itself on a peculiarly British version of Disney, it could grow by taking the model to other idyllic country locations. The British county lifestyle would be very appealing to certain segments of customers in other geographies.

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This, however, would require a leap of strategic scope that might be hard to imagine while the company is governed and owned as a family business. Students might argue that a buy-out by a larger multinational might take it in this direction and have the resources to implement this strategy.

A couple of comparisons could be discussed here. One would be the buy-out of innocent drinks by Coca Cola [similarly the acquisition of Ben and Jerry’s by Unilever] and the effect this might have on the acquired brand. The second could be to grow via other types of corporate governance structures, examples like John Lewis and the Co-operative might fit better with the value system of a company like Adnams? This also links with the discussion in iv) below. The case also mentions the highly successful young Scottish craft brewing company – BrewDog. This young company has grown aggressively and confidently over its first decade. The BrewDog story tells of how two, 24-year-old beer fanatics launched the company in 2007. The website states: MARTIN AND I (JAMES) WERE BORED OF THE INDUSTRIALLY BREWED LAGERS AND STUFFY ALES THAT DOMINATED THE UK BEER MARKET. It goes on to describe how the two entrepreneurs took some ‘scary bank loans’, invested in stainless steel and brewed beer that they took around to fairs in their old van. Their mission was to convert other people to the same passion they had for craft beer. Ten years later, the company had 1000 employees, 46 bars (a significant number of these were outside the United Kingdom), 70,000 shareholders and had hit the Sunday Times Fast Track 100 for a record sixth year in a row. There were also plans in place to spread further to Australia. BrewDog is one of the ‘tall poppies’ mentioned

by Andy Wood in the case and makes a powerful comparison with Adnams since both have very similar core products with equal provenance. Adnams, however, has not grown significantly for many years and has not spread outside of its locale.

The second ‘tall poppy’ mentioned in the case is Fever-Tree a drink mixer, manufacturer and marketer, famous for its Tonic Water and its core proposition that if what you drink is ¾ mixer – it is the quality of the mixer that really matters. Within 10 years of launch, the two founders of Fever-Tree sold 25% of the company to private equity investors and floated the company on the London Stock Exchange. At the time of floatation (2014), the company achieved a market capitalisation of £154.4m.

In January 2018, Fever-Tree was worth four times this amount.

However, students are likely to conclude that Adnams will retain its generic, steady-as-you-go strategy. Andy Wood uses the word ‘rapacious’ as the sort of growth and attitude Adnams does not value. Students might question if this can be sustainable in a world where stakeholders expect more, even from a values-based company? Compared against these young rival comparators, which have delivered fantastic growth, brilliant products and have deeply ingrained values, Adnams appears a laggard. iv) If this SME was acquired (by, for example, SABMiller), what might change?

Asking this question will make students think about the examples like Innocent and perhaps FeverTree and prompt a different perspective. Students who have grasped the notion of competitive advantage should argue that there are aspects of Adnams that should be preserved in a takeover situation and that acquirers/investors should not destroy the essence of Adnams and hence its customer value.

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Students might draw a culture web (see below), or an activity map in order to trace the core capabilities and sources of competitive advantage that Adnams has created. They might highlight the importance of the connectivity and distributed power (which might appear to be a paradox), the belief in innovation and the ability of Adnam’s leaders to take risks. The depth of understanding leaders have at Adnams about branding and their company brand, especially the core brand values that need to be protected. Ultimately, activity maps might reveal the importance of Adnams’ values in guiding decision-making and the pride the organisation takes in making decisions because it is the ‘right thing’ to do. Students should question if an organisation like SABMiller, or Coca Cola would be able to ‘read’ and understand these core capabilities and recognise the importance of protecting them against loss, inimitability or destruction.

At the same time, students might suggest that something is limiting Adnams’ growth potential and seriously question that the company is innovative at all compared with the young, new entrants exampled above. Without a comparison web, many of the words used to describe culture could be meaningless.

3.2 Route 2 This approach to the case can be used to teach material from Chapters 5, 9, 12 and 14. i) What do you find surprising about Adnams?

It is our experience that there will be a range of feelings about the case in answer to this question; from those who find it inspirational, to those who find the company unbelievable, and some who might find it frustrating. Some students get quite angry, complaining that the researchers have been ‘duped’ and that companies like this don’t exist and/or are not feasible. When challenged to explain why they think this, student explanations’ revolve around the belief that running a company in the way described in the case will lead to high costs and that ‘share-holder value companies would never operate like this’. Students argue that being part family-owned means Adnams has less scrutiny compared with if it were a fully listed company and that without full exposure to market forces, it will be higher cost – an assumption, since they have not researched the industry to find out if profit margins at Adnams are out-of-line with industry equivalents. We find this conviction is often hard to shift despite rational counter arguments. Frustrations can arise from the lack of growth, the Company has demonstrated despite the investment made into keeping operations current and up-to-date.

Some state a belief that surely only small companies can be managed like this – the feeling here is the implausibility of the company culture. Students say that it is ‘too nice’, that no company has staff who are universally positive about their work. The typical explanation students find (other than we have been ‘duped’) is Adnams’ relative size. It is only possible to have this sort of culture in a small company!

However, we have had students from large organisations counter these statements with examples from their own work experience which align with the leadership style and resilient strategic thinking that Adnams practice and have been able to tell very convincing stories of the power of organisations with distributed leadership and empowerment among small teams as well as the positive long-term cost savings of ‘green’ investments.

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To re-assure, we were not ‘duped’. We made three visits to Adnams, made 15 interviews with staff from a range of positions across the organisation and kept our eyes and ears fully open while there.

Andy Wood completed his doctorate at our business school and has been a frequent visitor since, kindly giving his time as a speaker to alumni events. The organisation was totally open to us, and we never felt that anything was being withheld or concealed. ii) Analyse Adnams’ culture using the culture web Stories: There are stories about employees, and how they are empowered to serve and, are accountable to the customer. There are stories about how employees can grow through the organisation. There are stories about the families that own Adnams – Simon Loftus is talked about as a talented marketer and very creative person. Jonathan Adnams as someone who loves sailing (not in this version of the case – but is in other material students might find) and the brewing and distilling aspects of the business.

There is a lot of investment in the brewery.

There are many symbols, some of them are given in the web (see above).

Power is distributed throughout Adnams; to customers, shareholders, tenants, the local community and employees.

There is some hierarchy at Adnams, but the structural glue is mostly conversation and closeness.

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The values are a large part of the control systems. These are monitored through the conversations and transparency among employees.

Pride forms a large part of the daily rituals. Innovation and the leading-edge nature of their products are routines built into the fabric of Adnams.

The paradigm can be summarised as in the web above. iii) How are strategic decisions made at Adnams? a) Andy quote: we have a framework for decision making. We look at: return on capital employed, internal capability and capacity and, our value base. If these things align, we go ahead. b) Values are at: http://adnams.co.uk and click About Adnams and scroll to the values. c) To align with their identity – brand and locale d) For the long term e) Aligned with interests of shareholders f) To create future value – which aligns with social attitudes: - quote from Andy Wood in the case ‘We are trying to build a model for tomorrow. In the new world this will be a good way to generate wealth – one that is not rapacious’.

- For example: provenance of food g) By understanding core capabilities and competences and leveraging these h) Through customer research i) Listening-to, encouraging ideas from employees j)

Through fostering close connections with all stakeholders

Given that this list aligns closely with the paradigm shown in the web above, the decision-making frame for Adnams is the culture. iv) Who are the leaders at Adnams, how do they think and what outcomes are delivered?

There are the obvious leaders: the family owners and board members, Andy Wood and his senior team (For example: Karen and Fergus), but the philosophy described is one where everyone can lead within their domain of influence and responsibility. This extends throughout the organisation (out to the front line staff) and includes customers (we listen to them and respond), shareholders (this is what our shareholders want), society generally (there is a need for provenance – we can supply that).

A cultural belief is that connections and ‘closeness’ are important. This is sustained through two-way communication, high visibility of senior people (in local society and in Adnams), design of offices (open plan at the distribution centre), location of the enterprise in Southwold (offices, brewery, distribution centre, hotels and retail outlet), long-term service by workforce (employees know each other).

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Closeness creates a shared sense of Adnam’s size, the competitive landscape and its threats – this transparency means that everyone ‘feels they carry’ the company and are, in part at least, responsible for its survival and future.

The organisational discourse is typified with words: respect, pride, transparency, the right thing to do and celebrating people. This reflects the behaviours and thinking of Adnam’s people and leaders.

Leadership is about promoting great ideas from everywhere and turning these into future value for the organisation.

Outcomes from this ‘organic’ nature are: risk taking, innovation and continuous, adaptive change.

However, putting to good use, the comparison with companies like BrewDog and Fever-Tree might make students thoughtful about where Adnams takes its risks; if they are big enough (?) and where more risk-taking might deliver other rewards (?). And, if the culture of the organisation blinds Andy and Jonathan to future possibilities?

Useful References: https://www.brewdog.com https://www.theguardian.com/lifeandstyle/2016/mar/24/the-aggressive-outrageous-infuriating-andingenious-rise-of-brewdog https://fever-tree.com

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‘Dare to know’: The integration of Université ParisDauphine with Paris Sciences et Lettres (PSL) University Lionel Garreau

1. Introduction The Dauphine/PSL case study provides a longitudinal perspective on the evolution of Université Paris-Dauphine until its recent integration with PSL, a project that started as a research alliance, and that finally became a merger, creating a new university. The case allows analysis of the transformation of the PSL project and an analysis of the cultural issues at stake for Université ParisDauphine in line with its integration with PSL.

2. Position of the case The case relates to the following themes in a strategy course (and in Exploring Strategy): a) Corporate culture in a public organisation during strategic change. b) The corporate strategy of a new form of university (Alliance – Merger). The case is likely to be taught at any stage of a strategy course (either as an introduction to start with articulating strategy and organisation culture, in the middle of the course to get deeper into the challenges of alliances and mergers, or at the end if the theme of organisation culture is taken as a king of opening of the strategy course.

3. Learning objectives

The key learning objectives for students are to: a) consider the interaction between culture and strategy in the evolution of strategy; b) develop their understanding of how to evaluate the cultural challenges that face mergers, even in a case that can be considered as a great strategic opportunity and c) consider the evolution of strategy as the alliance strategy moves towards a merger.

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4. Teaching scheme The suggested case analysis (below) enables students to both tackle the strategic perspective of the alliance/merger and consider the cultural challenges that PSL and Université Paris-Dauphine leaders have to manage.

The strategy appraisal On the basis of their understanding, students could be asked to prepare a presentation in which they: •

explain the context of the emergence of PSL;

•

analyse the evolution of PSL and

•

consider the strategic stakes for Université Paris-Dauphine to succeed in the merger.

One or more student presentations can then be used as a basis for a case discussion of the PSL/Dauphine strategy in class.

The cultural challenges Students could be asked to prepare an analysis (as if they were strategy consultants) which draws on the cultural web in order to identify the cultural elements that could make the integration of Université Paris-Dauphine and PSL a major challenge.

5. Questions 1. Analyse the evolution of the PSL project through its various forms over time.

2. Analyse the strategic stakes for Université Paris-Dauphine to succeed in the merger with PSL. 3. Consider the history and culture of Dauphine and PSL. What do you think the main tensions are for the integration with PSL?

6. Case analysis Question 1 Identifying the evolution of PSL in its mission and format highlight a dynamic view of strategy.

The initial project can be considered as an alliance as the five initial members created a scientific alliance that aimed at generating synergies via inter-organisational research project development. It could also help for getting funds from national calls for projects as the combination of these institutions enable them to show excellence in research (several Nobel prizes for example).

Then, the alliance changed format. Firstly, it integrated more institutions than in the initial project (in 2018, 23 entities are part of PSL University). Secondly, it became a merger as the various entities 309

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not only cooperate on research projects but also integrate their activities more and more. The evolution of the project is mainly influenced by the State in order to compete in the world university rankings, where French institutions, despite their reputation, are ranked relative poorly. Some examples can be found in the case: new statutes developed in 2017 to articulate PSL and the various entities, the entities ‘develop a common strategy for research, teaching and technology transfer through a shared budget’, Doctorates are now delivered by PSL and not by the entities that compose PSL, new degrees are created that incorporate resources from the various entities, etc.

Question 2 The stakes for Université Paris-Dauphine can be understood via the reading of the Université ParisDauphine section as well as the PSL sections in the case. Two main stakes can be considered.

The first and major element to take into consideration is that the ranking favours larger universities as university rankings aggregate the outcomes of activities, especially in the research area. The small size of the university (Université Paris-Dauphine is actually one of the smallest in France) prevents it from being considered as a major institution as a whole. Its reputation in its main fields (mathematics, economics and management) is excellent but as it is a small university, the aggregation of each field does not reach the same level as French, European or world leaders. Being considered as part of PSL would enable Université Paris-Dauphine to be considered as part of a wider entity and benefit from the aggregation of the outcomes from more than 20 entities (the benchmark model could be Oxford University or Cambridge University that aggregates various schools, colleges and research centres). The jump in the rankings would increase the perceived legitimacy in the academic field and could be used to attract the best students in France and students from all around the world.

Second, Université Paris-Dauphine has excellent outcomes in education and research but falls short in structuring, funding and framing major research projects. Its successful integration with PSL could benefit in terms of engaging with ambitious and structured research projects, possibly in collaboration with other entities of PSL. Consequently, Université Paris-Dauphine could increase its strategic capacity in integrating resources from PSL (mainly funds) and using other entities’ resources, especially researchers in the development of new projects and academic members in the development of new degrees. It could also benefit from the hard science model in which projects are developed over the long term with dedicated resources. The lack of structure for research activities was pointed out by the state commission that evaluated Université Paris-Dauphine in 2018. This lack of structure can be seen in the decentralised aspects of all elements of the university. Consequently, such a structure, if well managed, could benefit the university.

Moreover, considered over the long term, the increase of perceived legitimacy and the increase of strategic capacity can be seen as a virtuous circle: the higher the ranking, the more resources the university can access, the more it can develop its capacity, the more it could increase its position in the rankings.

Question 3 In this question, the aim is to understand Université Paris-Dauphine through the cultural web in order to identify tensions in the integration of Université Paris-Dauphine in PSL. Here, it is important to consider that culture can be a strong advantage for a company in its activities but that when confronted to change, this same advantage may result in difficulties. Students can identify salient elements of the 310

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cultural web to stress the issues at play here. The case is written in a way that students do not have all answers directly to hand. Like consultants, they should make up their minds about the elements that could be linked to the various facets of the cultural web.

Stories are very important at Dauphine, especially the birth story. The university was born during the main revolution of the 20th century in France, and started as a counter model to the wellestablished system. This aspect of Dauphine creates tensions with its integration with entities that are more than 100 years old (Chimie ParisTech (Est.1896), Collège de France (Est.1530), École normale supérieure Paris (Est. 1794), École Supérieure de Physique et de Chimie Industrielles de la ville de Paris (Est. 1882) and the Observatoire de Paris (Est. 1671)) and for which the establishment is a key legitimacy aspect.

Symbols. The place where Université Paris-Dauphine was established is important. Indeed, the place enables the university to have a favourable image for well-to-do people and for French businesses.

Moreover, its use of the coat of arms in its logo also points in the same direction.

Nevertheless, selection is a practice that has been considered as a symbol of Université ParisDauphine philosophy. The story about the minister that is shown no favouritism for his son demonstrates that meritocracy is a key element in the way Université Paris-Dauphine operates with its students.

In a certain way, the symbols are in line with PSL expectations for its entities. Both imply the implementation of a kind of elitism that PSL aims at developing and that the University communicates on its website (For example: Nobel prizes and other awards).

Organisational structure. Université Paris-Dauphine operates in a matrix organisational structure with education departments and research departments. As such, there is a difference with most French universities where departments articulate teaching and research in one field. Here, the organisation split the management of the two main activities into two distinct lines of management.

The governance structures (Student Life Board, Scientific Board and Board of Directors) are elected by students and employees. They do not propose top-down framing of activities. Instead, they work as an ad hoc filter for emerging activities, giving the opportunity for academic staff to take initiatives and lead the project they want to develop.

In the case, we report that PSL proposes a more formal structure for activities, both teaching and research. It is more infused with a traditional top-down management perspective that is not in line with Université Paris-Dauphine’s traditional way of doing things.

In line with the organisational structures, the power structure in Dauphine is very diffused. As the various governance structures (Student Life Board, Scientific Board and Board of Directors) are elected, it prevents them from implementing a top-down policy that would not meet staff expectations.

Furthermore, as a result of the entrepreneurial culture, academic staff have the power: they occupy all key positions in the university and are the head of all the programmes offered by the university. It provides academic staff with strong power as, as programme directors, they can choose who teaches on their programmes.

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From the perspective of integration with PSL, this very decentralised power may lead to tensions. For example, we see from the case that PSL has a more top-down perspective in which the entities follow the rules set by PSL (the example of the Vice President and the trip to India is such an example).

Another power issue lies in the way that academic members of humanities departments in Université Paris-Dauphine perceive the actions of PSL. Indeed, most academic members come from ‘soft science’ fields, especially management and economics. They appear to feel considered as less important than researchers in hard sciences – for example, the National Centre for Scientific Research (CNRS), the most renowned research institution in France, employs about 75% of researchers in hard sciences. The fact that Alain Fuchs, former CNRS director, was elected president of PSL worries them. Furthermore, the development of the PSL innovation fund that is dedicated to develop startups based on the utilisation of hard science research in business projects reinforces this perception.

Rituals and routines. Université Paris-Dauphine is set in the former NATO building, made up of long corridors with offices. In line with the decentralised structure and the entrepreneurial culture, many decisions are taken informally as people meet in the corridors. Voting by governance structures is a formal way to implement what has been discussed previously in an informal way. If people don’t know this, they may present their project directly to the governance structures without previous discussion, which would likely lead to rejection of the project. The testimonials from academic staff members are explicit on this point.

As PSL is not located in the same building as Université Paris-Dauphine and as PSL has more geographical proximity with other entities of PSL, actors from Université Paris-Dauphine may feel far away from the decision centre. They cannot fix issues or gain approval for their projects in PSL in the same informal manner.

Control. Control is not a key issue in Université Paris-Dauphine. Actually, as civil servants, the academic members have a secure lifetime employment, whatever their activity is. There is no course evaluation by students and research evaluation is done in a collective way. Control only comes from the state commission that every four years evaluates the general activities of Université ParisDauphine.

As PSL is a new entity, it is not clear what the control structures are. The incident with the recruitment of an academic highlighted in the case tends to show that the ‘excellence in research’ orientation of PSL has now been integrated as an a priori control mechanism in the recruitment of academic staff.

To sum up, we see that Université Paris-Dauphine has its own culture that enabled it to become a very successful university with a small-scale model. Its integration into PSL raises cultural challenges that both sides will have to work on in order to get the best out of this project.

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Ryanair: The Low Fares Airline – New Directions?

Eleanor O’Higgins

1. Introduction The case concentrates on how Ryanair could continue to successfully pursue the budget airline model in the face of external and internal challenges. This involves a grasp of how to analyse industry environments, and internal resources/capabilities of companies and their connection to the concept of sustainable competitive advantage. In sum, the Ryanair case illuminates how a strategy that is grounded in the best deployment of assets/resources/competencies, whilst adding perceived value to customers, delivers sustainable strategic advantage. The case also illustrates the difficulties and obstacles that stand in the way of achieving and retaining such advantage through changing circumstances. Leadership of such navigation of the enterprise is also an important theme in the case.

In the 11th edition, a new point of interest in the case was Ryanair’s changed strategy when it comes to customer service in its Always Getting Better (AGB) programme. For the 12th edition, a new theme is the carrier’s labour problems, especially involving trained pilots, whereby the need to cancel flights at short notice is an ongoing threat.

We also see a dynamic competitive landscape for Ryanair, with some credible rivals in the budget airline space, so how should Ryanair continue to take the initiative? One historical thorn in its side which it had managed to shed was its 29.8% shareholding in Aer Lingus, when IAG, the parent company of British Airways acquired Aer Lingus in mid-2015.

The case consists of the following:

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An opening section delineating the challenges facing Ryanair. After successfully navigating a complete change in its service philosophy and delivery in its AGB programme, in 2018/19, a new theme is the carrier’s labour problems: when confronted by pilot and cabin crew strikes and threats of further unrest, it reversed its previous stance against the recognition of trade unions.

However, uncertainties over labour unrest, controlling costs and the UK’s imminent departure from the EU (Brexit) had the potential to depress Ryanair’s profitability and share price.

The next section of the case gives an overview of Ryanair, delineating its history, philosophy and

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Subsequent sections present:

a review of its fiscal 2018 results; this includes a section on investor relations and the saga of its abortive bid for Aer Lingus.

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an outline of Ryanair’s business model and its operations as a budget airline;

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a description of the challenges faced by Ryanair;

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a brief overview of Ryanair’s battleground, the European airline industry; this Teaching Note also makes reference to a website Supplement describing in detail, Ryanair’s battleground,

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the European airline industry, especially the budget carrier sector, as the competitive -

landscape continues to change and a profile of Michael O’Leary, Ryanair’s ebullient former CEO, now taking up a new position as CEO of Ryanair Holdings, when, in 2019, Ryanair overhauled its structure to create a group configuration, encompassing Ryanair, Austria-based Laudamotion, Poland-based Ryanair Sun (renamed Buzz in 2019), and Ryanair UK.

Business students at all levels enjoy this case and relate to it, since air travel is an activity virtually everyone has experienced, and we all have stories to tell about the various airlines which we have experienced. The colourful personality of Ryanair CEO, Michael O’Leary is a further interest in the case.

The Ryanair case has been used successfully with students from Ireland and other European countries, as well as with North American, Middle Eastern and Asian students. The case would suit all levels of business students, from a capstone undergraduate course on strategy, to post work experience MBA and executive education programme participants. It has been used effectively with all these types of groups.

2. Position of the case The case is a comprehensive one and would be well placed towards the end of a course on strategic management. At this stage, students will have learned something of the economic, organisational and human context of strategy. The case concentrates on how to analyse industry environments, and internal resources/capabilities of companies and their connection to the concept of sustainable competitive advantage. In sum, the Ryanair case illuminates the business model concept; how a strategy that is grounded in the best deployment of assets/resources/competencies, whilst adding perceived value to customers, delivers sustainable strategic advantage. But the case also illustrates the difficulties and obstacles that stand in the way of achieving and retaining such advantage.

Important strands in contemporary thinking about strategy are brought together – especially the structural ‘positioning’ approach of Michael Porter, and the ‘resource-based’ view of Jay Barney. It delineates the issues of balancing cost containment, pricing and customer expectations.

Those participants with work experience can engage well with the internal management aspects of the case, that is, leadership, culture and the human resources issues. Suggestions are also given in this Teaching Note for using more advanced analytical techniques, such as scenario analysis.

In addition to its pedagogical classroom use, the case can also be used for a continuous assessment assignment, either by group or individually and for a case study examination.

The case relates to all chapters of Exploring Strategy, but most specifically to Chapters 2, 3, 4, 7 and 12. In addition, Chapters 6, 12, 13, 15 and 16 are also relevant.

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3. Learning Objectives The overarching learning objective is a comprehensive strategic analysis and evaluation of a business enterprise with the challenge of finding viable solutions to issues facing the company. This includes the following: -

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An understanding of how a company’s business strategy leads to success or failure, based on the enactment of its business model within its context (Chapter 7). Basically, can Ryanair continue its noteworthy success and growth, based on the budget airline model in the European context, especially now that it has gone ‘up-market’ and also had to recognise trade unions?

An analysis of a company’s situation to identify critical issues and devise a suitable strategy.

Essentially, this entails a SWOT analysis based on: ▪ an all-inclusive integrated understanding of the functioning of a company – its human and technical operations, leadership, customer relationships, financial structure, etc. (Chapters 4, 6, 15 and 16) and ▪ an in-depth environmental analysis (Chapters 2 and 3).

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Understanding developmental directions and a change in the process; how the process of sustaining competitive advantage is a dynamic one, requiring constant adjustment, alongside external and internal monitoring. (Chapters 12 and 13); Historically, in Ryanair’s case, the constant search for ways to cut costs alongside finding ways to add charges and ancillary revenue was ever ongoing and has given rise to some amusing ideas (such as threatening to charge passengers to use on-board toilets). However, from 2013, its approach to squeezing the last cent out of passengers has softened, alongside the provision of ‘frills’, use of primary airports, and higher labour costs after being forced to accede to higher cost staff contracts, all entailing higher costs. So, how can this pan out re profitability?

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Understanding the role of leadership in organisations (Chapters 15 and 16);

4. Teaching Process The case breaks down into two inter-related parts that can be organised into two sessions of 1.5 to 2 hours each. The first session could cover an analysis of Ryanair’s current position, including a SWOT or situational analysis, assessing how robust is the company’s strategy heading into the future. This would comprise an environmental and European airline industry analysis, with implications for the budget sector and Ryanair in particular, and can be prepared by students individually or in groups.

Armed with these analyses, students can do some preparation between sessions, to deal with the next stage of the case deliberation in the second session. This entails an evaluation of where Ryanair goes from here, in terms of coping with upcoming challenges through continued growth or consolidation or to examine other developmental directions, along with a consideration of Michael O’Leary’s new leadership position. The issues in the case can be broken down by addressing the list of questions in Section 5 below. These follow a natural sequence that can be applied to the strategic evaluation of most companies, so the process can be generalised to other cases.

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5. Questions for discussion 1. Why has Ryanair been successful thus far?

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2. Is Ryanair’s new labour cost environment sustainable along

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with its AGB strategy?

3. Would you recommend any changes to Ryanair’s strategic

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approach and growth trajectory? How should Ryanair develop in terms of further organic expansion and/or by acquisition?

4. Evaluate the strategic leadership of Michael O’Leary. Should he continue to serve as CEO?

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6. Case analysis 1. Why has Ryanair been successful thus far? Students can refer to Chapter 7 to answer this question.

There is no doubt that Ryanair has been successful in terms of market share and of profitability, up to 2018 and notwithstanding the 2012– 2013 blip which caused a rethink in its approach to devise its AGB programme. Heretofore, Ryanair’s operating profit margin compared very well to that of all comparators – Supplement Exhibit S3.

However, the latter part of 2018 has seen a €22 million loss and a lowered profit guidance for full year 2019 (at 31 March 2019), due to lower fares and higher costs. See https://www.statista.com/.

A column in the Financial Times had praised Ryanair’s ‘extravagance’ on three things – its appetite for cost cuts, its valuation and its ability to generate cash. In short, it followed the severe form of LCCs. The Strategy Clock is of use here. Up to its 2013 ‘conversion’, Ryanair had been following the Low Price, No-frills position 2 on the Strategy Clock very assiduously and effectively. This is because its appeal to customers was traditionally based primarily on low price. In fact, it almost seemed to regard its no-frills positioning and even rudeness to passengers as a badge of honour, in the context of its touted low fares.

Objective evidence on fares, as seen in the Supplement, shows that Ryanair offers the lowest fares on average. However, it must be borne in mind that apparent fare bargains in Ryanair’s favour can be diminished when extra fees – administration, check-in and luggage charges – are factored into its prices. Such comparative information on fares is openly available to all customers who can compare prices on airline websites, so it is easily perceived. Therefore, for those passengers who wish to avail of extra services, the supplementary costs do not make Ryanair the best value airline, an honour given to EasyJet. Also, we should take into account that Ryanair’s greater dependence on secondary airports further from city centres may add to ground transport costs and inconvenience. Such differences may put off business travellers, a segment that Ryanair is currently courting actively. However, for passengers who are happy with the most basic product, Ryanair is the cheapest option.

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Notwithstanding these provisos, up to 2018/19, Ryanair could operate successfully in the ‘No-frills’ category because it generally charged the lowest fares, and it was the cost leader. This is evident from Supplement Exhibits S3 and S4. It created a virtuous cycle because low cost allows for low fares, which attracts customers. Ryanair would appear to have managed to integrate cost saving into all aspects of its operations, perhaps something its competitors have not mastered as well, when one compares operating margins. Wizz Air is about equal to Ryanair in low costs per ASK. However, Ryanair’s average trip length is 22% shorter, typically associated with a higher unit cost. Thus, on a trip length adjusted basis, Ryanair has the lowest unit cost in Europe. Also, Wizz’s revenue per ASK is lower than that of Ryanair, even with its average higher fares than Ryanair.

In conjunction with its low costs, as part of its frugal culture, Ryanair has always been proactive in finding ways of raising ancillary revenue, by discovering new products/services to sell, or selling others that rivals give away for free, or that Ryanair itself used to provide gratis. An early example was charging for check-in luggage. While other airlines have followed suit in charging for products/services that they used to give away gratis, Ryanair has uniquely been a leader in this regard.

However, some of its past money raising ideas, such as charging to use toilets on-board are not serious but seem to be more to attract attention, and prove its cost-conscious credentials.

Ryanair expounded on its punctuality record, as an essential part of its product offering, that is, lowest fares and best punctuality, as opposed to unnecessary frills. Spring 2019 has seen Ryanair make extravagant claims and promises on punctuality. In fact, on-time landings are heralded with a trumpet fanfare on board. So, is Ryanair as good as it claims? Note Exhibit S2, which derives its data from an external evaluation, rather than from Ryanair itself. Ryanair does seem to be consistently in the top 5 of its European peers. It generally ranks better than EasyJet, Norwegian and Eurowings, whilst Wizz is generally more punctual than Ryanair. One can say that punctuality is not a problem for Ryanair, but it is not clear that it is a differentiating factor either.

We do not have any externally verified evidence about proportion of cancelled flights, especially relative to competitors, so Ryanair’s claims of superiority on these factors cannot be confirmed. Some observers claim that encouraging carry-on luggage rather than checked-in bags results in excessive delays in aircraft being loaded and unloaded, as passengers consume valuable time bringing carry-on bags onto the main deck, placing them in the overhead bins and then taking their seats. Of course, more recent events such as crew strikes, and even more beyond its control, ATC strikes have caused delays and cancellations. Ryanair has minimised the inconvenience to passengers by rescheduling in advance as much as possible. If the past and potential future disruption from the strikes has created a loss of confidence among passengers, this is not evident from Ryanair’s load factor of over 95%, as customers continue to be attracted by Ryanair’s low fares.

Ryanair’s strategy can also be seen in terms of the frameworks that explain the achievement of competitive advantage in Chapter 7 – Hypercompetition and Game Theory.

Its aggressive approach to growth and opening new destinations and routes gives it first mover advantage. Thus, it may inaugurate flights to a given airport, gaining an advantageous deal ahead of the competition. Through low fares, it grows traffic around that destination. When rival carriers recognise the attractions of that destination, they may be starting at a disadvantage to Ryanair. If a competitor tries to come in at lower fares, Ryanair has the deep pockets to sustain a price war, An early victim of Ryanair’s aggression, Barbara Cassani, then CEO of Go, which was eventually absorbed into EasyJet, admitted she had learned a crucial lesson about discounting. ‘You can’t take 317 .

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on someone with lower costs because they dig deeper than you to lower their prices and still make money while you’re bleeding’.

The fact that Ryanair has such an extensive route system, compared to its competitors also gives it an advantage, as rivals who wish to grow must bear in mind whether Ryanair is already in situ where they are considering new destinations. This automatically curtails their options. Thus, if they do decide to enter a route where Ryanair already exists, they will have to find a source of competitive advantage that is different to the lowest fares one, not an easy proposition.

Thus, the process of dictating terms of engagement, closing out options to competitors (in effect building barriers) and using its power has elements of Game Theory and Hypercompetitive Strategy.

2. Is Ryanair’s strategy sustainable?

Question 1 concentrated on Ryanair’s historical competitive advantages, based on its ultra low-cost strategy in the past. Question 2 is geared to answer whether its forced trade union recognition and its earlier change of heart and establishment of its AGB programme will enhance its competitive advantages, or actually damage it if it is too inconsistent with its former positioning, especially if it imposes costs that cannot be recouped. In this respect, while its star rating has improved from 2 to 3 since its AGB programme, it was still ranked worst airline of 19 short-haul carriers flying from the United Kingdom the sixth year running in 2019.

This question about the sustainability of Ryanair’s current strategy is best answered by first conducting a SWOT analysis (Chapters 2, 3 and 4) to identify the issues facing Ryanair, and to evaluate its present situation.

2.1 We start with an environmental analysis, and an emphasis on the budget sector.

The best way to approach this analysis is to go from the broadest unit of analysis to the narrowest: (a) analysis of the whole European airline industry, through to the budget sector, (b) mapping strategic groups in the budget sector and (c) an examination of individual competitors, to ascertain whether there are any that pose a special threat to Ryanair. (a) Porter’s ‘Five Forces’ model to analyse industry structure is a good starting point, as it easily incorporates the external influences (PESTEL) and criteria for success that face airlines in Europe, as well as specifically those in the budget sector: (i) Competitive rivalry General:

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Capacity in the European airline industry had been growing rapidly in 2017–2018, causing

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intense rivalry and pressure on fares, but this was expected to contract slightly in 2019.

Another factor creating intense rivalry is the fragmentation of the market, with the cumulative market share of the five largest players accounting for 40% market share, compared to 86% for the intra-US market.

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Davy suggests that 2019 and the medium-term outlook for the industry could be becoming more

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favourable with slowing capacity growth, industry consolidation and moderating fuel prices.

Consolidation and rationalisation – Airlines try to counter increasing rivalry by forming strategic

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alliances, and by mergers & acquisitions, for example, IAG takeover of Aer Lingus, Ryanair of Laudamotion. Rationalisation of the industry has also occurred from outright airline failures, as outlined in the Supplement. More failures or takeovers of weaker airlines could occur.

Among the major airline groups, both IAG and Air France-KLM were curbing their costs successfully, although the latter was chronically subject to strikes from crew. It was believed that a new CEO, appointed in 2018 would bring further discipline to costs and take advantage of longhaul revenue opportunities via the alliance. Meanwhile, the IAG network, consisting of a portfolio of brands was demonstrating consistent yield outperformance with a strong balance sheet, allowing flexibility to take advantage of acquisition or share buyback opportunities. This might have been at some compromise to quality in flagship British Airways, where cost-cutting had caused some slippage in its premium classes product. Lufthansa, whose large size conferred some advantages had certain issues such as high unit costs and poor financial record at Eurowings and Austrian Air. It had its own labour problems, with its pilots striking (later declared illegal) over lower pay scales for the Eurowings subsidiary crew.

Flag carriers setting up budget subsidiaries to avail of this apparently growing sector – but will these subsidiaries enhance or cannibalise their parent companies? Also, are these inconsistent with established practices, especially labour practices and pay rates, as per Lufthansa and Eurowings industrial relations problems?

Attempts by airlines to increase customer loyalty through frequent flyer programmes, various

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perks to regular customers.

Mainstream airlines vying for premium business long-haul passengers with Gulf-based carriers

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which offer premium classes for lower fares than European carriers.

Overcapacity on North Atlantic routes forces carriers to concentrate rivalry and price-cutting on

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intra-European routes.

Budget (LCC): -

Please note that the common term for budget carriers, that is, LCCs, or low-cost carriers, is often a misnomer, since often self-styled LCCs are very high cost, although they try to offer a low fares, no-frills product. Thus, this teaching note uses the terms ‘budget’ and ‘LCC’ interchangeably.

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Budget market share heading to 50% level in Europe. Increasing number of rivals entering sector,

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both start-ups and subsidiaries of mainstream airlines.

As more entrants develop route systems, budget airlines will find themselves competing head-tohead on the same routes, `for example, Wizz and Ryanair at Budapest.

Mainstream airlines trying to recapture customers from budget airlines by ultra-cheap fares on short-haul intra-European flights, for example, Aer Lingus in effect becoming a budget airline.

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Cost is critical to enable carriers to compete with lowest fares.

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Potential trend among some competitors to attempt to differentiate by adding some ‘frills’ and flexibility, especially to attract business travellers, for example, EasyJet adds flexibility and uses mainstream airports; Ryanair entering into this type of competition since AGB, which it had avoided in the past. Most budget carriers, including Ryanair, now have some form of frequent flyer loyalty programmes.

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Some differentiation based on main airport locations, but adds costs for carriers.

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Capacity utilisation (load factor) especially critical in low margin industry increased rivalry.

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For the survivors, the budget sector in Europe has stabilised somewhat, after several budget airlines had gone bankrupt or been taken over, as shown in the Supplement.

Ryanair perspective – increasing and intensifying rivalry in budget sector

(ii) The threat of entry General: -

The capital costs of entry and existing rivalry in the airline industry in Europe has not encouraged new entry in the 2010 period onwards. On the contrary, losses among many mainstream carriers have encouraged rationalisation and consolidation.

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Note that newly founded airlines or established airlines on new routes might have to be prepared to lose money for a period of time to gain customers, especially if there is already an established incumbent with deep pockets requires strong financial backing for entry. Scarcity of landing slots,

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and reserved slots for national carriers serves as barrier to entry at certain airports, for example, British Airways slots at Heathrow, Air France at De Gaulle.

Budget: -

Perceived customer demand attracting new entrants to budget sector, although very few financially as strong as established incumbents, Ryanair and EasyJet and increasingly, Wizz; budget airline hopefuls generally face financing constraints. Scope for growth in LCC sector attracts entrants in perceived underserved regions, cities and routes, for example, Pegasus in Eastern Mediterranean. Airlines from 10 newest EU member states are gaining momentum, for

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example, Wizz from Hungary.

New entrants increasing traffic at airports, for example, Stansted, pioneered by Ryanair for budget airlines, causing competition and potential cost rises at these airports.

Nature of entrants – established carriers create budget subsidiary, that is, not novices. However, problems and inconsistencies with existing business models compared to Ryanair’s heretofore strategic intent within budget sector?

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Established airlines can enter budget from different market bases. For example, mainstream airlines go ‘downmarket’ like Aer Lingus did, or set up separate budget subsidiary, as Lufthansa has done with Eurowings. Or charter airlines can enter by moving into low fare scheduled services, such as Air Berlin. Ultimate failure of Air Berlin shows difficulty for establishment of new entrants.

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New entrants are varied in terms of price/services trade-offs.

Ryanair perspective – moderate threat from new entrants (iii) The power of suppliers

General: -

Aircraft suppliers – past oversupply of aircraft and fierce rivalry between Airbus and Boeing has eased, as many airlines worldwide are increasing capacity, and there is a backlog of aircraft on order. In the past, stronger airlines, larger orders get better deals. Ryanair appears satisfied with its forward aircraft orders with Boeing. How will Boeing technical difficulties affect airlines, especially those dependent on its single type aircraft to increase efficiencies in operations, training, etc.? Ryanair has 135 737 MAX aircraft on order with an option for 75 more. One of the new 737 Max jets from Boeing was due to be delivered in April 2019, two in May and two in June. In the short-term, Ryanair’s large fleet of 450 planes includes a lot of emergency aircraft, which are located strategically and if Boeing can correct the software flaw in the 737 MAX, there may be no real adverse effects on Ryanair. In fact, this fiasco for Boeing may make the aircraft manufacturer more desperate and likely to offer further discounts to retain orders – but only if Boeing does manage to rectify its software flaws in a timely fashion, and to satisfy all stakeholders about the safety of the aircraft. Fuel suppliers – Autumn/winter 2019 saw a recovery

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in fuel prices, bad news for airlines which had got used to low oil prices. Airline traffic and capacity had grown accordingly, and lower fuel prices, enabling lower fares and encouraged demand. This was in contrast to the previous situation where airlines had no power, and fuel costs were subject to world price fluctuations.

The current oil price situation has not quite reached these critical levels, but fuel prices are a growing concern, and penalise those operators with the highest ex-fuel costs most. The only power carriers have is hedging, but this can be a double-edged sword, as the Ryanair experience of 2008/09 proved when fuel prices dropped below its hedged price.

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Airports – range from primary to secondary and tertiary; primary have greater power.

Airport services suppliers – bigger demand for such services thanks to deregulation, growth and outsourcing – but EU legislation ensures competition, reducing power of suppliers.

Budget: -

Aircraft suppliers – hegemony of Boeing in budget sector broken by Airbus, giving Boeing less power; historically, Airbus not interested in bidding for Ryanair business. Ryanair would incur enormous switching costs if it changed to Airbus with mixed fleet, so Boeing has power over Ryanair, but mitigated by current crisis at Boeing over737 MAX and previously, indirectly, with difficulties with its Dreamliner model.

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As in general case, but budget airlines have less capacity to pass on fuel cost rises to price conscious passengers, so those with the lowest ex-fuel costs will do best. Ryanair has vowed not to introduce fuel surcharges – ever – a promise it has kept without much difficulty.

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Airports – smaller secondary and tertiary airports want business from budget airlines, offering good deals: - but subject to EU constraints on state subsidies; - demand for secondary airports increasing, for example, popularity of Stansted and - Ryanair now in the fray for deals at primary airports.

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Airport service suppliers – as in general case, but budget airlines more likely to outsource.

Ryanair perspective – low-medium power of suppliers, but subject to outcome of Boeing issue (iv) The power of buyers

General: -

Passengers have more choice and access to information via the internet.

- although this can be confusing re special deals hedged with conditions and limited seats availability, as well as lack of clarity on comparative total fares when extras are added in, even using comparator websites like Skyscanner.

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Distribution – passengers can shop for flights on the internet; also, trend to direct booking; travel agents try to win back business by offering ‘complete travel solutions’ to customers, but not applicable to short-haul budget sector.

Budget: -

Copious choice for passengers from budget airlines with different features and fare structures, from mainstream airlines offering cheap fares, and from charter airlines moving into the scheduled budget sector.

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Budget airline fares appeal to price conscious travellers.

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New competitors in budget segment increase buyer power and force down prices.

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Increasing numbers of value conscious business travellers use budget airlines – especially valued for flight frequencies on routes and punctuality. Growing competition for the custom of these passengers. Even budget airlines, now including Ryanair, are introducing loyalty programmes.

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Distribution – direct internet booking is very convenient for simple point-to-point travel typical of budget airlines; internet booking makes cost and other comparisons regarding services, convenience of airports, etc., easy for passengers; EU regulations force websites to be more transparent about added charges, some of which are obligatory (e.g. check-in charge from Ryanair), and some optional (e.g. check-in luggage). Ryanair continually adding both optional and non-optional extras, even in its AGB product, for example, preferred seat choices – not unlike its traditional competitors such as Aer Lingus, BA.

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Ancillary revenues increasing in importance, but budget travellers discerning in spending extra.

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‘Blogs’ enable passengers to share complaints about customer service of various carriers – not favourable to Ryanair, despite its new ‘business-plus’ product.

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Passengers know their rights, entitlements to compensation over cancelled or delayed flights, a bigger issue for Ryanair since the strikes it incurred in 2017/2018.

Direct internet booking is very cost effective for airlines.

Complete travel solutions’ formerly offered by travel agents now available from budget sector websites, enabling more direct comparisons by passengers, but also more ancillary sales opportunities by carriers.

Ryanair perspective – strong power of buyers (v) The threat of substitutes

General: -

Fast rail and cross water tunnels and bridges enable ever faster and more convenient land travel, especially direct to city centres.

UK domestic flights declined 20% in the recent decade, with a 10% fall in passengers compared

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to 43% increase in international passengers.

Price of rail substitute is important; in many cases, more expensive than budget and even

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mainstream airline fares.

European mainland vacationers often use cars.

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Disruption to air travel from adverse weather and other unforeseen natural phenomena such as the 2010 volcanic eruptions in Iceland, which caused enormous disruption to air travel across western and northern Europe between March and May. Such events could occur unexpectedly, making road and rail travel more reliable. However, for islands such as Great Britain and Ireland, necessity to cross water makes road and rail less convenient, especially Ireland – Great Britain has ‘ground’ access to Europe mainland through Eurotunnel and Eurostar rail.

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In addition to natural phenomena producing disruption, strikes, especially from air traffic controllers have been causing air travel disruption.

Increased airport security measures entailing delay and inconvenience can make substitutes more attractive.

Budget: -

Rail and road are more likely to be viable substitutes for the shorter journeys typical of budget airlines.

More difficult for rail prices to compete with low budget airline fares for price conscious travellers’ business, despite increased security inconvenience and delay in air travel.

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Ryanair perspective – low medium threat of substitutes General conclusion from ‘Five Forces’ analysis It should be emphasised to students that the analysis offers a snapshot in time. The situation is ever changing and volatile, so the analysis and the way it is interpreted should take cognizance of this. The price of fuel is a case-in-point. Further, upward change will have various knock-on effects with respect to capacity, pricing, etc. Thus, the interrelated nature of the five forces should also be borne in mind. (b) Competitive groupings within the budget sector Having identified the challenges facing the budget sector of the European airline industry, it would be helpful to examine whether the sector can be broken down into subgroups with similar competitive postures. A strategic group map is an effective technique for identifying the relative strategic positioning of competitors. This exercise could help to identify those rivals who are closest to, or within Ryanair’s territory and, therefore, most threatening to Ryanair.

Firstly, students should identify the various key factors that discriminate among the competitors in the budget sector. These could include: - extent of route system, geographic markets served, average flight frequencies on routes served, extent of added frills, profitability, p/e ratios, ownership by another airline, use of strategic alliances, capital structure, capacity utilisation, etc.

In addition to extensive information contained in the website Supplement on ‘Competitors and Comparators’, the most up-to-date information on competitors can be obtained by students as part of the exercise of constructing the group maps, by visiting the websites of the various competitors. The most relevant rivals of interest to Ryanair are EasyJet, Norwegian Airlines and Wizz Air and, if looking at smaller or more locally based rivals, Aer Lingus, Vueling, Eurowings and Pegasus. Jet2, Transavia and FlyBe can also be considered.

Students can develop a number of strategic group maps using all or some of the dimensions suggested above, and/or others they identify themselves, two at a time. By piecing together the different implications from the different maps, this will lead to a rich understanding of competition within the budget sector.

In addition to groups, maps can also be used to examine the positioning of individual competitors in relation to each other. An example of such a strategic map is given in Exhibit 1 of this Teaching Note. The dimensions used are (i) extent of route system, from number and locations of destinations and bases, and (ii) customer service. The proportions of the circles reflect the relativities in size/market share. The information for both dimensions is contained in the text of the case and website Supplement, with Exhibits S1 and S4 of the website Supplement.

Several useful observations about Ryanair’s positioning can be elicited from students in studying the map. Firstly, Ryanair occupies a dominant position by virtue of the extent of its route system and its market share. It is obviously the largest in terms of market share, and has the most developed route system. Interestingly, although definitively positioned as offering the most basic of services, according to Product Quality ratings, since its AGB programme, its Skytrax rating has gone up from 324

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two to three stars. The map indicates that EasyJet is Ryanair’s closest competitor with a developed route system and medium service, although its airline ratings score is as low as Ryanair’s. Norwegian is growing fast, given its relatively short history, but is also in a more ‘frills added’ subsegment, between EasyJet and Ryanair. Aer Lingus, although with more frills too, is important as a rival because of its overlap with Ryanair on key routes out of Ireland.

There appears to be a rather crowded space of medium service airlines using main airports (although not exclusively). EasyJet was the leader within this space of airlines of varying size and stage of development. However, now Ryanair is joining the fray in this segment. Thus, this space is becoming increasingly competitive in its own right, and not least because of the rivalry created by Ryanair itself.

Thus, a question to consider from the Ryanair perspective is whether these airlines are going to encroach on its territory.

It would appear that those carriers adding customer ‘frills’ and tending to use more main airports may be trying to compete in what is perceived as an attractive gap between premium priced business class services and the most basic budget airlines, appealing to the price conscious business traveller. The issue for these airlines, including the reformed Ryanair, is their ability to organise the provision of added services and convenient airports without compromising the quintessential combination of costeffective operations that typified Ryanair and its previous success. Students can discuss whether Ryanair is getting its package of ‘frills’ right with respect to costs and what is valued by passengers, compared to rivals. An example is Norwegian’s emphasis on providing Wi-Fi on flights, whereas Michael O’Leary considers it an unnecessary luxury on short-haul flights.

However, instead of capturing a possibly lucrative unoccupied strategic space between premium and basic carriers, they could find that they are losing out to the mainstream carriers offering bargains at the top end, leaving the door open to new entrants in the lowest cost/price budget carriers at the lower end, like Ryanair used to be. If this lucrative segment exists, the successful competitors will have to be able to provide for it at the lowest cost in the segment, that is, an effective ‘best-cost provider’ strategy. A ‘best-cost’ provider strategy is a synthesis of Porter’s cost leadership and differentiation strategies. It aims to have the lowest costs in a particular segment of the market where it is providing more than the basic product/service. Thus, it is able to supply superior value to customers when it adds attributes that customers want, but the best-cost provider is able to produce these attributes at the keenest price and still make money. Many previous incumbents of this niche (Debonair, Go and KLMuk/Buzz) disappeared and Virgin Express, a competitor in this genre, had to be taken over by Brussels Airlines to survive. This suggests that in the budget airline sector, a best-cost producer strategy may be difficult to realise. Rather, there is a danger of being stuck in the middle, as well as operating in an increasing crowded competitive space. Armed with this information, students have to analyse whether Ryanair can succeed where others have failed.

At this time, Wizz Air appears to come closest to the pure budget model, as it is growing rapidly from its East European home. The lower part of the map shows a sample of small carriers that fall along a continuum of added frills. The question is whether these small carriers can ever get to the critical mass and geographical impact across Europe to compete with Ryanair and beat Ryanair at its own game, if they encounter Ryanair head-to-head on the same routes. How can they outlast Ryanair in a price war, especially those who are competing with a very basic product? We already see that Cityjet ceded one of its prime routes in 2018, between Dublin and London City Airport to Aer Lingus in an arrangement under which Aer Lingus will take over the Dublin-London City services, but will use Cityjet craft and crew to fly the route under its own brand. FlyBe sold itself to a consortium and 325

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delisted from the Stock Exchange in 2019. This shows how difficult it is for smaller players to survive as independent entities.

Should Ryanair be worried about the likes of Aer Lingus, a mainstream airline that is capturing budget conscious travellers? Also, as a subsidiary of IAG, does Aer Lingus enjoy advantages, such as interlining with British Airways and Iberia? Can similar advantages accrue to Eurowings in relation to Lufthansa? Or, can other mainstream carriers like British Airways, Lufthansa or Air France successfully occupy a similar quasi budget space? Is it possible that mainstream airlines like Aer Lingus can cross subsidise their budget operations from other longer haul route profits? However, on the other hand, is Norwegian taking its eye off the ball with its long-haul operations, resulting in financial losses and possibly unsustainable debt?

The above are a sample of questions and issues that can be derived from the strategic group map.

Students can be encouraged to extract definitive conclusions as well as questions arising from their group maps. The latter should stimulate classroom discussion as well as further analysis, perhaps using additional maps with other dimensions. As indicated above, further maps can be constructed to complement the one in this teaching note Exhibit 1, to provide a comprehensive picture of the competitive strategic space of Ryanair. (c) Evaluating selected individual competitors The next stage in industry analysis is the evaluation of rivals that compete in the same arena as Ryanair. This evaluation helps to predict the actions of individual competitors and the potential impact of those actions on Ryanair. In addition to the information provided in the case and website Supplement, the websites of the individual competitors detailed above can be sourced to update the information.

EasyJet

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Most direct rival to Ryanair; competing on many of the same routes, well established.

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Exemplary 2015 results, with 22% return on capital employed (ROCE); dipping as low as 9% in 2017, but back up to 14% in 2018.

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Low operating costs compared to legacy airlines, however, higher operating costs than Ryanair; concern about ability and scope to control unit costs ex fuel; also concern about revenue yield with respect to need to increase load factors and/or fares, given competitive landscape; cost reduction programme in 2018/2019 may have potential to reduce costs. New Airbus aircraft orders may reduce costs through greater seat density and efficiency.

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Good position in primary slot-constrained airports, with potential to take market share gains from higher cost legacy airlines. Strong positions at primary airports should be beneficial to stimulate higher yield business travel.

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There is scope for higher growth in ancillary revenues, as its 22.5% ancillary revenues lag those of Ryanair with 28.2%. This may reflect why EasyJet is considered such good value for money for passengers, of course, so EasyJet has a delicate balancing act to increase revenue without damaging its image.

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EasyJet brand is more upmarket than pure LCCs, and it has been voted best value for money airline for short-haul airlines in the United Kingdom. However, its strategic space is now getting very crowded. Historic differentiation is being eroded. That is, by Ryanair on pricing and by Vueling’s high frequencies on shorter business-oriented routes. Also, may be resting on its past laurels, as it emulates Ryanair more and more in charging for ‘extras’.

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Rivals Ryanair on value-for-money image and is perceived as being better than Ryanair on quality according to the Skytrax rating, and winning various awards (but not on airline ratings, which may be an indication of the erosion of its quality image advantage).

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EasyJet has a strong digital strategy as its digital initiatives are widening its distribution channels with its Jet Worldwide partner airline flight connecting product. Its digital strategy also contributes to the airline’s cost saving programme and maintenance and engineering initiatives to reduce fuel use and carbon emissions.

Relatively poor punctuality record with performance falling six years in a row, and rising

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complaints; generally ranked below Ryanair on punctuality.

Its sharp seasonality is fourth most skewed towards the summer season among Europe’s 20

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Rome Fiumicino Airport with entry of Ryanair there. According to CAPA, EasyJet is exposed to

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competition from both ends of the market, as pure LCCs can undercut it on price, and legacy airlines network makes them more competitive too.

Threats common to all airlines, such as air traffic controllers strikes, can affect EasyJet too.

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largest airlines, contributing to losses between October and March each year. Ryanair has had smoother profits over the years, with the exception of October 2018 to March 2019. Retreat from

Grew rapidly in terms of routes and passenger numbers, but growth being tempered, thanks to the stance taken by the block ownership of the family of founder Stelios Haji-Ioannou – difficult to implement strategic focus and intent with Sir Stelios in the background, for example, his insistence on high dividends curtails flexibility.

Frequent-flyer programme – jury still out on its usefulness to EasyJet. Setbacks from disruptions from terrorist attacks in destinations Egypt and Paris, but seems to have overcome these; some remaining concern over vulnerability of Paris as one of its main destinations.

Norwegian -

Another fast-growing carrier, third largest budget carrier by market share in Europe in 2019;

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innovative – first long-haul LCC with both wide body and narrow body aircraft.

Upgrading and increasing its fleet, but traffic growth lags behind fleet capacity – large leasing

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operation.

Has received numerous awards, even globally. Mixed record re punctuality, poorer in the United

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Kingdom (Exhibit S2).

Growth and innovation may be excessive, so management attention not focused enough.

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Some of its fleet consists of troubled Boeing 737 MAX, which have to be grounded, but

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ownership of leasing operation may offer alternatives.

Advantage is main airports in Europe, and affluent, price inelastic home market, in a geographically large country where flying is the best means of transport. Solid foothold in London Gatwick, London is Europe’s biggest aviation market – but Brexit creates uncertainties.

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Secondary airports in North America offer cost advantages, however, generally downside of high cost base in Nordic region, especially labour costs. Will cost reduction programme, Focus2019 be sufficient?

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Can be more expensive than it seems, with few frills, that is, charges for seating reservations, snacks, etc.

Struggling to make a profit; losses in three out of five years. Revenue does not come up to costs,

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especially in face of indifferent and falling load factors. Apart from better load factors, ancillary revenue needs to grow.

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Very unhealthy balance sheet makes continued viability without bailout questionable. Note

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heavily discounted rights issue.

High cost base and weak balance sheet makes Norwegian more vulnerable to external events,

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such as fuel cost rises, climate-related delays, etc. than other competitors.

Does not compete directly to any great degree with Ryanair or EasyJet because of little route

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overlap so far.

Issue of long-haul budget operation – Norwegian’s difficulties with achieving profitability

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coincided with the start of its long-haul operations, a business with different characteristics to short and medium haul. Can Norwegian succeed where everybody else has failed in long-haul budget airline? Is it a distraction that is diluting profitability?

Wizz Air -

An example of an aggressive new competitor from Eastern Europe; very growth oriented,

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predominately in Eastern Europe, but ever expanding its route system opportunistically. So far, very limited direct competition with Ryanair or EasyJet, but this is changing as Ryanair has aggressively entered the Romanian market, and Wizz continues its rapid expansion. However, fares are considerably higher than Ryanair (Website Supplement). Similar to Ryanair, Wizz does not make it to the top 10 value for money short-haul airlines serving the United Kingdom.

Profit margin second only to Ryanair.

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Deemed to be ‘no frills’ in the Ryanair mould, with even slightly lower cost base, but higher Skytrax star rating in the past; Ryanair has now caught up, with identical ratings as Wizz.

Mainly secondary airports, but not all, for example, Chopin Airport for Warsaw; better punctuality than EasyJet and Norwegian from UK airports, but not rated worldwide; Wizz generally better than Ryanair on punctuality metrics.

High seasonal dependency since relatively low flight frequencies per route may not suit business travellers.

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Relatively low fares yield counteracted by ancillary revenue, for example, upfront fee for joining

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its Wizz Discount Club.

Class discussion might centre on whether Ryanair has anything special to fear from Wizz. What about the idea of merging with (really being taken over by) Ryanair mooted by some observers.

Class participants could debate whether this idea might hold any attractions for Ryanair. The advantages would be the acquisition of a developed route system in Central and Eastern Europe, possibly picked up cheaply, already operating a similar business model to Ryanair. On the other hand, Ryanair has the wherewithal to grow organically wherever and whenever it suits.

Aer Lingus -

The target of Ryanair’s bid, and ultimately acquired by IAG.

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Traditionally high cost, almost completely unionised, but reinvigorated after near bankruptcy in 2001/02; recovery thanks to cutting more than one-third of staff and ruthless cost-cutting plan.

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Severe losses, burning through cash in 2009/10, with discontinuities and many strategy changes; but appears to have re-established itself with a definite strategy (‘civilised airline’) under then CEO, Christoph Mueller – seems to be working.

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Styled as a no-frills low-fares airline on many European routes, charging for hold baggage, onboard snacks, early seat selection, although still uses primary airports, for example, London Heathrow.

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A direct competitor to Ryanair on some routes out of Dublin and out of the United Kingdom, London generically; good punctuality.

Long-haul routes between Ireland and major US cities; Will Aer Lingus short-haul flights serve

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increasingly as feeder flights for long-haul IAG flights, but this would be largely limited to Irish market. Would this take some market share from Ryanair and does it matter? – another issue for class discussion.

2.2 The next step in the SWOT is to evaluate Ryanair’s strengths and weaknesses. This analysis is based primarily on Chapter 3. (a) Strengths and Opportunities: This question can be approached by listing Ryanair’s strengths in relation to competitors, and evaluating whether any of the strengths are opportunity sources offering sustainable competitive advantage. To fulfil this criterion, they should (1) offer superior customer value, (2) be unique and (3) not be easily imitable by competitors and non-substitutable.

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Ryanair first budget airline in Europe, market leader with first mover advantage.

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Most developed route system and good punctuality. Largest network and fleet in Europe, with growing presence in primary airports. Poised for further growth.

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 pre-empting potential competitors on the same routes, unless they can offer better value than Ryanair through lower prices (which requires them to have lower costs or be able to take the pain of losses – and/or extra services (but customers must consider these worth paying for). Given Ryanair’s low-cost position, and the precarious state of many airlines, few competitors have deep enough pockets to outlast Ryanair in a price war. Wizz is only rival on costs, but on trip length adjusted basis, Ryanair is the lowest.

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Low break-even load factor, easily cleared, reduces financial risk. Ryanair has one of the highest load factors in the world. Fuel price is not under control of the carrier, but this is no worse than competitors face.  can offer the lowest fares.  continuous good underlying operating profit.  healthy balance sheet and war chest. Ability to change is proven, even if belatedly – AGB approach has been helpful. Reversal in what were regarded as weaknesses under its previous ultra LCC strategy.

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AGB initiative includes a very successful digital strategy with establishment of Ryanair Labs, providing easier booking access for passengers and opportunities for more revenues, including ancillary revenues. Accommodation, holiday and event sales through its platform can help it achieve its aim of becoming the ‘Amazon of Travel’.

New strategy seems to have targeted ‘frills’ that actually matter to passengers, for example, digital, segment focus, seat allocation and primary airports.

In the past, labour costs seem to be lower than those of rivals, some of whom have sustained strikes and unrest. Interestingly, Norwegian has tried to circumvent domestic high labour costs by locating headquarters to Ireland, Ryanair’s home base (but currently labour relations may be a weakness for Ryanair because it has to abide by labour rules and conditions in countries of its bases, no longer allowed to follow Irish rules only). Ryanair is creative and resourceful in constantly finding new sources of revenue, within AGB programme, for example, Business-Plus product.

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Conversion to new fleet entails lower costs and better environmental friendliness. Ryanair claims to be the EU’s greenest airline.

Maintains loyal investment base through profitability, dividend and shareholder payouts, allowing greater freedom to invest in growth. Special payouts and dividends offer more flexibility in a cyclical industry than regular dividends. Compare pressure on EasyJet to pay high annual dividends.

Leadership – Michael O’Leary, management team and board of directors are united and effective in strategic approach and actions, determined competitors, especially compared to EasyJet boardroom battles of the past. (The Michael O’Leary leadership issue can be discussed in detail under Question 5 re strategic leadership issue.)

(b) Weaknesses and Threats: In an inverse way to the analysis of its strengths, Ryanair’s weaknesses can be listed and assessed to see whether any of them create critical vulnerabilities that impair Ryanair’s positioning and viability.

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Previously, pursued clear strategy, efficient and effective low-cost operator; activities fit together to create ultra-low cost – difficult to undercut Ryanair on cost and, therefore, on price. Key question now is whether this clear effective model has been diluted or compromised, especially in view of higher labour costs forced on the company? It does appear that extra costs associated with AGB have been absorbed, or recouped in ancillary revenues. Will extra staff costs after labour unrest and trade union recognition add to costs and less flexibility? This still remains to 330 .

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be seen, but can be considered by students. Any threats to its low-cost model are especially serious to Ryanair, since it is less able to pass on cost increases on to passengers, due to historic and avowed continuing dependency on low fares as its key selling point.

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Cost structure – aircraft utilisation open to improvement with lower number of hours per day than other budget competitors and comparators, especially Wizz.

EU regulation on compensation to passengers for delays and cancellations may be especially

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serious for Ryanair, with its own strike disruptions in addition to those of French air traffic controllers. Obviously, for budget carriers, such assistance and compensation costs would be out of all proportion to the fares paid by passengers, especially Ryanair’s very low fares.

Notwithstanding AGB programme, and good punctuality, Ryanair’s customer ratings remain low,

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and it has the distinction of being voted the worst airline in the United Kingdom for six years running. Even on value for money ratings, Ryanair does not make the top 10. There is certainly scope to improve its brand ratings.

Staff issues – Up to 2017, Ryanair appeared to have had no problems recruiting cabin staff,

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including pilots, to meet its needs. Cuts in staff salaries and numbers in face of financial crises were implemented without any incident – compared to British Airways and Iberia. The strife of 2017/2018 was quite a departure from the previous relative peace. Now, Ryanair has to contend with demands for better salaries and working conditions, and to conform with labour laws in other jurisdictions where crew are based, most of which are more stringent than those which had prevailed under Irish contracts. However, its competitors are also liable to these same conditions, but for Ryanair, it will mean losing a previous advantage.

According to CAPA, Ryanair has low flight frequencies. Among seven leading European lowcost carriers, its weekly average departing frequency per route of 4.9 is very low, with only Wizz coming in at a lower frequency of under 4. Low frequencies are a disadvantage in attracting higher yield business travellers.

Outsourced services outside Ireland may militate against employee commitment and intense company knowledge necessary to create adequate customer service, especially now, with AGB, that staff culture and service is more of a differentiating factor for Ryanair than in the past.

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Reputation – Ryanair has antagonised many constituencies (EU commissioners and officials, trade unions, competitors, various airport authorities, some politicians and journalists) whose support might have been useful in certain situations, for example, the EU decisions about employment contracts, about state aid at Charleroi/Brussels, and the authorities’ decision about the proposed takeover of Aer Lingus, etc. On the other hand, has Ryanair turned some of these problems to its advantage by holding itself out as a low-fares champion who will fight the establishment on behalf of ordinary passengers? This could be an interesting classroom discussion point.

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Is continuing stream of legal actions an unnecessary distraction and depletion of resources? Or,

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again, is it a sign that Ryanair will lead the fight for low fares on behalf of ‘the people’?

Increase in security delays, and latterly, uncertainly due to natural events, etc. may drive some passengers to avail of substitutes, like rail or car, but low prices of Ryanair mitigate this threat better than rivals.

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Threat of carbon tax on flights in Europe could have detrimental effect on cost base, but all European carriers face the same problem. Ryanair’s young environmentally friendly fleet helps somewhat.

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Uncertainties around Brexit – also affect its rivals.

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Issue with Boeing 737 MAX aircraft may delay Ryanair’s expansion, given the long lead time in ordering alternatives, and its dependence on Boeing aircraft generally, offering efficiency advantages. Note that Wizz has Airbus aircraft fleet, so not affected by Boeing issue.

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In the past, much antagonism against Ryanair is really directed against Michael O’Leary personally. Is his personal ‘in-your-face’ style a double-edged sword? (See discussion on Question 5, below.)

2.3 Having completed the SWOT, we are now in a position to answer the question as to whether Ryanair’s strategy is sustainable.

On the ‘strategy clock’ (Chapter 7), Ryanair has moved from its previous firm positioning in the Low Price, No Frills into the Hybrid Strategies quadrant with its AGB programme. In both cases, the carrier is highly dependent on charging low prices. The question is whether Ryanair’s new positioning enables the airline to continue in its leadership position of the budget sector of the European airline industry through the lowest costs. It can be addressed by evaluating: - how the strategy meets customer expectations compared to competitors.

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how efficiently Ryanair is delivering the strategy in comparison with competitors.

Combining these two evaluations, against the background of the budget sector industry analysis challenges, will give students some insights about how sustainable Ryanair’s strategy really is.

Teaching Note Exhibit 2a is a diagrammatic representation of how perceived customer value interacts with efficiency to produce sustainability. (a) Customer viewpoint: -

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Quality ratings of Ryanair still suggest low customer evaluations, even after implementing its AGB programme. However, business is booming, as seen in its high load factors, so it is possible that the fact that Ryanair gets passengers to their destinations at a perceived rock-bottom price is a value proposition that still appeals to customers.

This suggests that if it can get its enhanced service message across, it can do even better at appealing to passengers, especially given its attractive extensive route network, and relatively good punctuality. However, the high value for money ratings of EasyJet on customer perceptions could prove to be a challenge for Ryanair when it comes to recognition of its AGB extras and perhaps recouping some of its costs. The robustness of the budget sector in Europe shows that

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more and more passengers appreciate low fares. Once people have traded down, or experienced very low fares, they are reluctant to pay higher ones again. This fact is recognised by mainstream carriers setting up their own low-cost subsidiaries. Ryanair’s positioning on low fares that attract passengers is the clearest in the industry.

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Competition in the budget sector is intensifying, offering more choices to discerning customers who can easily compare product offerings and prices by means of website bookings. In particular, customers can easily assess whether all the extra charges, some optional and some compulsory, incurred in booking with Ryanair, add up to a higher fare overall with Ryanair versus competitors on any given journey. The main question for Ryanair is whether its enhanced services can be recognised and appreciated as such by passengers and whether this recognition would prompt passengers to pay some increase in fares for them, and, if so, by how much? Thus far, Ryanair has marketed itself primarily on its lowest fares.

(b) Producer/Efficiency Viewpoint: -

From the producer/efficiency viewpoint, the key question is whether Ryanair’s raised labour costs and enhanced service can be operated at low enough costs to charge the lowest fares on which it has traditionally depended for its custom, and still make a profit.

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Ryanair has put all the pieces within its control in place to run a budget airline, as demonstrated by its low break-even load factor.

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Ryanair still has the lowest operating costs and the highest operating margin of all its competitors.

However, certain cost advantages which Ryanair now enjoys could diminish: -

Ryanair has been forced to sign contracts with crew at higher remuneration than it had been paying. It remains to be seen how much higher staff costs will affect unit costs, and how significant this is. Then, moving staff away from Irish contracts to national contract conditions in their base countries could incur extra costs. Moreover, EU legislation curtailing working hours and making worker participation compulsory is quite inconsistent with Ryanair’s past strategy and could simultaneously curtail worker flexibility and raise staff costs.

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Share options for staff could lose their attraction relative to a wage rise, if there is ever a serious drop in the share price. However, high unemployment across Europe has eased this problem.

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Now that Ryanair is using more primary airports, this will entail higher airport charges, and more competition for landing slots. This will render its previous special deals at secondary airports irrelevant. However, this may have been eroded anyway due to EU moves against state subsidisation, so Ryanair may no longer be able to avail of discounts, grants, etc. relative to competitors. Also, as airports like Stansted, one of Ryanair’s mainstays, became more popular with budget and even mainstream airlines, Ryanair’s airport and associated charges were bound to go up anyway. It is hardly realistic for Ryanair to pull out of a hub like Stansted or Dublin, as the airline had once threatened to do if charges rise – although it did implement its threat to pull its base in Copenhagen after labour unrest there.

(c) Sustainability: -

The theme of sustainability can be analysed through the lens of business models. (Chapter 7). In particular, the concepts of value creation, configuration and capture can be applied to Ryanair.

How successful is Ryanair in these three activities, in its own right, and when compared with its competitors. The evidence suggests that it was historically successful in all three activities as they knitted together into an integrated whole that was hard to emulate. In its new guises, it is still 333 .

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developing an adaptation of its business model, but the outcome seems to be the same with respect -

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to enabling competitive advantage, as the way it creates value and configures its operations results in value capture. CAPA credits Ryanair and Michael O’Leary with ‘maniacal focus’.

Further, the sustainability of Ryanair’s new strategy can be tested against how it combines perceived customer value with its own efficiency. (See Exhibit 2a.) Even with its AGB programme and higher wages, Ryanair is probably in Quadrant 2 of Teaching Note Exhibit 2 in terms of sustainability. This is because its enhanced services have not yet translated into customer perceptions. It does not receive a high vote on value for money, but is accepted as a low fares leader. Thus, doubts over customer satisfaction as compared to other airlines suggest that it could not be placed in the high category on perceived customer value delivery. Although customers rate the components of the Ryanair experience poorly, the carrier comes out quite well in the proportion of passengers who ‘vote with their feet’ and continue to patronise the airline for its low fares and desirable routes.

Ryanair does aim to offer customers a reliable short-haul air service and a positive customer

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-

-

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experience at low fares, to attempt to move into Quadrant 1 from Quadrant 2 (Exhibit 2b). Prior to AGB, its ambition excluded the positive customer experience element. This change in ambition seems to make sense, since it realised that its original more limited ambition was vulnerable to attack from competitors which offered a more satisfactory experience at relatively low fares. (The strategic planning discussion in Chapter 13 can be applied regarding the issue of company vision and mission.)

The sustainability of its new strategy appears to be on track, although it has to be consolidated.

This is by way of improving customer perceptions and appreciation of its enhanced service offering, so low fares are not its only selling point. This might even enable some fare increases, to a point where Ryanair would see its yields increase, but it should still offer the lowest fares – an ideal position, that would make its competitive advantage hard to surpass by rivals. This is not to dismiss the continuing importance of keeping down costs and the need for efficiency. In this respect, Ryanair seems to be succeeding so far. The question is whether it can continue to add customer benefits and still be the lowest cost. Also, can it incorporate the loss of some of the cost advantages it has enjoyed so far, detailed above under the efficiency viewpoint.

Notwithstanding some of the higher costs entailed in the AGB programme, so far Ryanair has succeeded in being the lowest cost producer, although this position may be mitigated somewhat, but not entirely, by any means by its higher labour costs. In addition, it has enjoyed enhanced ancillary revenues from some of its added frills.

Even in 2018, Ryanair reported a break-even load factor of 73%, identical to 2017. This leaves a comfortable buffer between the number of passengers the airline needs and the number of passengers that want to fly with Ryanair.

While the above cost factors could somewhat reduce Ryanair’s erstwhile cost advantages to some extent, they affect its rivals as well, and Ryanair enjoys cost advantages over and above these anyway, such as cost-efficient aircraft, and general long-standing efficient operations in every piece of its value chain. This is in addition to its ability to raise additional revenues. These are not easily imitated or substituted by rivals. Thus, Ryanair fulfils all the methods recommended in Chapter 6 to sustain its price-based strategy: accept reduced margin; win a price war; reduce costs; focus on specific segments.

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The nature of Ryanair’s moves and countermoves lends itself to analysis by means of game

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theory. Its shifts into primary airports, one-by-one on a gradual basis may be seen through the game theory lens (Chapter 7). Its move into Rome Fiumicino Airport is a specific example, as it directly challenged EasyJet, which blinked first. Its legal wrangles with the EU, its sudden recognition of trade unions, and its reorganisation into a holding company all lend themselves to game theory analysis. It is not only a matter of analysing how Ryanair wins or loses the specific game but also whether it should have got involved in the particular game in the first place, with an eye on furthering its strategic intent.

The sustainability of Ryanair’s strategy is heightened by its approach to hypercompetition (Chapters 3 and 7). Its sequences of small moves enable flexibility and offer a series of advantages, often undetected by its competitors before the damage is done to them. The Rome Fiumicino saga whereby Ryanair outflanked EasyJet is a good example. Another example is a dispute with Hertz car rentals, which culminated in the launch of its own car rental website.

The above is a suggested answer on the sustainability question. Students themselves can develop more optimistic or pessimistic scenarios, for example, a competitor ups the ante with customer services at reasonable fares. The uncertainties about the effects of Brexit would make a good theme for scenario analysis. (Scenario analysis is described in Chapter 2.) Another way of provoking students to address the issue of sustainability is to ask students would they buy shares in Ryanair.

Why, or why not? If yes, how long and under what conditions would they hold on to them? In April 2019, Citadel Europe, a hedge fund, took a 0.56% short position in Ryanair, according to data disclosed to the Central Bank of Ireland. Based on Ryanair’s then market valuation of €13.2 billion, Citadel’s move amounts to a bet of about €74 million that the airline’s share price will drop, a view not concurred with by Davy or CAPA. Students can discuss whether they believe that Citadel is taking a good bet or stands to lose all its money.

Would you recommend any changes to Ryanair’s approach? (Refer especially to Chapters 4, 6, 8, 11, 12 and 13 of Exploring Strategy.)

Path dependency of its previous strategic history and incrementalism are important here (Chapter 6).

Generally, Ryanair has followed the path of logical incrementalism (Chapter 13), with some dramatic exceptions, namely, its AGB programme and its recognition of trade unions. Students can be asked to evaluate both types of strategy as enacted in Ryanair and decide on what changes, if any, are required (Chapter 12).

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Students can evaluate Ryanair’s financial and operational performance systematically against its competitors, and identify any gaps. For example, they might see a gap in quality and value-formoney ratings between Ryanair and its peers, and discuss whether and how this matters and how to go about remedying the gap with strategy that is suitable, acceptable and feasible.

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Overall, Ryanair has had an unwavering adherence to its lowest cost budget airline model, which

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has worked to its advantage to enable it to grow in a virtuous cycle between its navigation of the five competitive forces and the application of its proficiencies to a prototype successful low-cost carrier.

It retains this model even within a new company structure, Ryanair Holdings, incorporating subsidiaries Ryanair, Ryanair UK, Laudamotion, Buzz (previously, Ryanair Sun, a Polish charter airline; in 2003, Ryanair had made an opportunistic acquisition of KLM’s loss-making LCC subsidiary, Buzz, and assimilating it seamlessly into Ryanair). In fact, the establishment of the 335 .

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new structure will provide for openings for further incremental and opportunistic strategic moves,

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in the way of suitable acquisitions as consolidation in the industry seems to be proceeding apace, or in hiving off some aspects of Ryanair’s activities into a separate operation. But, Ryanair must be careful that it does not stray from its lowest cost position within this structure. If Ryanair wants to play the role of low fares champion in Europe, it has to assume superiority on the critical cost factors within its management’s control, now in a hybrid rather than a pure cost leader strategy.

Of course, the AGB programme appeared to be a radical departure, but, in fact, many of the added

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costs were recouped in additional ancillary revenues, or greater volumes and load factors, for example, flying to primary airports. Actually, Ryanair’s best-cost leader position only appears to have been enhanced through its AGB programme.

The other radical change for Ryanair has been the recognition of trade unions. This was a change

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that was forced upon the company. Although Ryanair has had to withstand strikes, in the longer term, it appears to be quietly getting on with making agreements with its unionised staff in its different countries of operation. Here, the global pilot shortage, especially captains, is a factor, but Ryanair is a significant employer in Europe, and all stakeholders – pilots, crew and passengers – would be net losers if Ryanair was to go under or change its model. Also, by training its own pilots, Ryanair can mitigate these shortages somewhat, provided the trained recruits are willing to continue to work for the airline. Generally, crew may prefer the security of working for a financially robust rather than a fragile airline. Thus, industrial relations remain a sensitive area for Ryanair, but it has to be seen in context of the industry and its own actions in this regard.

By and large, past changes have been consistent with, and enhanced, or at least, not interfered

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with Ryanair’s core focus. For example, its introduction of a private jet service to appeal to companies, government traffic and wealthy individuals in 2016 is an example of the latter. To this end, the airline kitted out a Boeing 737–700 for hire with 60-business class reclining leather seats. The corporate jet hire is charged by the hour, and available to destinations up to six hours away. Customers are charged for extras such as fine dining. The airline started with one corporate jet to assess the market before considering whether to add more, but up to 2019, it has not increased any further. Thus, we see another instance of Ryanair’s incremental approach, even in a radical deviation from its standard business model. If the new service doesn’t work out, it would not be a very costly experiment. If it does work out, the question would be how to operate this service alongside Ryanair’s main business. Such moves would be consistent with Ryanair’s previous flexible incremental approach to change, but always with its eye on the final target of growth and development. This has served it well in the past. When it deviated dramatically from this approach by its Aer Lingus foray, one can argue that this was not a success.

Additional sources of revenue could continue to be sought, again without compromising the lowcost model. At the same time, Ryanair has to continue aggressively to pre-empt competitors entering its routes. It has to anticipate its competitors’ growth patterns and destabilise them.

Currently, Ryanair has the deep pockets to wage a price war against any existing and potential airline competitors. How many price wars on how many fronts can Ryanair afford to fight?

Maybe one competitor alone cannot defeat Ryanair, but many simultaneous competitors might succeed. Scenario analysis (Chapter 2) and game theory (Chapter 7) would be useful here, drawing a series of strategic maps involving different combinations of erstwhile and potential competitors and their likely moves. Its main competitors’ strategic positioning are outlined in the website Supplement.

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Ryanair needs to understand its clientele, especially its new clientele, as it rolls out further routes and opens up hubs in mainland Europe, especially central and eastern Europe, and even further afield, in Morocco. What are their expectations, apart from the low fares aspect? Is outsourcing services a limiting factor? How can this be addressed without compromising costs, especially in the high wage, less flexible work environments of some mainland EU countries?

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Students should also be encouraged to entertain other possibilities, using scenario analysis. For example, should Ryanair enter any more ambitious strategic alliances or interlining arrangements in addition to the limited one with Aer Lingus? Southwest does not do this, and it does not seem to make logistic sense on a point-to-point route system. But, are there any circumstances where it would make sense for Ryanair? The costs and complexity of interlining arrangements could be a deterrent, for example, who is responsible for missed connections or baggage?

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Another issue is the rapidity of Ryanair’s growth. Is it growing too much-too fast, so this poses a threat to filling its capacity? Or is it worth taking the hit of a temporary decline if it eliminates weak competitors in the long term? Again, scenario analysis would be helpful here, analysing, in turn, scenarios of low, medium and high growth for Ryanair.

What about taking over other weaker rivals, such as Wizz, as has been mooted, admittedly, not by Ryanair itself? Should Ryanair consider expanding its model to longer routes, such as transatlantic ones, which it had been considering, but not following up? Again, the logistics would seem to be inconsistent with its erstwhile business model, and the jury is still out on the long-term viability of Norwegian’s long-haul budget service. Each of these strategic possibilities and others suggested by students could be considered by building a scenario around it.

3. Evaluate the strategic leadership of Michael O’Leary. (Refer especially to Chapter 15.)

Chapter 11 discusses types of leaders, that is, charismatic versus transactional, and types of leadership emphases and approaches. It is an interesting exercise to see how students would categorise Michael O’Leary. Perhaps what emerges is that he is difficult to categorise. What does this imply?

Class discussion about Michael O’Leary might start with defining what type of leader he is – transformational, transactional or situational. It is suggested that he embodies all three. As a transformational leader, he is renowned for his charisma, and quoted widely by admirers and detractors alike. He is inextricably linked with Ryanair’s ambitious vision and identity as the most prominent and successful budget airline in Europe. It is his drive that has provided the energy and focus for Ryanair’s successful trajectory over almost 35 years, with a very few stumbles. Yet, O’Leary has had the transactional skills to choose and structure management teams that have been able to spot and avail of opportunities along the way, and to execute change efficiently and effectively, such as the AGB programme, and the current initiative to make Ryanair the ‘Amazon of Travel’.

With respect to labour relations, O’Leary has been less sure-footed recently in his interactions with trade unions. In this respect, the new corporate structure of Ryanair Holdings with O’Leary as CEO of the holding company puts him at arm’s-length in negotiations, as these are left to the management of the individual units. This is arguably situational leadership, whereby O’Leary can react at a high level strategically, both proactively and reactively, but others may be nearer to the appropriate implementation of the strategy. Students might deliberate the pros and cons of the new structure.

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The above are some suggestions. The new structure offers an opportunity for students to discuss further how leadership may be enacted in Ryanair. An issue for discussion may be how communication and information might flow in this structure to maximise strategic planning and implementation, whilst dealing with unexpected challenges and availing of opportunities, foreseen and unforeseen.

Anyway, one may ask whether and/or for how much longer Michael O’Leary wants to stay in the job.

Will he get bored and retire to his cattle and stud horse farm, currently his hobby? There is a suggestion that he would not be happy to preside over a static comfortable situation, as he appears to need constant new challenges and controversies, whether externally generated or of his own making, to maintain his interest. Or, would he be headhunted by another airline or by another business altogether? Students might consider whether they would headhunt Michael O’Leary, and why or why not?

However, regardless of Michael O’Leary’s own departure decision, is his presence an asset or a liability to Ryanair? The case suggests that he is both. Students could debate the pros and cons of Michael O’Leary’s continued leadership of the restructured company. The characteristics that have driven the company forward – his enthusiasm and energy, his strategic insight, his determination and mission orientation – can these be carried too far? Is it all part of an integrated inseparable whole, so do you have to take the good with the bad? Is this where we may enter the realm of Sidney Finkelstein’s leadership failure warning signs, when you have too much of a good thing? On the other hand, O’Leary has been able to recognise the need for change, time and again.

In fact, some schools of thought would value highly Michael O’Leary’s relentless energy and his thriving on adversity. It displays a lack of complacency – quite the opposite of what Finkelstein points out as a danger signal. The capacity to irritate may bring about conflict and change. Also, in Michael O’Leary’s favour, as Ryanair’s largest single shareholder, he literally ‘puts his money where his (loud) mouth is’.

It is of interest that O’Leary has repeatedly expressed his admiration for Herb Kelleher the founder of Southwest Airlines, and commenting on Kelleher’s death in January 2019, declared, ‘Herb was the grand master Yoda of the low-fare airlines. He was the leader, the visionary and the teacher: without Herb, there would be no Ryanair, and no low-fares airlines anywhere’.

Another way of looking at Michael O’Leary’s leadership is whether he was the right person for the job during the launch and fast growth era, when there was a harmony between his dynamism and love of challenge and the requirements of the company. But does the company now require more of a transactional ‘manager’ than a transformational ‘leader’, so it can stop and catch its breath and consolidate? In other words, this is a ‘horses for courses’ approach to the evaluation of O’Leary’s leadership. Of course, even Michael O’Leary himself does not claim all the credit for Ryanair’s success. He acknowledges his talented and coherent management team, which provides diversity and balance. Moreover, he has been happy to strengthen his management team with new skills in marketing and public relations. This top team aspect has to be considered in the context of Ryanair’s leadership.

Students can be asked would they like to work directly for Michael O’Leary. Why or why not?

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List of Exhibits Exhibit 1. Strategic Group Map of the European Airline Industry Budget Sector Exhibit 2a. Strategic Sustainability Exhibit 2b. Ryanair’s Positioning and Potential Improvement

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Exhibit 1. Strategic Group Map of European Airline Industry, Budget Sector

Broad Ryanair

EXTENT OF ROUTE SYSTEM

EasyJet Norwegian Eurowings

Wizz Vueling

Aer Lingus

FlyBe Pegasus

Jet2

Transavia

Cityjet

Narrow Basic

SERVICES

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Exhibit 2a. Strategic Sustainability High

4

1

3

2

Perceived Customer Value Delivery

Low Low

High

Efficiency Quadrant 1 – most sustainable Quadrants 2 and 4 – sustainable Quadrant 3 – unsustainable

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2b.

Ryanair’s Positioning and Potential Improvement

High

4

1

Perceived Customer Value Delivery

2

3

Ryanair

Low Low

Efficiency

High

Sources Lex Column, 2010. Ryanair. Financial Times, 2 February, 18. Emmet Oliver. 2003. Former Go boss offers lessons in high flying. Irish Times, 28 November. Davy Research. 2019. Time to go long short (haul). CAPA Centre for Aviation. 2018. EasyJet SWOT; from green to amber for Europe’s orange airline.

23 November.

CAPA Centre for Aviation. 2019. Ryanair SWOT: the best of airlines, the worst of airlines.

14 January.

The juxtaposition of fulfilling customer value expectations in terms of product/service and price, in conjunction with provider efficiency, in comparison with competitors to create sustainable competitive advantage is described by Faulkner and Bowman in Faulkner, D. & Bowman, C. The Essence of Competitive Strategy. (Prentice Hall, 1995), especially Chapter 6, Strategic Choice.

CAPA. Ibid. 2019.

Donnelly, E. 2019. Pioneering Southwest Airlines co-founder Herb Kelleher dies at 87.

Independent.ie, 4 January

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Multi-sided platform competition in the video game industry Hakan Ozalp and Krsto Pandza

1. Introduction This case uses video gaming industry to discuss strategic choices and trade-offs characterised for companies that manage multi-sided business model. The case compares strategies between of main platform owners Nintendo, Sony and Microsoft. It also illustrates the main characteristic of multi- sided platforms, such as subsidisation/pricing, indirect network effects, quality, differentiation and exclusivity/multihoming students should be able to discuss the industry-level characteristics of video gaming industry as well as strategic choices of the three main platform owners.

2. Position of the Case The case study is designed to facilitate teaching of Business-level Strategy and Business Models (Chapter 7). There are also several aspects relevant for Industry and Sector Analysis (Chapter 3) and Entrepreneurship and Innovation (Chapter 10) within the case.

3. Learning Objectives The following learning objectives are addressed with this case study:

•

Identify principles and main strategic drivers of multi-sided platform competition.

• •

Differentiate between product-centric and platform-centric competition.

• •

Analyse strategic decisions and trade-off that lead to competitive advantage in platform-centric industries.

Identify successful approaches for managing platform ecosystem.

Assess the benefits of technological innovation for supporting platform-centring strategies.

4. Teaching Scheme The case study may be used as the basis for individual assignments, plenary discussion or for small group work. First, the instructor could direct the teaching session to discussing unique characteristics of managing multi-sided business models. These challenges are generic and not firm specific. It is fruitful to expose differences with conventional manufacturing and service business models (linear business models). After these differences are established, the discussion could be directed at exploring different strategies that the main players in video gaming industries implement in order to achieve a competitive advantage. The case could be concluded with the discussion about the future of gaming consoles.

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5. Questions for discussion 1.

Compare strategic management of platform-centric and product-centric competition?

2. Why have none of the three game console companies established a dominant position in the market?

3. What can we say about the importance of positioning for competing platforms in the market?

4.

Is the business model based on traditional gaming consoles sustainable? (Are we experiencing the death of the console)?

6. Case analysis 1. Compare strategic management of platform-centric and product-centric competition? With this initial question, the instructor could test if the student really understands the differences between managing a multi-sided platform business and a business that relays on a linear business model. Students will be familiar with formal definition describing multi-sided platforms (MSP) as technologies, product or services that create value mostly by enabling interactions between two or more customers or participants and that (1) each group of participants (‘side’) are customers of the MSP in some meaningful way, as well as (2) the MSP enables a direct interaction between the sides.

Product-centric linear models violate the first requirement. Resellers violate the second requirement.

There is no direct interaction between the sides. Familiarity with the definitions, however, does not demonstrate the understanding of decisions and trade-offs that are unique to managing multi-sided platforms.

The instructor should use this question to discuss strategic decisions and the associated trade-offs that platform companies have to consider. These are the following: a) the number of sides to bring on the platform; b) design; c) pricing strategies and d) governance rules. a) The number of sides; Sometimes this is obvious and, although gaming consoles could be considered as typical two-sided platforms, it is useful to emphasise a very complex innovation ecosystem of players that contribute to the development of the game. An example of LinkedIn could be provided in order to illustrate a three-sided platform (professionals/users, advertisers and recruitment agencies) b) Design; MSPs can encompass a tremendous variety of functionalities and features that reduce search costs, transaction costs or product development costs (Sony provides application programming interfaces and development kits that facilitate game development for the PlayStation 3). c) Pricing; Because MSPs serve multiple types of customers, they potentially have multiple revenues and profit sources. In reality, however, most MSPs have discovered that they have to offer their services for free, or at subsidised prices, to at least one side of the platform and

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derive their profits on the other side. The case provides examples how gaming companies adopted different pricing strategies. d) Governance; MSPs can regulate their various sides by resorting to non-price governance rules, which fall into two major categories: Rules regulating access to the MSP: Who is allowed to join? and Rules regulating interactions on the MSP: What are the various sides allowed to do?

2. Why have none of the three game consoles companies established a dominant position in the market?

Students will be familiar with the dominant position of many multi-sided platforms such as Google in web search, Facebook in social networking, PayPal in micropayments and the duopoly between Apple and Android platforms in smartphone operating systems. The video game industry offers an interesting competitive environment with fierce competition among the three main platform-owning companies.

The students should engage with the question of why we often see this ‘winner-take-all dynamics’ in multi-sided-platform competition but why we don’t see this same dynamic within the gaming consoles industry? Students will struggle to answer these questions if building on RBV arguments emphasising valuable, rare, inimitable and non-substitutable (VRIN)/ value, rarity, inimitability and organisational support (VRIO) resources and capabilities or Five Forces framework looking at bargaining power of suppliers and customers or barriers to entry.

The engagement with this question will enable students to identify: a) strength of direct and indirect network effect; b) little room to differentiate among different platforms (very few niches and differentiation opportunities exist) and c) difficult or costly use of more than one platform.

Students will more likely identify the network effect but struggle with differentiation and switching costs. The instructor could use a historical example of the video cassette recorder (VCR) and industrylevel platform standard war between Video Home System (VHS) versus Betamax industry standard platform. The dominance of VHS is explicable by the ability of JVC to build and orchestrate an innovation ecosystem and create superior network effect, in comparison with Sony’s approach.

Student should recognise that the gaming console industry also requires building of a strong network effect, which hints at the potential of winner-take-all dynamics. However, the gaming industry allows for a strong differentiation of platforms. Sony’s focus – on engineering excellence, technological sophistication and hardcore gamers – contrasts heavily with Nintendo’s focus on non-traditional gamers with creative games that do not require heavy processing power. Microsoft often differentiate with offerings that build on its expertise from IT and the internet industry. The instructor could add different example such as dominance of Microsoft-Intel PC architecture that did not allow for much differentiation and challenge students to compare video gaming with competition among Facebook, Twitter and LinkedIn within the social networking industry. Similarly, it is not costly to own multiple gaming platforms because consoles are heavily subsidised and serious gamers will often own more than one console. Additionally, games could be played on different consoles.

By engaging with this question, the student will be able to estimate which platform competition is most likely to get a dominant position and winner-take-all dynamics?

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3. What can we say about the importance of positioning for competing platforms in the market?

Students, given their likely familiarity with platform companies, together with the information in the case, will be familiar with different positioning represented by each platform-owning company. Each of these positions represents the strategic choices and trade-offs that these firms had to face: Xbox One, for example, aimed to be both a ‘gamer’s console’ and a living room entertainment and communication hub, which turned out to be an unsuccessful ‘stuck in the middle’ strategy. On the other hand, Nintendo has over time moved to a less-tech oriented but more novelty-oriented platform, starting with Wii – which was a great success initially, but then become limiting over time as Wii sales slowed and the ‘casual’ audience was buying only a fraction of games compared to ‘hardcore gamers’ – therefore, less royalties for Nintendo when calculated by each owned console. Moving forward to the ‘streaming’ era, it is also interesting to see how early positions for each platform is currently developing: Nintendo is investing in its unique brands (and games) with its novelty consoles, while making only minimal entry to a cloud- and streaming-based future, whereas Microsoft is aiming to leverage its Windows OS installed base together with Xbox devices and, finally, Sony is moving fast as its engineering and technological edge can get quickly challenged in a streaming future – such as the upcoming Stadia by Google which can provide much more horsepower through cloud computing, if required.

This question enables instructor to demonstrate that differentiation strategy and building on unique resources still explain some aspects of competitive dynamics in a platform industry.

4.

Is the business model based on traditional gaming consoles sustainable (Are we experiencing the death of the console)?

It is very likely that the students (undergraduate, pre-experience master level) will be familiar not only with console games but also with emerging mobile gaming and emergence of cloud gaming platforms. Google recently unveiled a cloud gaming platform Stadia, which is formidable in scale and ambition, promising the ability to play any game anytime, anywhere. The tech groups such as Google, Apple, Amazon and Tencent are all expected to reveal their own cloud gaming platforms, capitalising on their investment in data centres and connectivity around the world.

The last paragraph in the case study, and an expected familiarity of some students with the very recent developments in the video game industry, enable the instructor to conclude the case with the question of ‘Are we experiencing the death of the console?’ This could trigger the discussion about the disruptive nature of innovation. The students can engage with questioning what potentially makes consoles obsolete (mobile and streaming technology and subscription business model). If big tech groups become the Netflix of gaming, are the companies such as Sony and Nintendo becoming only complementors on new cloud-based platforms? The link between traditional consoles and emerging mobile gaming could sustain relevance of this case for the classroom discussion.

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Megabrew: creating an undisputed global brewing champion?

Duncan Angwin

1. Introduction This case study provides students with the opportunity to consider a) the development directions SABMiller has pursued and the corporate logics it has adopted in response to the pressures of stakeholders and changes in the external environment; b) the strategic issues it faces and the strategic options open to it just before the AB InBev bid; c) the attraction of SABMiller to AB InBev d) the approach of AB InBev to SABMiller integration e) future strategic options for AB InBev.

2. Position of the case The case provides the opportunity for a consideration of growth directions and strategic logics. It also focuses upon options development in relation to corporate strategy, and to reflect upon how such options are developed from matching external threats and opportunities with internal competences and capabilities. It also directs attention to how a target company might be integrated in order to create value for the acquirer. The case is suited to the middle to later stages of a strategy course. It could also be used as a case study assignment.

3. Learning objectives Study of the case involves students in understanding the following: •

How aspects of the macro-environment influence competitive structures of markets (Chapters 2 and 3 of Exploring Strategy), organisational capabilities (Chapter 4), stakeholder expectations (Chapter 5) and the evolution of corporate logic (Chapter 8).

•

The relevance of past strategic direction to future strategic direction (Chapter 6), and how

•

internal capabilities have both influenced and been affected by the choices of corporate logic.

How these factors affect consideration of strategic choice (Chapter 8).

•

How companies involved in M&A should think about how strategic value will be achieved through careful integration choice (Chapter 11).

4. Teaching scheme This case study can be taught as a class discussion orchestrated by the instructor around analysis of the strategic development of the organisation. A variant is to get to the point where a number of 347 .

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strategic options are identified and ask different student groups to develop a case in support of each of these to present in class. Student groups might also be assigned different integration strategies in order to argue the strengths and weaknesses of each for the acquirer.

5. Questions for discussion 1. Identify the growth directions and corporate logic that SABMiller has adopted in its development and the reasons for its success.

2. At the beginning of the case, SABMiller’s situation in 2015, just prior to its acquisition by AB InBev, is described. How do you perceive SABMiller’s strategic position at that moment, and what strategic options may have been open to it before accepting the AB InBev takeover? Was accepting the bid the best way forwards for the company?

3. Why was SABMiller attractive to AB InBev? 4. After the takeover, analysts observed poor share price performance from AB InBev and argued that integration such a large and complex company may be the problem. To what extent do you agree?

5. What strategy would you recommend for AB InBev in the future?

6. Case analysis 1. Corporate logic Initially, SABMiller was focused upon growing within the South African market (‘penetration’ quadrant in the Ansoff matrix). By way of background, its establishment in the Johannesburg gold fields was the result of the recognition of the huge market potential that the mining communities provided to the company. Over the subsequent decades, it came to dominate the beverage industry in South Africa and establish a very strong position in Southern Africa. Although not specifically mentioned in the case, parts of the development during this period showed that synergy was the dominant management logic – acquiring wineries and glass manufacturers for example. Where the case begins, SABMiller’s growth was constrained by the external environment, particularly by the sanctions campaign against apartheid, which reduced the purely synergetic investment opportunities for the business both regionally and globally.

With the ending of apartheid, a range of new growth opportunities opened up and initial opportunities were taken up in Southern Africa markets, of which SAB already had considerable knowledge. The 1990s therefore saw SAB’s corporate logic focus on expanding into new markets (Market Development in the Ansoff matrix) with its brewing business. In this, the emphasis was on acquiring, improving the efficiency and productivity of brewing businesses in developing countries, initially in Africa, then Eastern Europe and then more globally. Increasingly, SABMiller developed parental development skills in turning around underperforming brewing businesses.

The listing on the London Stock Exchange provided access to greater resources for expansion than were available before, allowing bigger acquisitions. Through many acquisitions, SABMiller became 348

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an increasingly global player but faced the challenge of showing that it could manage brands in large, mature domestic markets (e.g. the United States and Australia) and global brands – requiring very different capabilities.

2. (a) Strategic position In 2015, SABMiller received a takeover bid from AB InBev. This immediately brought SABMiller’s strategy under the spotlight as investors considered whether or not to support the bid. This provides an opportunity for students to consider the SABMiller strategic position in terms of its capabilities and competences, the business environment it faces, and stakeholder expectations. A good deal of this is fairly explicit in the case study but needs pulling together. In addition, some of the important factors will require students to make judgments beyond that which are written in the case. However, they might come to a view that can be summarised as follows: The business environment In terms of business environment, SABMiller was now operating worldwide. As noted above, its origins are in developing countries and its growth has come through entering developing markets, acquiring businesses and brands, and growing them. Clearly, the market conditions and potential for growth vary considerably by market; however, the strategy has seemed to yield healthy growth in the past in most of the markets in which it has entered. The question emerging in 2015 was just how far can the success based on developing markets could continue? The expectation seemed to be that SABMiller has to face and develop a strategy for the development of its businesses in mature and more sophisticated brewing markets.

Africa In 2015, the company had a very strong position in Africa. Students should consider the extent to which this is a strength or a possible threat (or both). This has historically been a somewhat volatile set of markets; one of the reasons, presumably, why the company has sought growth outside Africa.

Certainly, however, the competences learned in the marketing of its products and developing markets was honed in African countries and has proved most useful elsewhere. Students may wish to debate the extent to which these markets will provide substantial growth in the future. They might also wish to consider the potential risks and returns associated with doing business there and consider if the company is over-exposed or if the breadth of its operations across so many countries offers some risk protection for the firm.

Asia, Eastern Europe and Latin America The common characteristic of these regions is the relatively underdeveloped nature of the beer markets. This has provided SABMiller with a major source of growth. Arguably, the competences learned in Africa, both in terms of trading in developing markets and in terms of acquisition of breweries, have proved especially useful here.

Questions can then be asked about further opportunities here. Efforts at expansion in China have continued over the years. Although this is the world’s largest beer market by volume, it is known for its tiny margins. To what extent does this make sense? Arguably, India is a potential big bet for the future but, similar to China, global brewers cannot afford to be there as no one is making any

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money as they have to price so low. Russia could also be considered to be a major opportunity; it has long shown strong growth in beer consumption. However, SABMiller has a small share, maybe 5%. Carlsberg is the dominant player here with a much bigger share; maybe as much as 40%.

Latin America seems a bright prospect for SABMiller with strong growth rates, low saturation and good profitability. This area was the group’s second largest contributor of profits in 2014 and having a dominant position suggests this is sustainable for the medium term.

Western markets A significant problem with the focus on emergent markets historically was that, much of the company’s profits were in soft currencies leading to shareholder concern about the overall robustness of the business. It would appear that the expectations of the institutional investors pushed the company towards a refocus on Western markets – though this may have been pushing an open door – and a major acquisition: hence, SAB’s acquisition of Miller.

The beer markets in Western Europe and America are, however, very different from those in developing countries. The markets are more concentrated and saturated. Moreover, following the Miller acquisition, a large part of SABMiller’s operation came to be in the highly competitive US market. Students may ask, has this perhaps distracted from a focus on more profitable growth in other less developed markets? Was there an alternative?

The creation of the joint venture with Molson Coors was arguably about scale to compete with Anheuser Busch. Presumably, it is also a recognition that sales growth in the US is very difficult to come by. Also, it does cede control of a major developed market: SABMiller no longer has exclusive control of their presence in the US. Do students see this as a problem?

Following the Molson Coors joint venture, SABMiller acquired the Fosters Group in Australia.

Observers suggested this might be a replay of the Miller acquisition in the United States that struggled to achieve success. In Australia, the market is mature with strong competition suggesting a long fight, and the loss of key brewing licenses has been interpreted negatively.

Strategic capability In terms of the company’s resource base and capabilities, students might emphasise the following: •

Since its inception, the company has demonstrated responsiveness and adaptation to some significant challenges in its environment. Its move of corporate headquarters from London to Johannesburg in 1950, the introduction of a non-discriminatory code of employment in 1978, and the preparation of ‘complex defensive investment structures’ for deployment in 1985 in response to economic sanctions, indicate not only a sophisticated appreciation of the contemporary competitive and contextual environments but also an appreciation of and preparation for a range of possible futures. From the introduction of apartheid in the aftermath of the Second World War until its dismantling, SAB may be seen to be making strategic choices aimed at ensuring its survival and maximising its potential for growth into the future.

•

The shifting of its primary listing back to London is a further example that this capability still pertains. With a shift in strategic focus from surviving as a South African firm to growing as a 350 .

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global one, the firm had to move to a location where it could raise the funds it needed to facilitate this. However, as noted above and demonstrated in the case, this has brought with it a whole new set of stakeholder expectations.

•

The emergence of the company onto the global market, particularly with the acquisition of Miller, which led to a reframing of its corporate parenting role – from seeing itself as adding value in emerging markets to what the CEO (Mackay) referred to in 2004 as ‘a turnaround specialist’.

•

Undoubtedly at the corporate level, the company has also developed capabilities in the acquisition of breweries to which it can add value. This has been particularly apparent in terms of reducing inefficiencies in operations, but there has also been value addition in marketing. The delicate balance between brand loyalty and choice is demonstrated in Southern Africa, for example, by the retention and development of existing brands in the breweries the company has acquired in the region. Namibians can still buy Windhoek lager; Zimbabweans can still buy Zambesi.

However, the reduction in Miller brands on the US market demonstrated SABMiller’s appreciation that the development of brand loyalty can require some reduction of choice.

• Nonetheless, SABMiller has much less experience or expertise in Western markets, either in terms of competing in such markets, or at the corporate level in acquiring major firms operating in the Western market. Its executives claim to bring with them flexibility and tough mindedness, which they feel is applicable in any circumstances. However, students may wish to debate this.

They might argue, for example, that the indications are that the SABMiller capabilities were not suited to the challenges facing Miller; or that it absorbed management effort that might have been devoted to a continued focus on emerging markets. The same argument applies to the Foster Group acquisition in Australia.

Overall strategic position prior to the AB InBev bid It might be useful to ask the students to pull together an overall explanation of the strategic position facing the company. For example: Geographically, can SABMiller continue to expand by acquiring breweries in different countries across the world; or, as seems likely, will opportunities for that decline? If so, do they have the skills, competences and market power to dominate particular regions?

M&A opportunities also seem to be diminishing, and they have recently been rejected by Heineken, so growth may have to be more organic – very difficult to do in mature markets. The search for organic sources of growth suggests the need for greater clarity about future direction, informing potentially difficult choices.

For example, in terms of markets, SABMiller has benefited from their presence in high-growth markets (e.g. Eastern Europe), but many of these markets appear to be plateauing. The Western European and US markets are also at best flat, if not declining and craft beers seem to posing a real threat. Where there is growth, as in Asia, there appears to be no profit to be had. Latin America offers sustained profitable growth but still the question remains of where should they focus, and how do they develop their expertise to do so? There is also a question mark over how fast they need to grow versus the speed that they can manage? As a very large company, small increments will not be sustainable.

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In terms of brands is SABMiller ‘all beer to all men on all occasions’? If not, which segments should the company focus on? Is SABMiller just about beer or alcoholic drinks or all drinks? Are their beers premium beers, or are they mainstream beers?

Overall, given all this, how is the group more than the sum of the parts?

2. (b) Strategic options and evaluation The analysis of the strategic position of the company, therefore, leads to a consideration of strategic options. Arising from the analysis of overall strategic position, the strategic options might include the following: •

Emergent opportunism: That the right direction will become apparent based on being

•

operationally good and able to respond to opportunities, supported by their size and undoubted financial strength. Given the above analysis, however, this may simply not provide sufficient assurance internally or externally that expectations can be met – growth may not be fast enough.

Big bets: A contrary view is that the strategic trajectory of the past has run out of steam and some ‘big bets’ have to be made for the future. It seems clear that this is the approach of some of the major competitors. Anheuser Busch Inbev has a clear focus on the United States, Canada, Mexico and Brazil and has now bid for SABMiller. The Heineken brand is concentrated and focused on establishing a premium position. Arguably Russia seems to be Carlsberg’s recent focus, although financially they are struggling. Maybe SABMiller should bid for Heineken or Carlsberg?

• Market power focus: Focus on those countries where SABMiller have greatest market power and allocate relatively more resources to these countries. But would this provide sufficient growth and would it satisfy the SABMiller managers across the world? Moreover, there is the argument that this reduces the global scope of the business.

An emerging market refocus: Reduce the risks associated with the more developed markets – •

for example, in Europe, the United States and Australia, particularly with the recession in progress in 2012, and focus on ensuring as firm a base as possible in emergent markets. This would seem feasible given SABMiller’s competence in developing efficient operations – would this be seen by investors (or managers) as a way of sustaining growth as a global player? Indeed, would it make SABMiller more attractive as a target for takeover?

Product development: That is, new beer products and transference of beer products and brands •between markets. This builds on what the company has been doing so far. It has been launching

new varieties of beer and developing existing varieties. It has also been transferring brands across different markets and regions, as well as developing some ‘global brands’. It could carry on doing so and indeed accelerate the process. However, will this provide the company with the sort of growth that is now being expected of it and does it underestimate the importance of brand loyalty across the world?

• Market development in Asia/Eastern Europe/Latin America: That is, developing further the strategy already under way to enter developing markets outside Africa. This builds strongly on the strategy that has been followed over recent years. It seeks to apply the competences built up in African developing markets to developing markets elsewhere. It has been largely successful 352 .

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because it provides an opportunity to improve efficiencies and introduce better brand marketing.

Arguably it is a strategy that can be continued and developed. This presumably would include China and India. However, given the problems in these markets, return on investment in such markets may require a great deal of patience before it yields rewards. Would this satisfy the expectations of shareholders and particularly institutional investors, following their insistence on the need for hard currency growth and entry into Western markets? Is it possible that the firm could convince such investors that it would be more sensible to focus on developing rather than saturated markets?

• Market development: Western markets: That is, developing further presence in Western Europe, America and Australia. The initial foray into the US market was more trying than anticipated and observers believe that this may also be the case with the Foster Group acquisition. If not, what are the alternatives in the United States and Australia, given that exit does not seem acceptable.

In Europe, there seem few alternatives other than seeking to build share with existing brands against fierce competition. The company is developing competences in this, but building brands in mature markets is not their historic strength.

•A joint venture with a major western brewer: There is a case to be made for a joint venture with

an established western brewer. The logic of such a joint venture, presumably, would be that SABMiller could bring to bear its expertise and position in developing markets to the benefit of the partner, who could bring further entry points for SABMiller brands into western markets.

Clearly this would build on existing competences and resources. This is a different logic to the Coors joint venture but could benefit from the experience of managing a joint venture. Again, however, students may ask to what extent this would achieve the growth objectives of the firm and therefore satisfy investors.

Diversification: That is a move away from a reliance on brewing towards, for example, •

distribution and retailing (the company is already operating in hotels). This is not the strategic thrust of the firm as it stands, but it has a history as a much more diversified corporation. As noted above, flexibility in the adoption of corporate logics in the past could be regarded as a corporate competence. They also seem to have the resources available to allow them to do this. In recent years, however, the company has focused more and more around brewing, so diversification may be regarded as a shift back towards a corporate logic of portfolio management. It is also questionable whether the firm would want to go back to an approach that was essentially forced upon it by outside events. It could also confuse their investors, who would see them slipping down the path of unnecessary diversification in areas where they have little competence.

Sell: That is be acquired, probably by one of the other major brewers – and AB InBev is offering.

•Unlike most of the other major brewers (all western), SABMiller offers a market presence and a

set of competences that they do not have. It would be a significant opportunity for a major brewer to obtain a substantial position around the world. It might also be attractive to investors, who would see SABMiller realising a healthy return for its shareholders.

In evaluating these options, which could be done using the SAFE criteria (see Chapter 12) the students are likely to find there is no easy answer. Traditional competences seem to point to solutions in one direction; shareholder expectations seem to point in another and perhaps environmental/market opportunities to yet another. The options are, of course, not necessarily mutually exclusive; so students may come to the view that a mix of options is the most sensible way forward. After all, they 353 .

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might argue that it would be very unwise for SABMiller to jeopardise its skills or position in developing markets. However, it does seem to need to gain a greater presence in the West.

The bid by AB InBev forced the SABMiller board and its shareholders to consider these options and respond. By accepting the bid, this suggests they believe being acquired is in the best interests of the company and its shareholders, even though in order to satisfy regulatory concerns substantial brand assets such as the joint ventures with Snow in China and Miller Coors in the United States, plus significant European brands such as Peroni and Grolsch had to be disposed of. Certainly it is clear that AB InBev will benefit as the acquirer of SABMiller, but it is worth asking why should SABMiller sell out after so many years of profitable existence? Some commentators at the time were also questioning the wisdom of sale, even with the raised price. It seems the key issue was whether an independent SABMiller would be able to continue to sustain its profitable growth if the bid did not succeed.

3. Why was SABMiller attractive to AB InBev? It is clear from AB InBev’s history before the SABMiller acquisition, that is had been highly successful as a serial acquirer. AB InBev had become expert at extracting value from ownership, particularly in terms of large-scale cost-savings. It had been successful at cutting costs by 19% (by sales) when it bought Anheuser-Busch Cos. in 2008 and 21% at Mexico’s Modelo in 2013. It had developed a highly centralised approach to management and this had been imposed rigorously on its acquisitions, which had generally been regionally focused, making them easier to integrate. It prided itself on training world-class managers who could step into any part of the business, anywhere in the world and drive results. This approach is aimed at transcending cultural differences and harmonising diverse businesses, in a true global business model. AB InBev’s attention to efficiency and optimisation, particularly in terms of supply chain rationalisation and production efficiencies, cost reduction and redundancies, and installing a meritocratic culture based on performance measurement and the removal of executive privileges had helped to raise the company’s profit margins to the highest in the industry at 33% in 2015.

AB InBev also faced a strategic challenge of growth. Most of this had come from acquisitions, where synergy gains continued to help the firm prosper. However, once those acquisition integration synergy gains were exhausted, there was a risk that organic growth would not compensate. Indeed the case states that forecasts would show a slowdown with reduced synergy gains and increasing competition.

For a firm as large as AB InBev, this posed a challenge of finding an acquisition target large enough to make a difference – and there was a diminishing pool of opportunities.

AB InBev saw SABMiller as attractive as it promised great synergy gains to help sustain the groups profitability and growth targets. There seemed to be very good complementarity of presence in different markets as well as in products. It is far easier to buy an existing successful brand than to create one. It also seemed that AB InBev’s proven integration capability might again extract significant value. It also removed the potential of SABMiller being involved in another merger or acquisition that might threaten AB InBev in the future.

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4. After the takeover, analysts observed poor share price performance from AB InBev and argued that integration such a large and complex company may be the problem. To what extent do you agree?

There is no doubt that the SABMiller acquisition is a very large and complex integration to manage.

Rapid post deal actions such as laying off 5,500 employees, achieving around 30% of cost savings from rationalising overlapping regional offices and shutting down SABMiller’s palatial London Head Office and transferring activity to Belgium; a further 25% savings from increased bargaining power allowing them to push down the price of raw materials and packaging might be relatively straightforward to achieve, and send an important signal to the markets that synergy gains are ‘on track’, but gaining efficiencies from better brewing and distribution, and productivity improvements would be much harder, and longer term particularly where AB InBev had little presence. There is also a challenge that SABMiller already had a high quality, efficient operation, leaving little slack for AB InBev to exploit further. One might argue, referring to the Post Acquisition integration matrix (Figure 11.3) that AB InBev’s main integration strategy of Absorption, would not be very appropriate in the case of SABMiller. Through imposing their systems and procedures upon SABMiller, there is a real risk that a lot of important competencies in different regions that they had built up over a long period of time, would be lost. So whilst there could be economies of scope with global brands for instance, SABMiller had very significant brands that are local, and it is not certain that these could be expanded to other markets. Therefore, SABMiller’s local knowledge, although this may not fit well with AB InBev’s cost-conscious global model of managing its business and its overriding emphasis on global standardisation, and therefore, AB InBev’s preference for Absorption integration, is valuable, particularly if organic growth is going to be critical in the future. However, it is more likely that the markets and financial imperative will push AB InBev to focus strongly on increased market power and other economies of scale. This will not solve the groups underlying problem of growth when all the acquisition targets have gone.

Other factors to consider in terms of fall off in performance were the regulators insistence of selling off some of SABMiller’s prize assets. These have continued to perform well under new ownership.

In addition, the beer industry as a whole is increasingly competitive with further consolidation amongst major competitors and also increasingly challenging developed economy markets. In terms of volumes, Table 5 shows AB InBev is static, and although revenue is up 5%, much is achieved more through cost of sales reduction and efficiencies. A large portion of volumes come from developed economies and the trends there are not favourable to beer consumption.

5. What strategy would you recommend for AB InBev in the future?

It should be clear that AB InBev’s strategic situation is now quite similar to that of SABMiller in 2015. There is increasing competition, the beer market in developed countries is in decline. Once synergy gains have been extracted from SABMiller, which could take three years or so, AB InBev will again face a challenge of how to continue growing and sustaining profitability. It is hard to see what brewing targets would be available of sufficient scale as many are not for sale or would result in penal restrictions from regulators. Therefore, the ideas of innovation and diversification may prove attractive, in the way that SABMiller considered these options. However, both of these are potentially more risky than acquisition if invested in on a similar scale.

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AirAsia and the Tune Group: Diversifying across industries Julie Verity, Mark Jenkins and Tazeeb Rajwani

1. Introduction This case explores how a Malaysian-based group of companies, Tune Group, grew in a decade, from being a two-plane defunct airline company to a highly diversified and successful group. It then continues to describe the evolution of the Group over the next six years. The case mainly focuses on corporate-level strategy and business portfolios, with particular emphasis on corporate parenting and portfolio alignment with the centre and with other strategic business units (SBUs). To a lesser extent, the case describes the leadership of the Group and suggests that the culture and values of the organisation are influenced by the personality of the dominant leaders and that these also align with the dominant logic of the Group.

2. Position of the case This case links to Chapter 8 of Exploring Strategy. It presents a suitable context for students to discuss important topics such as the benefits and risks of diversification, the roles of corporate parents and the management of corporate portfolios. Thus, students learn about theoretical frameworks such as Ansoff’s Matrix, BCG Growth-Share Matrix, Ashridge Portfolio Display and Directional Policy Matrix to practical situations.

The case can also be used to deepen understanding of how corporate conglomeration evolves, and how corporate centres can add, or destroy value. Material in Chapter 15 is also relevant because the Tune Group case describes how Fernandes acquired a defunct airline, turned it into a successful company and spurred the growth of the Tune Group through his dynamic and transformational leadership.

3. Learning objectives The learning objectives of this case include the following: •

Gain an understanding of the logic, risks and benefits involved in building a corporate portfolio.

• •

Learn methods of analysis to think about how each strategic business unit (SBU) might contribute to a portfolio and where synergies might exist/be harvested.

•

Understand the concept of a dominant logic that holds highly diversified SBUs together.

Learn some of the tools and models relevant to corporate strategy: parenting styles and ways corporate centres might add/destroy value.

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•

Learn how to analyse corporate portfolios and to challenge which SBUs are attractive or unattractive.

4. Teaching scheme AirAsia and Tune Group is most suitable for teaching MBA and MSc students or groups of managers attending executive learning programmes. It can be used for two-hour small group discussion sessions on corporate diversification. Students will need to read and prepare the case prior to learning sessions.

They should also be encouraged to search media and databases for recent developments about Tune Group. Ideally, this case works best when students have a basic knowledge of competitive strategy and some of the classic strategy tools relevant to single business units.

5. Questions The following questions are relevant: 1) What are the factors driving the diversification of Tune Group?

2) What is the Tune Group portfolio, what contribution does each SBU make, and therefore, what is the dominant logic for this Group?

3) Looking at the SBU strategies, do you see any problems arising for the Tune Group?

4) How does Tune Group add value to the individual SBUs? 5) What is the future potential of the Tune Group? What SBUs should it protect and grow and what SBUs should it divest?

6) Evaluate the leadership of Tony Fernandes.

6. Case analysis 1. What are the factors driving the diversification of Tune Group? (i)

Making money. There is profit potential in the different markets that surround AirAsia and these appear under-exploited by the existing offers in local markets. The case describes how the Airline has spread into (what Fernandes labels) ‘adjacent markets’, and how the Region is under-developed compared with the United Kingdom, for example. Harvesting profit from possible synergies and scope economies across SBUs.

(ii)

Introducing new services into ‘adjacent’ markets delivered more profit to AirAsia than could be generated by completely separate companies providing the same service, given these lacked the synergies an integrated business model offered.

(iii)

Wield market power – adding new revenue lines facilitated fast growth and hence increased the market and regional dominance of the Group.

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(iv)

Personal interest - Fernandes was passionate about Formula 1 and Football, and maybe

(v)

this led to tenuous rationales supporting the Group’s expansion into these ventures?

Fernandes also appeared to believe he had the expertise to run many different businesses – successfully.

Passion for developing the Asean region and bringing work and financial good health to these under-developed countries. Eastern businesses and those in less-developed economies often have a moral sense and national cultural belief in local companies contributing to the overall well-being and general growth of the Country itself (i.e.: a purpose that extends beyond shareholder value and individual gain).

Some of these double-up with answers to the second question.

2. What is the Tune Group portfolio, what contribution does each SBU make, and therefore, what is the dominant logic for this Group?

The core business and spine of the company is the airline activity. Typical of the other low-cost airline business models, every part of the flying experience has been unbundled and priced individually.

Hence, the seat/ticket-to-fly is just one revenue stream. Additional revenue streams are kept within the AirAsia business, for example, ‘Pick a Seat’. Some other streams have been separated into individual business units, for example, holiday and travel (AAE Travel Pte), sometimes in partnership with other ventures within the Tune Group (e.g. travel insurance). The other SBUs within the Group could be interpreted as complementary revenue streams to the airline. So, customers often need a hotel when they arrive at their destination – hence Tune Hotels; travellers need a mobile phone to make journey plans and buy plane tickets – hence Tune Talk; customers don’t have access to a credit card – hence Tune pre-paid Visa card.

In the developing Asean economy, providing the ‘customer infrastructure’ to enable the low-cost e-business model of AirAsia meant that Tune Air had to facilitate the sophistication and growth of its customers as well. Tune Air could not sustain its supra-low-cost position without providing more local customers with access to digital banking, insurance and telephony services concurrently.

Having multiple revenue streams – some outside of what would traditionally be included in an airline ticket price – spreads the possibility for profitable return among services and products, increasing overall profit resilience. This could be especially relevant in: (i) unpredictable and turbulent environments and, (ii) where companies within the group are privately owned.

The dominant logic for the Group is shared core competences and resources. Students might suggest the following 1. The ability to be [very] low cost – This competence has been leveraged into related businesses and the learning costs + scope efficiencies (synergies) gained. For example, AirAsia and AirAsia X share: the sales platform/channel, IT infrastructure, airplane engineers and cabin crew. There are also examples in the case where this sharing constrains the activities and possibilities of – especially AirAsia X.

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model and the ability to secure investment capital. Therefore, the Tune Group exists because of its network of like-minded (seeking high-growth ventures) capital investors.

3. Tune Group’s customer database and its management – For example: Tune Group attracts merchant partners through the millions of customer visits that are made to the website each day.

This also enables low-cost marketing and social media activity. It also attracts sophisticated service provider partners – like Expedia.com. Therefore, the logic for the Group is to leverage and monetise its massive customer database and trusting visitors.

4. Fernandes’ style and knowledge (connectedness between the East and West) – Borrowing from the business models of Western exemplars and adapting to suit the Asian region; using the West as an aspiration to the East. Fernandes himself is a huge asset – in terms of living the brand values and being the main culture carrier of the Group. In the early years of the Group, Fernandes and Meranum were the ‘corporate’ centres.

5. The customer value proposition across companies in the Group is consistent – The Group has a set of brand values that can be stretched across different businesses. Latterly, these are used to define Tune as a lifestyle brand – for Asians. Businesses sheltering under a single brand identity have the potential for lower advertising and promotional costs. Customers can be tied-in and tempted to spend more through loyalty programmes and easy-to-use, friendly and sticky websites.

The potential to cross-sell is greater compared with individual companies with distinct brands.

3. Looking at the SBU strategies, do you see any problems arising for the Tune Group?

As is mentioned in the case, there were some inconsistencies with the brand proposition of Tune Air – AirAsia and X. Also, shareholders were concerned that costs from one business may be disproportionately carried by the other (cross-subsidisation). Students might challenge how F1 and sports car activities of Tune Sports fit into the logic of low cost of the Tune Group. Others might suggest that the target customer for a roadster is completely different from the one who buys a budget airline seat. Generally, the portfolio is diverse and if not managed carefully (with reference to parenting styles), the group will encounter difficulties.

It is likely that some of the strategies identified will require significant investment. For example, Tune Talk may propose to invest in improving their network. This would require a significant investment in transmitters etc. in order to improve coverage. The question then arises as to which investments should be prioritised for the benefit of the whole group.

Tune Sports is described in the case as corporate advertising and PR activities and, therefore, cost centres rather than SBUs. Caterham roadsters is, however, a potential revenue stream.

Classically, Tune Sport would be described as ‘corporate centre’ activity or ‘centralised services’. As was described above, the Group has a consistent value proposition with shared values: great value for money so that everyone can – empowering, fun, young, Asian, delivering on dreams and heroic. As separate businesses, each would not have the advertising budget to fund an F1 team, but together, the Group has the financial resources to take the gamble on this investment. In the end, it proved to be a gamble and the failure of this venture demonstrates the risks of corporations aligning with sport brands – which can lose!

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4. How does Tune Group add value to the individual SBUs? Using, for example, the Bowman & Kakabadse (2005) model (Figure below), students might argue that Tune Sport and perhaps Tune Tones, fit best in the top left-hand quadrant. Access to and management of the Group’s customer base and management of the website and social media could also be placed here. Transfer of business model knowledge to partners is best described by the top right-hand quadrant. And, finally, the leadership style of Fernandes, the consistent value set and customer experience that is visible across the group locates in the bottom right-hand quadrant.

So, there are examples of scale efficiencies (top left-hand box) that would not be achieved if businesses were stand-alone, examples of scope efficiencies through transfer of knowledge (top righthand quadrant) and, examples of shared creative knowledge and inspiration from Fernandes (bottom right-hand quadrant).

5. What is the future potential of the Tune Group? What SBUs should it protect and grow and what SBUs should it divest?

There is potential to use corporate planning tools to answer this question. For example, using the Directional Policy Matrix, students might place AirAsia in the ‘leader’ position and argue that the market within Asean has more potential for growth, citing the venture in India as one example. The case suggests that Insurance has similar growth potential and that the Tune Group customer base, the automatic referral to insurance when purchasing a flight ticket or phone, will give Tune competitive advantage over other insurance providers. Whereas, the AirAsia X business might once have been located in the ‘proceed with care’ area of the matrix, it appears to be gaining in credibility and resilience, so could be drawn as shifting position over time.

There is limited information in the case about the success or potential for Tune Hotels and Tune mobile phone services. However, students who search more widely might find that the competition in these markets from existing, more focused players is strong and that the increasing size and

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diversity of the Tune Group makes it hard for these Tune SBUs to keep pace. The case suggests that Tune Hotels are not succeeding outside of Malaysia.

Applying the Ashridge portfolio model, AirAsia is firmly in the ‘heartland’ providing excellent fit between Fernandes’ style (fun, slightly disrespectful, great value-for-money, Asian) and the low-cost short-haul business. Discussion about Tune Protect might raise the concern that an insurance business might not do so well with all of these values. And, that some values are missing, like for example, security and regulatory compliance. However, airlines need to be safe and also have to comply with government regulation, so these could be taken-for-granted, ‘hygiene factors’.

It is difficult to place AirAsia X, does this fit within the ‘edge of heartland’ region of the Ashridge model, in the ‘value trap’ area, or as Ballast? A long-haul airline feels very similar to that of a shorthaul one, but the case explains that there are significant differences to manage, and these could be in conflict with the skills Fernandes has developed. Some students might suggest that ‘X’ inside Asia could be successful because of Fernandes ‘feel for’ the Asian customer, but will not translate outside of this area because of the brand values and the economics of low-cost, long-haul flying.

Epsom College might fall into Alien Territory, and an interesting discussion could be had about where Tune Hotels could be placed at different points in this SBU’s history.

For the future, protecting and growing the ‘heartland’ will be important. It will also be important to understand which businesses match and can benefit from the core competences and capabilities that Fernandes and his Group have. How does Tune Care fit here?

Given the visibility of Fernandes (and perhaps Meranum) and their strong association with the brand and core competences of Tune, the question of succession, and how much value will be destroyed if either are no longer alive or associated with the Group should arise. Whilst both are clearly strategic assets, they are also potential liabilities. Excessive ambition and stretch – especially for Fernandes – are questions that commentators are raising.

6. Evaluate the leadership of Tony Fernandes Among other things, students should discuss the entrepreneurial, inspirational and transformational leadership of Fernandes. His quest for success, passion for the Asian people and appetite for risktaking are worth mentioning. However, given the visibility of Fernandes (and perhaps Meranum) and their strong association with the brand and core competences of Tune, the question of succession and how much value will be destroyed if either are no longer alive or associated with the Group should arise. Whilst both are clearly strategic assets, they are also potential liabilities. Excessive ambition and stretch – especially for Fernandes – are questions that commentators are already raising. Another debate is whether his conglomeration strategy is worth any good to the Group.

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CASE TEACHING NOTES

Severstal: a journey from growth to consolidation within the steel industry Eustathios Sainidis

1. Introduction The case offers an overview of the global steel industry, a highly dynamic, volatile and fragmented sector. It describes how one of the largest Russian steel producers Severstal has developed its international strategy through a number of overseas acquisitions during the booming years up until the Great Recession of 2008, and how the steel industry, markets and Severstal have developed since.

With a strong vision to become one of the major global players in its industry, the company successfully developed its international presence. However, the post-Great Recession economic and political developments have had a detrimental impact on global steel markets, with high levels of volatility and uncertainly to which Severstal have responded by taking a new strategic direction defined by consolidation, investment in product quality and cost efficiency.

2. Position of the case The case is concerned with identifying the strategic position of the organisation and methods of pursuing an international strategy followed by a turnaround strategy of consolidation and divestment. It links well to a number of chapters covered in Exploring Strategy, in particular chapters 2, 3, 8, 9, 11 and 15 and allows students to practise strategic management frameworks and concepts.

3. Learning objectives The case will allow students to develop the following: • • •

Their analytical skills by applying the strategic analysis frameworks of PESTEL, Porter’s five forces (Chapters 2 and 3), and Yip’s globalisation drivers (Chapter 9).

Their strategic thinking by evaluating and discussing strategic options for the organisation and how these options are suitable to its current strategic position (Chapter 8).

Their critical thinking on the reasons and process of pursuing an international strategy and the risks associated with rapid growth by pursuing mergers and acquisitions as a strategic method (Chapters 9 and 11).

•

Their understanding of the reasons and implications of a turnaround strategy (reconstruction) as a type of change in organisations (Chapter 15).

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4. Teaching scheme The case can be used over a two-hour small group discussion session to practise the application of strategic analysis frameworks and evaluation of strategic management concepts and to allow for debate on strategic decisions and options in a highly dynamic and volatile business environment.

Students will be expected to have read the case in advance to support the analysis of the case and discussion of the relevant concepts in the classroom. It is best used halfway through a strategic management module when students have a good grasp of the strategic positioning theories and are in a position to evaluate suitable strategic options. The case works best at final year undergraduate level or at MBA/postgraduate modules. It can also be used on executive programmes for practitioners to draw upon turnaround change strategies.

5. Questions for discussion Students can work on the following questions to make a critical evaluation of the strategic development of Severstal and also make links with the relevant theoretical sections in the book Exploring Strategy: 1. Using suitable strategic analysis frameworks critically, evaluate the business environment of the global steel industry. Identify the key drivers for change in the macro-environment, industry and internationalisation drivers (Chapters 2, 3 and 9).

2. Evaluate the development of Severstal’s corporate strategy, its strategic direction and vertically integrated business model. Discuss the motives, advantages and challenges of divestment (Chapter 8).

3. Evaluate the motives for Severstal’s acquisitions strategy and assess the suitability and impact of this strategy in relation to the company’s development and international strategy (Chapters 8, 9 and 11).

4. Identify and discuss the reasons that led Severstal to a turnaround strategy (reconstruction). What are the implications of this strategy on Severstal’s future development? (Chapter 15).

6. Case analysis 6.1 Strategic position Student task: Using suitable strategic analysis frameworks critically, evaluate the business environment of the global steel industry. Identify the key drivers for change in the macro-environment, industry and internationalisation drivers (Chapters 2, 3 and 9).

Teaching notes: Students should refer to Chapters 2, 3 and 9 and apply the strategic analysis frameworks of PESTEL, Porter’s five forces (Chapters 2 and 3) and Yip’s globalisation drivers (Chapter 9).

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PESTEL analysis:

•

Political: - Political stability in Russia is questionable. Inward looking government policies, regional geopolitical instability, corruption and relationship with steel oligarchs is an issue.

- Trade wars between the United States, China and the EU have increased geopolitical tensions and made access to overseas steel markets difficult.

- Carbon emissions reduction agreements will increase pressure on steel producers to reduce emissions.

- Occasional protectionist measures.

- Bilateral Trade agreements between China (largest steel market by volume) and other countries directly impact on local steel producers and increase the threat of further industry consolidation.

- Global demographic changes to drive future large-scale government infrastructure projects in emerging economies.

•

Economic: - Steel is a highly volatile market with sudden highs and lows in global/domestic demand making forecasting very difficult and uncertain.

- Steel is a commodity and subject to economic cycles. The Great Recession of 2008 had a detrimental effect on the sector and its players. With the exception of China and Australia, all other major steel markets were in recession. Pre-recession levels of steel consumption were reached almost a decade later consequently putting extreme pressures on steel producers’ finances and potential for growth.

-Russia enjoyed constant growth of GDP and FDI since 1999 up until 2007. Questionable market (automotive) growth since then.

•

Social: - Shortage of labour skills in developed countries accessible to steel producers.

Employment prospects in steel plants not attractive in developed markets.

- Consumers and automotive producers are moving towards lighter, fuel efficient/electric vehicles and steel producers will need to adjust their product specifications accordingly.

- Further urbanisation in emerging countries will lead to high demand for residential and office buildings, public transport and utilities infrastructure.

•

Technological: - New production methods available for steel producers to increase efficiency, reduce waste and energy consumption.

- Steel recycling methods to put pressure on mining companies questioning vertical integration strategies of steel producers.

•

Environmental: - Steel is one of most easily recyclable materials. Using scrap metal as a raw material is cost effective and reduces energy consumption.

- Steel manufacturing is highly polluting.

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•

Legal - Environmental regulations (Paris agreement) and health and safety policies at steel plants are putting pressure on steel producers to become more efficient in their operations requiring large funds of investment.

- Planning permissions for new steel production facilities very difficult to obtain due to environmental impact.

Porter’s Five Forces analysis:

•

Threat of entry: - Economies of scale are essential especially for hot-rolled and cold-rolled steel (–).

- Steel production facilities are very capital intensive, tight planning permissions and environmental regulations are barriers for new entrants especially for upstream processes (-).

- Steel producers from developing economies have access to cheap resources (+).

- Current steel producers generally control distribution channels; however, this is not a - limiting factor (+/–).

- Long-term investment in production technology will be required (–).

Government policies may act as barrier of foreign direct investment (–).

Overall: LOW (Moderate in emerging markets and downstream production).

•

Bargaining power of suppliers: - Consolidation of coal and scrap suppliers (+) - Switching costs for buyers are high (–).

- Possibility for scrap metal producers to enter steel production (by Mini-Mills) (–).

- Threat of backward integration is high (–).

Overall: LOW. •

Bargaining power of buyers: -- Consolidation of buyers, especially for service metal centres and construction industry - (+) Relatively easy to switch steel suppliers (+) Some steep producers have tried forward integration but their capabilities are limited (–/+).

Overall: HIGH. •

Threat of substitute products: - Substitution of common grades by high-strength steel (+) - Plastic tubes substitute steel for water supply (+).

- No realistic substitute for large-volume buyers, such as automotive, large-diameter pipes, construction and tooling (–).

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Overall: MODERATE. •

Competitive rivalry: -- Steel industry is relatively balanced although still highly fragmented, but ArcelorMittal - has dominated as largest producer by volume (+).

- Evidence of hyper-competition. Price wars and opportunistic strategic are common (+).

- High fixed costs (+).

High exit barriers because of heavy investment and large employment numbers (+).

High level of product standardisation although some evidence of differentiation (–).

Overall: HIGH. Yip’s globalisation drivers:

•

Market (global): - Common customer needs (from automotive and engineering industries) - Absence of global marketing strategies

•

Cost (global): - Global economies of scale - High product development costs - Global R&D - Global sourcing opportunities (especially for iron ore)

•

Competitive (global): - Global competition - Existence of leading countries - Number of new entrants is slowly increasing.

•

Government (local): - Some technical standards are not in agreement.

- Trade barriers and protectionist measure are occasionally introduced by national governments.

The above business environment analysis should allow students to conclude on the key drivers for change of the macro-environment (PESTEL), industry (Porter’s five forces) and markets (local/global). Good students may plot the industry’s life cycle (Section 3.3.2 e.g. Figure 3.4 in Exploring Strategy) to illustrate and discuss the dynamic nature of the global steel industry as it moves throughout economic cycles.

Long-term strategic thinking will conclude that the steel industry is driven by pressures for greater efficiency and flexibility in steel production to meet buyers’ requirements in demand and product specification, the threat of further consolidation as new competitors enter the industry from emerging markets and retaliation strategies by existing and new competitors.

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6.2 Corporate strategy and strategic direction Student task: Evaluate the development of Severstal’s corporate strategy, its strategic direction and vertically integrated business model. Discuss the motives, advantages and challenges of divestment (Chapter 8).

Teaching notes: Students should refer to Chapter 8 for their analysis and discussion. In particular, Ansoff’s model on corporate strategic directions is very useful for describing the development of Severstal under the leadership of its Chairman Alexei Mordashov. With a combination of market penetration (home market) and market development (international market), Severstal managed to grow in the noughties but reversed into consolidation and divestment since 2008. Students could look at the strategic logic of these two directions, the advantages and challenges they pose. Chapter 8 offers a sound theoretical base for students to add criticality to their evaluation. In addition, students can explore the rational of a vertically integrated business model, and how it fits within certain industries such the steel sector.

6.3 Motives for acquisitions Student task: Discuss the motives for Severstal’s acquisitions strategy and assess the suitability and impact of this strategy in relation to the company’s development and international strategy (Chapters 8, 9 and 11).

Teaching notes: The motives of acquisitions for Severstal are as follows:

•

Speed of entry into overseas markets which will support the company’s international expansion.

•

A defence mechanism by Severstal against hostile acquisitions. The bigger and more powerful you are the less chances you offer competitors to aim for your acquisition.

• • •

The industry is undergoing consolidation due to its fragmented nature. Deregulation of the steel industry in emerging markets allows for further acquisition of foreign assets.

Severstal’s IPO in the London Stock Exchange has attracted investment capital from Russian and foreign creditors. The capital has been used for overseas acquisitions.

Severstal is weak in exploiting and leveraging its strategic capabilities across its international assets but investment in management development training programs will act as an enabler to share acquisition skills. Severstal (and the steel industry in general) are under pressure to reduce

• •

costs, even more now because of the global economic crisis.

The acquisition of overseas assets allows access to new capabilities and distribution channels, and this was evident with the company’s first overseas acquisition with Rouge in the United States.

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•

Severstal is under pressure from its shareholders in London and Moscow to deliver growth.

•

Acquisition is a typical strategy to meet this stakeholder expectation.

Severstal’s Chairman Alexey Mordashov has a strong personal ambition for his company to

•

become a major global player in the industry.

The steel industry is highly opportunistic and speculation on raw material and steel prices may stimulate a short-term boost to Severstal’s share value.

Students may argue that so far Severstal’s acquisitions have delivered added value to its products although the North America assets were underperforming from 2007 till they were sold in 2014.

Operational management in the company also lacks the skills to incorporate the new assets into its business model and culture. Synergies were never realised.

To assess the suitability and impact of Severstal’s acquisitions strategy on the company’s development and international strategy, students should be asked to capture the main business environment factors (earlier analysis in question 1), which push steel producers towards acquisitions: •

PESTEL conclusions support acquisitions as an international strategy due to political factors (deregulation, privatisation of steel mills in emerging markets), economic factors (emerging markets’ growth), social factors (demand for housing, transportation), technological factors (costefficient production methods, environmental issues) and legal factors (reduction of trade barriers, Kyoto and Paris agreements). From the earlier Porter’s five forces analysis, acquisitions make much

•

more sense than building new steel mills. Environmental regulations also act as a barrier when applying for planning permission. In the steel industry, there is no global-local dilemma as the products are highly global

•

in nature (Yip’s globalisation drivers).

Students can then move towards the core of the task in this question and make use of Chapters 8, 9 and 11 of Exploring Strategy. Students should refer to strategy directions (Ansoff’s framework) in Chapter 8, types of international strategy in Chapter 9 and acquisitions (types, motives and key success factors) in Chapter 11. All three concepts link together well with enough of data in the case for students to make an evaluation of how Severstal has used acquisitions to fulfil its strategic direction to enter new geographical and market segments (a combination of new product (related diversification) and market development in Ansoff’s framework in Chapter 8). This strategic direction was supported by Severstal multi-domestic strategy (low configuration and coordination of international activities) with evidence of moving to a global strategy although at an embryonic stage (Chapter 9). The tutor may also ask students to identify the sources of competitive advantage of Severstal: the generic strategy of Severstal is hybrid with cost leadership in Russia and elements of differentiation in the United States and Europe.

6.4. Turnaround strategy (reconstruction) Student task: Identify and discuss the reasons which led Severstal to a turnaround strategy (reconstruction). What are the implications of this strategy on Severstal’s future development? (Chapter 15).

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Teaching notes: Severstal has gone through a cycle of related diversification followed by rapid divestment and consolidation: a turnaround strategy (reconstruction). Students will find here Chapter 15 (Section 15.4.2) a useful source to expand on their discussion. A turnaround strategy driven by cost reduction measures; in the post-Great Recession business environment, Severstal embarked on the disposal of its North America assets and a reconfiguration of its business units, leadership and management structure. The relevant section in Chapter 15 on turnaround strategy (reconstruction) offers points for students to explore further: •

Main elements of Severstal’s turnaround strategy: crisis (external) stabilisation; management/

•

business unit changes; clarification of target markets and core products; financial restructuring.

Mechanisms employed by Severstal to increase revenue and reduce costs (Table 15.1).

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CASE TEACHING NOTES

Indian Premier League: Glitz, Glamour and Globalisation Steve Henderson

1. Introduction This case study provides students with the opportunity to analyse a globalising market driven by rapidly changing technology. Such globally available sporting entertainment will be familiar to many students (soccer, tennis, golf, etc.) though the relatively underdeveloped nature of cricket provides an opportunity to consider whether there are strategies that can help the market to develop.

2. Position of the case The case was initially written to focus on Chapter 9 of Exploring Strategy, which addresses International Strategy. This makes the case of interest to students with international responsibilities or ambitions and others generally attracted to its sporting context. It also has an interesting element in that this looks at a global service-based offering when many cases in this area look at product- based markets. To add to this, the case has been revised and positioned in a way to allow a wider look at strategy that is reflected in the questions posed below.

3. Learning objectives

The intention of the case is for students to learn about the drivers in international market development and consider how issues such as culture influence the development of successful strategies.

4. Teaching scheme This is a compact case which has complexity and depth that could be used in different ways. It could be used to focus on the international areas addressed in Chapter 9. For this purpose, it is best suited to use in plenary class discussion and/or with small groups. Alternatively, it could be used to take a wider look at strategy development as covered in the first half of the book. With these two options in mind, questions for use in class are seen in the next section.

5. Questions

The following first five questions might be used to stimulate discussion with students based on the issues of internationalisation: 1. Using Yip, what drivers of internationalisation have encouraged the development of the IPL?

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2. Considering the diamond proposed by Porter, what advantages and disadvantages have you observed in the Indian base of the IPL that might help or hinder its progress around the world?

3. Comparing some of the potential markets for the IPL as a broadcast product, what does the Cage framework reveal about the chances of success in those countries?

4. Following on from Q3, what do you think this implies for market selection and entry for the IPL? 5. To what extent do you feel the models of internationalisation are useful looking at a case like IPL rather than a typical physical product led organisation?

These questions are aligned to earlier chapters in the book and offer options to be used in the teaching of the subjects covered in those areas.

6. Using the ‘three horizons’ model, define the strategy that IPL is following and explain how the history of this market has shaped their approach.

7. Carefully defining the IPL market and its key stakeholders, determine how its environment provides opportunities and threats that might be addressed.

The IPL has a variety of possible sources of revenue, explain the advantages and disadvantages 8. in terms of diversification.

6. Case analysis The case has been initially written to fit with the international models that can be seen in the first five questions and their links to Chapter 9. However, the nature of the case means that the answers to the questions do not always fit as neatly as might the study of a market for a physical product. This allows the tutor to discuss the suitability of these models with students. This element will be of significant interest to the many students working (or intending to work) in industries that do not involve physical products, for example, the service or public sectors.

The remaining three questions draw from the earlier chapters of the book and, as seen below, have been put together to allow students to often draw from more than one chapter. Given the technologydriven globalisation at the heart of the case, there are a number of opportunities for students to consider comparison with other modern markets based around entertainment.

1. Typical answers drawing from Chapter 9 might include the following: • •

•

Market Drivers: a growing entertainment demand, cricket has a global audience, sporting superstars offer transferable appeal.

Cost Drivers: of less impact as this is not a manufactured physical product – however, technology advancement is offering the opportunity to provide sport live across the world at a low cost. Government Drivers: again, as a service, trade control around national boundaries is less obvious – however, the boundaries of rights holders are creating pseudo boundaries of control.

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•

Competitive Drivers: the global sporting calendar and the season’s relation to weather, race to spread interest in the sport in less active cricket countries, development of similar leagues.

2. Typical answers drawing from Chapter 9 might include the following: •

Factor conditions: India has a massive cricketing fan base; similarly, it has a well-established group of cricket clubs; its international cricket team forms part of the ICC; its people are well known for having travelled the world and set up home.

•

Home demand conditions: the popularity of cricket in India has helped fill the grounds though

•

it has the drawback that it brings a gambling interest with it.

Related industries: India has a well-developed IT/Communication sector.

•

Strategy, structure and rivalry: Local rivalry has driven the development of the IPL though now, a danger that they dominate locally.

3. Typical answers drawing from Chapter 9 might include the following: • •

Cultural distance: whilst the cultural distance between cricket fans in the world may be significant, the IPL is dealing with broadcasters who have much less of a local perspective.

•

Administrative distance: there is a well-established administration through the ICC.

•

Geographical distance: as the product is not of a physical nature, this offers less of a problem.

Economic distance: opens up the debate of whether this product has much of a reach beyond those with reasonable disposable income – hence, a focus on certain nations.

4. Mainly, students will draw answers from Chapter 9. There is a clear opportunity for IPL to develop but this is a fast-moving market where success can disappear as fast as it arrives due to short-term contracts with broadcasters and sponsors. On the other hand, there is a limited need for IPL or similar organisations to make significant capital investment, for example, no manufacturing plant. This question offers the opportunity to draw from the answers to the first three questions and ask students about some specific strategies that might be followed. In this way, you might also link to areas of the book that look at strategic choice (in Innovation and Entrepreneurship with Chapter 10 and in Mergers, Acquisitions and Alliances in Chapter 11) and evaluation (in Chapter 12 on Evaluating Strategies).

5. Again, mainly drawing from Chapter 9, there are two elements that can be tackled in addressing this question. Firstly, to address each model and its components in turn to consider what difference a lack of physical product makes to the ability to apply the model. It also allows the class to open up a wider discussion about (internet) technology’s impact on national boundaries and its implications for their legal and financial systems to be abused by large corporations.

6. This question is intended to draw together the thinking from Chapter 1 where strategy is introduced with that about history and culture in Chapter 6. Whilst the class discussion could go in different directions, the elements relating to Chapter 1 should open up discussion about the objectives for IPL, levels of internationalisation, and what they are actually selling to their customers. For the history and culture elements, students should identify how the market has been historically shaped through the English speaking nations of the Commonwealth in its early days and the migration of those people in later years.

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7. This is another question intended to draw from two chapters. Firstly, the students could take analysis such as PESTEL analysis from Chapter 2 and, secondly, stakeholder thinking from Chapter 5. Initially, it would be interesting to discuss with the students whether the analysis should be viewed from an international perspective or looking individually at the national level.

There are significant stakeholder areas such as the power of broadcasters to be considered amongst a range of issues that make this market interesting and typical of sectors globalising based on technology advances.

8. Drawing from Chapter 8, there is an interesting potential portfolio of broadcast, sponsorship, ticketing and merchandise income for competitors in this market. Discussion could focus on stakeholders in these areas (e.g. the power of players), and how value is seen by the customers.

With this question, there is ample opportunity to draw comparisons with other sports – for example, Deloitte produce freely available consultant reports on soccer club’s income (Deloitte Football Money League) that would make an interesting juxtaposition with cricket.

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CASE TEACHING NOTES

Handelsbanken – Banking done differently Olof Brunninge

1. Introduction This case study provides students with the opportunity to consider internationalisation processes and to connect them to the internal conditions of, notably the corporate culture, of the firm that is going international. Handelsbanken developed into a rather standard type of universal bank during its first 100 years of existence. However, when a newly appointed managing director took over in the 1970s, the bank developed a unique culture of decentralisation, differentiating it from most of its competitors.

Once Handelsbanken went international around 1990, the bank’s culture had a major impact on how the internationalisation was undertaken.

2. Position of the case The main links to Exploring Strategy are to Chapter 9, addressing internationalisation processes of firms. The case provides a basis for discussing the choice of entry modes, as well as international structures, for instance linked to the global/local dilemma (Section 9.4, International Strategies).

While such issues are often discussed from an external perspective, the case provides a strong link to corporate culture, as discussed in Chapter 6 of Exploring Strategy.

3. Learning objectives

Study of the case involves students in understanding of the following: • • •

The choice of entry modes, including the pros and cons of different modes, in an internationalisation process.

The management of cultural change and the long-term endurance of corporate culture.

The need to achieve fit between corporate culture and the choice of (internationalisation) strategy.

4. Teaching scheme The case can be used to apply analysis tools, such as the cultural web, as well as to critically discuss major topics in international management, such as the choice of entry mode or the structuring of an international organisation. Students can discuss in groups to what extent the choice of entry mode is actually a free choice, rather constrained or even predetermined by the character of the organisation.

In a plenary discussion, the class can discuss whether a strategy that involves being radically different is a wise choice. How different can a strategy be? For how long? Which advantages and risks are associated with radical difference?

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5. Questions 1. Handelsbanken is known for its culture being different from that of its competitors. Characterise Handelsbanken’s culture and discuss how the culture is spread and kept alive in the bank.

2. What entry modes into foreign markets has Handelsbanken applied throughout its history?

Discuss in particular what impact Handelsbanken’s culture has had on the choice of entry modes into different foreign markets. Would there have been different options if the bank had had a different culture?

3. Like all internationalised organisations, Handelsbanken is facing the global-local dilemma.

Discuss how this dilemma is handled in practice. What is done globally, and what is done locally?

4. How is Handelsbanken making sure that its culture is kept alive in an expanding organisation, and how can this culture be kept alive during further expansion?

6. Case analysis 1. Students can use the cultural web model to get an overview of elements constituting Handelsbanken’s culture: Rituals and routines: Managing Director’s annual visits to local branches, symbolising the importance of branches to the organisation.

Stories: Stories about Jan Wallander and the change he initiated. Stories about ‘heroic’ branch managers have put the principles of decentralisation and cost consciousness into practice, sometimes in an unconventional manner, for example, the British branch manager who took personal initiatives to reduce the cost of office furniture and artwork when setting up his branch office.

Symbols: The Octagon as a symbol that each organisational member’s contribution to the success of the bank counts. Initially the abolishing of the marketing department and the fact that Handelsbanken still has no marketing department.

Control systems: Accounting systems allocating revenues and costs to the branch level. Internal (between branches) and external (with competitors) benchmarking system is based on return on equity. The Octagon encourages and rewards individual initiatives, not least when it comes to cost savings. Corporate culture overall often plays a more important control role than formalised control systems when it comes to guiding the behaviour of organisational members.

Power structure: Top management controls the credit process, corporate culture and major strategic decisions including capital allocation. However, many decisions are left to local branches and top management expects local initiatives from, for example, management in a foreign market to develop operations. There are also limits as to how central management can interfere in the business of a local branch, for example, it is not allowed to force a branch into a business with a particular customer against the will of the branch manager.

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Organisational structures: Handelsbanken has a three-level structure (branches, regional head offices and central head office). The branches are supposed to be the core of the structure. Head office functions have been reduced, for example, there is no central marketing department. Managers are recruited internally when this is possible (more external recruitments may be necessary during international expansion).

Decentralisation and cost consciousness stand out as the paradigm characterising Handelsbanken’s culture. The different aspects of culture taken together also provide a sense of uniqueness to the bank that is mirrored in the idea of doing things differently and finding solutions to business problems that mirror organisational culture rather than following industry trends.

2. Historically, Handelsbanken’s business in foreign markets was initially driven by the desire to serve domestic customers doing business abroad. This was initially done through a type of agent, that is, foreign correspondence banks in different markets. After World War II, Handelsbanken engaged in joint ventures with Scandinavian partners in order to have local presence in markets that were important to customers, while at the same time-sharing costs with the partners. Some foreign branches in key markets were also opened by Handelsbanken alone.

Generally, non-equity entry modes are problematic in banking as local presence in a market is required to help customers effectively. The choice is thus between different equity entry modes, either with partners or without. Entering foreign markets with a partner definitely became uninteresting when Handelsbanken started going for local business in foreign markets around 1990. Existing branches were instead used as a stepping stone for further expansion. In principle, in such a situation, a company has the choice between greenfield investments (setting up one’s own branches) and M&As. Handelsbanken’s culture however limited the possibilities for M&As as the bank was reluctant to add large groups of new staff to the organisation in a market, particularly if these people had been socialised in one and the same company (and corporate culture) before. Handelsbanken therefore never enters new markets by M&As. The bank is also reluctant to engage in the acquisitions of larger foreign banks, at least as long as the own operations in a country are small. Handelsbanken is more open to large acquisitions in terms of money involved, as long as there are not many new people coming with the acquisition. The overall reluctance to engage in M&As of course limits the speed of growth while at the same time ensuring the integrity of the Handelsbanken culture. Without that culture, the bank could have grown much faster, Nordea being a merger of different Scandinavian banks being an example.

3. Students can discuss to what extent business issues are handled in a centralised manner even in a decentralised bank. Overall, Handelsbanken’s culture is not negotiable and the bank is making major efforts to ensure that the culture is taught to new organisational members, not least in markets outside Sweden. Practically this implies that Handelsbanken should work with highly independent branches and in a cost-conscious manner in all markets. At the same time, within this overall framework, there is a lot of freedom to develop differently on a national or local level. A notable example is the positioning of Handelsbanken in the United Kingdom as an old-style private bank, whereas the bank is more of a mass market provider in the Scandinavian markets.

Managers on the national and local levels are expected to come with local initiatives. Expansion in new markets is eventually decided on by central management, as usually significant capital commitments are required, but the initiatives are supposed to come from local management, in line with the concept of decentralisation.

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Students can also consider the dimensions of local adaptation and global integration to the Handelsbanken case. It should be noted in this context that global integration is probably less important in banking than in manufacturing industries, where firms can draw advantages of economies of scale by selling the same products in all markets. Financial products are in a sense more local as they are often governed by national legislation and preferences. What can be globally integrated though is the way of running a bank. Hence, at Handelsbanken, culture is integrated across national markets. This has made it easy to transfer managers between markets (e.g. with a Danish manager being the Managing Director of Handelsbanken), although most staff consists of home country nationals in each market. Generally, Handelsbanken of course puts much more emphasis on local adaptation than on global integration. Local adaptation is an ideological cornerstone for the bank, not only when it comes to different national markets, but even in comparison between neighbouring branches that should be allowed to be different in order to better meet their respective customers. Apart from corporate culture, Handelsbanken therefore emphasised local adaptation rather than global integration. This is also mirrored in local staff quickly assuming key positions in local markets and expatriates only serving in some key positions in the beginning. Handelsbanken thus aligns closely to a multi-domestic type of strategy, but with a strong global integration on the level of corporate culture.

4. Culture is essentially about meanings shared by people. On the organisational level, maintaining a culture implies that it needs to be shared among employees. Handelsbanken wants to avoid its culture becoming diluted by people who do not share it. A primary strategy for achieving this is to keep the inflow of new people limited, especially when it comes to management positions. Managers are mostly recruited internally when this is possible. In international expansion, however, particularly when expansion goes quickly like in the United Kingdom, the inflow of outsiders, even in management positions is unavoidable. Handelsbanken thus puts a lot of emphasis on selecting the right people to recruit, particularly when it comes to branch managers. The bank would even refrain from entering an attractive local market if no suitable branch manager can be found. Once branch managers have been selected, they receive internal training and a lot of support (that at the same time is surveillance) from experienced Handelsbankers.

So far, this concept seems to have been successful. Handelsbankers outside Sweden have often opted for the bank as a conscious choice to work in a decentralised organisation. They are hence reported to be more zealous about Handelsbanken’s culture than their Swedish peers.

Students should however note that this system of carefully recruiting branch managers one by one and providing extensive training and support is both time and resource consuming. While expansion, not least in the United Kingdom, has gone very quickly, growing through M&As would have been an option for much quicker growth. In order to preserve the corporate culture, Handelsbanken is reluctant to engage in larger M&As. Where smaller M&As have been undertaken, extensive training has been provided to new organisational members.

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Caitec: A Chinese Business in Africa Paola Pasquali, Shameen Prashantham and Mathew Tsamenyi

1. Introduction The case describes the efforts of Tang Hong, a Chinese entrepreneur, to build and grow a business in Ghana, a small but relatively stable international market in West Africa. The case outlines how the entrepreneur identified and acted upon opportunities, thereby growing his business in an unfamiliar environment. In that sense, the case illustrates the learning process that firms in international markets typically go through, figuring out what works and what does not. The case also usefully presents a major crisis that the business encountered due to rapid and unexpected changes in the regulatory environment (which is not uncommon in emerging markets) and the options being considered by the entrepreneur. Guided by a penchant for risk taking, at the beginning of 2013, Tang decided to import a large number of excavators – employed in gold mining – into Ghana for a trade credit value of US$100 million. He had purchased 100 machines to wholesale and had taken responsibility to sell the remaining 300 on behalf of the supplier. According to the contract, Tang would sell the excavators and pay back the supplier within 10 months. He had never imported that many machines and was aware that such an operation was quite risky, but when he concluded the deal excavators were in high demand from Chinese small-scale miners in the country. However, following the government’s crackdown on smallscale illegal mining activities, the situation took an unexpected turn: within the space of two months, Tang’s market segment abruptly disappeared. Tang is now debating the next steps he ought to take to sell the machines and avoid financial collapse.

2. Position of the case The case relates to the following themes in a strategy course (and in Exploring Strategy):

a) Country and market characteristics; PESTEL/CAGE framework (Chapters 2 and 9). b) International strategies (Chapter 9). c) Entry mode strategies (Chapter 9). d) Entrepreneurial strategies (Chapter 10). e) The levers a strategist might employ in effecting major strategic changes (Chapters 14 and 15).

The case could be used to teach the notion of PESTEL factors analysis as well as that of integration responsiveness-framework in International Strategy.

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3. Learning objectives The key learning objectives for students are as follows: a) To appreciate the challenges of doing business in an emerging market. b) To understand the process of assessing business opportunities and expanding a business entrepreneurially in an international market. c) To be sensitised to the importance of dealing with crises in an international market.

4. Teaching scheme The case analysis could be divided into three parts: A. In the first part, after prompting a summary by the students on their understanding of the case, the lecturer identifies the key issues in the case via the CAGE and PESTEL frameworks (question 1).

B. Discussion of case questions about Caitec group (questions 2 to 5) its business opportunities and risks in Ghana. In this part, the lecturer facilitates the discussion on a Q&A basis to assess students’ understanding of the case.

C. Closing. Summarise the findings of the discussion and finalise the discussion by highlighting the main concepts in the case and an update of ‘what actually happened’.

5. Questions 1. Provide an overview of Ghana’s business environment from the perspective of the CAGE and PESTEL frameworks.

2. How did Tang Hong build up his business in Ghana?

3. What was the situation of the mining market at the time of Mr Tang’s perception of a large business opportunity?

4. What were Tang’s main options after his market segment was flushed out of the country?

5. What lesson can be learnt from Tang’s experience?

6. Case analysis A. Overview of the key issues in the case through CAGE and PESTEL models (question 1).

The lecturer could first ask the students to recount the main features of the CAGE and PESTEL models in orienting internationalisation strategies. These could be visualised on a whiteboard and could be subsequently used to examine Mr Tang’s strategy to expand his business in Ghana from a Chinese perspective.

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Differences

Opportunities

Threats

Political

At that time, Ghana had just transitioned to an electoral democracy. China is an authoritarian political system.

Distance: High

Potential scope for progressive reform in a democratic regime.

Misunderstanding of how the local system functions, and what is really going on in the political realm.

Economic

Between the early 1980s and early 1990s, Ghana was a fast-growing economy, as was China.

Limited market Economic growth potential in Ghana conducive to owing to its small business. population Similar income (compared to, say, levels make it easier Nigeria). to understand local

Sociocultural

Income levels not that customers’ needs different when Tang and way of thinking. first made a move into Ghana. Distance: Low Different languages English is the most spoken. Confucian work ethics in China versus Ghana’s more relaxed attitude towards work and time. Pervading role of religion in Ghanaian society versus China’s secular socialist values. Distance: High

Technological

Environmental

popular language in international business. The fact that Ghana is an English-speaking country might facilitate business entry by English speakers or people who can learn the language (previous knowledge of it).

China more advanced Can provide a

Misunderstanding due to culture/ language barriers.

Ghanaian customers might prefer technology from other countries, need time to promote Chinese brands.

in technology than Ghana.

Distance: Moderate

compelling valuefor-money proposition by offering ‘good enough’ Chinese technology at lower prices than Western technology.

Availability of natural

Ghana has no

Lack of

resources in China,

manufacturing

infrastructure, erratic

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richness in natural resources in Ghana.

Distance: Low

Legal

Cultural

Administrative

industry. Great potential to develop local production in all domains, no competition.

power supply in Ghana could hinder the establishment of a finished product type of business.

Institutional weakness Tang is more prepared to and high levels of navigate the informality Ghanaian characterise institutional institutions in both environment.

Ghana and China.

Distance: Low

Possible misinterpretation of the law due to the specific ways in which institutions operate in each system.

Differences

Threats

Different languages spoken, different social norms/religion.

High

Similar institutional weakness in both countries (although the specific administrative regimes are likely to have some dissimilarities).

Moderate

Geographic

On different, distant continents; no direct transport route between the two countries. High.

Economic

Both emerging

Opportunities Brokering opportunities for actors capable of bridging the cultural divide (e.g. through bilingual skills in English and Chinese).

Once one has the right connections and knows ways to navigate the system, institutional weakness can help to achieve faster growth making procedures leaner.

Few Chinese businesses in Ghana at the time (most businessmen preferred moving to developed countries), so less competition.

Potentially more

markets. Both growing rewarding business at double the rate of investments, low-

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Differences might lead to misunderstandings and miscommunication, which might hinder the business.

Institutional weakness entails lack of certainty and a more unstable climate for business.

Ghana’s administrative heritage reflects its colonial past, which is not shared with mainland China.

Geographic distance makes the logistics and establishment of the business harder.

Consumption and income volatility might give rise to

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Western economies.

Similar levels of income when Tang moved there.

Low

cost labour pools (advantage in production).

Customers more likely to behave in a similar way.

‘unexpected stops’ in capital inflows.

B. Discussion of the specifics of the case (questions 2, 3, 4 and 5) 2) How did Tang Hong build up his business in Ghana?

In 1995, Tang Hong left China to undertake work for a State-Owned Enterprise in Ghana. In 1997, Tang eventually left his company to start his own import business in Accra. Caitec started as a company importing tyres. It then progressively expanded into a group of companies including: Caitec Fishing, a fishing net factory; Caitec Motors, importing commercial vehicles and spare parts; Caitec Delta, importing tyres and successively trucks, excavators and mining equipment; Hai Hong, a construction company which built Caitec Towers and in 2010 began the construction of Tang Palace, a luxury hotel in a central business area of Accra.

Tang tried to see what the local market needs were and tried to match them by relying upon his networks and contacts in China (i.e. tyres and spare parts producers). In growing his business, he also leveraged on previous skills and lessons learned in Ghana. For example, he began to import small parts for cars and only subsequently, having become acquainted with the import procedure, he began importing machines. His case illustrates well how the internationalisation of business is constantly a learning process, and in their international strategies, first-hand lessons and skills learned on the ground are key foundations for further expansion. It should also be remarked that his strategy of differentiating his assets and getting involved in different types of businesses allows his companies to sustain each other in times of economic hardship.

3) What was the situation of the mining market at the time of Mr Tang’s perception of a large business opportunity? How did the environment suddenly change?

At the time of the decision, there was a high interest in Tang’s machines among Chinese miners and the legislation that banned foreign miners from small mining was not being implemented. It should be emphasised Tang had a penchant for risk and believed that only by taking risks one can make money. The lecturer could further stress that Tang did not do any specific pre-investment analysis or projections, as he based his decision on his feeling about the market. The way to achieve targets for Tang was also crucially related to a relentless monitoring system, which he also perfected throughout the years. At the time of his decision, thousands of foreign small-scale miners were present in the country. Although banned by law, small-scale mining by foreigners – operating in collusion with Ghanaian nationals and local authorities under the cover of providing technological equipment – was a common practice and a market opportunity.

Following a series of violent and at times deadly incidents between Ghanaians and Chinese miners, the situation escalated early in 2013. On May 14th, President Mahama launched a Ministerial Task force to tackle illegal mining (‘galamsey’) in Ghana. The campaign led to the arrest and deportation or voluntary departures of thousands of foreigners, many of which were Chinese nationals. For instance, only between 1st June and 25th June 2013 as many as 3, 877 Chinese nationals voluntarily or forcedly left Ghana. With all his customers flushed out of the country, not only did Tang’s market suddenly vanish, but also, some of the machines he had sold, partly unpaid for, had been abandoned on mining sites or had been seized by locals.

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4) What were Tang’s main options after his market segment was flushed out of the country?

The lecturer could stress that these options could also be adopted in combination.

•

Getting a loan to pay the manufacturer within the agreed time (10 months) and in doing so, gain more time to sell the machines. On the one hand, such an option would have saved his reputation with SANYI: the latter would have received its payment as agreed. Moreover, apart from a timely payment to SANYI, a loan would have gained him more time to individuate and sell to another market segment. On the other hand, a loan alone would have saved his situation only in the short term. Eventually, he would have had to sell the machines and repay his debt to the bank. Even more critically, the borrowing situation in Ghana was extremely hard at that time. All the banks in the country were investing in treasury bills and hardly lent to the private sector. Unlike Chinese banks, Ghanaian banks had small capacities and were reluctant to lend big amounts of money. Tang had approached the two Ghanaian banks he had borrowed from in the past but neither of them was willing to support him this time: they both deemed the financial situation of such a loan too risky. Tang was thus considering getting a loan from a foreign bank. In that case, however, he would have had to get SANYI to guarantee for him.

•

Returning the excavators to the manufacturer SANYI to be sold to its dealers in other African countries. Tang decided to bring up this possibility at the meeting he had scheduled with the SANYI regional director in South Africa. Returning all the excavators to SANYI would have surely got him out of the big debt trouble. However, such an option would have borne an extremely high cost. As the export cost of one machine was around US$ 16,000, he would have lost millions of dollars in such an operation. Moreover, such a move – provided that SANYI agreed to such a deal – might not have avoided him collapsing in the long term as a result of huge losses. Additionally, such an operation would have had an enormous impact on the finances of Caitec group as a whole. Finally, the act of returning all excavators would have also entailed losing face with the manufacturer, SANYI. His long-established reputation would have been scratched by such decision.

•

Setting up a Ghana-China Chamber of Mines enabling partnerships between Ghanaian and Chinese stakeholders employing SANYI machines. What had allowed Tang to previously sell machines to Chinese illegal miners was the lack of legal enforcement of Ghanaian legislation and the collusion of small-scale foreign miners with local authorities. Illegal mining had a bad reputation mainly because of the poor regulation and safety practices, as well as high incidence of accident rates and environmental degradation. But what if this practice could instead be regulated and made mutually beneficial through a partnership among local authorities, communities and Chinese miners? Chinese small miners could resume work and the use and purchase of his machines. Together with his management staff, Tang came up with a ‘Proposal for Green and Sustainable Alluvial Mining Pilot Zone Development’. This project entailed the collaboration of local and central government actors, such as the Ministry of Mines and the Minerals Commission, recognised mining institutions such as the University of Mines and Technology, Ghanaian SMEs operating in the mining business as well as Chinese small mining businesses. This creative and very ambitious project planned to utilise potential alluvial gold areas by mining them in lots with a pairing of both Ghanaian and Chinese management, with an investment of capital of US$ 600,000 per lot. Different from the illegal miners’ practices, the project was thought of as a partnership among local governments, local miners and Chinese miners. This would enable monitoring of environmental and health and 383 .

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safety standards as well as compliance with Corporate Social Responsibility practices. The project was further designed to benefit the local populations and create a standard model for future alluvial development projects. The initial investment was going to be for 360 million US$ and subsequently create thirty thousand new jobs and a commitment to spend US$ 100,000 a month on community approved projects. The main obstacle with this project was that it required a long time to leverage on all networks. It also entailed the change of certain policies regarding small-scale foreign miners by Ghana’s Ministry of Mines.

•

Selling the machines to other small-scale miners operating in the Ghanaian market. Although all Chinese small-scale miners had been expelled from the country, small-scale mining continued in Ghana. Local small-scale miners could buy his machines. An aggressive sales strategy to what had become the main segment of the market was the fastest and financially healthiest way to come out of his tough situation. This option would also enable him to protect his good name and would leave his reputation intact with the manufacturer. However, the impediments to selling to local small-scale miners were one too many. First, in terms of the time constraint: selling those many machines within a few months remained a very difficult task. Second, many Ghanaian small-scale miners did not buy heavy duty equipment but rather, rented it at daily rates between 1,500 and 2,000 GH¢ (US$ 390–520). Furthermore, unlike the Chinese miners, Ghanaians were not familiar with Chinese machines, so time was needed to promote the Chinese brand. In addition, Tang knew from his sales experience in Ghana that unlike his Chinese customers, Ghanaians normally did not have large amounts of money to pay for deposits and often did not pay on time. For these reasons, he had not considered selling excavators to Ghanaian small-scale miners in the past, but the situation had now forced him to reconsider his strategy.

5) What lessons can be learnt from Tang’s experience?

The lecturer could summarise students’ suggestions and scenarios on the whiteboard. Some students will respond to this question by saying that Tang should not have risked this much or should have not risked at all. The lecturer could remark that although all the above might be true, risk-taking approaches are also those which normally bear the highest profits. The lecturer should highlight that another key issue in this case is the resilience on the part of an entrepreneur when his attempt at expansion has gone awry. He does not resign himself in front of the challenge, he tries anything possible (consider, for example, the creative idea of a China-Ghana chamber of mines). Moreover, the lecturer could stress the importance of Tang’s leveraging on his networks, which again provides an example of how to deal with crises in international markets. In sum, some key takeaways are as follows: -

The pursuit of high levels of reward goes hand in hand with high levels of risk.

-

Resilience is vital in pursuing entrepreneurial opportunity.

-

Networks represent an important source of resources for entrepreneurs.

C. Closing

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The lecturer can now reveal ‘what actually happened’: Tang’s businesses did not collapse as a result of the 2013 crackdown on ‘galamsey’. As of 2015, Caitec group is doing well. Tang sold almost all the excavators by 2015.

The first lesson to be learnt in this case is Tang’s resilience. What got him out of the sticky situation in this case was a combination of some of the options mentioned above. First, he desisted a hasty exit and asked for a loan from a Chinese bank, which granted him one. He thus repaid the manufacturer within 10 months and in doing so gained more time to sell the machines. The leverage on his networks was also crucial to recover his investment. The network that turned out to be the most useful was the one with the Ghana’s Small-scale Mining Association. Tang began to give support to the association by making available his machines to the association. An agreement was reached between him and the association whereby Tang would give Ghanaian small-scale miners an initial credit for 80% to buy his machines. The miners would pay 20% of the price of the machine upfront and then could use the machine, paying back Tang 10 months later with the revenues from their mining activities. A technical aspect that helped this arrangement was that these machines had devices on them which would allow them to work only for 300 hours. When such time was reached, the company could stop the machines automatically. As a result, the machines would be reactivated only if the customers had paid back their debits. To make sure that the mining activities would continue and enable payment, Tang further created a taskforce of seven people who would daily check on each machine sold on credit, putting pressure on small-scale miners to work on a regular basis so as to be able to repay their debt as fast as possible. Another factor played to Tang’s advantage: all the big mining companies were in financial difficulty and at around the same time had started laying off people. These individuals had all gone into small-scale mining, expanding the pool of Tang’s potential local customers.

At this point, the lecturer could also relate Tang’s new commercial strategy to the notion of the integration-responsiveness framework, which emphasises the importance of being responsive to local needs. In closing, the lecturer could reiterate the importance of dealing with crises in an international market. He/she could remind the students that in this case, a combination of options ultimately saved Tang from bankruptcy: first, desisting a hasty exit; second, a thorough leveraging on any possible network he could use; third, a responsive adaptation to the new market segment, which included offering credit and a relentless financial control on his customers. The lecturer could conclude that Tang’s case is a very good representation of how to respond to some of the challenges of expanding a business entrepreneurially in an emerging market.

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Going For A Ride: Entrepreneurial Journeys In The On-Demand Transportation Sector Dr. Oksana Gerwe and Prof. Rosario Silva

1. Introduction The Going for a Ride case study provides background on three disruptive start-ups in the ondemand transportation sector: Blablacar, Turo and Lyft. The case is concerned with the topic of the entrepreneurial journey, opportunity recognition, early growth of a venture and its strategic challenges as the company matures.

2. Position of the case The case relates to the following themes in a strategy course (and in Exploring Strategy): a) Entrepreneurship and Innovation (Chapter 10) b) Opportunity recognition, entrepreneur and entrepreneurial team, market gaps, resources and capabilities (Chapter 10) c) Platform Business Models d) Business Strategy and Models (Chapter 7) e) Disruptive Innovation (Chapter 10)

3. Learning objectives The key learning objectives for students are to: a) develop their understanding of how entrepreneurs come up with an idea for a business venture; b) consider the role of entrepreneurs’ background, resources and professional profile in shaping the opportunity and the start-up trajectory and c) appreciate the challenges a new venture at the earlier stage of growth and development, as well as at later stages when the business scales up and matures.

4. Teaching Scheme The suggested case analysis enables students to consider a range of issues around the journey of three disruptive start-ups. Students could be asked to present in-depth analysis on one of the start-ups, or a comparative analysis of the three presented in the case.

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The case is structured so that each segment (Blablacar, Turo and Lyft) provides a wealth of information about opportunity recognition, followed by the initial idea formulation and the founder profiles and resources that the students can use to map the early phases of the entrepreneurial process for each platform. The final section for each platform highlights platform-specific challenges.

In addition to the case notes, further information around each company is available through various sources on the internet. Each company also has a dedicated website detailing core company information and business updates, allowing student analysis to go further if the instructor desires: Blablacar: https://www.blablacar.co.uk Turo: https://turo.com Lyft: https://www.lyft.com The final part of the case allows for a Segway into a broader discussion on the future strategic challenges for on-demand transportation platforms.

5. Suggested General Questions

1) Entrepreneurial Journey How was each founder (or team of founders and management) able to identify the opportunity in the relevant market? What was the role of foresight and planning, on the one hand, and serendipity, on the other hand?

2) The role of the entrepreneur in shaping the start-up How did the profiles, resources and professional backgrounds of the founders and management contribute to the start-up trajectories?

3) Evolution of company identity How did the brand identity of each start-up evolve as the companies grew and expanded?

4) Disruptive innovation and competitive dynamics Even though all three start-ups operate in the transportation sector, they are not disrupting the same incumbents. How does each company affect incumbents and which incumbents are threatened by each of the start-ups?

6. Suggested company-specific questions Blablacar 1) Should it reconsider its branding and positioning in light of the company’s size and scale?

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2) Are there other services that Blablacar could offer to its users as it is trying to expand? In other words, is there room for product diversification?

Lyft 1) How can Lyft compete with Uber going forward, given that the latter has stronger resource base?

2) What unique value proposition can Lyft bring to market to be attractive to potential passengers?

Turo 1) What extra services could Turo provide?

2) Are there geographic expansion possibilities?

7. Case analysis (General Questions) 1) Entrepreneurial Journey How was each founder (or team of founders and management) able to identify the opportunity in the relevant market?

In each case, the real-life dilemma or challenge played a critical role in identifying an opportunity. In the case of Blablacar, Frederic Mazzella could not get to his destination for Christmas and realised that there was no online service that would allow passengers to identify drivers travelling in the desired direction to share the ride with them. Lyft was conceived after Green saw a taxi sharing practice in Zimbabwe and turned the idea into a company, Zimride, focused on long-distance carsharing in the United States. Having observed the spectacular rise of Uber, the focus shifted from long-distance to inner city ride sharing. Likewise, Turo was conceived after its founder experienced car-sharing first-hand when her car broke down and she needed to use that service to move around.

What was the role of foresight and planning, on the one hand, and serendipity, on the other hand?

The initial ideas of all three start-ups underwent significant transformation over the years as the companies grew and the external environment changed. However, at the initial phase of development of multi-sided platform businesses, it is key attract both side of the platforms – drivers and passengers.

The challenge is, though, whom to attract first. Whom do you focus on? This dilemma is often described as a ‘chicken and egg’ problem. Blablacar had two lucky breaks that allowed the company to attract more passengers: in 2007 with the strike of French train drivers and in 2010 with the eruption of a volcano in Iceland. In both cases, passengers needed to get home but could not do it via train or plane; the increase in demand led to an increase in supply – drivers willing to give rides to travellers.

In the case of Lyft, the change of market dynamics and the rise of Uber caused the founders to shift focus from one business (Zimride) to another (Lyft). Aggressive marketing, such as the use of the pink moustache, was used to differentiate the company from Uber, both in the eyes of passengers and in the eyes of drivers. As for Turo, its growth and development has been steadier, as the company gradually attracted capital and increased its reach.

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2) The role of the entrepreneur in shaping the start-up How did the profiles, resources and professional backgrounds of the founders and management contribute to the start-up trajectories?

The backgrounds and resources of founders played a key role in the start-up trajectories. In the case of Blablacar, Frédéric Mazzella brought to the company his scientific research and computer science background, MBA training and an affinity for branding and communications, which he had developed earlier during his MBA Programme at INSEAD. The other two founders contributed expertise in IT and entrepreneurship. Lyft benefited tremendously from the entrepreneurial experience and IT background of Logan Green and John Zimmer. Similarly, the entrepreneurial focus and an MBA degree of Harvard Business School of Shelby Clark were important for Turo. Her social aspirations also played a role in shaping a business that would put to use underutilised privately owned assets (vehicles), leading to better resource utilisation and sustainability.

3) Evolution of company identity How did the brand identity of each start-up evolve as the companies grew and expanded?

For the three companies, the increase in scale and reach resulted in reconsideration of their approach to marketing and positioning. As the companies became more mature, they had to project a more mature image to stakeholders. For example, Lyft had to let go of its pink moustache on the front of the car, Blablacar toned down the colours on its logo, and RelayRides was renamed Turo to evoke the aspirations of tourism and travel rather than ride sharing.

4) Disruptive innovation and competitive dynamics Even though all three start-ups operate in the transportation sector, they are not disrupting the same incumbents. How does each company affect incumbents and which incumbents are threatened by each of the start-ups?

The main incumbent competitor of Blablacar are inter-city trains, buses, trains and, possibly, planes.

This start-up made a shared ride with a private driver becomes a viable alternative to other means of public transportation between cities. The key incumbents for Lyft are taxi companies or public transportation within cities. As for Turo, their main competitors among incumbents are traditional car rental providers such as Hertz, Dollar, Europcar, etc. Thus, even though all three platforms compete in the transportation segment, they each have their own direct competitors among incumbents against whom they need to establish their positioning and competitive advantage.

8. Case analysis (Company-specific questions) Blablacar The segment on Blablacar concludes with two issues the company is facing.

1. Should it reconsider its branding and positioning in light of the company’s size and scale?

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2. Are there other services that Blablacar could offer to its users as it is trying to expand? In other words, is there room for product diversification?

These questions lead to the following considerations.

1. Blablacar brand was initially conceived by its founders as a peer-to-peer alternative to traditional transportation. The brand represented its socially inclusive, fun, egalitarian and slightly eccentric spirit. The passengers were encouraged to talk with drivers and vice versa so that a car ride would become more than just a ride but an opportunity to meet someone new, chat on the way, share companionship and split journey costs.

After multiple rounds of investment with the company valuation of more than 1bn euros and with the operations covering multiple countries, Blablacar was no longer a small start-up company trying to find its niche in the market. It became the largest inter-city carpooling company in the world. It was time to update the brand to reflect the new phase in company development.

In 2018, Blablacar went through a serious rebranding exercise. The company logo was changed from the bright green-red-blue to a more toned-down colour scheme of navy blues and greens with fonts that are more streamlined and images (nb. Examples of the logo are easily found on the internet). Yet, the new symbol of the two overlapping inverted commas that also reminded of two car seats were introduced to represent the connection between the driver and the passenger that remains at the heart of Blablacar brand identity. The phone app was also redesigned to match the new brand identity.

2. Considering the fact that Blablacar is an inter-city long-distance transportation platform, the company decided to expand their services to include other options of getting from one city to another city in addition to carpooling. For example, in 2018, Blablacar announced plans to acquire Ouibus, the bus division of France’s national railway company SNCF, which has been losing money for years. As part of this deal, BlaBlaCar announced a $114 million investment in Ouibus, which would also make SNCF a shareholder in Blablacar. Early in 2019, a similar development was launched in Russia, where licenced inter-city bus drivers would be able to offer seats on their bus routes via Blablacar platform, increasing occupancy of official bus rides between cities.

Lyft The section on Lyft concludes with the description of the intense competition between Uber, who is the market leader in car-sharing, and Lyft, the second largest competitor in the United States and Canada. The question that Lyft is facing is as follows: 1. How can Lyft compete with Uber going forward, given that the latter has stronger resource base? What unique value proposition can Lyft bring to market to be attractive to potential passengers?

One possible solution is for Lyft to build a brand around values as well as quality. Given that the price competition between Lyft and Uber is bitter, Lyft needs to stand out along other dimensions – purpose, mission and activism. From the beginning, Lyft tried to differentiate itself from Uber, which 390 .

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positioned itself as a black car service. Instead, Lyft positioned its brand as a peer-to-peer ride hailing experience. “Lyft’s VP of Marketing has stated Lyft’s goal is to enhance people’s travelling experience by providing them best transportation and that cities should be built around people, not around cars”2. Lyft is also trying to grow its social impact and activism. For example, it enables riders to donate to charity on each ride. They introduced the Ride Safe program to ensure riders get home safely after a night of drinking.

Another way for Lyft to grow and compete with Uber is via going public that will bring new resources to the company. In early 2019, Lyft was considering and IPO, trying to do it before Uber going public3.

Turo The segment about Turo concludes with a consideration about how and where Turo could go next in terms of 1) extra services it could provide and 2) new geographic expansion possibilities.

1. In 2018, Turo, added a new feature that gives users access to ‘extras’ they might need on a trip, such as camping gear, a bike racks, a child seats or prepaid fuelling. Car owners renting out their vehicles on the app can earn more by providing extras. Hosts set their own prices and keep 90% of money earned renting out these extras. Turo gets the remainder. Such extra services allow the company to better meet the specific needs of their customers and tailor their offering to more fragmented market preferences.

2. In 2018, after raising $92 million in additional capital, Turo purchased a German competitor Croove. This could be a good platform for the company expansion in Europe, where car ownership is lower than in the United States of America but road travel is very high. Hence, the demand for daylong car rental could be substantial.

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https://www.forbes.com/sites/simonmainwaring/2018/10/16/how-lyft-drives-growth-throughpurpose/#2ebf278115f1 3 https://www.businessinsider.com/lyft-plans-2019-ipo-bloomberg-2018-8?r=US&IR=T 391 .

CASE TEACHING NOTES

Leadership at Apple inc.

Loizos Heracleous and Angeliki Papachroni

1. Introduction The case looks at the development and success of Apple as an innovative company under the leadership of Tim Cook and Steve Jobs. The case begins by noting Apple’s current, leading market position, its near bankruptcy during the 1990s, and its remarkable turnaround under Steve Jobs since 1997. After Job’s unique approach and record of achievement, Apple transitioned to a new era where it faced unique challenges. The case ends with the question marks over Apple’s future, asking whether the new leadership will be able to maintain the record of achievement under new competitive pressures. The case will be attractive to students as discussing a company producing aspirational products with which they will be very familiar.

2. Position of the Case The case is likely to be taught in the middle or latter part of the course, dealing essentially with issues of Strategic Choices (Part II of the book) and Strategy in Action (Part III). Familiarity with environmental and cultural issues (Part I) will be important.

3. Learning Objectives

The learning objectives for this case are the following: • • •

To explore the nature of strategic leadership using Steve Jobs’ leadership at Apple Inc as an example.

To explore the nature of successful innovation and how it might be accomplished.

To engage students in strategic analysis and strategic thinking throughout the case, for example, the advantages as well as dangers of going against the ‘industry recipe’ (Apple’s proprietary system).

4. Teaching Scheme The Apple Inc. case typically leads to spirited discussion, given that a significant percentage of the students will own an Apple product and be fans of the company, and virtually all students will have heard of Apple and be familiar with at least one of its product offerings. Given the iconic status of the company, students’ analysis may not always be dispassionate.

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This case can be discussed effectively in around 90 minutes. It fits well as either the first, or the second half of a three-hour session, where the other half is an interactive discussion of issues of strategic leadership and innovation in fast-moving and intensely competitive industries. Or, such a discussion can take place intermittently over a three-hour period, in the context of the issues that Apple raises. The case can be positioned in a course after issues such as strategic thinking, industry analysis, leadership, innovation and strategy-as-practice have been discussed, since all of these issues feature in this case.

Some preparatory questions that can be given to students in advance are as follows: 1. How innovative is Apple? Is it a strategic innovator?

2. What is your evaluation of Steve Jobs as a leader?

3. What are your recommendations to Apple as it continues in its new era under Tim Cook?

Two further questions that can be brought up during the discussion, and that can stretch students’ thinking, are as follows: 1. Should Apple rethink its closed system, proprietary ecosystem approach?

2. Is Apple off the roller coaster that characterised its history?

In terms of use of time, depending on the time available (for example, if there are 120–180 minutes available to discuss the case), these last three issues could be suitable for in-class group work.

On the first discussion question, the class can be divided into two groups, and each group asked to provide good reasons for either sustaining or opening up Apple’s system. This issue leads to interesting discussions, since there are good reasons for both decisions, and a decision on this issue is a key strategic choice that Apple has to make (see analysis of this issue towards the end of this teaching note).

On the second discussion question, the issue is whether Apple is off the roller coaster that has characterised much of its history. Essentially the question asks whether Apple has now developed a sustainable competitive advantage. This will create debate between students who are Apple fans and believers, with students who are more dispassionate in their analysis of the issues (see discussion of this question towards the end of this teaching note). The instructor can either divide the class in two parts and ask each part to give reasons for which Apple is off or still on the roller coaster, or divide the class in groups of about five students each and ask them to deliberate this question for 10–15 minutes, make a decision on this and offer their reasons for the decision, before returning to plenary discussion.

5. Case analysis 1. Is Apple a strategic innovator?

Strategic innovation is defined as offering different answers than the established ones, to the key questions of strategy; who, what and how (Markides, 1998). Historical examples include internet banking versus high street banking, and budget airline carriers versus flag carriers. These two examples can be analysed as follows: 393 .

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What is strategic innovation?

A different answer to the basic questions of strategy: What, who, and how Strategic innovation dimensions

Airlines: Dominant answer

Airlines: New answer

Banking: Dominant answer

Banking: New answer

Full service air travel

Budget air travel

High street banking

Virtual banks

(positioning)

Differentiation, service levels

Low cost, no frills

Differentiation (brand, Differentiation (service levels, reliability) convenience)

Who?

All segments

Primary target budget All segments

What? (product service) What?

conscious travellers How? (channels, Air & ground delivery) infrastructure

How? (internal architecture)

Air & ground

Branches, telephone internet,

infrastructure

Flag carriers, focus Budget airlines, focus Full service on quality-innovationon leanness & infrastructure efficiency

Primary target educated professionals

Internet, telephone

Call centres, internet supported by full infrastructure

So - has Apple engaged in strategic innovation?

It is important to note at the start that Apple is not a typical ‘first-mover’ (Chapter 10.5.1) – indeed, its strategy is more to follow, but to do so highly effectively. In this sense, as in the case of iTunes for example, a lot of its innovation is business model innovation rather than simple technological innovation.

Nonetheless, Apple computer products have been innovative in the “what” dimension of the table above, especially user friendliness, design and reliability of operating system. These attributes have been eroding, however, with IBM-compatible computers gaining ground in these dimensions.

Apple’s iPod and iTunes have been innovative in the “what” (user friendliness and design) as well as “how” (iTunes’s seamless integration with the iPod). Its iPhone is innovative in the “what” (product features, design, integration of different capabilities) compared with other devices. The iPad is innovative on both the ‘what’ (product features, e.g. the retina display) and the ‘how’ (links with Apple’s ecosystem, such as the App store) dimensions.

Finally, Apple Inc. as an organisation has been innovative in terms of the ‘how’ (internal architecture and interconnected offerings). Its proprietary system goes against the industry recipe of specialisation, and leads to both dangers and opportunities (as discussed in additional question 1). This analysis shows that Apple can be seen as a strategic innovator, particularly in the dimension of what (products) as well as how (internal architecture and interconnected offerings).

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An interesting question to pursue further here would be, what factors aid Apple’s innovative capacity (Apple’s core competency: see also Chapter 4)? These include: •

proprietary ecosystem enabling the seamless integration of hardware and software;

•

pervasive culture of customer orientation, urge to produce ground-breaking products;

•

Attracting the best talent and driving them hard;

•

Flat organisation and reduced bureaucracy;

•

‘Deep collaboration’ instead of discrete, linear innovation processes and

•

Historically, Jobs’ leadership embodying the spirit of creativity, which has shaped Apple’s DNA.

2. What is your evaluation of Steve Jobs as a strategic leader at Apple?

Materials from Chapter 15 will be particularly useful here: highlighted especially are the roles of top managers as leaders (envisioning, aligning and embodying) and leadership styles (transformational or transactional).

The instructor might start by asking students on their views on the differences between management and leadership. It may be noted that both are needed for success; management without leadership would lead to a stagnant, conservative organisation that would be quickly overtaken by its competitors; and leadership without management would lead to inefficiency and low reliability of operations. This discussion can be summarised as follows:

Is there a difference between management and leadership?

Management  Staying on course  Maintaining order  Supervising people  Efficiency-oriented  Sustaining the present 

Leadership  Setting the direction  Creating change  Inspiring people  Effectiveness-oriented  Opening up options for the future 

Both are important for success, in the right mix

The instructor might ask, what determines the right mix of management and leadership? This is a matter of weighing up relevant factors, which include: -

type of organisation (having mechanistic versus organic organisation designs, for example)

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-

Type of task (a task involving creativity, as in an advertising agency versus a task where

-

reliability is critical, such as in an airport flight control tower) Type of individuals (soldiers versus university professors, for example) and

-

Stage of career development (as one rises up the ranks, the importance of leadership becomes comparatively higher).

Was Jobs more of a leader or a manager? This is an interesting question. It is clear that Jobs was more of a leader than a manager, but also that he had both capabilities. The case outlines, for example, not only how he pushed for ground-breaking products and inspired Apple employees to create a different future (leadership task), but also how he brought and maintained order and control in an once chaotic organisation (managerial task).

The instructor might then ask, what is it that makes a leader ‘strategic’? What is it, in other words, that can connect leadership with strategy? Some potential answers to this question are below:

What are the key tasks of a strategic leader?

Maintaining a helicopter view of the industry  Ensuring strategic alignment and addressing misalignments (taking difficult decisions)  Building winning company capabilities  Developing a high-performance org. culture  Attracting, developing & retaining the best talent  Developing global strategy and a corresponding organizational mindset 

Again the discussion can turn to the extent to which Jobs was a ‘strategic leader’. Considering the above issues: Jobs clearly had a helicopter view of the industry and could draw strategic implications from it that translated in resource allocation decisions for Apple. For example, he understood the importance of user friendliness and outstanding design of products, and he could make tough choices about what projects Apple should be spending its scarce resources on. He understood industry convergence, and ensured that Apple had competencies in the key aspects; hardware as well as software. A key enabling factor for this helicopter view was his intimate knowledge of the industry, having spent decades in it, since developing the first Apple computer with Steve Wozniak (even if Wozniak was in fact the technological genius in the pair, and Jobs the marketing genius).

Apple was strategically aligned after Jobs’ tenure, and Jobs eliminated some misalignments such as a chaotic culture with little cost control, and too much resource spent on new product development projects that did not have enough promise or potential. The issue of alignment is discussed further below.

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Building winning company capabilities. Arguably, Apple’s core competencies are innovation through outstanding design and seamless integration of hardware and software, leading to a great and engaged customer experience. These have been Jobs’ legacies and have helped Apple be a successful competitor, and arguably, Jobs’ leadership could historically be seen as a core competence of Apple (which explains why investors had been nervous about what will happen now that Jobs is gone).

As the case describes, the culture at Apple was high-pressure, where excellent people were pushed hard to deliver ground-breaking products; and characterised by a strong sense of community and belonging to one of the world’s best organisations. Jobs’ leadership was a key driver of this atmosphere.

As the case mentions, Apple under Jobs’ leadership aimed to attract the best talent available, and retain it through various means, which included the chance to work for the acknowledged most innovative company in the world, on exciting projects.

Developing global strategy and a corresponding organisational mindset: Apple still remains a quintessentially American corporation, in terms for example of image, culture, location where innovations are developed, and seat of control. A case could be made that Apple needs to focus more on global emerging markets, where growth is fastest. Its premium strategy however may not be the most suitable for emerging markets such as China and India, where people are more price-sensitive.

This poses an interesting strategic challenge, of how Apple should approach large emerging economies such as these.

Overall, the above analysis shows that Jobs is an effective strategic leader. Having said that, an interesting discussion can be carried out around his maverick behaviour and strict approach to people (he was profiled in Sutton’s book ‘the no asshole rule’ on the chapter describing the virtues of assholes). Did his maverick and some would say inconsiderate behaviour detract from Jobs’ leadership effectiveness? This is an interesting question to ponder; the answer is unknowable because this behaviour is part of who Jobs is as a person; and, arguably, behaviour that can be seen as eccentric is often a characteristic of leaders who redefine corporations, industries and societies. We don’t know if he would be such a successful leader if he had a different personality. Is such behaviour however a necessarily integral part of a successful strategic leader? The answer here is ‘no’, since many successful strategic leaders did not display such behaviours (e.g. Jack Welch).

Has Apple been too dependent on Steve Jobs? The answer to this is probably ‘yes’, even though many believe Tim Cook, the current COO, together with Jonathan Ive, head of design, will still ensure that Apple is successful now that Jobs is gone.

3. What are your recommendations to Apple in the Cook era?

Materials on the forcefield analysis of change and types of change (from adaptation to revolution) may be helpful here.

Of course, it is difficult to make recommendations to a leading company. However, additional questions 1 and 2 discussed below, as well as the previous analyses, point to some recommendations: •

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lower-cost strategy there, with simpler products? Should it sell its existing products cheaper

•

there? There are problems with each of these propositions. Apple’s solution seems to be to maintain its pricing and product quality in these markets and expand distribution by investing in its own retail stores.

Use its cash pile as an uncertainty buffer, to accelerate global growth and to maintain its

•

innovation edge. Its announcement in early 2012 that it would grant dividends after 17 years of a policy of zero dividends, and engage in share buybacks (at a total cost of $45bn), indicates that Apple felt safe in its cash generation capabilities at that stage.

Sustain control of its technological ecosystem (see additional question 1)

•

Expand its own retail distribution chains. This is a use of Apple’s cash that makes a lot of sense; Apple stores strengthen the brand, bring Apple closer to its customers, enable it to control the whole customer experience, and help it win new converts.

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Sustain focus on making great products, attracting the best talent, and on being selective in its new projects. Even though this sounds simple, these were things that Jobs was passionate about. Have they been institutionalised in Apple, or will the focus on these factors wane now that Jobs has gone?

Additional discussion question 1 – Should Apple rethink its closed ecosystem, proprietary approach?

There are likely to be split opinions on this issue. There are good arguments for either decision, as follows: Apple should sustain its proprietary ecosystem because: -

it offers a cushion against supplier power (e.g. software);

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it allows market power (e.g. pricing) when offering bundles of products (e.g. IPod and

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iTunes) (cushions buyer power); it strengthens differentiation and avoids commoditisation (cushions competitive rivalry) and

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it enables systemic (versus stand-alone) innovations that would have been difficult otherwise.

On the other hand, Apple should open up its proprietary ecosystem because: -

its operating in a world of open standards where interoperability is important;

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its global market share in computers remains around 5% because of the effects of its closed

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ecosystem; opening up would give access to a larger potential market and

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more software developers would produce software for its devices.

Whatever formal analysis suggests however, Apple is likely to keep its proprietary ecosystem, given the belief that it aids ground-breaking innovation and user friendliness, and supported by Apple’s exceptional performance over the last several years.

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If there is sufficient time, the instructor can bring up here the following issue: An interesting aspect of Apple’s proprietary system is the effective achievement of synergies. Synergies are notoriously hard to achieve. How has Apple succeeded in achieving synergies (e.g. hardware-software interoperability, deep collaboration) where most other companies fail to do so? Some relevant factors here would be: tight- control historically exercised by Steve Jobs, and since late 2011 by Tim Cook; role -of leadership and culture as integrative forces across departments and specialisations (e.g. emphasis on making great products through deep collaboration); role -of organisational design (organic, flat, not bureaucratic and simple processes) and - role of software as core competence that could be transferred to several new products. central But the decision is not binary. Perhaps sustaining control, combined with selectively opening up where Apple believes it makes business sense (such as its iTunes standards, enabling iTunes songs to be played on other MP3 players; and opening the App store which sells apps from developers around the world) would be the best approach.

Additional discussion question 2 – characterised its history?

Is Apple off the roller coaster that has Since this is a question about the future, it is impossible to have a definitive answer. However, the following issues are relevant: -

If Apple has achieved sustainable competitive advantage, the implication is that it is off the roller coaster and that it will continue being successful without having to face a sharp downturn.

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Apple’s strategic alignment and its core competencies, outlined above are positive indications with regard to Apple’s competitive advantage. It would be difficult, for example, for competitors to imitate Apple’s innovative capacity and effective synergies in its organisation design.

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Apple’s ability to focus its efforts and resources is beneficial. As the case notes, Jobs often said ‘I’m as proud of what we don’t do as of what we do’. Jobs removed 70% of product development projects when he took charge at Apple in 1997. This focus is consistent with Porter’s (1996) assertion that without making tough choices, a company does not have a strategy and Apple’s product diversification (from PCs to consumer electronics and

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entertainment) as well as geographic diversification (from the United States to global market) are also positive indications; more emphasis is needed on Apple’s global efforts, however, especially how to achieve higher penetration of leading emerging economies. This is a tricky challenge, given Apple’s differentiation, premium pricing strategy.

Having said the above, the risks of operating through a proprietary system, in world of open standards, are significant. It is by no means clear that Apple’s competitive advantages will continue to effectively outweigh these risks.

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Has Teva been saved? Responding to challenges and problems in generic pharmaceuticals 1. Introduction This is an individual note on Teva, a global pharmaceutical company. The case describes the international strategy that Teva has followed with a number of acquisitions designed to rapidly increase turnover and profitability. It also shows how such a strategy can lead to significant challenges for an organisation.

2. Position of the Case The case study is designed to facilitate teaching of international strategy and also to evaluate the different drivers for mergers acquisitions and alliances.

3. Learning Objectives To achieve ambitious corporate goals, Teva followed an aggressive international strategy of nonorganic growth from 2006 with smaller and larger acquisitions. The case is designed to help students analyse the different international strategies that Teva has pursued since 2006. Teachers could particularly focus on the following sections: International Strategy (9) Mergers, acquisitions and alliances (11)

4. Teaching Scheme

The case study may be used as the basis for individual assignments, plenary discussion or for small group work. For example, the tutor could lead the class through a discussion of the motivations for the various acquisitions Teva has made and discuss whether these were strategic, financial or managerial.

They could also consider how much Teva`s international strategy has changed over time looking at the four basic international strategies and question why they have focussed on wholly owned acquisitions rather than joint ventures or other market entry strategies. The case could also lead to a discussion on the challenges the new CEO faced and whether the latest international strategy the company has announced is likely to be successful.

5. Questions for discussion

What were the drivers for internationalisation that led to Teva’s rapid acquisition programme?

Describe the key motivations behind Teva’s acquisition programme and comment on how well the programme met the ambitions of the international growth strategy?

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Using the four international strategies, describe how Teva`s international strategy changed since the departure of Shlomo Yanai.

6. Case Analysis What were the drivers for internationalisation that led to Teva’s rapid acquisition programme?

Students should consider that Teva followed a very ambitious international strategy. The company moved from a leading player in their domestic market of Israel to one of the leading global players in the manufacture and supply of generic pharmaceuticals.

Students should utilise Yip’s four drivers for internationalisation in their analysis.

The generic pharmaceutical market is one that has a high potential for internationalisation. Cost drivers are one of the most important aspects in driving internationalisation. The generic pharmaceutical market (unlike the ethical pharmaceutical market) is extremely competitive with relatively low barriers to entry and low margins. To achieve competitive advantage, manufacturers must reduce costs and focus on economies of scale.

The standardisation and relatively high value of pharmaceuticals, as well as the small physical volume, mean that logistics are favourable for centralised manufacture and distribution.

Customer needs across the majority of markets are very similar, although there are differences in the processes for gaining registration of generic pharmaceuticals and changes in packaging and labelling of pharmaceuticals.

Although not covered fully in the case, students should be aware that governments and public or private healthcare insurers in many countries are concerned about spiralling healthcare costs and are increasingly looking to reduce or at least contain drug costs by driving the switch from branded to generic and biosimilar medicines. Supportive government policies to encourage the switch are therefore another key driver for internationalisation.

Describe the key motivations behind Teva’s acquisition programme and comment on how well the programme has met the ambitions of the international strategy.

Students should consider that underlying the aggressive acquisition strategy has been a long-time desire laid down by the former CEO and Chairman for the company to very rapidly increase turnover, something that could only realistically be achieved by inorganic growth. Students may argue that these acquisitions had strong strategic motives: •

Extension especially into new markets especially in Asia via Taisho and Taiyo

•

Consolidation of the generic pharmaceutical business through acquisitions in Europe and Japan through Barr, ratiopharm and Taiyo, and particularly the acquisition of Allergan’s generic business

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Improving capabilities in research-based pharmaceuticals most notably by the acquisition of

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Students could also question the managerial motivations of the acquisitions that have taken place.

The challenges of Teva: Was the purchase of Cephalon for example driven by managerial hubris?

The success of the previous acquisitions perhaps leading the CEO to pay too high a price for a research-based organisation.

Using the four international strategies, describe how Teva`s international strategy changed since the departure of Shlomo Yanai.

Multi-domestic strategy Teva’s initial strategy was to become, or to consolidate, their position as the dominant generic drug producer in individual markets or regions. The purchase of regionally strong organisations, such as Barr and ratiotherm was aligned with this strategy. These acquisitions gave Teva locally tailored product portfolios while expanding manufacturing capacity in key markets. Students may discover that many governments offer favourable treatment of pharmaceutical companies that conduct research, manufacture or at least package, in their country, which may be a driver to locate R&D, manufacturing and packaging in specific geographic locations. The purchase of Cephalon and the joint venture with P&G appear to be separate ventures to establish higher added value products, not linked with the core business of generic pharmaceuticals. Although achieving spectacular revenue growth, this strategy left Teva with relatively high costs from a large number of manufacturing and research sites.

Global strategy Levin’s stated strategy attempted to turn Teva’s multi-domestic strategy into a clear global strategy, however, at the time, it seemed that those in support of a multi-domestic strategy came to predominate. Schultz as the new CEO introduced a much more global strategy:

•

Manufacturing has been rationalised with a significant cost saving especially in Israel.

•

Appears to be less wedded to maintain a Headquarters based in Israel.

This provides an opportunity to discuss the global/local dilemma for Teva.

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Managing M&A: Elekta’s acquisition of Neuromag Svante Schriber

1. Introduction This case describes how Swedish medtech firm Elekta acquired Neuromag, a small research-based firm in an adjacent but different industry. In hindsight, the acquisition of Neuromag may appear a well-planned acquisition, fulfilling the conditions for a capability acquisition by adding novel organisational capabilities (in diagnostics to complement Elekta’s capabilities in specific field of therapy, or treatment). But despite the appearance, the transaction was shaped by several uncontrolled factors. The case therefore illustrates how acquisitions are formed by the organisational and competitive context, while only some variables are firmly in the hands of acquiring managers.

Foremost, the case is useful for highlighting the complexity that emerges when decision-makers need to handle multiple different considerations in acquisitions. Specifically, the case illustrates how a long-standing partner relation between two firms was suddenly transformed into an acquisition, how strategic considerations undergirded the acquisition decision, how past relations, cultural, competence and processual considerations informed decisions how to integrate the two firms. The case thereby complements and nuances commonly held views of acquisitions as rational target selection and valuation processes between independent and typically large firms, and informs how strategically important capabilities are preserved and nourished in M&A.

2. Position of the case

The case links with several chapters of Exploring Strategy, in particular with Chapter 11, but also with Chapter 7. As a fundamental question, it allows students to discuss diversification versus focusing on a single industry, as illustrated in Ansoff’s framework in Chapter 7. Students should be able to recognise that Elekta is entering a new market with a new product, in essence diversifying towards a conglomerate. Still, it is important to remember the target was very small and the overall portfolio (revenue streams from different markets) did not change significantly. Moreover, there were connections, or synergies, between the two firms’ products.

The case however ties in most closely with Chapter 11 on M&A. First, students should be able to discuss the motives of M&A in relation to the case. All three strategic motives are: Extension (by bringing the MEG to new markets), Consolidation (by sharing resources to some extent, including already developed algorithms) and Capabilities (including research, marketing, and research and development). Financial and managerial motives appear less in the case.

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Students also should recognise the process looks different from traditional depictions, such as Figure 11.2. Rather than a ‘rational’ process, Elekta was faced with the decision to acquire this particular firm, or not. Hence, the target choice and negotiations phases appear less prominently in the case.

Lastly, students should be able to discuss the case in relation to Figure 11.3 and recognise the level of analysis of the integration approach versus the model. Specifically the model suggests how acquisitions (taken together) are integrated. In contrast, case suggests a ‘hybrid approach’ where different functions are integrated in different ways. Expressed in the terms of Figure 11.3, the product development function of Neuromag was integrated in a fashion similar to ‘Symbiosis’ whereas ‘Absorption’ (integration but little need to avoid frustration among target staff) depicts how integration was conducted in Market and Sales, and regulatory affairs the integration approach reflects a more nuanced.

3. Learning objectives

a. Exploring the strategic considerations behind acquisitions in general and in relation to other nonorganic growth models, for example, alliances. b. Identifying how processes may evolve incrementally rather than being fully controllable. c. Analysing the role of interpersonal relations and trust in acquisitions. d. Exploring some of the considerations of culture in acquisitions. e. Analysing how integration can be planned and executed. f.

Discussing how firms can increase their acquisition capability through long-term relationship building.

4. Teaching scheme The case can be used for two-hour class discussions around acquisitions with MBA or other graduate students familiar with strategy and management theory. However, there is no need for students to master finance, marketing, accounting or other specific subjects, as these aspects are not central to the case. The case can be used with students more versed in M&A research or students that are making first experiences with M&A cases. The case covers a variety of strategic and organisational aspects that may take some time to digest fully, but can fruitfully be addressed in shorter discussions to raise awareness of some of their implications. Hence, depending on student background, it may advisable that students have familiarised themselves with the case prior to class.

5. Questions for discussion a. What does the case tell us about the trade-off between non-organic growth modes, that is, acquisitions and alliances? b. How does the case match traditional accounts of rational strategic choice processes? c. What is the value of being familiar with the target firm? d. Discuss the importance of cultural differences in acquisitions, as illustrated in the case.

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e. Discuss the managerial considerations in Elekta behind how the integration was conducted. f. Would it be feasible for Elekta to repeat an acquisition in a similar manner, or for other companies to pursue similar acquisitions?

6. Case analysis. a. What does the case tell us about the trade-off between non-organic growth modes, that is, acquisitions and alliances?

At a fundamental level, firms can decide to strive for organic growth or non-organic growth. Of course, these are not necessarily mutually exclusive, and many firms indeed use different means of achieving their goals. However, literature suggests firms adapt the means (e.g. use of alliances or M&A) depending on the specific needs they wish to achieve. In general, tight control over valuable capabilities can benefit from M&A, while non-core activities can be shared through alliances.

Thereby, the balance between alliances and M&A suggest what firms can achieve; strength in controlling valuable capabilities or a multitude of contacts to strategically less valuable capabilities.

The case illustrates that alliances and acquisitions are not opposites, but can be different parts of the same process. Starting with an alliance, the case illustrates how an ongoing relationship develops into the need to acquirer the Finnish firm. Students should be able to recognise the value of controlling the capabilities in the target firm; both in terms of keeping it alive (through financing it), and avoiding others taking over the Finnish technology and thus denying it to Elekta and its customers. However, it is also important to recognise Elekta’s first option was not to acquire Neuromag, but the risk of having one’s reputation tarnished alongside the positive synergies persuaded Elekta to go forth with the acquisition. b. How does the case match traditional accounts of rational strategic choice processes?

Traditional M&A and strategy research tend to emphasise managerial decisions as largely rational processes starting with an identified strategic need or gap, moving on to finding a suitable partner, negotiating and integrating. Instead, the Elekta-Neuromag case illustrates different type of decision process. In fact, this kind of process is far more common in reality than typically expected by students.

In a wider perspective, the case points to benefits from being open to opportunistic acquisitions.

Rather than optimising the organisation for analysing and assessing a large range of potential firms, potential acquirers might benefit from being open to reacting quickly to opportunities opening up. c. What is the value of being familiar with the target firm?

M&A generally come with substantial risk. In essence, what sets M&A apart from organic growth is paying upfront for the right to try to realise potential synergies with an often unfamiliar firm. Put differently, the cost is upfront, benefits may come later, if, as many acquirers have experienced, they come at all. To this end, firms invest substantially in attempts to mitigate risk through extensive due diligence. As time and information is often scarce, this however typically leaves risk. Teachers can benefit from suggesting students considering acquiring a firm somewhat akin to buying an apartment or a used car.

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In the case, the acquiring and target managers were familiar with each other. This means much of the risk was smaller than in many other M&A. Technical familiarity, personal contacts between persons from the two firms, and not least trust played an important role in reducing the sense of risk in this case. Still, students can be reminded that the firms were not completely transparent. For instance, Elekta managers immediately needed to invest in mapping the quality and regulatory affairs in the target to ensure a firm grip of this central function in medtech firms. Still, a key conclusion is that the risk was reduced thanks to the familiarity, in essence meaning a higher value to the acquirer. d. Discuss the importance of cultural differences in acquisitions, as illustrated in the case.

Cultural differences receive a lot of attention in M&A. In the main, differences in culture are perceived as difficulties because they imply a risk of misunderstanding or conflict between persons from the involved firms. This risk is exacerbated by the fact that cultures are difficult to decipher and categorise, especially given the limited time or insight available to acquiring managers into a target firm. To some extent, cultural differences are also considered a benefit (e.g. the entrepreneurial culture of small, high-tech firms such as Neuromag offer something difficult to build, and therefore in itself a reason for acquisitions). However, benefiting from such benefits generally require integration, or interaction, that risks failing because of the difficulties of managing and integrating cultures.

The case depicts something of a particular case. The firms were familiar with each other from many years of cooperating. Even if this was limited to certain persons such as in marketing and not necessarily all persons needed to take central roles in integration, top management perceived having a clear idea of the target firm organisational and national culture. Put differently, the Elekta, the acquiring firm, felt relatively certain they were aware of and could manage cultural differences with the target.

The case simultaneously illustrates two levels of culture. At the organisational level, small, entrepreneurial firms are typically more flexible and less formalised than larger firms. Thus, the sheer size difference implies there is a need to avoid integrating too fast; otherwise, for example, ‘oversized’ reporting requirements can burden small, innovative firms, negating the very purpose of the acquisition.

Second, the case also illustrates a national level of culture, where Sweden is sometimes perceived in Finland as something of a ‘big brother’, both in terms of having a larger population and economy, but also sometimes perceived as being a bit arrogant. This can be discussed as it meant a sense of caution was called for when integrating.

Moreover, the roles of firms influence how employees perceive M&A, and acquirers are often perceived as being somewhat bullying. Driving integration general requires taking control and introducing new ways of working, for example, reporting systems. Being told to work in a new way is often perceived as negative, and consequently, target employees often experience acquirers as ‘taking charge’ in a negative way.

But what happened in the case? Elekta was very careful in integrating, attempting to give the target firm the time to adjust and actively holding back functional managers wishing to take charge of their counterparts in the target. While appreciating the time taken to integrate and indeed considering this the necessary way to integrate, Finnish employees expressed integration perhaps was too slow! It is 406

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important to emphasise to students that employees can express various sentiments and regard a process from different perspectives. Therefore, the main point of the case is that the integration appreciated the importance of cultural differences correctly mirrored, and voices can always be found pointing to how things might have been done in a different way.

Lastly, as illustrated above, students should be made aware that cultures are multifaceted and fragmented. Not all persons from a particular country or employees of a certain firm share the same values. Hence, teachers should stress the value of familiarising with different cultures but point out the importance being cautious with cultural generalisations. e. Discuss the managerial considerations in Elekta behind how the integration was conducted.

Integration serves the purpose of achieving synergies between firms. At the same time, integration is typically very costly, often takes longer than planned, and typically more difficult than expected. To increase the chance of success, acquirers often select deliberate strategies suited to the type of acquisition. This is illustrated in Figure 11.3 of Chapter 11 (Angwin-Meadows matrix) but the commonly referenced Haspeslagh-Jemison version is equally applicable. However, such strategies and frameworks are often defined at firm level, and discussions fruitfully can be developed around this.

In this case, the target can easily be depicted as a small, high-tech, entrepreneurial firm. The aim was to benefit from their existing products, but also to develop new ones. But rather than pursuing only one integration strategy for the entire target, Elekta selected a two-pronged integration strategy.

Successful students recognise the importance of quickly integrating less sensitive organisational areas simultaneously representing strengths in the acquirer. This included marketing, product development strategy and quality and regulatory affairs (e.g. knowing how to access new geographic markets circumscribed by import restrictions for medtech products).

Simultaneously, Elekta top managers were deliberately cautious with integrating the research and development department. These are often highly sensitive; if employees do not appreciate integration, they can easily decide to leave the firm or simply work less. This is disastrous to innovative firms – and to acquirers wanting to acquirer innovative firms. In short, discussions fruitfully can be guided to make students aware of the dual, or hybrid, integration approach, the reasons behind it, and that it was successful in the Elekta case. f. Would it be feasible for Elekta to repeat an acquisition in a similar manner, or for other companies to pursue similar acquisitions?

The case may seem a ‘one-off’ as it depended on a range of beneficial contingencies. Elekta and Neuromag had a long-lasting relationship. Elekta had the financial means to act quickly and acquire the target. Target personnel were overwhelmingly positive to the acquisition. Capabilities and markets offered potential synergies. Not least, the opportunity opened up at a time when Elekta managers were not too busy elsewhere but had time to consider and manage the acquisition. So, does this mean acquisitions like the Elekta and Neuromag deal are only possible in very rare instances?

Not necessarily.

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Firms are not only ‘takers’ of opportunities, but often attempt to influence their environment and future. Students could discuss the benefits of deliberately investing in building inter-firm relationships. For instance, this can take the form of alliances, but also through logistics or distribution agreements, and the like. This means that the benefits of reduced risk can be achieved by consciously investing in nurturing network relations with other firms that can, at a later stage, prove potential M&A targets. Firms also deliberate can attempt building a rumour as preferred acquirer, for example, through ensuring target employees and owners perceive past deals as positive.

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CRH plc: Optimising value through Corporate Strategy Mike Moroney

1. Introduction The focus of this case study is corporate strategy in a global context as the vehicle for optimising added value through managing growth and development. This case deals with CRH’s unrivalled success in the challenging building materials industry since its foundation in 1970, weathering the severe sector downturn of 2007–2013, with impressive, sustained recovery both absolutely and relative to peers. The case is set in early 2019 as the Group pursues its ambition of being the world’s leading building materials company. Following the successful integration of acquisitions totalling €8bn in 2015/16, CRH had resumed major corporate activity in a series of sizeable purchases totalling in excess of €5bn in 2017 and 2018, matched by a similar amount generated through dynamic capital management over the same period. The case examines the pivotal role-played by corporate strategy in these respects. This case is structured in three main parts. The first part outlines the characteristics and dynamics of the building materials industry in which CRH operates.

The second part profiles CRH using the framework of the Group’s strategic vision of global industry leadership and the Group’s proven, value-creating business model. The final part discusses CRH’s unique, value- accretive corporate strategy in relation to scope and diversification, corporate parenting and acquisition-led expansion.

2. Position of the Case

The case study is concerned primarily with how corporate strategy can be the engine of value creation, growth and development for the enterprise (Chapter 8 of Exploring Strategy). There are a number of sections of the text of particular relevance to the CRH case study. The following is a list of how the focus of the case study relates specifically to the content of Exploring Strategy.

CH7 Business models CRH’s Corporate Strategy employ significant Value Configuration and Value Capture dimensions.

These include: acquisition and development, active integration and management of businesses, business portfolio management and dynamic capital management.

CH7 Strategy directions CRH’s extensive use of overseas market development (with limited product development) building on historical areas of competence.

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CH8 Diversification drivers To varying degrees, CRH employs all the synergistic drivers of value creation in pursuing its strategic directions: economies of scope, dominant logic, exploiting superior internal processes and increasing market power (especially as regards reserves and supplier relations).

CH8 Vertical integration Vertical integration is an important, second-stage part of CRH’s strategic direction. Building on the platform of initial acquired stakes in cement or (more likely) aggregates, over time the group integrates forward to capture leading market positions in regions/countries.

CH8 Value creation and the corporate parent CRH employs the value-adding activities of portfolio manager, synergy manager and parental developer in a selective, focused and low-cost-use manner.

CH9 International strategies Although difficult to earmark precisely, CRH’s international strategy most closely resembles the multi-domestic historically, veering increasingly to the global/transnational.

CH9 Market selection and entry CRH’s strategy for overseas market selection has evolved over time, with choice of country markets (and product markets within countries) determined by the Group’s strategic posture, in addition to market characteristics. What is constant is CRH’s absolute requirement for market leadership and hence relatively low levels of competition. CRH’s preferred entry modes in overseas markets are also explored.

CH9 Internationalisation and performance With significant, long-established and enduring product focus, CRH has managed to build international scope and reap the benefits of international diversity without incurring many of the associate crippling costs of coordination and control. The contextual factors and internal mechanisms facilitating the ‘best of all worlds’ approach are explored.

CH11 Mergers and Acquisitions CRH’s finely honed and superbly executed acquisition formula, together with a clear strategy of value accretion in post-acquisition integration, underpins much of the Group’s strategic success. A key feature of such success is that the Group’s acquisition strategy is not static, but evolves and develops to anticipate and react to the changing industry environment.

3. Learning Objectives

The case is designed chiefly to help students understand how corporate strategy, including a singular acquisition process, can contribute to strategic success and value creation. Specific learning objectives are as follows: 410 .

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To explore how a (small) corporate centre can optimise value and drive global leadership in the

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multi-business enterprise through the business model.

To explore the relations between the corporate centre and business units.

• • •

To outline and evaluate the directions and methods of corporate strategy pursued by CRH together with their strategic value generation.

To examine CRH’s internationalisation strategy and its contribution.

To examine the role, contribution and evolution of acquisitions in a successful corporate-level strategy.

4. Teaching Scheme While the CRH case may be used as a basis for small group work, the issues involved are dealt with more satisfactorily during plenary discussion. Small group work may be used appropriately as preparation or a precursor to subsequent plenary class discussion (perhaps on the basis of one question per small group in a multi-group class). There is sufficient detail in the case for an assignment.

5. Questions for Discussions The following questions can be used: 1) Outline CRH’s diversification strategy and discuss how it generates value for the Group.

2) Discuss CRH’s acquisition model and how it contributes value.

3) Consider other ways in which Corporate Strategic Management realises value for CRH by reference to the Group’s business model.

4) Describe and evaluate the internationalisation strategy pursued by CRH. 5) Going forward, discuss whether you believe Albert Manifold and CRH corporate management can optimise value and achieve global leadership.

6. Case analysis 6.1 CRH’s diversification strategy and how it generates value for the group.

CRH pursues two primary directions of strategy development in defining its corporate scope, each based on a key component of the Group’s business model. The first direction involves extensive use of overseas market development. Over almost 50 years, CRH’s geographic remit has broadened from almost total reliance on Ireland to 32 countries spanning the globe. This expansion has been underpinned by CRH’s unwavering product focus: heavyside building materials and products (e.g. cement, aggregates, ready mixed concrete, asphalt, concrete products 411 .

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and bricks). This is the part of the industry in which the Group has operated traditionally and for which it is renowned. CRH’s overseas market development has built upon the Group’s long established market dominance in its home base of Ireland. Indeed, CRH’s portfolio of products in 2018 bears a remarkable similarity to that at the genesis of the Group in 1970; the essential differences are geographic scope and scale. In line with its business model, CRH’s overseas market development has been constructed on a platform of a Balanced Portfolio, thus minimising risk.

CRH has supplemented its overseas market development with selective, limited and successful product extension in complementary areas. The main new product areas are glass fabrication, clay bricks and specialist distribution. By and large, such new product businesses are confined to specific geographic locations (e.g. glass fabrication in the United States) and are not replicated across the Group’s geographic portfolio.

CRH’s second major direction of strategy development is vertical integration. There is a clear and established input-output sequence in the industry from primary materials through heavyside products and lightside products, culminating in residential, industrial/commercial and infrastructure outputs. CRH’s internal value chain mirrors the front-end of the industry’s value network. As a predominantly heavyside player, CRH engages in forward vertical integration, from primary materials (cement and aggregates) through to heavyside products (concrete products, asphalt products, pavers and bricks) and on to selected lightside products and specialist distribution (builders’ merchants and DIY stores). Vertical integration has been an important complement to the Group’s overseas market expansion strategy development. Once an initial foothold in a region or country has been established (usually through acquisition), CRH activates its vertical integration strategy up the value chain. The Group’s business model leverages enhanced value from vertical integration by the processes and policies of Making Businesses Better.

There is little doubt that CRH’s chosen strategy directions generate significant value for the Group, being well chosen and rooted in its business model. Overseas market development has been strongly related in nature and, therefore, value-creating in contribution. CRH has been steadfast in ensuring that its overseas expansion builds on its substantial reservoir of industry expertise and experience, together with its management competences, in heavyside materials and products. Thus, CRH’s diversification is rooted firmly in appropriate and synergistic drivers: • Exploiting economies of scope (predominantly the same product portfolio worldwide) • • •

Applying a dominant corporate logic (sourcing, exploiting and developing heavyside businesses) Exploiting superior internal processes (rigorous management processes, best practice and benchmarking) Increasing market power (purchasing synergies and substantial reserves)

As a direction of strategy development, CRH’s vertical integration has proved similarly apposite and rewarding. CRH integrates forward into products and businesses in a manner that represents a strong fit both with industry dynamics and with the Group’s competences and processes.

Through vertical integration, CRH amplifies the initial return from acquisitions (see below), builds market scale and leadership and optimises profitability. This is achieved through the 412 .

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application of a proven managerial approach, capturing operational synergies along the value chain and realising the advantages of large-scale and leading market position.

Overall, it can be seen that CRH’s diversification strategy manages to achieve a ‘best of all worlds’ approach. On the one hand, the Group continues to deliver substantial increases in scale and associated value by expanding geographically across the globe and by successively integrating forward along heavyside industry value chains from initial product/market platforms acquired. On the other hand, CRH mitigates potential associated costs of coordination and control. This is possible by rigorously sticking to product areas of existing knowledge and capability, thus minimising the challenges posed by greater scope. (This balancing act is facilitated by the commodity nature of industry outputs, standard production processes and nonproprietary technologies.)

6.2 CRH’s acquisition strategy and its value contribution Overall, CRH’s proprietary and inimitable acquisition strategy demonstrates strategic fit, underpinned by components of its business model. The Group’s deal-making and acquisition competences are well attuned to the fragmented nature of the building materials industry, in which medium-sized, private, often family-run businesses have traditionally been predominant. In addition, CRH is acquiring in that part of the industry (heavyside materials and products) in which it has substantial experience and insight, both in a general sense and more specifically with its worldwide spread of development teams on the ground. Furthermore, the elements of its purchase process (privately-held targets, market leaders, careful structuring of deals, retention of ownermanagers and low purchase multiples) are designed to maximise returns from acquisitions, once consummated. The foregoing elements are enabled and financed on competitive terms by means of the business model’s Financial Strength, and are developed and delivered through the Proven Acquisition Model.

In more recent times, CRH has extended its purchase criteria in anticipation of the wider spread of emerging industry trends, notably consolidation, by undertaking selective larger acquisitions.

Moreover, CRH has modified the purchase process for such deals to facilitate more expeditious closure, with more hands-on involvement post-acquisition. However, the fundamental precepts of the acquisition formula remain unaltered.

Unsurprisingly, in light of the above characteristics, acquisitions have been very valuable for CRH. There are two main benefits of its acquisition strategy. Firstly, CRH has been to the forefront of industry consolidation, in many respects establishing the template in this regard. In turn, its acquisition strategy has enabled the Group to become a leading global player in the building materials industry, from the inauspicious launch pad of a small, peripheral home market.

Secondly, acquisitions have been the main engine of CRH’s growth and profitability. Historically, as indicated in the case, acquisitions have contributed 70% of CRH’s profit growth.

Overall for CRH, acquisitions deliver a constant stream of quality businesses at low cost. The Group’s winning acquisition strategy ensures that acquired entities (around €30 billion by value in aggregate since 2000) are robust businesses in their own right. All are market leaders with local franchises and are well run. Moreover, by not overpaying for acquisitions, CRH locks in initial value.

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6.3 How Corporate Strategic Management realises value for CRH by reference to the Group’s business model In addition to driving CRH’s diversification (scope and strategy directions) and singular and value-enhancing acquisition strategy (strategy methods), Corporate Strategic Management delivers considerable value in its own right. This is because, unlike in many other corporations, the corporate centre performs a pivotal and active corporate parenting role and is engaged in value-added activities, founded on the bedrock of the Group’s business model.

On an ongoing basis, the relentless cohesive, synergistic and low-cost management of a large group, reinforces and boosts returns from operating entities, both newly purchased and existing businesses. CRH invests considerable time, effort and resources to reduce costs, optimise cash flow and raise profits in operating entities, employing the wide range of measures outlined in the case. While retaining their local character and autonomy, operations also benefit from being part of an industry-leading, global group through scale economies and network effects.

CRH’s corporate activities are also value enhancing in their own right. This is demonstrated by two elements of the business model, which are conceived and orchestrated at the corporate centre and delivered throughout the Group. A balanced portfolio is a long-established and central tenet of CRH’s culture and way of doing business. It has proved particularly valuable for the Group across industry cycles, cushioning the impact of severe down cycles and ensuring relative stability and continuity in a precarious sector. Financial strength delivers two benefits. It reduces CRH’s cost of doing business to industry-low levels, and it provides the wherewithal to purchase companies opportunistically and cheaply at the bottom of the cycle when there are few other buyers. Together, both business model dimensions ensure that CRH is exposed to low levels of portfolio and financial risk.

Low purchase multiples and a disciplined, practiced acquisition formula generate significant value from purchases ab initio. However, this is only part of the value equation from CRH’s purchase activity. The acquisition process does not end once a company is bought. The approaches of the Making Businesses Better business model dimension are employed to the full.

Post-acquisition integration is rapid and well honed, involving the full panoply of Group systems and processes, with newly acquired entities subject to close managerial oversight. As a result, initial returns from acquisition activity are boosted and sustained.

CRH has always pursued a strategy of acquisition-led growth on the one hand, and continuous improvement of new and legacy businesses on the other hand. Since 2014, under Chief Executive Albert Manifold, these approaches have been linked explicitly through the business model.

Between 2016 and 2018, Group spending on acquisitions amounted to €5.3 billion. Over the same period, CRH realised €4.8 billion from divestments under its programme of dynamic capital management. Substantial strategic assets and growth platforms have been secured for a relatively small net outlay.

6.4 CRH’s international strategy International strategy is not the prime focus of the CRH case study. Nonetheless, there are a number of dimensions of CRH’s international strategy that are worthy of comment. Firstly, in relation to drivers, CRH‘s international strategy would appear to derive from cost factors. There are two 414 .

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specific drivers in this regard: the desire to obtain economies of scale and scope (understandable given the small home country base of Ireland) and exploiting industry fragmentation via acquisitionbased consolidation. Secondly, over time, CRH’s international strategy has evolved from a multidomestic, geographically-based approach, to a global strategy built on product groups that are integrated synergistically. Thirdly, CRH has adopted a twin-pronged strategy in relation to market selection. The Group’s traditional approach involves synergistic extension and plugging gaps in the product/market portfolio in developed economies. This has been supplemented by the increasing importance of developing integrated materials-based businesses in emerging markets. Finally, CRH’s market entry strategy is notable for its almost exclusive focus on acquisitions ab initio.

(Acquisitions are also a major component of continuing investment in established overseas markets.) There is also evidence of a dichotomy between developed economies and emerging markets, with joint ventures featuring more prominently in the latter (reflecting market factors and the greater risks involved).

6.5 Optimising value and achieving global leadership going forward In the short term, CRH’s strategy and business model look set to underpin and sustain the Group’s progress. Internally, the elements would appear to be in place for continued growth and value generation. In particular, CRH has substantial funding available to finance acquisitions. Externally, as might be expected, the situation is more unclear and potentially less supportive. The Building Materials industry is currently in a growth phase, and there appears to be no shortage of acquisition opportunities in the corporate market. As against this, recovery from the severe downturn of 2007– 2013 has been anaemic by historical standards. Moreover, the sector may be past mid-cycle, with industry players and investors looking to when the next downturn may occur, deterring investment.

As a result, returns from existing operations and potential acquisitions may be subdued. All of management’s undoubted experience and insight will be required to face future challenges.

In the long run, CRH will undoubtedly face further cyclical downturns in its sector. The evidence is that, while inevitable, construction recessions rarely repeat the patterns of the past, and each downturn brings different tests. As against this, CRH’s capacity to adapt and respond to new challenges is impressive. While substantial reductions in year-on-year earnings cannot ever be ruled out, the Group generally outperforms industry peers when times get tough. On the other hand, the experience of history also suggests that CRH is usually well placed at the bottom of the cycle to exploit low valuations, forced sellers and a general shortage of credit availability in the acquisition market, as in prior cycles. A currently remote, but potentially more impactful, challenge is structural changes in construction methods and the type of building materials employed. The critical success factors are judgement and timing.

Internally, the greatest internal challenge to CRH is likely to be increased complexity from continuing growth, which could threaten to undermine the Group’s singular and successful corporate management style. Received theory posits increasing marginal costs to diversified growth, with firms constrained to achieve financial rather than synergistic economies. In addition, external developments could presage larger and more powerful competitors and more demanding customers. Furthermore, the development of CRH will inevitably increase the influx of new managers into the Group, leading to an expanded managerial cadre and resulting organisational diversity. In turn, this could result in a more formal management approach internally, undermining the critical informal mechanisms and threatening accumulated, collective managerial knowledge and expertise.

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Throughout its history, CRH has been adept at anticipating and responding to challenges. Witness its staged strategic development, increasing product-focused management and the larger acquisitions undertaken since the mid-1990s. It is probable that the Group will continue to respond to further challenges in the evolutionary fashion that has characterised its development to date. In dealing with greater diversity in future, it is likely that CRH will endeavour to maintain its flat hierarchy and to boost the role of (a larger number of) divisions in the corporate integration process. Greater competitive and customer pressures may prompt the Group to bolster its marketing function, as has been done in recent years with human resources and development. The challenge posed by the expanding number of managers is likely to be met by greater use of information technology to enhance communications, increased emphasis on management development, a more systematic approach to disseminating corporate values by cultural means and leveraging social processes.

Finally, as regards global leadership, reflecting CRH’s evolutionary growth and development, this is more likely to be an outcome of the Group’s strategy and business model, rather than a driver. While powerful in aspirational and motivational terms, too great an emphasis on this vision could impair the carefully crafted strategy and infrastructure put in place and nurtured over half a century.

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Counterstrategy: resisting the Mexican narco-trafficking business Clive R. Kerridge and Sophia O. Kerridge

1. Introduction This case usually gets good student engagement since most have some knowledge or perceptions about organised crime, which features prominently in contemporary films, TV, books, magazine articles and online news media – though rarely have they thought previously about those organisations as ‘successful’ businesses.

Students are encouraged to analyse the strategies employed by Mexican drug cartels (or ‘narcotrafficking organisations (NTOs)’), which are major international crime organisations, then to evaluate the strategic options open to them – and to the Mexican government, as it seeks to counteract the growing power of the NTOs. This case can be used at different stages of a strategic management module/course or as an integrative case, concerned with issues of Strategic Positioning (including external/internal analyses (Chapters 2–4 in Exploring Strategy 12e); strategic purpose and stakeholder power sources, (Chapter 5); and Strategic Choices (drawing on interactive strategies Chapter 7, diversification directions and drivers Chapter 8, and strategic alliances Chapter 11).

In particular, the case provides an opportunity for evaluating future strategic options (Chapter 12), including use and application of the SAFe criteria. An optional final challenge in the case can be on Evaluation Criteria and the four qualifications (Section 12.6.1 p. 395) – applicable to the NTOs and to the Mexican government.

2. Position of the Case

The position of the case study in the course depends on the role for which it is being used. It could be used in one of the following ways:

a. It lends itself to being used at different stages of a course: (i) Initially, in strategic choices (directions and methods), based on an analysis of strategic positioning (ii) Later, revisited in applying strategic evaluation criteria and techniques (Chapter 12 themes) b. Used in conjunction with supplementary information (accessible via the website links), it is also a useful case study for considering strategic alliances (Section 11.4), in the context of nonconventional international businesses that operate under fast changing conditions.

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c. The case has been developed as an integrative study, leading students to develop and evaluate strategic options for these atypical businesses, based on environmental analysis, determination of organisational capabilities and identification of key stakeholder power and influence. Applied in this way, it would be normally be used later in the course.

3. Learning Objectives • •

Strategies of atypical business organisations – be able to assess the parallels and differences between ‘NTOs’ and conventional business corporations.

Strategic analysis – be able to apply external and internal analysis tools, for example,

•

SWOT/TOWS. Strategic choices – based on the analyses for an assigned NTO and/or the government, be able to

•

define and choose strategic directions and methods.

Strategic alliances – be able to assess motivations for suitable alliance opportunities, under

•

conditions of rapid change [optional extension to case study].

Strategic evaluation – be able to conduct a strategic evaluation, for example, apply to SAFE criteria, with due regard to the power and influence of key stakeholders.

4. Teaching Scheme 4.1 Plenary or seminar session discussions The case could be used in plenary or seminar sessions as a basis for discussion – ideally culminating in two or more student groups evaluating strategies from the differing points of view of (a) one (or more) of the major NTOs, and (b) the Mexican government.

See suggested questions/tasks in Section 5 below.

Note: it has been observed that students are often amenable to doing extra self-directed online research, to update themselves with current/recent activities and trends in these non-conventional industries. As well as online sources such as insightcrime.org, a 2016 book ‘Narconomics’ by The Economist’s Tom Wainwright4 looks at the NTOs from a similar business analysis viewpoint.

4.2 Role-playing active learning sessions Alternatively, this case lends itself particularly well to active learning session(s), with role-playing by student groups. This can be effected in various ways but the following is a suggested framework, based on a (four class activities’) approach, which has been used successfully:

4

Wainwright, T. (2016) Narconomics: how to run a drug cartel; what big business taught the drug lords.

London: Ebury Press/Penguin Random House ISBN978-1-7850-30413

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4.2.1 The class is divided into separate ‘NTO’ groups5 plus one group which takes the Mexican government’s role/position.

4.2.2(a) Each group conducts a SWOT analysis for its assigned organisation (NTO or the state) 4.2.2(b – optional) Each group shares its analysis, ideally using a TOWS matrix to generate strategic options 4.2.3 Using an Ansoff Matrix, for example, on boards or flip charts, each group: i. defines the strategic directions available to their assigned organisation; ii. gives examples of strategic methods that may be applied, for example, alliances (if so, with what, with whom?) and iii. shares these directions/methods with the other groups in the cohort.

4.2.4 Transfer some of the NTO groups’ members into the government ‘camp’ (bringing their knowledge and perceptions!) and get each group to conduct a strategic evaluation: a. What strategic options are open to the NTO/government? b. What limitations apply? [consider stakeholders; apply some/all of SAFE criteria] c. Recommend an optimum strategy [for their assigned organisation] d. What are the prospective consequences (positive or negative) of the likely choices?

5. Questions/Tasks for Discussion Note: starting with more straightforward analytical questions but working up to strategic evaluation tasks – and leading students to look beyond the case study.

1. What strategies are being followed by the main NTOs? Strategic analysis of the NTOs’ positions, for example, SWOT (including differences between the main cartels) What are the [two largest] NTOs’ objectives? Who are their key stakeholders and what are their expectations?

Which diversification strategies applied at which stages of the NTOs’ life cycles/evolution?

2. What strategic options are available to NTOs (at the time of the case study)?

How is the current situation changing?

Implications for NTOs’ strategic options [if class-work, perhaps select one NTO... or one per student group] 5

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3. How might these strategic options be evaluated?

What strategic options are open to the NTOs? What limitations to implementation [Suitability; Acceptability and Feasibility] [from viewpoint of the Presidency – or its advisors…]

Which strategic choices are the NTOs most likely to make?

What are the short- and long-term implications on them and their opponents?

What is the likely reaction from their competitors?

4. What strategic options are open to the government? ......and which strategic choices should the President make?

6. Case analysis 1. What strategies are being followed by the main NTOs? Strategic analysis of the NTOs’ positions Based on a good reading of the case, students (or student groups) should be able to produce a SWOT analysis for the main NTOs. Some of these apply to most drug cartels but others are distinctive to one or a few. Some examples (this is not a definitive list!): Strengths -

control of corridors/access to USA market

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embedded relationships with state administration/politicians

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established brands and reputations, for example, for quality/consistency

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consistent and strong leadership

Weaknesses -

lack economies of scale

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narrow product range

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low/no international penetration

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low barriers to competitive entry

Opportunities -

growing European cocaine market

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reduced power of the Colombian NTOs

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growing synthetic drugs markets

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legitimate businesses, using (laundered?) profits and supply chains

Threats -Aggression and militarisation of competitors -matured cocaine demand in the United States of America -changing presidency/party administration’s policies and allegiances -legalisation of marijuana in more of the key markets, for example, legitimate US competitors If class time permits, students (or groups) can be encouraged to assess the relative importance of opportunities and threats, in terms of a PESTEL analysis represented similarly to that of Illustration 2.1 on page 38, ‘A PESTEL for the FANGS’.

What are the NTO’s main objectives?

This needs some understanding of their overriding aims but is also dependent upon prevailing conditions, that is, build on the SWOT/TOWS analysis.

The successful NTOs have maintained an unrelenting focus on protecting and exploiting their key resources and capabilities; also on rapidly adapting to changing conditions. This is particularly evident in the shifting balance of power between 2010 and 2017, in favour of the Sinaloa Cartel and The Zetas, whereas under the more stable conditions of previous decades there was almost a status quo, with four or five principal NTOs dominating the regional trafficking business: Juarez, Gulf, Sinaloa, Tijuana cartels and La Familia Michoacana.

Who are the key stakeholders?

Again, this will vary between NTOs – students should be able to look beyond generalisations. Do differences in the business model operated by the Zetas and Jalisco Cartel, compared with the longer-established cartels, imply different stakeholder power and different types of influence?

Some stakeholders are directly or indirectly involved in the business of drug trafficking but there are also several that have other coinciding interests. Ironically, those who probably have least power or influence are the numerous end users of the illegal narcotics.

Note: when evaluating the government’s strategic objectives, a similar range of stakeholders will be evident, domestically and internationally.

Which diversification strategies have applied at which stages of the NTO’s life cycles/evolutions?

Within the case study text, students should be able to identify how the NTOs have followed different strategic directions at different stages of the markets’ and cartels’ evolution: market penetration (and literally fighting off competition!); product development (ATS and other synthetic drugs); market development (new domestic and European markets); conglomerate diversification (human trafficking, piracy and counterfeiting, money laundering, plus legitimate businesses).

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Note: although the sequence is different, there are close parallels with SABMiller in the Megabrew case study pp. 638–649, in that each of the four Ansoff Matrix quadrants applies at a particular time – and that success has been most conspicuous when there was a clear prioritisation on a strategic direction (the question does not yet ask about methods).

2. Which strategic options are available to NTOs (at the time of the case study)?

On the basis of their analyses for Question 1, students can start to consider which directions and methods are available and appropriate to the relevant NTO(s). The first requirement is to identify key changes in the environment, for example, increased military pressure from the government (and the United States of America?); new political structures, with PRI party having recovered the presidency; disruptive business model of the Zetas (and some of the smaller NTOs, byproducts of the fragmentation of previously large cartels); increasing demand for synthetic narcotics in the United States of America; the novelty of competition from legal marijuana businesses in US states, initially just Colorado and Oregon but now becoming more widespread.

These present both threats and opportunities for the NTOs. However, what is not changing may be equally important: little likelihood of USA legalising ‘hard’ drugs; no apparent reduction in North American demand for illicit narcotics, even if some variation between market segments.

This is an opportunity to combine PESTEL (Chapter 2, macro environment) and Five forces (Chapter 3 industry-level) external analyses with a review of the relevant organisation’s strategic capabilities in 2019 and, by implication, the constraints on its ability to act or grow. If done well, this should lead students naturally into the ‘Suitability’ criterion for answering Section Q3.

Students should also consider the value chain: where and how do the organisations add (or not) value? Are there opportunities for further integration or outsourcing? To what extent does the organisation’s culture and/or business model influence or inhibit further diversification? Which of the conventional strategic methods (organic; M&A and alliances) are applicable?

3. How might these strategic options be evaluated?

Answers to the preceding question Q2 should help focus students on which options are available to the NTOs. Now, they can evaluate these options, using the SAFE criteria of Chapter 12: Suitability; Acceptability and Feasibility.

In doing so, students should be encouraged to define which are the key strategic issues.

Suitability, perhaps in terms of a version of Table 12.2 and/or 12.3, reviewing options in relation to strategic direction and methods. Clearly there will be some differences between options for an illicit NTO and those for legitimate corporations – although similar strategic principles may apply!

As shown in the case study’s Figure 4, shifting alliances are a characteristic of the drug cartels’ businesses. Reviewing the suitability of strategic alliances is likely to be an important consideration.

Before evaluating the government’s own strategic options, the presidency or its advisors will need to understand the options for, and likely choices being made by the NTOs. A complication is that each NTO’s strategy will be influenced by its perception of the competitors’ emerging strategies under the changing conditions, that is, elements of game theory (see Section 7.3 Interactive Strategies, particularly 7.3.2 on game theory).

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Table 1 on the following page gives a framework for aspects that students might incorporate into their SAFE evaluations, in relation to answering Q3 and Q4. Note: these are intended as examples and are not meant to be prescriptive.

4. What strategic options are open to the government? .....and which strategic choices should the President make?

The key challenge to this case rests in evaluating the strategic options for the new Mexican administration.

In terms of suitability, options are inevitably linked to their evaluation of the NTOs’ likely strategies and priorities – but these are unlikely to be homogeneous (students should refer to their 5.3 evaluation – see above).

Acceptability considerations will need to look hard at risks and prospective returns/rewards. With the benefit of hindsight, it was painfully clear to the new administration that previous president Calderón’s ‘war on drugs’ had led to a catastrophic increase in violence and instability across many states – with a serious deterioration in quality of life for many Mexicans – a risk which had been badly underestimated (lack of scenario analysis?). After initial signs of a reduction during predecessor Peña Nieto’s tenure as President, high levels of violence recurred and are still a feature of life for many in 2019, the first year of the Lopez Obrador presidency. Identification of key stakeholders is needed here – and an understanding of the power/attention matrix (Chapter 5, Figure 5.3) and sources of power (e.g. Table 5.2) would be useful.

In terms of feasibility, students should distinguish between what are the administration’s (and most people’s) desired actions and outcomes versus those strategies that are feasible to apply and deliver. As the proverb says: ‘The road to hell is paved is with good intentions’.

This is also the opportunity to reflect on which of the ‘Qualifications’ (Section 12.6.1) apply to evaluation criteria, which have been used.

The lessons of recent Mexican history do not augur well for purely military responses. There seems to be no convincing evidence that the federal government’s militarisation of its conflict with the NTOs, from 2006 onwards, led to reductions in illicit drug production or drug trafficking activities – though the consequent destabilisation (of the balance of power between increasingly militarised NTOs) certainly generated more violence and instability. The [endemic?] corruption of local government officials and the judiciary in some states is surely also a major obstacle.

In evaluating options, students may consider and discuss that perhaps it will only be measures that reduce the profitability and attractiveness of drug trafficking, in and through Mexico, which are truly feasible strategic options(?).

Or is it the case that eradication of the international drug smuggling business is just not feasible – and that viable strategies in a Mexican context may better focus on limiting the scope of state/NTO intervention? Arguably, that may avoid the extensive ‘collateral damage’, which results from the widespread violence, as NTOs fight competitors for control of these profitable illicit businesses, under rapidly changing external conditions.

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Interested students can follow progress and developments since 2018, using the referenced internet sources and other current reading. This NTOs problem is not going to disappear quickly but conditions and strategic priorities will change: a suitable case for emergent strategies?

Table 1. Evaluation of (proposed/optional) strategies: aspects and/or tools to consider SAFE criteria SUITABILITY (issues and opps)

(Ranking)

(Screening)

For NTOs (e.g. Sinaloa Cartel)

For Mexican Presidency/govt.

SWOT (do a version of Table 12.2?) SWOT (also a version of Table 12.2?)

Can/should start evaluation using… Seek to define Key Strategic Issues Five Forces PESTEL (NTOs as) Strategic Groups?

Scenarios Screening Strategic Capabilities (the state’soptions or NTO’s?)

Value Chain Ranking as second-guessing Directions/Methods (as Table 12.3) (game theory here too: multiple optimising players), Aspects of Game Theory for example, disrupting NTO value/supply chain – is this ‘balloon (strategies in relation to likely effect’ or a true blitzkrieg? competitive responses) Screening – scenarios?

on basis of Competitive Advantage [CA] - capabilities - strategies Try as Table 12.4 structure but… consider Linkages and Inimitability, that is, the ‘I’ of VRIN, but be aware of: • complexity • casual ambiguity • embedded cultural aspects

- external - competitive (inter-NTO) use….

Decision Trees approach[?]

Life Cycle analysis

Try on an Arthur D Little [ADL] matrix?

Competitive Positions

NB important that govt understands where the various NTOs are in their cycle/trajectory – and associated drivers

ACCEPTABILITY Stakeholders

(NTO stakeholder expectations) NTO Leaders NTO partners (especially international) NTOs’ local communities, for example, funds, employment, security NTO local ‘partners’ (e.g. corrupted)

(Govt. stakeholder expectations) The People (but the electorate will not be homogeneous) The United States of America – and agencies such as UNODC Industry and investors Judiciary and law enforcement Implications? what trade-offs are acceptable, for example, civil liberties and human rights

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A1 – Risks

NTO ‘Brands’/reputations (i) Sensitivity analysis (?), for example: • growth rates/demand • drug use trends • market shares: international, for example, China and local/regional NTO competition (ii) Financials – cash flow (and defensive investments)

‘Mexico’ brand/reputation – and associated opportunity costs: (i) Sensitivity analysis (as for the NTOs but also assessing capacity to act (‘balloon’ syndrome again) local motivation(?) (ii) Financials – budget resources (economic factors, not just politics?)

A2 – Returns

Financial AND non-financial

Primarily (?) non-financial – though, by implication, subsequent financial returns • Cost-Benefit analysis • Real options (emergent), for example, lessons from the Colombian 1990s experience (?) (use

A3 – Reactions (of stakeholders)

(use stakeholder mapping) Likely reactions?

• Local communities/beneficiaries (stability, for example, a ‘Putin effect’?)

• The buyers (clients – not endusers) • Beware of a balloon effect (where just move the activity/resources between NTOs)

stakeholder mapping) Political context/agendas Mexican political parties, for example, PRI Economy and finance Unions and people’s representatives The judiciary The Media (linked to parties/views?)

Local communities, for example, social costs Ethical considerations + Human rights Externals – The United States of America especially

FEASIBILITY

(how/can it work in practice) Cash reserves (cash cow rather than weakening maturity phase?)

Sustainable CAs (embedded skills, knowledge and especially experience) Organisational appropriateness (and flexibility to respond to changes) Rewards and incentives?

Trust (or lack of trust) in relationships

(how/can it work in practice) Resources and capabilities?

• financial/govt budgets • people and skills (e.g. police, military and the politicians at different levels) Existing? or to be acquired? (if so, how?)

Are there supporting systems for the HR? For example, Rewards/incentives and Training+Dev

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Integrating/combining resources (culture and leadership clashes?)

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Integration of resources (especially HR, recognised already as a key problem!): • Finance • HR • Tangible/physical resources/assets • Intangible resources and assets (tech?)

• Support resources esp. political parties

CASE TEACHING NOTES

Oak Tree Inn: Growth challenges facing a family-run tourism business Ron Livingstone

1. Introduction This case study is about the development of the Oak Tree Inn business in Balmaha, Loch Lomond, Scotland www.theoaktreeinn.co.uk. The business is a family run SME and is in the tourism sector. It has been successful as a bar, restaurant and holiday accommodation (annual turnover in 2018 of £3m ($3.8m and €3.4m) and the owner-directors have aspirations to grow to £10m ($12.8m and €11.3m) by 2025. The business is considering options for expanding. These include replicating the Oak Tree Inn in other locations within the Loch Lomond National Park (and using a centralised kitchen), developing a water boat and floating restaurant offer to give access to people from other parts of the loch and expanding into options to support online trade (e.g. selling artefacts from Loch Lomond with an associated brand).

This case provides students with opportunities to generate and explore business options and factor in current issues such as strategic decision making in a family business, raising finance, tourism policy and how to attract and retain employees into the tourism/hospitality sector.

It is suitable for undergraduate and postgraduate, including MBA, teaching.

2. Position of the case This case is primarily focused on Evaluating Strategy (Chapter 12) and provides students with the opportunity to apply the SAFE framework as well as other analysis.

Students can: •

analyse the business’s current strategic position;

•

develop and propose strategic options and assess their Suitability;

•

evaluate the Acceptability of the range of strategic options;

•

evaluate the Feasibility of strategic options, particularly with reference to financial and nonfinancial information and

•

produce a final recommendation after Evaluation and synthesis of each of S, A and F.

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There is also scope to explore elements, such as: • •

Starting, running and developing a SME – the journey, the challenges and the personal experience.

Running and developing a family enterprise – with a successful business now established, but very much still family run and controlled; a full and honest exploration of the challenges and dynamics.

•

The importance of clarity of vision, passion, beliefs and the values lying behind a successful

•

of applying for funding, capital expenditure, income, expenditure, investing for the future, etc.

P&L, Balance Sheets, key ratios, investment challenges, etc.

•

•

•

•

SME. In this case, the strong belief in providing employment opportunities for the local community and supply chain; their focus on quality and artisan provision; the clear identity and important role of an SME within the community.

The finances of and accounts for starting, running and developing a business with real examples

Tourism, hospitality and leisure – contextual information, policies, trends, specific sectoral considerations (e.g. rural tourism), etc. This is a central and key component to this business, as it is on the east side of Loch Lomond, Scotland’s first National Park. Opportunities to provide a wider view here on the National Park, so this can be placed in an international context with over 100 countries having land designated as National Parks. Deeper exploration of stakeholder importance with, in this instance the role of the national tourism body (Visit Scotland) the community group (Friends of Loch Lomond), the National Park Authority itself, etc. as well as the role of businesses in terms of being accommodation provider, food and drink, involvement in local and national tourism initiatives.

HRM – growing, developing and training staff (especially in a rural area) in hospitality, food/café/drink, retail, events; strategic intent to create jobs for the local community and to encourage young people to stay and have a future in a rural area.

Operations, supply chain and quality management – key to the business philosophy is sourcing goods locally and supporting local enterprises (including the local whisky distillery and brewery, local farms for the supply of meat, a local web development and social media company, local artists work for sale in the shop and inn, etc.); however, the focus on quality goods and service is key.

Marketing, promotion and branding – an essential part of the Fraser Family business mix as the business has developed, linking in to the unique aspects of the east side of Loch Lomond National Park (with the west side being the busier, main route north; the east side being a 15-mile deadend, no through road) so attracting people to the business, giving them a reason to come and stay (and then return) is key. The business use of both traditional and digital/social media provide good opportunities for in-depth study.

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•

Legal aspects of running a business – covering the various business law dimensions of setting up and running a business; also looking at possible alternative legal business structures, which the expanding business could follow.

•

Strategy and overall business planning and development – how the business has grown (some planned, some opportunistic; some developments taking decades, others reactionary and up and running in months); the plan for the future; opportunities for wider sector analysis and trends in each of the businesses or for the overall business as a whole.

3. Learning objectives The study of the case involves student understanding of the following: 1. Developing strategic options based on strategic analysis of an organisation’s competitive position.

2. Evaluating strategic options using the SAFE framework.

3. The importance of using both financial and non-financial information when evaluating strategic options.

4. The dynamics and context of running a family business SME.

4. Teaching scheme Pre-reading It is suggested that students read Chapter 12 of Exploring Strategy, covering analysing organisation performance, evaluation of the suitability, acceptability and feasibility of strategic options and overall evaluation of options to recommend ways forward.

For developing a range of strategic options, students should be familiar with Chapters 7 and 8. This includes the concepts relating to competitive strategy and developing strategic options available to the organisation.

If exploring issues of entrepreneurship and strategic management practice, then Chapters 10 and 16 will also be useful points of reference.

Case preparation Students should read the case in advance in order to get a full understanding of how the business has got to where it is at the time of the case and also to fully understand the main features (both financial and non-financial), which can be drawn upon in order to both generate and evaluate strategic options.

Students may also visit the company website (www.theoaktreeinn.co.uk) where additional case resources are available.

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There may also be some directed activity in advance of a class session. Students can be asked to get a better understanding of the context within which the business is operating by looking at the National Park website: www.lochlomond-trossachs.org and sources for Scottish tourism facts and trends, such as: www.visitscotland.org and click Corporate and then Research and Insights. Information sources on family business in Scotland and the United Kingdom can be found at sites such as: sfba.btck.co.uk/ and www.ifb.org.uk/.

Using the case in a learning environment A key focus of this case study content is detailing where the business has developed to and outlining the position it now finds itself in – aspirations to more than triple turnover in a period of around seven years (from £3m in 2018 to £10m by 2025) but with a range of factors which both present challenges and opportunities. The primary discussions in class can then be around generating strategic options and evaluating these to develop recommended way(s) forward.

There are various ways a learning experience could be organised including: 1. Organising students into work groups The class could be divided into groups of 4 and 6 and each group asked to firstly analyse the business’s competitive position (perhaps drawing up an expanded SWOT on larger flip chart type paper). The group can then draw up a range of strategic options they decide are possible opportunities for the business and ensure that they provide justification for these options. There could be a pause in the group breakout sessions at this stage, with each group briefly presenting to the other groups their range of possible options. This can be useful to share across the larger class cohort the ideas generated.

The groups will then use the SAFE framework to evaluate their options and then arrive at a recommended way forward. Each group can also then present this to the rest of the class in turn, with justification for the chosen recommendation given in the presentation.

2. Pitch to ‘investors’ A similar approach to that above can be taken, but with each group being briefed that they have to present their recommendation to a panel of possible investors/backers. The group will then have to consider how their presentation/pitch is structured and the key elements within the presentation that they will need to cover.

3. Role-play – as the owners The students could be formed into groups to immerse themselves through role-play as being the family owners. This can also support exploration of the dynamics of a family business as well as immersing themselves in family businesses passion for the local area, for giving employment to locals and providing job opportunities for young people in the area so that they are retained locally instead of moving to the larger cities. It can also support the exploration of how important it is to this business to maintain and further foster the ‘family’ approach to the business when it is considering options for development. This approach can tease out the issues and challenges and perhaps give the ‘family business values’ dimension a greater weighting whilst evaluations suitability, acceptability and feasibility.

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For all work by students, once they have completed written work, they can voluntarily send it to the owners of the Oak Tree Inn via the home page for their business: www.theoaktreeinn.co.uk.

5. Questions

1. Carry out an analysis of the Oak Tree Inn’s current competitive position and state what, if you were Sandy Fraser, would be your main priorities and concerns for the future growth of the business?

2. Given the Fraser family’s ambition for growth within the challenging context outlined in the case, suggest a range of strategic options for growth and assess their Suitability.

3. Now evaluate these strategic options in terms of their Acceptability to key stakeholders.

4. Now evaluate the options with a focus on Feasibility using both financial and non-financial.

5. Based on your implementation of the SAFE framework, what is your final recommendation for a strategy for growth?

6. Case analysis Brief overview of the business position The Oak Tree Inn is a very successful tourism business in a small, picturesque village called Balmaha, on the east bank of Loch Lomond, one of Scotland’s most iconic natural locations and within Scotland’s first ever National Park.

The business is a family-owned business with a turnover of £3m ($3.8m and €3.4m) and aspirations to grow to £10m ($12.8m and €11.3m) by 2025. The award-winning Oak Tree Inn business comprise of holiday accommodation (sleeping 90 guests a night), an authentic Scottish bar, restaurant, artisan coffee and ice cream shop (both home produced) and a popular village shop. It employs 100 staff (some seasonal).

Issues facing the business One of the main constraints is that the business is located on the east side of the loch, which has a dead-end road, so there is no through-traffic. This has meant that the business has had to make Balmaha a true visitor destination to attract customers, transforming it from being, as one bank manager called it in the 1990s, a ‘graveyard of tourism businesses’. It has been so successful that quite often the road has to be closed by the police in the peak summer time due to too many visitors.

This in itself has now brought a fresh business challenge – how to grow the business if there is restrictive physical capacity in the area for growth in the real number of customers able to visit.

This business context then includes the following issues for study and discussion: a. National Park setting and policies with an internationally recognised ‘label’ of National Park

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b. government and enterprise agency focus and imperatives on tourism growth c. family business dynamics and values d. growth aspirations which will require innovation and doing things differently (due to physical capacity of the area) e. requirement for working in partnership with other stakeholders to achieve a greater goal f. required changes to leadership arrangements, management information systems (MIS), etc. to support growth g. attracting seasonal workers and maintaining high-quality, consistent service h. asset utilisation and financing growth The family business dimension The Oak Tree Inn was built in 1998 as a traditional style Scottish inn, and it has grown over two decades to provide increased capacity in accommodation, food and drink service. The business has also expanded into grinding its own artisan coffee, making its own ice cream and opening a village shop for locals, visitors and walkers on the West Highland Way long distance footpath which runs through the village.

The business is run by the Fraser family, with Sandy and Lucy Fraser establishing the business and taking large risks to do so. Many of their eight children now work in the business. Two of the family’s core beliefs are to (a) make the east side of Loch Lomond a destination of choice and a thriving economic area for tourism providers and suppliers to those businesses (e.g. they have a policy of buying all supplies locally where possible) when 20 years ago it was a ‘dead end road’. This is a passion of Sandy since he was born and brought up in the area; and (b) to provide employment and business opportunities for their family and other young people and not see them migrate from the rural communities to the cities for work. They have huge passion for the business, a clear understanding of what is required and a myriad of ideas but, despite being successful to date, there is no formal approach to strategic planning, no Management Information System (MIS), which provides information for evidence-based decision making, and there are unclear processes for key decision making.

The priorities and values of the family business owners will be key components in evaluating future opportunities for growth. However, these also have to be balanced against the desire to more than triple turnover within 7 years and the recognition that new management and leadership positions and systems will need to be introduced.

SAFE There is information in the case study on the Oak Tree Inn to support the evaluation of (i) organisation performance, (ii) suitability, (iii) acceptability and (iv) feasibility.

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Students should generate various possible scenarios for the future and then carry out assessment of the suitability of potential strategic directions and methods.

The company’s resource base and financial position is included so as to provide a basis for feasibility evaluation through evaluation of financial risk and sensitivity analysis and investigation of potential financial return using various financial ratios (financial information can be provided to whatever required depth/level to support ROCE, DCF, payback period, etc.).

Students could also explore possible desired people profiles, skills and experience based now, and what would be required for future plans. Students should also include commentary on tangible and intangible resources and assets, which should be available to support future proposed plans.

Possible options for the future Despite its success to date, the business only really has a basic understanding of its competitive positioning and its core competences. The business needs to explore these in some depth to underpin future growth opportunities.

The business is exploring ways of increasing turnover and profitability. Options that students may generate include: a. opening to new markets through creating access to the loch by, for example, having their own jetty and cruise boats with options to dine on board – with food from the Oak Tree restaurant – and picking up passengers/diners from other parts of the loch;

b. market expansion by buying other underperforming restaurants around the National Park and turning them into ‘Oak Tree Inns’ and exploring the further option of a central kitchen for preparing and assuring food quality across outlets; c. franchising and/or opening new outlets of the Café concept (with the home-made ice-cream and home-ground artisan coffee) around the National Park and further afield; d. online selling of branded artisan products linked to current offerings with the ‘Loch Lomond’ brand; e. diversifying into options for smoke-houses for meat, etc. and micro-brewery; f.

expanding offerings to current markets to include activities on-site and on the loch;

g. working with other stakeholders in the National Park to look at good practice examples for visitor management and destination marketing to maximise visitor spend and stay.

Students should have explored the strategic directions open to the company, having explored the businesses’ core strengths and distinctive offerings within the market place.

In developing their answers, students could also explore the issues facing the business and present possible solutions, for example, as above. One key element that students should also highlight and explore is the challenge that the business currently does not have the full MIS in place nor an optimal

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management structure to truly know what each business is contributing to the business.

Organisational structure, information management and strategic decision-making processes will all be key components of a way forward so the business can have the ability to make solid strategic decisions.

Links to other chapters Links can be made to Chapters 2 and 3 – tourism, and in particular rural tourism, is a global phenomenon, and there are many options for students to analyse the macro and sectoral context for the Oak Tree Inn. Chapters 4, 5 and 6 – this business gives opportunities to analyse its distinctive resources and capabilities (arguing that it is unique and inspiring in many ways); to examine the dynamics of a successful family business (and the family business relationships within the Fraser family) and to analyse the organisational culture (rich information for the development of a Cultural Web for instance).

Chapters 8 and 10 – there can be information to support the generation of possible strategic directions, which can be mapped out; as well as exploration of the value chain and options on the BCG matrix.

This can all be linked with the entrepreneurial dimension and drivers for this business and their requirement to innovate in terms of their offering, presence and market reach.

Chapters 13, 14 and 15 – there is an interesting dimension to explore how the business has grown and may continue to change and grow over time. The central roles played by Sandy Fraser (the father) and Lucy (the mother) is inspirational and thoroughly engaging. How two of their sons and one of their daughters are now taking on key responsibilities is also an interesting insight into leadership, succession and managing change. Features of organisational structure, internal communication and resilience are the key identified challenges going forward for this ambitious business.

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CASE TEACHING NOTES

Strategic Planning at King Faisal Hospital and Research Centre Saudi Arabia Paul Walley

1. Introduction This case focusses on the strategic planning processes inside a public sector organisation. At time of case, senior managers have embarked on a formal planning process and the effectiveness of both the process of strategy development and the outcome can be explored and critiqued.

The case provides students with the opportunity to explore how political processes influence the outcome and demonstrates that, even within the public sector, organisations can be seen to compete with each other for market share and a share of the resource pool. Changes within Saudi Arabia that have taken place since the strategic plan was first developed further highlight some of the challenges of developing their strategic plan.

2. Position of the case The case aligns to Chapters 13 and 16 of Exploring Strategy, Strategy Development Processes and The Practice of Strategy. It would be of particular interest to students who work/expect to work in the public sector or students who work in a Middle East context who will see similar challenges with the environment or culture. Students new to techniques such as PESTEL will find it a good case to practice this type of analysis in an environment different to their own.

3. Learning objectives

•

To demonstrate the application of PESTEL in a different type of business environment.

•

To assess the strengths and weaknesses of a deliberative approach to strategy development.

•

To understand the nature of competition for resources in a public sector context.

•

To understand the challenges of developing and implementing a strategy from the perspective of dealing with stakeholders.

4. Teaching scheme The case offers the opportunity to conduct various pieces of analysis about the environment and internal capabilities. There is also an opportunity to explore the impact of the public sector and international context. In this way, it is best suited to plenary discussion in class or with small groups, following some time spent researching or developing some of the analysis. Our teaching suggestion includes the following: 435 .

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Have students prepare the case in advance. They should complete a PESTEL analysis and might also consider a stakeholder analysis. For a more in-depth understanding, it would be useful for students to look more in depth at the PESTEL factors other than that simply presented in the case.

-

Ask students to present their findings from the PESTEL analysis. Different groups could be asked to cover different elements from the framework. A major part of the ensuing discussion can focus on the impact of the generous funding from the King. How does this resource availability and historic lack of competition affect performance? Would you expect KFSH to be efficient? Would it feel as though resources were abundant?

-

Ask students to discuss the impact of culture. Has anyone worked/lived in the Middle East? How does this affect the ability to work?

Ask students to assess the stakeholders. How do the stakeholders affect the content and process

-

of developing the strategy?

Discuss the competitive situation. Does KFSH have any competitive advantage? What factors to will lead to long-term success for KFSH? Is it medical excellence? Is it good relations with stakeholders?

-

If the analysis from the students is strong, the content of the strategy can be discussed.

One discussion that can be had is if the analysis of the situation would be different if the strategic analysis had been conducted after: 1. the oil price crash of 2013.

2. more recent events that have led to more challenging relationships between Saudi Arabia and many other countries.

5. Questions The following might be used to stimulate discussion with students: 1. What are the key macro-environmental factors that influence the strategy in this case?

2. What have been the steps in the strategy development process at KFSH? How deliberative have they been?

3. How will KFSH maintain/enhance its position?

6. Case analysis 1. What are the key macro-environmental factors that influence the strategy in this case? The relative uniqueness of the circumstances must be teased out early on so that sense can be made of the strategy development process. Tutors can start with PESTEL, which helps to structure many of the key points:

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Politics The role of the state is obviously the major factor in this environment with high political exposure and direct state involvement. The government funds most healthcare in the Kingdom and the Ministry of Health (MoH) is significantly expanding healthcare provision across the entire country. One of the features of the Saudi Royal family is their keen attention to public opinion, which is partly how they have maintained considerable support for many years. The historical role of KFSH has been as the specialist Hospital for the Royal family, and it has been politically supported and protected for many years.

The policies within the MoH will largely dictate how well KFSH prospers. The narrative shows that the hospital has probably overlooked some aspects of its relations with the MoH, with its decision to not cooperate with the National Referral System, for example. A good strategy would have senior leaders at KFSH influencing the politics. How much time should the CEO spend at KFSH, and how much externally?

Economics Saudi Arabia has 30% of all known crude oil reserves globally, and it funds almost all economic activity in the country from the revenues this generates. (Saudi Aramco is arguably one of the bestrun corporate organisations worldwide). For years, it has been able to provide almost limitless funding to organisations such as KFSH. At the time of the case, crude oil prices were high ($100/barrel), so funding was generally easy to find. However, when oil prices fall, there will be more of a squeeze and good scenarios would consider this.

At some point, there has to be a discussion of the hospital’s funding position. Historically, there has been very little limit to the amount of money available where spending can be explained or justified.

The case mentions the opulence of the environment, including the marble floors and walls in many areas. Overspending on projects is normal and usually only results in delays as the extra finance is sought. Staff within the hospital are constrained in their thinking and want to spend their way out of all problems. No-one senior would feel constrained by finance for projects but operational budgets feel tight due to the pre-existing commitments to expenditure in any financial year. (The actual finances are not widely published, even to senior managers. Money for short-term spending is ‘found’ by the CEO).

There are some threats to this, both in terms of the competition for funding from rival hospitals and in the supply of money as the country becomes more adept at not wasting its financial resource.

Social Influences The case identifies a few of the cultural and demographic factors that are relevant to bother the strategy and its development process. The population is undergoing some radical changes, with many more elderly people who will ultimately increase demand for some care services. The advent of ‘Western style’ living, including diet are major factors. The Saudi culture and climate discourages activity such as sport making some health conditions worse. The consanguinity of marriages in KSA is known to increase the prevalence of inherited diseases, including heart defects and genetic predisposition to some cancers.

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Obesity Rates

Diabetes Rates

1. Nauru

78.5%

1. Nauru

30.7%

2. Tonga

56%

2. UAE

19.5%

3. KSA

35.6%

3. KSA

16.7%

4. UAE

33.7%

4. Bahrain

15.2%

5. USA

32.2%

5. Kuwait

14.4%

6. Bahrain

28.9%

6. Oman

13.1%

7. Kuwait

28.8%

7. Tonga

12.9%

8. Seychelles

26%

8. Mauritius

11.1%

9. UK

24.2%

9. Egypt

11.0%

Source: WHO, 2008 World Health Organization 2008 At some point, it is worth discussing the role of religion and its influence on the organisation. For western managers, it is difficult to manage staff who disappear twice a day (often not coming back) because of prayer times. Female Saudi staff are often restricted in what they are prepared to do, for example, treat male patients. Female patients need to have guardians and all wards are therefore single-bedded with an ante-chamber for the guardian. As it happens, KFSH is one of the most western-style organisations in KSA with mixed gender working and a high proportion of Western staff.

It will be interesting to see the changing demographic as a driver for change. A very high proportion of young Saudis have studied in the United States and lived a more Western lifestyle before returning to KSA. There is increasing evidence that some social changes are occurring – perhaps even at a faster pace that anyone would have originally predicted. The sudden law change to permit female drivers and the opening of some cinemas are indications of the underlying social forces at play. Have the advantages of the more relaxed laws made it more attractive to work in Saudi Arabia? Will other changes discourage an expat workforce?

Technological KFSH is often working at the forefront of technology, especially in the development of new treatments for complex illnesses. It can afford (or at least request funding) for almost any new technology it wants and always wants to select the most advanced technology available.

Ecological Although there are some environmental issues within the country, these have not really had much of an impact yet. It is worth pointing out that almost all electricity is produced using oil-fired generators, all water comes from energy-intensive desalination plants and petrol is 16 US cents per US gallon.

There is now some investment in green energy, but this is at an early stage.

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Legal In the economy as a whole, the legal framework is extensive and quite restrictive. Outside companies are not allowed to operate independently in KSA – they must partner with a Saudi company, usually owned by a highly influential Saudi family (often part of the Royal family). Hence, most retailers are franchises, for example. Expats cannot own property. Normally Saudi women have to have special permission to own property. There is also a process of work ‘saudisation’ where gradually all well- paid jobs are being reserved for Saudis only.

Most laws are based on sharia law, and there are further restrictions on dress codes etc. TV is heavily censored and internet access restricted. Cars should not contain both men and women who are not related/married. On the street, these laws are imposed, occasionally brutally, by religious police – muttawah.

Section Summary:

The PESTEL analysis reveals that KFSH will have enjoyed good access to funds for many years – and has probably become used to this lavish spending. In the future, this money supply could be threatened and at a time that demand for healthcare continues to rise across the country.

Tutors can consider whether to talk through a number of scenarios here, concerning availability of money supply, demand growth etc. In practice, the strategic planning team did not go through this type of scenario analysis. You might ask why not? Part of the answer is cultural where predicting the future and looking at ‘bad news’ scenarios can be problematic. Were some of the present-day situations even conceivable during the 2012 planning process?

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2. What have been the steps in the strategy development process at KFSH? How deliberative have they been?

Tutors can ask the students to identify the stages of the planning process the consultants and team embarked upon. In practice, there was clear methodology the consultants introduced into KFSH, and this was used for both the 2008 and Vision 2020 plans.

The first strategic plan was very successful in its establishing of the Vision & Mission for the organisation and this was communicated very well to members of staff. As a process for defining the role of the organisation and providing some degree of coordination and integration of activities, this was highly successful.

Tutors can discuss the extent to which the Vision 2020 plan stuck to this methodology and how it was used.

•

The external analysis is competent and creates a clear picture of some of the country’s challenges

•

and the government’s likely actions and policies. There is clear understanding of the external environment amongst the strategy development team, although there are many uncertainties about what will happen to demand, funding etc.

The team have a clear view of internal weaknesses but these are difficult to discuss internally because of cultural constraints. Consequently there is a clear (and agreed) vision and mission but weaker acceptance and understanding of where they are. The internal analysis is hindered by the

•

•

lack of discussion about the slow progress on the existing strategic projects and the barriers to implementation. (The author was banned from conducting a SWOT analysis and prevented from presenting the report showing 14% completion of the strategic projects).

The strategic goals and objectives are clear and ambitious (too ambitious?) but they are consistent with the environmental analysis.

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•

The organisation’s capacity to implement strategic projects seems limited and this appears to be limiting progress in many areas. The construction projects are making good progress but other projects, for example, to utilise these facilities are not happening as fast.

Sharper students will pick up on the 80+ strategic projects mentioned in the text. One of the negative aspects of the generous money supply is that the plan becomes overloaded with perfectly rational projects, which can be afforded, where the organisation lacks the capacity and capability to implement them, especially within a reasonable timespan.

The variety lens can allow important insights in this case. Contrast the bureaucratic organisation with its dynamic, leading edge and quaternary medical research. The ineffectiveness of the control systems do allow considerable room for clinicians to play with new ideas. The funding, especially from nonGovernment donors, can allow new developments to emerge. (From the author’s perspective, this could become a real problem when some fairly wild ideas were proposed by people with money to donate. For example, one proposal was a 600-bedded children’s hospital to be built in Riyadh. This is vastly oversized compared with any norms). The US consultants were very useful in challenging existing norms and looking to future development.

The discourse lens is the other major perspective that needs to be used here. Given the cultural norms about critique and reporting bad news, ask students to interpret the statements by the Minister for Health quoted in the case study. The language here shows assumptions and interests – especially a clear loyalty/bias towards other healthcare providers. The whole process of consultation can be seen as one that shapes influence and aligns those with power to the proposed plans and actions.

Patterns towards some emergent strategy?

Exploring Strategy highlights elements of emergent strategy that might be considered here: •

There are clear political processes that influence strategy. The hospital is having to come to terms with external competition for resources, partly as a result of political support for other organisations. Internal political processes also influence the detail of the strategy. Different clinical

•

departments create internal competition for resources and the decision to grow some departments is a partly political decision. Note the case narrative hints that the staff consultation processes try to limit the extent of the debate across departments as to whose department is going to grow and whose isn’t.

3.

How will KFSH maintain/enhance its position?

The analyses above uncover two different perspectives of how the organisation needs to develop: A rational perspective will see the further development of facilities and capabilities, especially in the areas of oncology, organ transplant surgery and genetics. The hospital can afford to recruit and retain the expertise and should be able to raise the capital for any facilities. Students may even use VRIO analysis to identify core competences in these areas.

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Another perspective would focus on the relationships between staff in the hospital and in other Saudi institutions. The discourse process uncovers patchy support for KFSH because of only moderate performance and a lack of attention to external relations. There has not been enough attention paid to the MoH, including developments such as the National Referral system and also lack of attendance at policymaking committees where KFSH should really be shaping the national approach. Irrespective of how technically good KSFH is, without external support the organisation cannot prosper.

If time permits, it may be worth looking more formally at the stakeholders within the case study. Most of the key players are external to KFSH, representing all of the Government departments, Royal family and other KSA healthcare organisations. Others to debate would be: •

Senior Saudi KFSH clinicians

•

Other Saudi staff

•

Expat clinicians

•

Expat workforce (are all nationalities equal?)

•

Patients

•

Department of Planning and Monitoring

•

Project teams

•

Construction companies

•

Equipment suppliers

What happened next?

Tutors may like to explain the strategic plan that was produced. The figure below shows the draft plan as discussed in 2013.

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The key features of the plan include: •

more acknowledgment of competition;

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better understanding of the role of KFSH in the country and

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fewer strategic programmes and projects (target of 60% reduction in live projects).

Since the plan was published, a number of key events have changed the hospital’s circumstances: •

The Minister froze KFSH salaries to allow other hospitals’ remuneration packages to catch up.

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The oil price has significantly dropped leaving revenues in the Kingdom lower and putting the Government under more financial pressure.

The Minister for Health was removed from office in April 2014. Some reports suggest the failure

•

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to control the MERS virus was a reason. Others suggest the Minister recommended a surgeon for King Abdullah but the medical procedure went wrong and the King became trapped outside KSA for months. If true, this wouldn’t have been a good career move!

The next appointed Minister only lasted 1 month before he was fired and replaced because of an unflattering YouTube video.

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•

A number of members of the Saudi Royal family passed away: o Crown Prince Sultan in 2011 o Crown Prince Nayef in June 2012 (replaced by Prince Salman) o King Abdullah in January 2015

These changes have led to a succession of reshuffles changing the balance of power. (King Salman is the uncle of the KFSH Head of Research). Each of these changes potentially affects the relationships and funding for KFSH. Students will almost certainly point to the appointment of Crown Prince Mohammed bin Salman, who has driven the country’s internal reforms but has also been a highly controversial figure in international relations. The Crown prince was almost entirely unknown at the time the strategic plan was created, and someone who would have been regarded as at least one generation too young to influence Saudi affairs. Would any scenario assessment have included some of the events that have occurred in the later stages of the lifetime of the strategic plan?

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Mormor Magda’s Ice Cream – can you be hot in a cool market?

Authors: Anders Melander and Adele Berndt

1. Introduction This case study provides students with the opportunity to consider how to develop and execute a strategy that fosters growth in a small business, specifically one which is tightly connected to the previous owner/founder, but which has been taken over by a new owner. The case is unique as it relates to an industry that is very traditional.

Mormor Magda is positioned as a unique offering on the market. However, how should capabilities be developed and managed to provide a sustainable competitive advantage? The crowdfunding initiative creates an interesting dynamic as there is now a lot of pressure on management to actually produce the forecasted growth, which did not happen – in fact, investors all lost money. This has also tarnished the image of the organisation, and thus, the new owner must not only rebuild the brand but also find a way to reposition it.

The key questions stated in the case is how the new CEO is going to fulfil her promises on growth and reposition the company. Following from this, how is she going to process the strategy development in the firm in the future?

2. Position of the case The case relates to the following themes in a strategy course (and in Exploring Strategy):

a) Chapter 16 (The practise of strategy). The question of who to involve in strategy development is highly relevant. And the issue of how and when to communicate strategy becomes essential as all shareholders are to be Mormor Magda’s ambassadors at the marketplace (either for good or bad, depending on the outcomes). b) Chapter 13 in which strategy development in different contexts are in focus. In this case, students can practice how strategies can be developed in simple/static conditions. c) Further, there is a link to Chapter 5 (strategic purpose and stakeholder mapping) is of value in order to understand the challenges involved in strategy development.

3. Learning objectives Study of the case involves students in understanding of the following: •

The implications and challenges of managing strategy development in an organisation, specifically a small organisation operating in a niche market.

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How to develop strategy in small organisations (especially on the issue of whom to involve and

•

how to involve them in the process).

The use of crowdfunding in the case further sets the light on financing growth and different

•

financing opportunities.

The challenge of repositioning and strategy development for new owners.

4. Teaching scheme The initial discussion could centre around the background to the case, that is, what/or what is Mormor Magda. This discussion could include how local products are perceived, and the strategy used in the crowdfunding campaign. The following English videos can help in this regard: Campaign Website (English): https://www.fundedbyme.com/en-us/ Company Summary: https://www.youtube.com/ and search for “Mormor Magda tillverkar glass -som om du gjort den själv” The discussion could also focus on the use of crowdfunding in enabling organisations to grow. Sites Fundedbyme.com as well as Kickstarter.com reflect campaigns that are similar to those used by Mormor Magda. Both websites are examples of crowdfunding websites. In the case of Fundedbyme, the projects will allow the investment of money in return for shares (equity) in the organisation. In the case of Kickstarter, there will be some reward that will be given to the person donating money (rather than investing) or the opportunity to pre-order products.

5. Questions

1. In what ways (if any), do you think the strategy development process is different in a small business (as typified in Mormor Magda’s) from the process in a large organisation (like Apple or Unilever)? Give specific examples to illustrate your answer.

2. On Kickstarter.com (or a similar crowdfunding website), identify one project you would consider giving some of your money. Why did you select this project? What was it about the campaign that persuaded you to part with your money?

3. When a crowdfunding campaign achieves its funding target, many would regard it as a successful.

However, this does not guarantee the long-term success of the business itself. Knowing that a successful campaign does not always translate into business success, should Angela have taken the decision to run a crowdfunding campaign?

4. Mormor Magda has undergone many changes in recent years. If you think about the current situation of Mormor Magda, what do you think are the major challenges that Maria has to address in order to put the business on a solid financial footing, and start generating a profit?

5. Given these factors (Question 4), how do you think Maria should develop Mormor Magda’s strategy (with the goal of being sold in 200 stores, and distribution stated as a major issue)?

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Additional question: 6. A major challenge that Maria is facing is the entry of new competitors in the market. How could Porter’s Five Forces model explain the challenge Maria is facing? Does this model suggest a strategic action she should consider?

6. Case analysis Small business owners may not have the experience of strategy development and not have access to others to ask for advice who are experienced in a specific area. We see this in Mormor Magda where Angela (the entrepreneur who started the business) used the board to guide her, despite them not having experience in the ice cream business. There isn’t the money to pay a strategist, and then there is the challenge of finding someone who is knowledgeable about this specific industry. Consequently, Angela had to look for mentors outside the business, but she becomes the only strategist. The same situation applies to Maria (the new owner) who also has limited experience in the ice cream business.

In large organisations, there is more expertise in the organisation, and there are also resources which mean that external help can be recruited.

The current challenges that Maria faces are linked to the SWOT associated with the business.

Strengths: Despite Angela Hafström (the entrepreneurial spirit, her marketing skills, especially in social media), the board of the company, the brand value, the brand ambassadors (owners), the business was sold and the new shareholders lost money. Yet the product is still selling, and the brand does still have a positive reputation in the market. The introduction of dairy-free ice cream now accounts for a major part of the business.

Weaknesses: Angela Hafström (and the history of the business), Maria’s lack of experience of the industry, the limited market penetration (how to manage distribution and how to reach the exposure needed in food stores?), the geographical positioning of the factory and the limited production facility (machines and localities). The fact that Maria lives three hours away from the factory is also a possible issue (from an operational management perspective). Then, there is also the issue of a brand that was tied to a specific person, and the person is no longer associated with the business.

Opportunities: A growing interest for healthy ice cream, the importance of social media as a marketing device, the consumer interest in ice cream as a product, the need for challengers in markets dominated by huge international players.

Threats: The large international organisations have the financial muscle and market share to squeeze the smaller producers out of the market. In addition, the introduction of plant-based ice creams can draw the attention away from Mormor Magda’s offering. These are developed and marketed by large organisations, which also means they can carry losses (which MM cannot do).

An important conclusion in this analysis is that the firm was heavily dependent on Angela, which now presents a challenge to Maria. It is difficult to talk about organisational capabilities in a small business like this. As a result, the investors are investing in an individual’s ability to realise her dreams.

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Should the crowdfunding campaign have been undertaken? The answer to this could be positive or negative, depending on the student’s perspective and attitude towards crowdfunding.

Yes, it was a way to get money from people who are passionate about the idea of ice cream and the local nature of the business. It was also a way to get people to support Angela, who was a known in the local area.

No, there was too much risk involved. Risks included that the funding target would not be reached, and the risks associated with ice cream as an industry. In addition, selling a share of the business was not a good idea. If she wanted to use crowdfunding, she could have rather used another kind of crowdfunding (rather than equity crowdfunding).

Maria faces several challenges in developing an updated strategy: From the case, it is obvious that Maria herself is vital in the strategy development process. She is the one that dares to call people and ask them about the industry (the shop owner). She is the one that will need to take new initiatives developing the products etc.

There are several strategies she might use to increase the number of food stores stocking the product.

•

•

She needs to ensure that she develops demand among consumers through the introduction of new products, but she must also ensure that she supports the markets where the products are already stocked. This means ‘rewarding’ stores and consumers in regions where there are good sales and support for the product. This means, she could decide to launch new products in these areas. By focusing on the new product, she can continue to differentiate her product from others on the market, which is an important part of standing out in a very competitive market.

As a present problem is the ability to reach enough sales in the fridges that she offers the stores, she can form an alliance with other challengers in the market. Offering two (complementary?) products in the same fridge is one way of increasing attention (and sales). Another strategy is to develop the design of the fridges in some novel and unique way. If they can be designed so they are not competing for space in the same way as today, this will be beneficial. It is important to ask

• •

•

why she should go for the stores. Is there any alternative way of approaching the market? Would some stores be more beneficial than others?

Brand extension. For example, other products produced under the label of Mormor Magda?

Students might suggest some of these. One alternative could be to focus on the waffle market.

Another alternative could be the single wrapped ice-cream market. Even though Unilever dominates this market in Sweden, a few of Mormor Magda’s direct competitors are in this market.

Another strategy she could consider is relocation of the business so that it is closer to Stockholm where she lives – the business would not have to be tied to its current location. This would have several disadvantages, such as becoming removed from the people who initially supported the venture and exacerbating the betrayal experienced by the investors.

Additional question Porter’s five forces model suggests several factors influencing the market. These factors include the threat of new entrants, the bargaining power of the buyers and of the suppliers as well as the threat of 448 .

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substitute products or services. In the case of Mormor Magda, the suppliers are all local producers (e.g. farmers and berry producers), whose bargaining power is moderate. The bargaining power of the stores (the buyers) is very high, and some no longer want to support the product due to low sales numbers. There is also the threat of new entrants (specifically small and local ones), which continues to pose a threat.

One strategy that is suggested is a differentiation strategy where Mormor Magda not only has different products but also has a unique reputation in the market (even though there is a new owner). This is something that Angela used to communicate often, but Maria is not as active in communicating.

Update to the case: At time of publication, Mormor Magda’s ice cream continues to sell and be distributed within Sweden. No discernible strategic changes have been implemented by Maria as the new owner of the business.

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CASE TEACHING NOTES

Emmaus: the founder as a resource?

Notes by Hélène Gorge and Ludovic Cailluet

1. Introduction The Emmaus case deals with the character of Abbé Pierre, a catholic priest and the organisation he founded just after the Second world war – Emmaus – which went on to become one of the most important French philanthropic operators.

The case focuses on challenges in running ‘pluralistic’ organisations, that is ‘organisational contexts where objectives and values are multiple and ambiguous, where power and influence are shared among a variety of stakeholders’ and that have been some time qualified of organised anarchy. In such organisations, the deliberate top management process usually associated with strategy making might be altogether absent or irrelevant.1 The case also illustrates the challenges represented for organisations, corporations or not-for-profit entities, by historical strategic resources such as a founder or/ and an entrepreneur.2 The history of the charity Emmaus pervades its strategy through leadership and organisational issues.

Emmaus has developed through a web of communities and associations federated under the umbrella of a ‘movement’ but largely under the patronage of an individual Henry Grouès, l’Abbé Pierre – A.K.A The Father. His central role as a fundraiser and charismatic personification of the cause of poverty fighting in France has been a challenge for Emmaus managers and executives since its foundation. The case shows the ambiguity of relying on a historical leader for an organisation.

2. Position of the Case

The case focus is on the management of a complex relationship between the founder of the organisation and its leadership. It focuses on dealing with change when history is a very valuable resource (Chapter 15: Leadership and change and Chapter 14: Organising and strategy). It is original in its look at historical strategic resources (Chapter 4: Resources and Capabilities and Chapter 6: History and Culture).

A second focus is on the specificities of leadership and management in not-for-profit organisations (pluralistic setting) with loose structures mixing volunteers (including for religious motives) and salaried employees (Chapter 5).

1

Denis, Jean-Louis, Ann Langley, and Linda Rouleau. ‘Strategizing in pluralistic contexts: Rethinking theoretical frames’. Human relations 60.1 (2007): 179–215.

2 Cailluet, Ludovic, Hélène Gorge, and Nil Özçağlar-Toulouse. ‘“Do not expect me to stay quiet”: Challenges in managing a historical strategic resource’. Organization Studies 39.12 (2018): 1811–1835.

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Given this relative complexity, the case could be used either at the end of a strategy course looking at practices or at the beginning through the lens of history and culture, R&Cs, stakeholder management and governance. It could also be used in a special section dedicated to not-for-profit or religious organisations.

3. Learning Objectives

a) To assess the possibility to effectively align the strategy with the existing resources and capabilities. b) To understand the changing role/nature/effect of resources or competences over time. c) To understand the specific challenges of managing historical resources. d) To understand that the nature of the resource could create an advantage or a challenge or threat to the organisation in times of change.

4. Teaching Scheme Emmaus is most likely to be used as a basis for plenary discussion rather than small group work. It might be a good idea to start the session by asking among students how many would be willing to work for a charity versus working in a commercial company and why. The instructor might want to ask the ones who would consider a career or at least a period of their career in such an organisation why they would do so (if none answers positively the instructor might rhetorically ask the group why someone would be doing such a thing).

There are good chances that students invoke the strategic purpose, the higher philosophical or ethical motivation generated by a not-for-profit organisation’s mission, vision, values and objectives (Chapter 4).

A general discussion about the difference between a mission or purpose driven organisation and a profit driven organisation could then be developed by the instructor in terms of the differences in strategizing in both organisations.

How different is a not for profit such as Emmaus compared to a corporation?

Students also need to underline the major difference between for-profit organisations and not-forprofit entities such as Emmaus in terms of: - Goals/mission, that is how to fulfill the expectations of the stakeholders (generating dividends for shareholders versus providing efficient use of resources to fulfilling the mission).

- Responsibility of the executives towards stakeholders (charities have obligations towards the purpose of the organisation and maybe limited in their strategic options by their statutes).

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- Usually (but not always, for example, private foundations) a more democratic, or at least more collegial perspective on the nomination of executives and principal officers in not for profit.

This could be organised by the instructor on the white board as a table:

Examples of topics

Not for profit

Corporation

Culture

Mission driven

Profit driven

Efficient use of resources to fulfill mission/purpose Defined by statutes Mission completion indicators

Fulfill fiduciary duty to shareholders Compliance with commercial law Financial ratios

With other charities to attract donors/subsidies

With other firms to attract clients/gain market shares

Expectations of stakeholders Governance KPI Competition

This section should take no more than 20 minutes. During the next 15 minutes, it is important to have students reconstituting the timeline of Emmaus and Abbé Pierre to make sure everyone is aware of the major events, and how the founder saga and first years of Emmaus have had a lasting impression on the purpose and values of the organisation until today. It is a very French example and if the group of students includes French students or students familiar with the French culture, it is a good idea for the instructor to call them upon as ‘experts’.

A good support material could be to show students a picture of Abbé Pierre with the ragpickers and to have them comment the symbols represented (many such pictures can be found on internet using keywords such as ‘Abbé Pierre’+‘Emmaus’+ ‘chiffoniers’ (ragpickers in French).

See examples below.

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Keystone/Hulton Archive/Getty Images Abbé PIERRE looking at the wall of the house covered in bills in Paris on March 6, 1954. An exhibition entitled AU SECOURS DES SANS-LOGIS was opening in the department store Printemps.

Thousands of people saw a life-size house, houses requested by abbé Pierre to shelter the homeless.

Upon his request, each visitor pinned a bill on the walls for the founder of the work. (Photo by Keystone-France/Gamma-Keystone via Getty Images)

Fondation Abbé Pierre Logos of Fondation Abbé Pierre before and after 2016 Once the chronology and the major elements of the history and current situation of Emmaus are clearly established, the instructor may want to switch to the first of the questions for discussion asking a group of students to come to the whiteboard.

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5. Questions for Discussion The following questions can be used: 1. What are the distinctive elements of Emmaus as an organisation? Analyse the culture of the organisation using the cultural web.

2. How do the Abbé Pierre character and story participate in building a sustainable competitive advantage for Emmaus?

3. How and why did Abbé Pierre present a challenge for Emmaus management? More than a decade after Abbé Pierre’s death, how should Emmaus manage the ambiguous heritage of its founding figure?

4. Provide an example of a company/organisation with characteristics comparable to Emmaus including a very prominent founding character/entrepreneur/manager. Analyse the positive/negative impact of that character on the organisation in terms of opportunities and threats.

6. Case Analysis 1. What are the distinctive elements of Emmaus as an organisation? Analyse the culture of the organisation using the cultural web.

The first element students might focus on is the role and personality of Abbé Pierre as a social entrepreneur and leader. The man has successfully created a national movement out of a little group of ragpickers. Emmaus is deeply associated with its founder’s saga and historical character.

This gives employees/associates and donors a meaningful sense of identification reinforcing the sentiment of belonging to the organisation and the will to give money to support its charitable actions.

Another distinctive character is the decentralised nature of the organisation with hundreds of different communities, associations and organisations.

Eventually, Emmaus relies on private donors, the subcontracting of some social services and the work of volunteers.

Emmaus’ paradigm is of a missionary nature. It revolves around three axis: to ensure an ethical and charitable economy; social and environmental justice; peace and free movement of people to guarantee universal citizenship.

It is very broad but provides for many different operational ventures (accommodation, health, training, social services, etc.). Since its founding years, the notion of self-sufficiency is central to the organisation’s culture and and has driven the development of commercial activities (rag picking) that would be called recycling or circular economy today. Thus, the paradigm has an impact on Emmaus strategy.

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The case contains only limited information to perform a complete cultural web analysis, but they may use stories such as the quasi-mythological saviour of the convict, the radio speech of 1954, the role of Abbé Pierre in the Résistance, etc.

Symbols could be mentioned in their analysis through the Abbé Pierre silhouette, the cassock, beret, cane and general look of a saintly figure caring for the poors.

Power and organisational structures are important aspects that students may trace out of the peculiar organisation of Emmaus often calling itself a ‘movement’ emphasising the fact that it is, since its founding by Abbé Pierre, much more a federation myriads of semi-autonomous organisations under the umbrella of the Emmaus brand than a more structured corporate-like organisation. The hierarchy cannot be as formalised and clear in such decentralised ventures mixing employees with thousands of volunteers and involving the work of beneficiaries (the ragpickers). As a consequence, control systems need to be coherent with the culture of Emmaus.

2. How do the Abbé Pierre character and story participate in building a sustainable competitive advantage for Emmaus?

Students might be helped in their analysis by the instructor distinguishing the internal and external impact of a resource for an organisation.

For Emmaus, Abbé Pierre served internally to define the goals of the organisation. He was also an entrepreneurial force and led the operations of Emmaus during the first years of the venture. In that respect, his skills, competences, experience and charisma served the organisation as would do experts, managers or executives of a regular company. After this first period of Emmaus and from the 1960s, Abbé Pierre was a unitary figure for a movement that by nature was and is still very decentralised and centrifugal.

In addition to his persona, the saga and the symbols associated with Abbé Pierre have participated and still participate after his death in the sense of purpose and belonging for employee, volunteers and companions.

Externally the figure of Abbé Pierre and his name have been essential elements to attract the attention of politicians and of the ‘man on the street’. A favourite personality for the French between 1989 and 2003, Abbé Pierre remains a distinctive name in the French national collective memory. The Father is an icon of popular culture who represents the fight against poverty. Ever since his death, he is regularly named whenever a campaign is mounted to collect funds for the charity or to publicise its initiatives to improve accommodation solutions for homeless, ‘working poors’ or refugees. His name, image and silhouette have been used in various campaigns by Emmaus and its affiliated organisations.

3. How and why has Abbé Pierre presented a challenge for Emmaus management? More than a decade after Abbé Pierre’s death, how should Emmaus manage the ambiguous heritage of its founding figure?

Abbé Pierre was an entrepreneur, a builder and a social leader. He was never interested in setting up a centralised organisation. As the founder of Emmaus, he very quickly came into conflict with the board of the association. His management style was not based on economic rationality or business techniques. He was a priest and as such was driven by his faith and was per instance promoting weak or dishonest managers of local communities who he thought could improve or must be given a chance.

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This was making life difficult for the growing organisation, which had to be structured. The board of directors made of businessmen, Catholic Church senior members and administrators removed Abbé Pierre of his operational responsibilities as early as the end of the 1950s. However, Abbé Pierre was such a popular figure and smart PR specialist that his name remained very important for Emmaus.

The major challenge for Emmaus management came from the fact that Abbé Pierre was not an employee of the organisation and as such could not be told what to do or not to do.

Students might take the examples of his involvement in a big scandal with his support of negationist writer R. Garaudy or his involvement in competing causes or associations that conducted direct actions against such as Droit au logement.

The heritage of Abbé Pierre is certainly easier to manage after his death than before. A major challenge for Emmaus is to keep alive the figure of Abbé Pierre and his message in the future, and to educate younger stakeholders as well as potential donors and volunteers. The new generation does not know the old priest that their parents got used to seeing on television for years.

The association has to maintain the historical resource of Abbé Pierre by carefully valorising the archives through exhibitions and social media campaigns using the numerous images generated over 60 years about Abbé Pierre and his actions. The brand itself is a very strong asset to raise funds and interest about the causes defended by Emmaus.

To some extent, Abbé Pierre could be compared to famous figures that young people could relate to without having never been in touch with: Che Guevara, Gandhi, Marylin Monroe, Steve Jobs, John Paul II or Mao Zedong…The main point and challenge for Emmaus is to remain connected with this historical resource to use it as a competitive lever over other charities and causes.

4. Provide an example of a company/organisation with characteristics comparable to Emmaus including a very prominent founding character/entrepreneur/manager. Analyse the positive/negative impact of that character on the organisation in terms of opportunities and threats over time.

Here, the instructor could encourage students to provide examples from different countries, they may suggest many examples of entrepreneurial or family firms. Alternatively, the instructor might want to suggest examples him/herself.

The role of a prominent historical figure in an organisation could be positive or negative and at times both as the following examples suggest.

Steve Jobs of Apple is clearly a historical resource for the company, he has been a pivotal element of the success of the firm not only as a founder but also as an executive. Nevertheless Jobs was not the always the best resource for his own firm from the perspective of his shareholders, employees and colleagues.

Jobs dropped out of Reed College and then, with his buddy Steve Wozniak, he set up his own company based in the family garage in 1976. Five years later Apple Computers went public and two years after that reached the Fortune 500. At this point Jobs recruited John Sculley, formerly head of Pepsi-Cola, to be Chief Executive of Apple. Jobs remained the chief 456 .

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visionary of the company which put him in charge of developing Apple’s next product – the Macintosh computer. The Mac made it’s debut in 1984 but sales were poor and this put a strain on both Apple’s finances and Jobs’ relationship with Sculley.

Jobs effectively created a company-within-a-company by building his own team to work on the Macintosh. They even had their own separate building on which Jobs flew a pirate flag, saying ‘it’s better to be a pirate than be in the navy”. The trouble was that Jobs’ pirate empire lost money and it tipped him into a battle with Sculley and the Apple Board.

The relationship between Jobs and Sculley deteriorated further when complaints came from the Macintosh team that Jobs worked them too hard. “Being gentle and polite was not part of his demeanour”. A full-blown power struggle then erupted between Jobs and the Board of Apple which culminated, in Spring 1985, with Jobs being removed from his position of command in the Macintosh group. Jobs left Apple and started a new company NeXT which was bought by Apple in 1996. At that point Apple was struggling but with Jobs back in the CEO position it moved into its period of greatest success with the launch of the iPod, iPhone and iPad. Other examples abound of founders or family members who could have been a not so easy resource to tap from.

Ingvar Kamprad, the founder of furniture company Ikea was in youth a militant in fascist leaning political movements. Despite Sweden being a neutral country during the Second World War, the personal beliefs of the company founder had impact on the brand.

After his death in 1994, Per Engdani, a Swedish fascist activist, had his personal letter made public. In the letters it was revealed that Kamprad had joined Engdani’s pro-fascist NysvenskaRörelsen (New Swedish Movement) in 1942. At that time Kamprad, aged 16, had helped raise funds and recruit new members, doing so until at least September 1945. It is not clear when Kamprad left NysvenskaRörelsen, but he remained friends with Engdani into the 1950s.

In his 2000 book Leading by Design: The IKEA Story, Kamprad devoted two chapters to his time with NysvenskaRörelsen, and in 1994 a letter to IKEA employees (in direct response to the Engdani letters) referred to the involvement as the ‘greatest mistake of his life’. Kampad explained his time with the New Swedish Movement as being politically influenced by his father and grandmother in the Sudetenland of Germany, but his attitude to NysvenskaRörelsen remained ambivalent, in 2011 it was revealed that the Swedish Security Service had a file on Kamprad labelled “Nazi” and in 2010 Kamprad had told journalist Elisabeth Asbrink that ‘Per Engdani is a great man, and I will maintain that as long as I live’.

Jacques Dessange (1925-2020) is a self-made man who started his hairdressing career in Paris in 1945, caring for the Dior models. He opened a first salon in 1955 and developed it into a chain with former employees. From 1975, he expanded through franchising and created his own haircare product line with L’Oréal. In 2010, his group internationalised with 800 salons in 36 countries and a turnover of 1 billion euros, receiving 5% royalties from franchisees. After selling his shares to a group of investors, in 2011, the elder Jacques Dessange published a book (The Plot) exposing the supposed conspiracy led by his son Benjamin to fire him from continued involvement with the company. The son, who controlled 12% of the shares, sued for libel. In 2013, Benjamin Dessange was indicted for sexual harassment of a female 457 .

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executive of the company – his father paid the legal costs of the woman involved.

(Source: https://www.lexpress.fr/actualites/1/societe/jacques-dessange-attaque-violemment-son-filsle-groupe-replique-en-justice_1040416.html) The lesson here is that historical resources are difficult to control for organisations, this is especially true when they are consistent with the name of the company, its founding moments, great successes (products, innovation, new market penetration, etc.) or major transformations. Companies have sometimes used their owners in advertisements as in the case of Lucianno Benetton (Italy) and Gert ‘tough mum’ Boyle of Columbia Sportswear Company (USA). Religious organisations are especially adept of such use as in the case of The Missionaries of Charity founded in Calcutta by Mother Teresa.

The Catholic Church extended the value of such resources in most recent years by the practice of canonisation (making a Saint of a mortal).

The value they help to create is contingent to the coherence between the resource and the strategy conducted. When historical resources are embedded in individuals, they also exert agency. They may have their proper agenda that is not congruent with the evolution of the organisation. ***

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CASE TEACHING NOTES

Siemens B: ‘making real what matters’ Gerry Johnson

1. Introduction The Siemens A case study is concerned with their environmental scanning exercise (Strategic Foresight). It allows the examination of how and why this exercise has influenced the development of strategy.

The Siemens B case study provides further background on the Siemens portfolio but is primarily concerned with their strategy development from 2014 to 2018. This period covers the announcement

by Siemens of major strategic changes in their Vision 2020 strategy in 2014 and Vision 2020+ in 2018. As such, it is concerned with their attempts to move from an electrical engineering business to a digital solutions business, the associated portfolio changes and strategy implementation plans including organisational design and perceived need for a culture change.

The case study and these notes largely relate to the developments between 2014 and 2018. It is likely, however, that there will have been further strategy developments at Siemens since the writing of this case study (indeed the postscript in the case explains some), so students should be encouraged to check these out.

2. Position of the case

The case is concerned with the implementation of Siemens digital strategy. As with other enterprises, Siemens have found that this change fundamentally affects many aspects of the business. The case can therefore be used to explore many themes but in particular the following in Exploring Strategy: a) The corporate strategy of a major multi-business firm (Chapter 8). b) The strategy development processes within Siemens giving rise to Vision 2020 and Vision 2020+ (Chapter 13). c) The challenges of strategy implementation and effecting strategic change (Chapter 15). d) Organisational design (Chapter 14). e) The levers a strategist might employ in effecting major strategic changes (Chapter 15).

The case study could be taught with a focus on the above, but it is bound to raise issues concerning b, c and d and is, therefore likely to be taught towards the end of a Strategy course or on course on Strategic Change.

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3. Learning objectives The key learning objectives for students are to do the following: a) Consider the impact of digitalisation on the strategy development of a major corporation. In this context: o Consider the logic of a corporate portfolio and how that may need to change given major environmental and market changes in particular relating to digitalisation. o Develop their understanding of how to evaluate the likely effectiveness of the strategy implementation plans and a programme of strategic change of a major multinational firm. o Appreciate the challenges a corporate strategist might face in effecting the implementation of a major strategic change.

4. Teaching scheme The suggested case analysis (below) assumes that the emphasis will be on the development of Siemens strategy and its implementation. If you have not already used the Siemens A case in class, ensure that students have read it as background to the B case. It might also be appropriate to encourage wider reading on Siemens and its markets.

The case lends itself to a three-stage teaching approach which encourages students to (a) understand the changes in the corporate portfolio of Siemens since 2014; in relation to the implementation of strategy, (b) recognise how the change context affects the developing strategy and (c) consider the appropriateness of the elements of a change programme.

Stage 1: The changing corporate portfolio The teaching session might begin by reviewing the dramatic portfolio changes between 2014 and 2019.

Table 2 in the case study shows and explains the portfolio in 2017 and when Vision 2020 was announced in 2014. Siemens traditional electrical engineering businesses feature strongly and Vision 2020 is a strategy that argues for the benefits of digitalisation across that portfolio. Vision 2020+ announced in 2018 changed this portfolio significantly (as shown in Figure 5) and the announcements made less than a year afterwards in May 2019 suggested that Siemens saw its future in businesses with much greater emphasis on digitally enhanced services than its traditional electrical engineering businesses.

All this allows you to raise questions about the logic of the portfolio changes but, in so doing, it is important to consider what is driving those changes and the challenges of implementing them.

Stage 2: Strategy development and the change context On the basis of their understanding of Siemens, ask students to prepare a presentation which:

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• • •

explains the strategy development processes giving rise to Vision 2020, Vision 2020+ and subsequent strategic moves; explains the context of change (e.g. using the Change Kaleidoscope) in 2014 and how this changes subsequently and identifies and justifies the key challenges that need to be addressed in implementing the proposed strategy.

One or more student presentations can then be used as a basis for a case discussion of the change context in class.

Stage 3: The change programme Require students to prepare a presentation which: • •

identifies the strengths and weaknesses of the strategy implementation plans and change programme explained in the case study and proposes and justifies any changes to those plans and change programme.

5. Questions (relating to stages 2 and 3 above) i) Explain the strategy development processes giving rise to Vision 2020, Vision 2020+ and subsequent strategic moves. ii) Using the Change Kaleidoscope, analyse the context of the strategic transformation that Siemens faced: a. In 2014 at the launch of Vision 2020. b. In 2018 at the launch of Vision 2020+. iii) With particular reference to the emphasis on digitalisation, what are the main challenges Siemens faces in the implementation of their strategy? iv) Evaluate the steps already taken and those planned to influence the adoption of Siemens future strategy in the businesses. v) Would you suggest other approaches? If so, why?

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6. Case analysis For Stage 2 Strategy development processes The Siemens A case study explains the Strategic Foresight exercises that highlighted the significance of digitalisation for Siemens. In 2014, when Vision 2020 was announced and in the Foresight exercise which preceded that there were 400 people involved in strategic planning in Siemens of which 70 were based in the corporate centre. This together with the illustration of the Siemens planning calendar shown in Chapter 13 suggests that strategic planning at both corporate and business levels played a significant role in the development of the Vision 2020 strategy.

Accounting for the subsequent strategic developments is less straightforward. Case A explains that a revised Foresight exercise contributed to Vision 2020+ but the CEOs emphasis on the need for greater ‘agility’, the devolution of strategic decisions to businesses and the slimming down and de-emphasising of the corporate centre suggest less reliance on centralised planning. Further the portfolio changes that followed (quite rapidly) Vision 2020+ suggests that strategy development was emergent in nature, strongly influenced by learning about the requirements and impact of digitalisation. In the language of Chapter 13, ‘logical incrementalism’ seemed to be taking over from centralised planning.

The evolving context of change Identifying the key aspects of the change context helps explain the developing strategy and highlights the challenges in its implementation. In terms of the constructs of the Change Kaleidoscope, the following observations might be made.

In 2014: at the launch of Vision 2020 The scope of change is very substantial for the long term – changing from a prime orientation on cutting-edge engineering within clearly defined business units to an emphasis on identifying growth opportunities around digitalisation. Whilst this is not urgent – it is not a turnaround situation – the pace of portfolio change suggests rapid change. Nonetheless in terms of the type of change explained in Section 15.4 of Exploring Strategy in his public statements Joe Kaeser sees the strategic change as evolution. Do students agree with this? Evolutionary change poses a significant challenge in itself not least because a change in culture amongst those in the traditional businesses cannot be taken for granted or expected.

Arguably this may not be helped by the cultural and skill-based homogeneity that is likely to have developed over the history of Siemens which, quite rightly, has prided itself on its engineering excellence. Indeed, Vision 2020 sees a need to preserve the skills of the past. Whilst there has been a recognition of the need for a significant change at the corporate centre, what, then is the readiness for major change in the businesses. This suggests the need for a staged approach to change with a first stage designed to build readiness for more substantial change. Students might, then, be asked to consider the extent to which (and how) the first few years of Vision 2020 has prepared the way for Vision 2020+.

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In considering readiness, if students employ a 7S model or the Cultural Web to understand the change context in 2014, do they find an organisational configuration (see Section 14.5) that is likely to meet the challenges of digitalisation and increased innovation? In terms of the 7S model, arguably the strategists are seeking to align reward systems and targets (via KPIs): but what about the skills, experience and management styles of managers and staff? Will the targets and rewards be sufficient to galvanise the required change amongst managers long experienced in Siemens as an engineering business? And is the organisational structure best suited to this? Arguably as the implementation of Vision 2020 proceeds, there is increasing recognition of the problems here.

Siemens have the capacity to effect change in terms of financial resources and manpower – at least at the centre. They are also confident that they have the time to carry out their proposed change programme – though in 2014, they had been coming under increasing critical scrutiny from investors.

In 2014 in terms of the capabilities that exist for leading change, the strategists at the centre have a good deal of experience in setting measures designed to encourage and monitor change. They have also given thought to the need for changes to remuneration policies to reward overall corporate performance rather than just within business performance and thus, they believe, reward such collaboration. It is less clear, however, how much experience they have of the sort of cultural changes expected for stages 2 and 3. Nor is it clear what capabilities for change exist at business unit level.

Indeed the approach to strategy implementation and change in 2014 and in the past has seemed to be very top down.

Despite the top-down approach, students may also question where the effective power lies for ensuring the proposed changes envisaged in Vision 2020 come about. This raises the question of what power over what resides at the corporate centre and what is dependent on the power to effect change at divisional and business levels. In terms of the short- and medium-term horizons of Vision 2020 strategies action from the centre (e.g. in terms of restructuring, targets, reward structures and portfolio management) seem to have been in line with Siemens traditional approach. Given the sort of cultural changes required in the medium term and certainly in the long term to achieve buy in at business unit level, it is interesting to note the emphasis on obtaining digital capabilities via acquisitions and the way in which these were deployed. This is discussed below.

For Stage 3 Given an understanding of context and the concomitant challenges, what might students identify as the strengths and potential weaknesses of the change programme for Vision 2020 explained in the case study? And what other elements of a change programme might they suggest?

Vision 2020 acknowledged the need for a staged approach to change in that the CEO set out three priorities with different time periods. By 2018, he was reporting that the first short-term priority about improving performance with an emphasis on business-level performance, turning around underperforming businesses and cost savings had been achieved.

Vision 2020’s second priority was, however, more to do with enhancing customer centricity and innovation as well as portfolio re-alignment and improved project management. The emphasis here on cultural change shades into the more significant challenges required to achieve the third priority.

There were several approaches here:

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Changes to the way in which senior executives in the divisions and businesses are rewarded, with more remuneration based on overall corporate performance as an incentive to collaborate across businesses.

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An emphasis on KPIs and associated performance monitoring by the corporate strategists.

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Students may therefore consider how effective are KPIs? Section 14.3.3 points out that the use of KPIs is common in large corporations such as Siemens that have multiple business units, but also points to the dangers of inappropriate targets and measures. There is also the concern that KPIs may not achieve the sort of cultural changes required here; that managers find ways of achieving performance measures whilst not making the changes the KPIs are intended to promote.

Workshops for executives to encourage them to consider how the long-term strategy will affect

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The acquisition of digital businesses was central to the strategy of digitalisation. Figure 2 shows

their businesses and how the expertise within their businesses might be leveraged to achieve benefits across Siemens. Whilst acknowledging the value of such events, Section 16.4.1 also points to the challenge of transference from what is discussed and agreed in such workshops back to the everyday reality of running a business. increase in the number of such acquisitions from 2016 onwards. These acquired businesses were positioned alongside the more traditional businesses to collaborate on projects. The extent to which they were integrated with those businesses seems to have varied according to context. The emphasis was on encouraging and facilitating learning and change through co-operative activity rather than a reliance on argument and exhortation alone.

Students should be encouraged to question which of these elements of the change programme are likely to have had most impact on the desired move to a digital future. Arguably it was the centrally planned acquisitions and the extent to which the introduction of such digital capabilities had an influence on the performance and digital capability development within the different businesses in the portfolio.

Vision 2020+: a digital future Vison 2020’s third priority was long-term growth though digitalisation. The question Joe Kaeser needed to address was how to move forward from the progress made by 2018, not least by the acquisition of digital capabilities by acquisition. Vision 2020+ was his answer to this and was largely about how to effect the necessary strategic changes at corporate and business levels. Students can be tasked with assessing the likely success of this strategy for change. This might be done as follows: 1. Reconsider the change context via the Change Kaleidoscope.

The question here is to what extent and where is the context for change different in 2018 from 2014?

Students may argue that the likelihood is that where success has been experienced the readiness for change may be greater, that by 2018, there may be greater capabilities to advance the digital future envisaged and less of a reliance on a homogeneous engineering culture. We do not know from the case study but it is reasonable to assume that this will have varied by business. It also seems that by 2018, Joe Kaeser had come to the view that the leadership (in Kaleidoscope terms, the power) of the development of Siemens digital future needed to be devolved to the businesses. The challenge of the

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fundamental scope of change remained, however, especially in businesses at the interface with customers. This might be considered by examining the main aspects of Vision 2020+.

2. Parenting, portfolio development and the new ‘operating model’.

Siemens had been a relatively centralised corporation. The strategic direction had been set from the centre, with a large corporate strategy department responsible for advising on portfolio development, strategic planning and the implementation of those plans (e.g. through centrally determined KPIs).

How, then, do students make sense of the ‘operating model’ shown in Figure 4? This envisages that corporate centre management will be replaced by a ‘governance framework’ to establish guiding principles within an overarching Siemens ownership culture. In parenting terms (see Chapter 8, Section 8.6), how do students see this working? Has Siemens become a portfolio manager and, if so, how can this work given the ambitions to develop the digital future envisaged in Vision 2020?

Given that the Siemens executive board will remain as the body answerable to shareholders (and the stakeholder board) it will be required to retain ownership of the strategy and, therefore, at least overall responsibility for capital expenditure and portfolio developments associated with that.

Also what do students see as the role of the ‘strategic companies’ and the ‘operating companies’? The former are certainly more arm’s-length than the latter (where the CEOs sit on the main board). But how will this play out in the long term? Is the intent to retain this model or is it envisaged that the operating companies are the likely core of the digital strategy whilst the strategic companies are investments that might eventually be divested altogether?

Students might also be tasked with considering what responsibilities should reside where given the decentralisation envisaged in Vision 2020+. If the operating companies are envisaged as the core businesses for a digital future, to what extent will strategic decisions lie with them and what will lie within the ‘guiding principles’ of corporate ‘governance’. Moreover, given the size of the operating businesses themselves, where will decision-making powers lie within them? Should the HQs of each of the new operating businesses become devolved ‘corporate HQs’, directing strategy or should decentralisation get closer to customers and markets within the businesses; and, if so, for what? In other words, how should decentralisation actually operate to provide the ‘adaptability’ Joe Kaeser called for in Vision 2020+? Students might be asked to consider, for example, where decisions on key strategic issues such as acquisitions, r&d investment and competitive strategy should reside. At the time of writing, the precise nature of all this had yet to be decided at Siemens.

A further challenge in achieving the envisaged digital future is the extent to which integration of the capabilities associated with digitalisation and engineering is needed – in effect this is the challenge of ambidexterity addressed in Chapter 15 (Section 15.4.4). There is a need for both the exploration for a digital future and the exploitation of the skills gained from decades of engineering experience.

So far, this seems to have been addressed structurally by allowing for different systems and cultures in the digital business units and the traditional engineering business units. Should this continue and how should the extent of integration be managed?

The challenges here can be understood within the context of the observations of researchers who have sought to make sense of digitalisation strategies in firms. For example, Yoo et al (Organising for Innovation in the Digitised World, Organisation Science 23(5), pp. 1398–1408) argue that firms following strategies of digitalisation tend to exhibit the following characteristics:

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They tend to be more heterogeneous than more traditional firms and ‘often only temporarily integrated, with the levels of heterogeneity and integration changing dynamically in response to unpredictable changes from inside and outside the firm’s ecosystem’.

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There is less clarity of job functions and responsibilities, less emphasis on permanent teams and more on people coming together in ‘highly varying task expertise-people units’ according to circumstances (p. 1401/2).

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There is a need to invest in new forms of creativity through ‘constrained serendipity’, so less emphasis on the sort of carefully planned and monitored development typical of Siemens past. (p. 1403)

Martin Friesl (Is this the end of strategy as we know it? EFMD Global Focus 3(12), pp. 16–19) points to a problem with all this: ‘Steering a tanker is a little different to making sure an entire fleet is moving in a particular direction.

Strategy work in the latter scenario deals with a potential paradox: to manoeuvre quickly, the captain of each ship needs to be autonomous. Yet too much autonomy bears the risk of the fleet dissipating’ (p. 17). He argues that finding a solution for this conundrum will be the biggest challenge of strategy in the future.

Given such considerations about Siemens evolving strategy, what do students make of the further portfolio changes announced in May 2019 (see the postscript in the case study)? It seems that Siemens sees its future in a much more limited portfolio, arguably of businesses in which digital capabilities can be most readily integrated. Is this the logical extension of Vision 2020 and Vision 2020+?

3. Levers for leading strategic change When it comes to actually leading the strategic changes, the prime responsibility seems to lie within the businesses. This then raises the question of the levers for change available (see Chapter 15) given the challenges posed by the evolutionary scope of change (Section 15.4), the centrality of culture change envisaged and the issues identified above.

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Who (at least in terms of management levels) is responsible for what, and what are the appropriate leadership styles in effecting change (Sections 15.2.1 and 2)?

Does Vision 2020 and 2020+ provide the compelling case for change required (Section 15.5.1)?

What else at the operating level in businesses might help provide this?

Given inevitable resistance to change or the inertia of past practice, where does the responsibility lie for challenging the taken for granted (Section 15.5.2)? And what form might this take?

How will operational processes and routines be changed (Section 15.5.3)? Do such changes

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provide the basis for challenging the ‘old ways’ and, if so, will they simply arise ‘bottom up’ or do they need to be planned or, perhaps, encouraged?

In terms of the tactics for change, presumably the demonstration of success (e.g. of digitalisation projects or of co-operation across divisions) will be important.

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Central to all this may be the need for the persistent and consistent signalling of the need for change from top management.

4. Cultural change There is, then, the issue of the call for cultural change, which Joe Kaeser sees as central to achieving the strategy. His argument is that Siemens needs to be more like a family business and to adopt an ownership mentality to help deliver all aspects of the strategy, not least the personal responsibility for innovative thinking. Students might consider the extent to which they go along with this. In what ways will such culture change help deliver the strategy? How feasible is it for a company with such strong historical roots in and current resource commitments to Germany to galvanise a feeling of ownership in a multinational company operating in so many countries round the world. There also seems to be a reliance on exhortation for culture change rather than a cultural change programme as such. In the past, there has been a reliance on KPIs as a means of effecting change. To what extent does such an emphasis resonate with the sort of organisation identified above by Yoo et al? So what might a programme of culture change look like?

In all this, the problems of leading strategic change identified in Section 15.6 seem to be apposite and are worth reviewing.

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Cultivating a rich harvest at Orchard Sally Keith

1. Introduction Orchard Information Systems provides software and services to social housing organisations in the United Kingdom. This market entered a turbulent phase in 2016, with traditional funding models being withdrawn.

Students can explore the relationship between leadership, organisational structure and strategy. The focus is on the changes needed when the founder and owner of the business retired after 40 years. At the same time, two long-serving directors were due to retire. The business at that time was wholly owned by the founder and his family, with the founder’s son working in the business. The case outlines the subsequent management and organisational changes that took place within the company.

2. Position of the case This case marries the hard and soft skills needed for leadership during times of change (Chapter 15). It can also be used to illustrate strategy development (Chapter 13). As such, the case is likely to be used towards the end of the course.

3. Learning objectives • • •

To stimulate an understanding of the relationship between the key elements in leading strategic change.

To understand the differences between a family owned and run business and a family owned business.

To consider the roles of leadership in a family business.

4. Teaching Scheme This is a compact case which has complexity and depth that could be used by students to explore the relationship between leadership, organisational structure and strategy.

As the topics covered fall towards the end of the Exploring Strategy text, it is best suited for use towards the end of a strategy course. It could also be used in courses that focus on leadership during times of change.

The questions provided are best suited for use in plenary class discussion or small group exercises.

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5. Questions for discussion 1. Using the Change Kaleidoscope, discuss the barriers the new chief executive will face. What is the most effective style for the new chief executive?

2. What are the implications of the key changes in the structure of Orchard after the retirement of the founder?

3. What do you think the next change for Orchard Information Systems will be?

6. Case Analysis 1. Using the Change Kaleidoscope, discuss the barriers the new chief executive will face. What is the most effective style for the new chief executive?

Students should use the change Kaleidoscope (Chapter 15) in formulating a response to this question.

Key considerations in the discussion will likely include the following: a. Time How much time does Orchard have? Why do you think a second chief executive was appointed in 2018? b. Scope How deep within Orchard should the change go? Is it a transformational change? Are the changes complete? c. Preservation How important is it to develop new products and/or markets for a sector in turmoil? d. Diversity Has Orchard developed a homogenous outlook as a legacy of the founder? e. Capacity The chair stated that there will be investment in new people and new skills, including leadership skills. What impact can this have on staff?

Power Consider the changes in power as the structure has developed. f. g. Capability Is the management team experienced in managing change? Will the staff be hoping that ‘everything will return to normal?’ h. Readiness Have the changes of the last two years put Orchard in a strong position to face continuing change?

The change within Orchard has largely been incremental, led by a long-standing manager after the founder retired. Ian Shard was planning the succession following the founder’s retirement and his own retirement. Pat Clarke is more likely to be less evolutionary, building on the changes implemented by Ian Shard. His style may be revolutionary.

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2. What are the implications of the key changes in the structure of Orchard after the retirement of the founder?

Students could use McKinsey’s 7-S framework (Chapter 14) as a starting point to make sure they understand the importance of the coordination of the elements, rather than relying on structure alone.

Students should consider if and how the superordinate goals will change after the family has withdrawn from running the business.

The discussions are likely to consider the following: Strategy: • What is Orchard’s strategy after the founder’s retirement? What has changed? What is the

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company trying to do?

How are strategies adapted to deal with change?

The strategy is moving from consolidation to growth. Orchard are investing their profits to achieve this.

The new CEO has flagged up the ambition to acquire and integrate new business. This will have major impact on the 7-S framework. It could be at odds with the board’s original intention, articulated in their outlook for the year to April 2019. Then, they saw opportunities for organic growth and do not mention acquisitions.

Structure: •

How are decisions made?

• Where does authority lie?

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How is the company divided and organised?

This is an area of major change at Orchard. The key factor here is about authority.

The shareholder level has now been formalised. The executive team is given responsibility for key functions and is accountable to the board.

Systems: • What are the key processes within Orchard?

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How are they monitored and evaluated?

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Are any outsourced?

There are no specific references here, but the changes are implicit in the scope of the executive team’s responsibilities.

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Skills: • What are the skills that are synonymous with Orchard?

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Are there any skills gaps?

• What are the strongest skills within the company?

• What are the skills their customers have/are looking for?

The skills needed for growing into a larger organisation are being addressed through recruitment and training.

The training programmes will focus on leadership now, as well as technical skills.

There has been an increased customer focus. The updated digital platform indicates an increasingly collaborative approach with customers, which reinforces Orchard’s strength in implementation.

Staff: •

Is there a diversity of skills and outlook within the senior team?

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Are there gaps in specialisations?

Any move to widen the diversity of skills and outlook is only beginning. The board and executive will continue to change so may widen the diversity.

The gaps in specialisations are unclear. The gap most frequently mentioned is that of the lack of leadership and the skills needed for managing a growing company.

Lucy Armstrong talks about the impact of change on the workload of staff. There are difficult choices to be made. The way these are handled will be critical to the continued success of Orchard.

Shared Values/superordinate goals:

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These are unlikely to change, but might Orchard consider any revisions?

It will be hard for Orchard to maintain its family culture but it can maintain a friendly, cooperative culture.

The IIP accreditation praises the values, which are defined, communicated and understood. These values and goals are likely to remain focused on supplying services to the social housing sector certainly in the short term.

The strength of the shared values is likely to be tested in the coming year as Pat Clarke brings his own vision to the business.

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3. What do you think the next change for Orchard Information Systems will be?

Students will be expected to synthesise their analysis of questions 1 and 2 in order to answer this question. Students my find it helpful to use the types of change matrix in Chapter 15 to structure their discussions.

Students should consider the background of the new CEO appointed in 2018 alongside his stated intentions. Does their analysis of the first two questions and the evidence in the case study suggest that they are realistic? Or desirable?

They should consider strategic leadership roles and styles. Pat Clarke has been appointed to be a transformational leader who will embody the changes at Orchard. Will the new functional structure at Orchard keep him abreast of all operations or will the executive become immersed in their own function and miss the strategic opportunities or risks?

Good students will consider the fit between a commercial CEO working in the social housing sector.

Students should be aware of the impact of the transition from the entrepreneur whose innovation grew the business to the new CEO’s approach of acquisition, perhaps to buy in innovation.

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Strategy Work in Dörr och Portbolaget – How open can you be?

Anders Melander

1. Introduction This case examines Dörr & Portbolaget i Vittaryd’s 8 (DP) change of strategic practices. Traditionally the strategist in DP was the owner-manager, as in many traditional owner-managed (small) family businesses. In this case, the challenges emerging when the next generation of owner-managers develop a more inclusive and transparent way of practicing strategy are discussed.

2. Position of the case The case primarily relates to the practice of strategy (Chapter 16). However, the theme of leadership and strategic change is also present in the case (Chapter 15).

The case is likely to be taught towards the end of a strategy course as the focus is on linkages between the mentioned themes.

3. Learning objectives The main learning objective in this case is to further an understanding of consequences from choices in strategic practises. More specifically the consequences from choices in whom to involve in strategising; strategising approaches and in strategy methodologies.

Within this overall learning objective, the case offers more specific learnings on how the practice of strategy is linked to the leadership style and organisational governance. Focusing on the change from a traditional top-down way of governing to a more inclusive and empowering style, the case offers fertile ground to discuss the implications as such a shift in leadership style.

4. Teaching scheme

This case is designed to focus on the changes taking place in the practice of strategy in DP. However, the case also lend itself to a contextual analysis, which can be used as a starting point for the analysis of strategic practice. Here, we present these two options, starting with the narrow focus on changes in strategic practice. __________________________ 8

Direct translation, ‘Dörr & Portbolaget i Vittaryd’ is ‘The Door and Industrial Gate company in Vittaryd’.

We use the abbreviation ‘DP’ in the following.

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Focusing on the changes in practice, students could be asked to prepare a presentation in which they: a) describe the strategic practices before the company enters the Hoshin Kanri program. b) describe the strategic practices at time of case. c) discuss the implications of changes in terms of the strategist (Who?), Strategising activities (What?) and strategising methodologies (Which?).

One or more student presentations can then be used as a basis for a case discussion of the change context in class.

However, if we start with the contextual analysis followed by an analysis of the change in strategic practice, the case can be used in two sessions (or in two sectional phases during one session).

In the first session, students are asked to conduct an environmental analysis of the case. Frameworks such as PESTEL and the five forces model are recommended.

Students are asked to prepare a presentation on the following topics: 1. What are the fundamental drivers of change in the door sector (PESTEL)?

2. How could the industry DP operate in be defined (Five Forces)?

3. Identify the critical success factors in this industry (FF and Blue ocean analysis)?

In the second session (or phase two), the critical success factors form the starting point for the discussion. For this session, students should be asked to prepare a presentation on the organisational implications of the critical success factors identified in the first session.

In this session, students can be divided in groups of four or five and the sessions starts by letting the groups compare their presentations. The assignment is to compare their reasoning and identify a joint answer to how the company should be organised.

In second session, representatives for the student groups (8 in a group of 40 students) come forward and write the group’s answer on the whiteboard. In this way, the teacher has all answers on display and can, in step three, initiate a discussion with the entire student group.

5. Questions Following the scheme with an explicit focus on the strategic practices, the questions are as follows: 1. Describe the strategic practices before the company enters the Hoshin Kanri program.

2. Describe the strategic practices in at time of case.

3. Discuss the implications of the changes in terms of the strategist (Who?), Strategising activities (What?) and strategising methodologies (Which?).

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4. Today, DP has grown in turnover, profit as well as mentality. The company is now entering a new development program. How should that opportunity be used by owners/managers to create leverage with regards to strategic practices in the future?

It is also possible at this stage to spur students’ interest by adding the question stated in the title of the case, ‘How open can you be?’.

Following the set up with two related sessions, the following questions could be separated a such: Session one: 1. Identify the fundamental drivers of change in the door sector (PESTEL)?

2. How can the door manufacturing be characterised in an industry life cycle analysis?

3. How could the industry DP operate in be defined (Five Forces)?

4. What are the critical success factors in this industry (FF and Blue ocean analysis)?

Session two: 1. Given the identified critical success factors in the industry DP operate in, how should the strategising practices be optimised?

2. How did DP design their present strategising practices in 2018?

3. If you compare the answers in question one and two; did DP implement an optimal change of practices?

4. Today, DP has grown in turnover, profit as well as mentality. The company is now entering a new development program. How should that opportunity be used by owners/managers to create leverage for the future?

It is also possible at this stage to spur students’ interest by adding the question stated in the title of the case; How open can you be?

6. Case analysis

Following the scheme with an explicit focus on the strategic practices, the analysis starts with a description of the practices in place when the company enters the Hoshin Kanri project.

The situation in 2016 is apparent in the quotation from Johan in which he states that: ‘We believed this was the way you had to manage a small manufacturing company. But we also understood that there was a need for change. We discussed the situation several times and came to conclusions, but then daily operations took over and we forgot all that was decided’.

The situation he refers to is the operational focus described in the weekly schedule. An operational focus making management unable to analyse and understand the holistic situation, decide on proper 475

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actions and executing those actions. He states that ‘we’ understood that there was a need for change, but we are not informed about who ‘we’ refers to? Most likely it is the two brothers, Johan (CEO/production manager) and David (marketing manager) that realise the need for change.

Moreover, one strategic decision is made; to expand the production workshop. But, applying a more thorough analysis they later understand that this expansion is not at all addressing the actual root cause in the organisation. The issue is (at that time) not a lack of production space, but the production planning.

Addressing the second question of how DP designed their change in strategic practices, the starting point is the Hoshin Kanri management system. The leading principles in this system are transparency, inclusiveness and fact-based. This is also addressed by DPs application of the model. In brief, the structure can be described as follows: Daily Management •

5- to 10-minute meetings on Mondays where all employees state their weekly targets.

•

The noting of weekly targets on whiteboards.

•

The follow-up of weekly targets the following week and establishing of new targets.

•

Major disturbances escalated to the top management team.

Top management team (TMT) •

Disturbances in daily operations are analysed and suggestion developed by TMT members.

•

Monthly TMT meeting in which operational disturbances and other strategic issues are presented and prioritised. The result is presented on a whiteboard.

Project groups are initiated to investigate prioritised disturbances and issues.

• •

Next TMT meeting; project results presented and (new) disturbances and strategic issues presented and prioritised.

Noticeable is that the project groups do not necessarily have to be staffed by the top management team. An example mentioned in the case is the behavioural guidelines that are to be developed by five employees from the production department.

The third question addressed the optimality of DPs design of their strategic practices. When compared with the Hoshin Kanri management system, DPs application lacks some essential parts. In the HK system, owners set the overall vision in the annual planning system. A vision that is then broken down into specific Hoshin issues owned by departments and/or individuals.

In DP, this annual planning cycle is missing. Here it is the owners (Johan, David and Lars) that decide on the long-term objectives and there is no structured break down of the objectives into Hoshin issues.

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management process or through initiatives taken in the top management team. How the long-term objectives are related to the decided projects are not transparent to the entire organisation. One example is the decision made to enter the 18-month long development program in the fall of 2018.

This decision was made by the owners without consulting other members in the top management team nor other employees.

Finally, given the decision to enter the development program, how should that opportunity be used by owners/managers to create a leverage for the future?

Discussing this with Johan and David, they visualise a future in which they have been succeeded as managers at DP and instead focus on the start-up of new businesses, perhaps in a non-related industry.

What drives them is to test if the practices developed in DP is working when applied in a different context. Perhaps DP only represent the beginning of an industrial empire.

Related to the set up with two related sessions. In session one the focus is: At the macro level, using the PESTEL framework, the link between door manufacturing and the political and financial decisions influencing the level of housebuilding can be discussed. Questions that could be addressed are; How are the market interests related to the level of housebuilding? How will the drive for affordable housing affect DPs market? Will the trend towards sustainability affect DPs business? The driver of this discussion is the level of dynamism in the sector. As it is heavily influenced by macro factors such as the general economy, and the availability of financial resources as well as institutional factors like the building regulations and political subsidiaries, the market is rather dynamic and actors operating on this market must develop strategies to address sudden changes in market demand.

At the meso-level, the Porter’s five forces model can be applied. The initiating challenge being how to define the industry in which DP competes. There are two essential choices. The industry is defined either as the Swedish door industry or as the ‘Swedish outer door industry’. In the case, there are figures provided on the door manufacturing and sales in Sweden. By some simple calculations, students can establish a good grip on the size of the industry (depending on how they define the industry) and the differences between niches in the industry.

Below we have taken information from the case and calculated the production and sales of doors in different segments. It is noticeable that outer doors represent a rather small segment compared to interior doors. Moreover, the value per sold door is almost 13 times higher for outer doors than interior doors. Implying that the manufacturing of outer doors (and to some extent institutional doors) is much less automatised and volume dependent.

The facts – The Swedish door market was 2000 MSEK in 2017

Type of door

Sales by value (%)

Sales by value (MSEK)

Production of doors in Sweden 1661 000 (doors)

Sales of doors in Sweden (doors)

Value of sold door

Institutional

37.5

2000 × 37.5 = 750

20% = 332 200

332 200 – 79 000 = 253 200

750 MSEK/ 253200 = 2 960 SEK

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Outer

36

720

Interior

22

440

8% = 132 880 68% = 1129 480

132 880 + 13 000 = 145 880

720 MSEK/ 145 880 = 4 930 SEK

1129 480 – 416 000 = 713 480

440 MSEK/ 1129 480 = 390 SEK

At this point, we have established some of the basic differences between a volume dependent B2C market and a B2B market. If we to this add that DP mainly focus on renovation and other customer unique outer doors, we can establish the importance of critical success factors, such as personal relations, in their business. This analyses leans towards a definition of the industry as ‘The Swedish Outer Door Industry’.

Narrowing down the analysis to direct competitors, it is obvious that DP is more specialised than Ekstrands and with considerable market power when compared to ST (about 50% the size of DP). It is also the impression that the rivalry between these three companies is not intense. We can only speculate on the reason for this, but some plausible explanations are that ST is mainly a regional player; that the market is big enough for all three players and that the nature of customer relationships (long lasting) makes direct confrontation of the market rare.

The critical success factors for DP are mentioned in the quote; ‘We don’t market ourselves in the media. We run our homepage and besides that we live on our reputation. Good personal contacts with key decision-makers are the key to more business in this industry. Good reliable products delivered on time are a basic requirement for these contacts. Efficient management of the (hopefully) few complaints is another important ingredient’. (David Ahlin, Marketing Manager DP) Notable is that price is not included in this listing. The rather low importance of the price is also addressed when Johan declares that ‘We don´t give discounts’!

Outside these factors directly related to the business, The CEO also address mental growth as critical factor for the future. ‘This fall we will enter an 18-month-long development program in lean management. Our purpose with this is to make the entire company grow mentally one step further.

Making everyone take on more responsibility to develop their own work as well as the company’s.

We are on our way, especially in the production workshop’. (Johan Ahlin, CEO DP) A further sign of the importance of personal contacts is provided in the comments on how customers react to the improvements in the complaint management system. ‘It’s strange, but today it seems that some customers are more satisfied after we solved a complaint, than they are with a complaint free delivery’, meaning that the personal contact following on from a complaint is regarded as highly valuable by the customers.

Given the identified critical success factors in the industry DP operate in, how should an operation design their strategising practices?

In order to produce good reliable products delivered on time, DP obviously needs a customer-oriented design and production department, solving specific customer demands as they appear. A basic condition for this is that all employees are informed about operational issues and empowered to make strategic decisions. For this to work in an efficient way, the internal communication with the 478

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organisation is essential, making sure that information received by the sales personal is communicated and understood by all relevant employees. A further condition is that all employees have knowledge about strategic priorities.

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CASE TEACHING NOTES

In the Boardroom at HomeCo

Gerry Johnson

1. Introduction This case study takes the form of a role-playing exercise based on a fictitious company, HomeCo. The substantive issues are to do with governance and business strategy. However, the case provides students with the opportunity to consider how such issues may be addressed in practice through processes of negotiation in the context of a meeting of a board of directors and the preparation for that meeting.

The first part of the case study provides background on the company and outlines the main challenges facing HomeCo. There are then vignettes which give the background and roles for each of the eight characters concerned, the members of the board of HomeCo.

2. Position of the case The case can be used in different positions in a strategy course.

1. Within a session on governance as the major theme.

2. Within a session which raises the debate on strategic options that leads into or links to governance issues.

3. Or as a strategy process/practice case to consider how strategies come about or decisions negotiated given the different interests of various stakeholders.

3. Learning objectives 1. The key learning objective is to develop students’ appreciation of how strategic decisions are influenced by the political and personal interests of various stakeholders as well as (or perhaps rather than) rational analysis.

2. The case also encourages students to see the relationship between governance issues and strategy and strategic options. In particular:

-

What drives what in principle?

-

What drives what in practice?

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4. Teaching scheme Pre-reading: It suggested that students read Chapter 5 of Exploring Strategy, in particular in relation to issues of governance and stakeholder analysis. If the case study is to be used to explore issues of strategic management practice, then you may wish them to read Chapter 16 before or after the roleplay. In addition, they should be familiar with concepts relating to competitive strategy and the strategic options available to the firm and therefore the content of Chapters 7 and 8.

Case preparation: Students should read the case itself, their own role and the role of all other characters prior to the class for three reasons.

1. It allows them to think themselves into the role they are to play and be prepared to argue the case from that point of view.

2. It provides them the opportunity to understand the views of their fellow board members – something they would be aware of in practice.

3. It allows them to negotiate with others prior to the meeting. In practice, students rarely do this unless told to do so; but, of course, it is likely that it would happen in practice. It is therefore suggested here that a period of prior negotiation is built into the role-playing.

Tutors should choose the allocation of roles carefully to ensure that the points of view expressed by those involved achieve airtime prior to and in the session. If there is more than one group, it is also possible to assign roles to see to what extent different personal styles influence discussion and outcome (e.g. one group could have a dominant Derek and another a more passive one; one group a strong chair and another less so).

The roles in the case study have been written to allow for different group sizes. There are eight characters identified in the case so the maximum group size is eight. It is possible, however, to play the role-playing exercise with less than eight per group (e.g. one or more of the characters have ‘sent their apologies’ to the meeting). If a character has to be dropped, it probably makes sense to drop either James or Leslie since they are likely to make similar arguments in the role-playing exercise.

It is also helpful to have an observer in each group which could be a student or a tutor.

The class itself might then be as follows: 1. Unless it has been covered elsewhere on the course, it may be useful to hold a class discussion on corporate governance prior to the role-play to ensure students understand the concepts.

2. The role-playing exercise in which the students are tasked to work in groups to run a board meeting and come to a decision on what they propose to do. The most insight from the exercise is achieved if this takes the following form: a) A period of pre-meeting negotiation in which participants are encouraged to persuade others of their points of view and, potentially, build alliances for the meeting itself. Time for this could, of course, be provided as ‘evening work’. b) The meeting itself: 60–90 minutes is usually long enough for this.

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3.

A plenary discussion in which each group reports back on the decision it has reached and how and why it reached that decision – including the influence, if any, of the pre-meeting negotiations. If an observer is present, s/he can also report on what was observed. This can then followed by plenary discussion on the differences between the groups in terms of how and why they arrived at those decisions with the tutor referring them back to the issues relating to corporate governance, stakeholder influence, processes of strategy development and the practice of strategists.

If there is insufficient time for the role-playing exercise, the case can also be used to get students to consider how the roles would play out in practice. This can be achieved by allocating roles to students (or groups of students) and asking them to propose how they would approach the meeting from the point of view of the role allocated. They can be encouraged to consider this both in terms of the meeting itself and the way in which they might seek to influence views outside the meeting.

5. Questions The tutor has a choice in terms of the use of questions. One option is to prompt preparation for the role-play by posing questions on issue identification relating to the competitive position of the firm and governance such as those below. If the aim is to discuss how strategic decisions are actually taken this may not, however, be desirable since you may not wish to privilege the influence of objective and rational analysis over stakeholder interest. The second option is to use the questions in the plenary de-brief session to explore the extent to which such analysis might have influenced the debate.

In either context, the questions posed are as follows: 1. Undertake a strategic analysis of HomeCo. What are the key strategic issues it faces?

2. What are your views about Michael’s desire to prioritise the governance issues? (This can be addressed both objectively and from within the role of the different characters.)

3. Conduct a stakeholder analysis. What are the relative power and interest positions of the different board members?

4. What are your views as to what the company should do? (Again this can be addressed both objectively and from within the role of the different characters.)

There are also questions relating to the meeting itself that can inform a discussion of strategy making in practice. These might include the following: 1. Did you arrive at a decision? What was this based on?

2. How would you characterise the discussion in the meeting?

3. Could you personally have had greater influence at the meeting? How? 4. Could the meeting have been conducted more effectively? How?

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6. Case analysis Strategic analysis

Whether conducted by the students prior to the role-play or as part of de-brief, a basic strategic analysis should be encouraged. The key points that should arise from such an analysis include the following: •

HomeCo is not in a strong market position. Its core business seems flat in a mature market with a major multinational competitor. It has also diverted resources into non-core businesses. The non-core businesses themselves are pretty ill-defined as a result of opportunistic diversification.

It is also unclear as to what any of the businesses have in terms of distinctive strategic capabilities; so there is unlikely to be a basis of differentiation. This weak position is probably at the root of the concerns of the institutional shareholders. It is also views that Derek is keen to express at the meeting.

• •

•

It is also difficult to see why the business needs two divisions. This may be more to do with its acquisition history than strategic or structural logic.

So presumably the options are:

-

Sell the business whilst they can get a good price. (Derek’s position)

-

Build capabilities and differentiation in an area of focus which probably means divesting some other parts of the business. This might be accompanied by a restructuring of the business. (Pretty much Brian’s view.)

-

Look for areas of growth on the basis of the current portfolio. (This seems to be what James and Leslie advocate). It is, however, difficult to see how this option stands up to a rational and dispassionate view of the strategic position of the business.

Michael believes that such options have to be considered in the light of clarity on governance issues. If this is taken on board, it places the institutional investors as the prime stakeholders represented in this board meeting by Julia and within the company by Michael and Paula. There are, however, other stakeholders with their own interests. So the meeting usually plays out as a negotiation between these different stakeholders either individually, or as coalitions of interest – and that may depend on the extent to which there has been effective pre-meeting negotiation and alliance building.

The Role-Play: A central question is to what extent an orthodox, objective analysis of the position of the business or the personal agendas or power of persuasion of board members are likely to be the dominant influences. If observers are used it is useful to provide them with a checklist against which to make notes based on the sort of issues noted below for the de-brief session.

Typically the outcomes of the role-playing exercise depends more on the dynamics and personalities within the group, and therefore, the plenary should explore why and how this is so.

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The plenary de-brief The de-brief might include four elements: 1. Feedback from the groups and the observers (if used) on what decision, if any, was reached and on what basis. So, for example, questions which might be addressed include the following:

-

Did the chair set down an agenda and follow it?

-

How interventionist was the representative of the institutional investors (Julia)?

- Was there an attempt to identify HomeCo’s key strategic issues? (There may well not be unless this is prompted or unless Derek is given or achieves airtime.)

- To what extent did the governance debate or the strategy option debate dominate? Was that dependent on logic or the force of personalities of those at the meeting?

My own experience is that in student groups, the strategic options get emphasised over the governance issues because:

That’s what students get taught.

That’s what students are interested in.

That’s what they think strategic management is about; governance is something separate.

They identify more with the managerial agenda.

2. Influence in the meetings. How did individual members of the board seek to be influential and how might they have been more influential? This gives the opportunity to consider what tactics were employed to influence the debate? These might include the following: o Pre-meeting meetings and coalition building. Did these take place? If so, who met whom and why? Were any alliances formed and on what basis? Were these alliances evident in the meeting itself? o Agenda setting o Issue selling o Exercise of positional power o The use of analytic argument (even if it is ‘adapted’ to fit the interest of the board member) o A plea for more data; or the ‘invention’ of data to support an argument o Personal or linguistic style o The use of ‘artefacts’ such as a whiteboard or flip chart 3. An analysis of the case in line with a conventional strategic analysis such as that above and a comparison of the outcome of this with the discussion and decisions made in the meetings. There are likely to be differences and the discussion can address why this is so.

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4. How the meetings might have been more effective. Would clarity and agreement on the governance question, as Michael wanted, have helped? Would more careful analysis and clarity on key strategic issues have helped? Could the meeting have been more effectively managed and chaired? Students usually say it would have been better to have more data in the case study. It is worth asking how they think such data would have been used – for rational dispassionate analysis or to selectively to justify board members’ views?

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