U U N IT

5
Strategic Capability and
Competitive Advantage

Unit Overview

Organisations and/or firms have different strategic management capabilities

and functions. Some functions may include, but not be limited to the following:
establishing organisational culture, aid in establishing or maintaining competitive
advantage, utilise resources more efficiently, and more. These are some of the reasons
why strategic managers and leaders should aim to maintain strategic capability
within organisations. The strategic management process model is designed to allow
firms to gain and maintain its competitive advantage. Thus, the strategic capability
of organisations must be understood in relation to the strategic management process.
Managers and leaders should aim to have a strong alignment between an organisations’
strategic capability, competitive advantage and strategic planning. Unit 5 examines
this alignment in looking at how organisational objectives are classified and selected;
how strategic managements can shape an organisation’s competitive advantages; and
competitive selection in relation to strategy analysis.

Unit Objectives

By the end of this Unit you will be able to:

1. Develop sound organisational objectives.

2. Analyse the competitive advantages of strategic management by organisation.

3. Evaluate sound strategy analyses and competitive selection.

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 This Unit is divided into three sessions as follows:

Session 5.1: Identifying Sound Organisational Objectives

Session 5.2: Competitive Advantages of Strategic Management

Session 5.3: Strategy Analysis and Competitive Selection

Reading and Resource

Required Reading

Strategic Management: Evaluation and Execution (2016). Chapter 6: Supporting

the Business-Level Strategy: Competitive and Cooperative Moves. Available
at http://2012books.lardbucket.org/books/strategic-management-
evaluation-and-execution/s10-supporting-the-business-level-.html

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 SSession 5.1

Identifying Sound Organisational

Objectives

Introduction
To identify sound organisational objectives, strategic managers should carefully
evaluate the significant connection between organisational structure and organisational
strategy. Session 5.1 focuses on this relationship. It must be understood that the
organisational structure can shape organisational objectives, from which organisational
strategies are derived. Researchers such as Alfred Chandler have found a significant
relationship between structure and strategy. The main finding was that structure must
follow strategy. Organisations are collections of people brought together for a purpose.
To achieve this purpose successfully, people need to be organised within the best
possible structure. Decisions on structure are primarily strategic decisions. Structure
can make or break an organisation as well as affect its strategies. Therefore, designing
a suitable structure is a major strategic task. Structure provides the framework for the
activities of the organisation and must harmonise with its goals and objectives. Goals
and objectives determine strategy. This session illustrates how structure and strategy
are effectively matched.

Thompson and Strickland (2003) provide useful guidelines for linking structure
and strategy. These guidelines emphasise identifying strategy-critical activities,
outsourcing non-value adding activities, delegating authority in appropriate amounts,
and building collaborative relationships.

Students’ attention is drawn to the emerging role of inter-organisational relationships

as a new configuration that serves as a prerequisite to successful strategy execution
and business performance. These relationships display features of natural ecological
systems and so are described as business eco-systems. Managing business operations
through a process perspective also forms a major part of this session. Managing
organisational resources by designing jobs with appropriate spans, provides a fresh
way of creating high performance jobs that deliver successful strategy execution.

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 Matching Organisation Structure to Strategy
There are few hard-and-fast rules for organising the work effort to support strategy.
Every firm’s organisation chart is idiosyncratic, reflecting prior organisational patterns,
varying internal circumstances, executing judgements about reporting relationships,
and the politics of who gets which assignments. Moreover, every strategy is grounded
in its own set of key success factors and value chain activities. Thus, a customised
organisation structure is appropriate. But despite the need for situation-specific
organisation structures, some considerations are common to all companies. Thompson
& Strickland (2003) summarise these considerations in Figure 5.1.

Figure 5.1: Structuring the Organisation to Promote Successful Strategy

Execution
Source: Thompson & Strickland. (2003). Crafting and Executing Strategy, Text and Readings, 12th
edition. P. 369 - 382

Identifying Strategy-Critical Activities

In any business, some activities in the value chain are always more critical to strategic
success and competitive advantage than others (Thompson and Strickland, 2003).
Value chain activities can be seen from three perspectives: routine activities, support
activities and primary activities.

• Strategy-wise, a certain portion of an organisation’s work involves routine

administrative housekeeping: doing the payroll, administering employee benefit
programs, managing cash flows, handling grievances and the usual assortment
of people problems, providing corporate security, managing stockholder relations,
maintaining fleet vehicles, and complying with regulations.

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 • The second perspective describes those activities that are support functions and
include: information technology and data processing, accounting, training, public
relations, market research, legal and legislative affairs, and purchasing.

Among primary value chain activities are certain crucial business processes that
have to be performed either exceedingly well or in closely coordinated fashion
for the organisation to deliver on the capabilities needed for strategic success. For
example, tourism is a key foreign exchange earner for most Caribbean countries. A
hotel/motel enterprise has to be good at fast check-in/check-out, room maintenance,
food/beverages service and creating a pleasing ambience. These activities are primary
for that sector of the tourism industry. Therefore, these primary activities have to be
performed exceedingly well and in a timely fashion to achieve sustainable competitive
advantage based on the requisite competitive strategy. These primary activities must
be the building blocks of an appropriate organisational structure.

Reasons to Consider Outsourcing “Noncritical” Value Chain

Activities
Many organisations spend a lot of time and energy on activities relating to support
and bureaucratic functions that make minimal contribution to market success. These
activities serve as distracters and therefore should be restructured so that time, effort
and money are correctly spent on strategy-critical activities. Non-critical activities
may be candidates for outsourcing. These activities are also services performed
internally to satisfy various staff requirements but they do not contribute optimally to
implementing a successful strategy. Indeed, most of a company’s overhead consists of
services the company chooses to produce internally. However, many such services can
be purchased from outside vendors who have expertise and technology to produce at
much lower costs.

But there are strong reasons to consider outsourcing besides lower costs and less
internal hassle. Approached from a strategic point of view, outsourcing non-crucial
support activities can decrease internal bureaucracies, flatten the organisation
structure, speed decision making, heighten the company’s strategic focus, improve its
innovative capacity (through interaction with “best in world” suppliers), and increase
competitive responsiveness. The experiences of companies that obtain many support
services from outside vendors indicate that such outsourcing allows a company to
concentrate its own energies and resources on those value chain activities where it
can create unique value, be the best in the industry (or, better still, best in the world)
and where it needs strategic control to build core competencies, achieve competitive
advantage, and manage key customer-supplier-distributor relationships. Critics
contend that the danger of outsourcing is that a company can go overboard and hollow
out its knowledge base and capabilities, leaving itself at the mercy of outside suppliers
and short of the resource strengths to be master of its own destiny. However, a number
of companies have found ways to successfully avoid such pitfalls.

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 Reasons to Consider Partnering with Others to Gain Added
Competitive Capabilities
Aside from the cost savings and agility that outsourcing can permit, there is another,
equally important reason to look outside for resources to compete effectively.
Partnerships can add to a company’s arsenal of capabilities and contribute to better
strategy execution. Companies join together to become more competitive and to share
resources. These partnerships are often in the form of strategic alliances. Cooperation
is a prerequisite for greater innovation, problem solving, and performance. Inter-
organisational linkages provide a kind of safety net that encourages long-term
investment and risk taking. Collaboration is also the signature of a networked society
(Evans & Wolf, HBR, 2005, pg. 96).

Making Strategy-Critical Activities the Main Building Blocks

Strickland & Thompson (2003) state that the rationale for making strategy-critical
activities the main building blocks in structuring a business is compelling. If activities
crucial to strategic success are to have the resources, decision-making influence and
organisational impact they need, they must be centerpieces in the organisational
scheme. Plainly, implementing a new or changed strategy is likely to entail new or
different key activities, competencies, or capabilities and, therefore, require new or
different organisational arrangements. If workable organisational adjustments are
not forthcoming, the resulting mismatch between strategy and structure can open the
door to execution and performance problems. Hence, attempting to carry out a new
strategy with an old organisational structure is usually unwise. Just as a company’s
strategy evolves to stay in tune with changing external circumstances, so must an
organisation’s structure evolve to fit shifting requirements for proficient strategy
execution.

Although the emphasis here is on designing the organisation structure around the needs
of effective strategy execution, it is worth noting that structure can and does influence
the choice of strategy. A good strategy must be doable. When an organisation’s present
structure is so far out of line with the requirements of a particular strategy that the
organisation would have to be turned upside down to implement it, the strategy may
not be doable and should not be given further consideration. In such cases, structure
shapes the choice of strategy. The point here however, is that once strategy is chosen,
structure must be modified to fit the strategy if in fact, an approximate fit does not
already exist. Any influences of structure on strategy should logically come before the
point of strategy selection rather than after it.

The primary organisational building blocks within a business are usually a combination
of traditional functional departments (R&D, engineering and design, production and
operations, sales and marketing, finance and accounting and human resources) and
process-complete departments (supply chain management, filling customer orders,
customer service, quality control).

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 Managers need to be particularly alert to the fact that in traditional, functionally
organised structures, pieces of strategically relevant activities and capabilities often
end up scattered across many departments. This results from vertical, structural
formation that is typical in functional structures. Consider, for example, how a
functional structure ends up with pieces of the following strategy-critical activities
and organisational capabilities being performed in different departments:

1. Filling customer orders accurately and promptly—a process that cuts across
sales (which wins the order); finance (which may have to check credit terms
or approve special financing); production (which must produce the goods and
replenish warehouse inventories); warehousing (which has to verify whether
the items are in stock, pick the order and package it for shipping); shipping
(which has to choose a carrier to deliver the goods and release the goods to the
carrier).

2. Speeding new products to markets—a process that is fragmented among R&D,

engineering, purchasing, manufacturing, and marketing.

3. Improving product quality—a process that often involves the collaboration

of personnel in R&D, engineering and design, components purchasing from
suppliers, in-house components production, manufacturing, and assembly.

4. Supply chain management—a collaborative process that cuts across such

functional areas such as purchasing, engineering and design, components
purchasing, inventory management, manufacturing and assembly, warehousing
and shipping.

5. Building the capability to conduct business via the internet—a process that
involves personnel in information technology, supply chain management,
production, sales and marketing, warehousing and shipping, customer service,
finance, and accounting.

6. Obtaining feedback from customers and making product modifications to

meet their needs—a process that involves personnel in customer service and
after-sale support, R&D, engineering and design, components purchasing,
manufacturing and assembly,and marketing research.

Increasingly during the last decade, companies have found that rather than continuing
to scatter related pieces of a business process across several functional departments
and scrambling to integrate their efforts, it is better to reengineer work effort and
create process departments. This is done by pulling the people who performed the
pieces in functional departments into a group that works together to perform the
whole process. Such an effort will require a different type of structural arrangement
such as a horizontal configuration. Horizontal structure organises around core
processes. Organisations typically shift to a horizontal structure during a procedure
called reengineering.

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 Reengineering, or business process reengineering, basically means the redesign of
a vertical organisation along its horizontal workflows and processes. A process refers
to an organised group of related tasks and activities that work together to transform
inputs into outputs that create value for customers (Daft, 2007, pg.113). Reengineering
changes the way management think about how work is done. Rather than focusing
on narrow jobs structured into distinct functional departments, they emphasise core
processes that cut horizontally across the organisation and involve teams of employees
working together to serve customers (Figure 5.1). Pulling the pieces of strategy-
critical processes out of the functional silos and creating process departments or cross-
functional work groups charged with performing all the steps needed to produce a
strategy-critical result has been termed business process reengineering. This discussion
also shows the importance of identifying and understanding the importance of
thinking about processes rather than functions.

Determining the Degree of Authority and Independence to Give

Each Unit and Each Employee
Companies must decide how much authority to give managers of each organisation
unit (especially the heads of business subsidiaries, functional departments, and
process departments) and how much decision-making latitude to give individual
employees in performing their jobs. In a highly-centralised organisation structure, top
executives retain authority for most strategic and operating decisions and keep a tight
rein on business-unit heads and department heads; comparatively little discretionary
authority is granted to subordinate managers and individual employees. However,
such traditional wisdom may prove to be useless in highly changing or volatile markets
where flexibility is critical. A simple basic concept as designing jobs by adjusting a
job’s span appropriately can have a monumental impact on business performance.

Structuring High Performance Jobs

Simons (2005) asserts that structuring key jobs to achieve optimal business performance
should be based on the four basic spans of a job: control, accountability, influence
and support (p. 55). That is, a business can maximise its potential only when each
employee’s supply of organisational resources equals his or her demand for them, and
having that same supply-demand balance applied to every function, every business
unit, and the entire company. The span of control defines the range of resources – not
only people but also assets and infrastructure – for which a manager is given decision
rights. A manager ’s performance will also be judged on how these resources are used.
Senior management must adjust spans of control according to each key position and
unit in relation to how that company or business unit delivers value to customers.
Simons (2005) demonstrates that Wal-Mart has configured its entire organisation to
deliver low prices, therefore efficiency and attention to details is critical to strategic
success (p. 56)

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 Wal-Mart’s strategy depends on standardisation of store operations coupled with
economies of scale in merchandising, marketing and distribution. Standardisation
is achieved at Wal-Mart where store managers have a narrow span of control and
limited decision rights on hours of operation, merchandising displays and pricing
because resource utilisation is critical to its success as a low-cost provider. On the
other hand, managers at corporate headquarters (parent) have a wide span of control
because they oversee merchandising and other core operations. These managers have
greater autonomy because they are responsible for implementing best practices and
consolidating operations to capture economies of scale. Given that Wal-Mart sells a
range of perishable items, corporate managers even have control over lighting and
temperature at Wal-Mart’s 3,500 stores. Of course, the breadth of span of control given
to managers will depend on the type of business operations.

The span of accountability refers to the range of trade-offs affecting the measures
used to evaluate a manager ’s achievements. Managers such as financial officers or
budget mangers can make few trade-offs while those responsible for market share
or business unit profit would have a relatively wide span of accountability. One span
deals with resource management while the second focuses on attaining goals. Neither
of these two spans are incompatible. A wide span of accountability and a narrow span
of control motivates subordinate managers to become entrepreneurs because they are
forced to use their creativity to figure out how to succeed without direct control of the
resources they need. Adjustment of these spans can be made to foster creativity and
entrepreneurial behaviour.

The third span of influence deals with how much data or information an individual
or manager needs to adequately perform his or her work. Those who possess a narrow
span of influence just focus on their local area in performing their jobs. An individual
with a wide span must interact extensively with, and influence people in other units
(Simons, 2005, p. 57). Consequently, this span can be adjusted to suit the desired
behaviours. When greater flexibility and responsiveness are demanded by market
conditions, a wider span of influence would be necessary to stimulate thinking outside
the box to foster creative solutions for customers, increase internal efficiencies, make
innovation a core competence in the company’s culture, or drive a new strategic intent.

Widening the span of influence breaks down the traditional rigidity of organisational
structures based on boxes and silos. Although Wal-Mart must centralise merchandising
and distribution to deliver low prices, its senior and operational managers must
still monitor the changing competitive environment and create close contacts with
customers to capture budding trends. At the same time managers must be encouraged
to test new ideas, share information and learn. Simons (2005, pg. 58) concluded that
executives can widen a manager ’s span of influence by redesigning her job by placing
her on a cross- functional team for example, or giving her assignments that require
her to report to two bosses (matrix structures). Setting goals also require a span of
influence especially when it is a stretch goal because one must interact with several
different persons to achieve it. A wide span of influence often indicates both the power
and effectiveness of an executive.

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 The amount of help one gets from others throughout the organisation describes the
span of support. Traders in financial institutions need little support from their fellow
traders, can stay focused on their own work and are compensated based solely on
individual performance. However, a wide span of support becomes critically important
when customer loyalty is vital to strategy implementation, for example in exclusive
hotel chains or for complex value chain in aerospace industry. Managers who manage
key processes in organisations require a wide span of support. Team or group-centered
incentive programmes which often foster a sense of equity and belonging and
encourage people to help others achieve shared goals, utilise a wide span of control.

Simons (2005) argues that the firm’s business strategy and the role of a particular job
or unit in implementing it must decide how spans are determined. Two of the spans
measure the supply of organisational resources the company provides to individuals.
The span of control relates to the level of direct control a person has over people,
assets, and information. The span of support is its “softer” counterpart, reflecting the
supply of resources in the form of help from people in the organisation.

The other two spans – the span of accountability (hard) and the span of influence
(soft) – determine the individual’s demand for organisational resources. The level
of an employee’s accountability, as defined by the company, directly affects the
level of pressure on him to make tradeoffs; that pressure in turn drives his need for
organisational resources. His level of influence, based on where it is embedded in the
firm’s structure and operational system, also reflects the extent of resources needed
by him. Therefore, maximum individual and organisational performance will only be
achieved when the supply of resources for each job and each unit equals the demand.
In other words, span of control plus span of support must equal span of accountability
plus span of influence. Assigning spans deals directly with delegation of authority
which is a critical feature in configuring an organisation.

Delegating greater authority to subordinate managers and employees creates a

more horizontal organisation structure with fewer management layers. Whereas in
a centralised vertical structure managers and workers have to go up the ladder of
authority for an answer, in a decentralised horizontal structure they develop their own
answers and action plans as making decisions and being accountable for results is part
of their job.

During the past decade, there has been a growing shift from authoritarian, multilayered
hierarchical structures to flatter, more decentralised structures that stress employee
empowerment. The new preference for leaner management structures and empowered
employees is grounded in three tenets:

1. With the world economy moving swiftly into the Internet Age, traditional hierarchical
structures built around functional specialisation have to undergo radical surgery to
capitalise on both the external market and internal operating potentials of e-commerce
technologies. Companies the world over are having to reinvent their organisation
structures and internal business approaches in order to (a) incorporate

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 productivity-enhancing, cost-reducing benefits of Internet technologies; (b)
enhance their capabilities to act and react quickly; and (c) create, package, and
rapidly move information to the point of need.

2. Decision-making authority should be pushed down to the lowest organisational level

capable of making timely, informed, competent decisions. In practice this means
giving meaningful decision-making authority to those people (managers or
non-managers) nearest to the scene who are knowledgeable about the issues
and trained to weigh all the factors. Decentralisation means that the managers
of each organisational unit should not only lead the crafting of their unit’s
strategy but also lead the decision-making on how to execute it. Decentralisation
thus requires selecting strong managers to head each organisational unit and
holding them accountable for crafting and executing appropriate strategies for
their units. Managers who consistently produce unsatisfactory results have to
be weeded out.

3. Employees below the management ranks should be empowered to exercise judgment

on matters pertaining to their jobs. The case for empowering employees to make
decisions and holding them accountable for their performance is based on the
belief that a company that draws on the combined intellectual capital of all its
employees can outperform a command-and-control company. The thesis is that
employee empowerment shortens organisational response times and spurs
new ideas, creative thinking, innovation, and greater involvement on the part
of subordinate managers and employees. With employee empowerment, jobs
can be defined more broadly, several tasks can be integrated into a single job,
and people can direct their own work. The experience of Japanese companies
in the eighties and nineties illustrates how market success can flow from
empowerment and collective knowledge.

Providing for Cross-Unit Coordination

The classic way to coordinate the activities of organisational units is to position them
in a hierarchy so that those most closely related report to a single person - a functional
department head, a process manager or a geographic area head. Managers higher
up the pecking order generally have authority over more organisational units and
thus the clout to coordinate, integrate, and arrange for the cooperation of units under
their supervision. In such structures, the chief executive officer, chief operating officer,
and business-level managers end up as central points of coordination because they
are in positions of authority over the whole unit. When a firm is pursuing a related
diversification strategy, coordinating the related activities of independent business
units often requires the centralising authority of a single corporate-level officer. Also,
diversified companies commonly centralise such staff support functions as public
relations, finance and accounting, employee benefits, and information technology at
the (parent) corporate level.

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 Assigning Responsibility for Collaboration with Outsiders
Someone, or some group in the organisation, must be authorised to collaborate as
needed with each major outside constituency involved in strategy execution. Forming
alliances and cooperative relationships presents immediate opportunities and opens
the door to future possibilitie, but nothing valuable is realised until the relationship
grows, develops, and blossoms. Unless top management sees that constructive
organisational bridge, i.e. building with strategic partners occurs and productive
working relationships emerge, the value of alliances is lost and the company’s power
to execute its strategy is weakened. If close working relationships with suppliers is
crucial, then supply chain management must be given formal status on the company’s
organisation chart and a significant position in the pecking order. If distributor/
dealer/franchisee relationships are important, someone must be assigned the task
of nurturing the relationships with forward channel allies. If working in parallel
with providers of complementary products and services contributes to enhanced
organisational capability, then cooperative organisational arrangements have to be put
in place and managed to good effect.

Perspectives on Organising the Work Effort and Building

Capabilities
All organisation designs have their strategy-related strengths and weaknesses. To do
a good job of matching structure to strategy, strategy implementers first have to pick a
basic design and modify it as needed to fit the company’s particular business makeup.
They must then (a) supplement the design with appropriate coordinating mechanisms
(cross-functional task forces, special project teams, self-contained work teams, and
so on), and (b) institute whatever networking and communication arrangements it
takes to support effective execution of the firm’s strategy. While companies may not set
up “ideal” organisational arrangements to avoid disturbing certain existing reporting
relationships or to accommodate the personalities of certain individuals involved,
internal politics, and other situational idiosyncrasies, they must work towards the
goal of building a competitively capable organisation. Competencies and capabilities
emerge from establishing and nurturing cooperative working relationships among
people and groups to perform activities in a more customer-satisfying fashion, not
from rearranging boxes on an organisational chart.

Organisational Relationships
Daft (2007) argues that organisations can choose to build relationships in many ways,
such as appointing preferred suppliers, establishing agreements, business partnering,
joint ventures, or even mergers. He remarked that organisational research has yielded
perspectives such as resource-dependence, collaborative networks, population
ecology, and institutionalism. Managing these new relationships present a daunting
challenge for managers who can no longer rest in the safety of a single organisation.
Making decisions in the new category of inter-organisational structure is much more
challenging and complex. Organisational relationships are the relatively enduring

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 resource transactions, flows, and linkages that occur among two or more organisations.
Independence characterised business through-out most of the 20th century when the
environment was basically stable and fairly predictable. However, businesses are
now forced into dependent and collaborative relationships because of an increasing
unstable and complex environment of the 21st century. James Moore quoted in Daft
(2007, p. 172) argues that organisations are now evolving into business ecosystems.
Toyota has a strong and success-producing relationship with its suppliers.

An organisational ecosystem is a system formed by the interaction of a community

of organisations and their environment. An ecosystem cuts across traditional industry
lines. A company can create its own ecosystem. Daft (2007, p.172) stated that Microsoft
travels in four major industries: consumer electronics, information, communications,
and personal computers. Its ecosystems include hundreds of suppliers, including
Hewlett- Packard, and millions of customers across many markets. Apple Computer
is arguably having greater success as an entertainment company with its iPod and
iTunes Store than it ever had as a computer manufacturer. Apple’s success grows out
of close partnerships with other organisations, including music companies, consumer
electronics firms, cell phone makers, other computer and even car manufacturers (Daft,
pg.173). Apple and Microsoft, like other business ecosystems, develop relationships
with hundreds of organisations cutting across traditional business boundaries.
Business ecosystems require different behaviours from management. They must now
think horizontally by building relationships with suppliers and customers. Business
leaders can learn to lead economic co-evolution. Managers now need to learn to see
and appreciate the rich environment of opportunities that grow from cooperative
relationships with other contributors to the ecosystem.

There are four variables that relate to ecosystem evolution: resource dependence,
collaborative networks, population ecology and institutionalism.

Resource dependence theory argues that organisations try to minimise their

dependence on other organisations for the supply of important resources and try
to influence the environment to make resources available. Organisations succeed by
striving for independence and autonomy (Daft, 2007, pg.177). When threatened by
resource dependency, organisations try to exert control to overcome the vulnerability.
Dependence on a resource depends on (a) the importance of the resource to the firm,
and (b) how much discretion or monopoly power those who control a resource have
over its allocation and use. Organisations tend to devise two strategies to reduce that
dependence. One strategy is to adapt to or alter the interdependent relationships.

This approach can include purchasing ownership in suppliers, developing long-term

contracts or joint ventures to lock in necessary resources. Another technique is to use
inter-locking directorships, which means boards of directors include members of the
board of supplier companies. A second strategy is using a power strategy. For example,
large, independent companies have power over small suppliers. Wal-Mart has grown
so large and powerful that it can dictate the terms with virtually any supplier especially
since it is a large buyer. Wal-Mart actually has greater say in how Procter & Gamble
and other suppliers like Levi Strauss conduct business with them.

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 Organisations are highly interconnected. Companies need production efficiency
to survive. However, the institutional theory postulates that organisations need
legitimacy from their stakeholders to survive. The institutional perspective describes
how organisations survive and succeed through congruence between an organisation
and the expectations from its environment. The institutional environment is composed
of norms and values from stakeholders (customers, investors, associations, boards,
government, collaborating organisations). Thus according to Daft (2007, pg.189) the
institutional view believes that organisations adopt structures and processes to please
outsiders, and these activities come to take on rule-like status in organisations. The
institutional environment reflects what the greater society views as correct ways of
organising and behaving.

Daft, Murphy & Wilmott (2014) define legitimacy as the general perspective that an
organisation’s actions are desirable, proper, and appropriate within the environment’s
system of norms, values, and beliefs. Institutional theory is therefore concerned with
the set of intangible norms and values that shape behaviour, as opposed to the tangible
elements of technology and structure. Organisations must fit within the cognitive and
emotional expectations of their audience. Most organisations today are concerned
with legitimacy, especially in the wake of several corporate scandals of the nineties
and early 21st century. Reputational capital has become critical in assessing businesses
publicly for investment purposes and otherwise. The recession of 2009 also raised
questions about the ethical conduct of corporations’ senior management. Additionally,
many corporations actively shape and manage their reputations to increase their
competitive advantage and managers are searching for new ways to bolster legitimacy
in the wake of ethical and financial scandals at such well-known companies as Boeing,
Enron, and WorldCom.

Institutional Isomorphism
Organisations have much to gain from building reputational capital and appearing
legitimate. Inter-organisational relationships feature a number of forces that
contribute to their posture reflecting a similarity with one another. This is a core point
in institutional theory. Institutional similarity, called institutional isomorphism is the
emergence of a common structure and approach among organisations in the same
field. Isomorphism is the process that causes one unit in a population to resemble
other units that face the same set of environmental conditions. Increasing similarity
depends on three core mechanisms: mimetic forces, which result from responses to
uncertainty; coercive forces, which stem from political influence; and normative forces,
which result from common training and professionalism.

Mimetic Forces
Many organisations, especially business organisations, face great uncertainty which
seem to make many executives copy or model other organisations especially those that
have been successful in a particular activity. The pressure to copy others represents
mimetic forces. Daft argues that executives observe an innovation in a firm generally

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 regarded as successful, so the management practice is quickly adopted. An example is
Wi-Fi hotspots in cafes, hotels, and airports. Starbucks was one of the first companies
to adopt Wi-Fi, enabling customers to use laptops and handheld computers at Starbuck
stores. The practice has rapidly been copied by both large and small companies. Mimetic
processes explain why fads and fashions occur in the business world. Downsizing of
the workforce is another trend that can be attributed partly to mimetic forces.

Coercive Forces
All organisations are subject to pressure, both formal and informal, from government,
regulatory agencies, and other organisations in their environment, especially those
on which a company is dependent. Coercive forces are the external pressures exerted
on an organisation to adopt structures, techniques, or behaviours similar to other
organisations. These pressures can include the force of the law, or power difference
resulting in resource-dependence. Organisations operating under these constraints
will adopt changes and relate to one another in a way that increases homogeneity and
limits diversity.

Normative Forces
The third reason organisations change according to the institutional view is normative
forces. Normative forces are pressures to change to achieve standards of professionalism
and to adopt techniques that are considered by the professional community to be
up-to-date and effective (Daft, 2007, p. 193). Professionals share a body of formal
education based on university degrees and professional networks through which
ideas are exchanged by consultants and professional leaders. People are exposed
to similar training and standards and adopt shared values which are implemented
in organisations with which they work. Companies accept normative pressures to
become like one another through a sense of obligation or duty to high standards of
performance based on professional norms shared by managers and specialists in their
respective organisations. These norms are conveyed through professional education
and certification and have almost a moral or ethical requirement based on the highest
standards accepted by the profession at that time.

Main Roles in Ecosystems

Keystone Organisations
Keystone organisations play a crucial role in business ecosystems. Fundamentally, they
improve the overall health of their ecosystems by providing a stable and predictable
set of common assets. Wal-Mart’s procurement system and Microsoft’s operating
system and tools are used by other organisations to build their own offerings (Iansiti
and Levien, 2004, pg.69).

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 Key stones increase ecosystem productivity by simplifying the complex task of
connecting network participants to one another or by making the creation of new
products by third parties more efficient. They can enhance ecosystem robustness by
consistently incorporating technological innovations and by providing a reliable point
of reference that helps participants respond to new and uncertain conditions so that they
can survive external shock. For instance, Microsoft and its community of independent
software vendors were able to collectively survive the adoption of the World Wide Web.
Keystones encourage ecosystem niche creation by offering innovative technologies to
a variety of third-party organisations. Keystones represent the core of an ecosystem
therefore by continually trying to improve the ecosystem as a whole; they ensure their
own survival and prosperity. The removal or failure of a keystone usually will lead to
catastrophic collapse of the entire ecosystem. The benefits that the keystones provide
represent effective strategy and not altruism. An effective keystone strategy creates
value and shares value with others in the ecosystem. That value is first created through
a platform, which is an asset in the form of services, tools, or technologies that offers
solution to others in the ecosystem. Microsoft software platform, an intellectual asset
plays that role.

Dominators
Dominators operate differently from keystones. They wield power in an exploitive
fashion by either exploiting a critical position to control the network or, more
deceptively, drain value from it. In the first case, denominators can integrate vertically
or horizontally to own and manage a large portion of a network directly. IBM was one
such player before the arrival but the arrival of the PC ecosystem led to failure of that
strategy by IBM, a mainframe dominator.

Secondly, a dominator can drain value from an ecosystem by simply occupying a hub.
By sucking value from the network that other members created, there is not much left to
sustain the ecosystem, which ultimately collapses and brings the value denominator’s
fall too. Enron is a most recent example. EBay’s role is that of a keystone while Enron
was a value dominator. The company that share the wealth, eBay ended up making
money. The company that concealed and sucked from others, was destroyed along
with other members in the ecosystem.

According to Greenhalgh quoted in Daft (2007) to succeed in today’s environment,

old-paradigm management practices based on power, hierarchy, and adversarial
relationships must be traded for new-era commonwealth practices that emphasise
collaboration and communal forms of organisation. The companies that will thrive,
Greenhalgh believes, “are those that really have their act together—those that can
successfully integrate strategy, processes, business arrangements, resources, systems,
and empowered workforces,” (p. 181). That can be accomplished, he argues, only by
effectively creating, shaping, and sustaining strategic relationships.

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 Strategy and Organisational Design
Of the several determinants of structure, strategy has perhaps the most potent
impact on an organisational configuration. Porter, Miles and Snow (year) postulated
two topologies that indicate how competitive strategies determine organisational
configurations. Managers must determine how to compete based on such variables as
competitive advantage and competitive scope.

Competitive advantage can be determined through the use of low cost or through
their ability to offer unique or distinctive products and services that can command a
premium price.

Competitive scope indicates whether to serve many customer segments (broad scope)
or concentrate on only a narrow scope by targeting a selected customer segment.
Strategy therefore is the outcome of these choices. A differentiation strategy features
innovative products and services that are unique in the industry. An organisation may
use advertising, distinctive product traits, or new technology to achieve a product
which the customer perceives as unique. These customers are usually price-insensitive.

Organisational design characteristics must support the firm’s competitive approach. An

innovative focus on creating new products to capture customers’ loyalty is somewhat
different from a company who wants to maintain market share for long-established
products in a stable industry. Managers take an efficiency approach to organisation
design in pursuing a low-cost leadership strategy, whereas a differentiation strategy
demands a learning approach. Organisations designed for efficiency have different
characteristics from those designed for learning.

A low-cost leadership strategy (efficiency) is associated with strong, centralised

authority and tight control, standard operating procedures, and emphasis on efficient
procurement and distribution systems. Employees generally perform routine tasks
under close supervision and control and are not empowered to make decisions or
take action on their own (Daft, 2007, pg.68). A differentiation strategy results in a
different configuration especially if there is a need for quick and consistent learning
and creativity. This strategy demands a structure that is fluid and flexible, with an
organic decision-making authority system. Empowerment is a salient feature of this
structure/ configuration. Empowered employees work directly with customers and
are rewarded for creativity and risk taking. As is the case in the firm 3M, research,
creativity and innovativeness are given prominence over efficiency and standardisation.
Porter ’s third competitive strategy is called focus. Here, the firm concentrates on a
specific market or buyer group while trying to achieve either a low-cost advantage or
a differentiation advantage. Puma, a German athlete-wear company utilises a focus
strategy (particular customer groups).

The prospector strategy requires characteristics like a differentiation strategy, and the
defender strategy uses an efficiency method as followed in a low-cost leadership strategy.
The analyse strategy represents a mixed-approach of both cost and differentiation.
However, the reactor strategy provides no obvious strategic direction and therefore
no clear design technique. A prospector strategy concentrates on innovation, risk-

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 taking, emerging opportunities and growth. It operates best in a quickly changing
growing environment that requires creativity. Both Microsoft and FedEx are typical
examples of this strategic type. A defender strategy is a holding strategy that seeks
stability and sometimes may involve retrenchment. There is a need to produce reliable,
high-quality products for dependable customers. This strategy works best in either
a declining industry or stable environment. Thirdly, firms that try to maintain their
previous success in a stable market/industry while trying to innovate are examples of
an analyser strategy. Some products are aimed at keeping current customers. Others
will be marketed for a new, more dynamic environment where there is great growth
potential. The reactor strategy is a strategy for failure or declining market share. Xerox
and Kodak seem to have followed that strategy because they failed to match consumer
trends.

However, it must be stated that while strategy plays a pivotal role in determining
structure, other contingency factors are also impactful. Both environment and
technology are also powerful determinants of structure. In the 21st century,
telecommunications technologies have transformed entire industries and created new
ones. The Internet is the most obvious example. It has consequently made Amazon.
com a very successful business inside of a virtual structure. Technology in turn has
been a driver of environmental change. A rapidly changing, political, economic, socio-
cultural, legal and technological environment has been significant in reformatting
organisational configurations.

In the NDS Victoria (2012) video below, Dr. Richard Sharpnel shares further insight
on the alignment between strategy and organisational structure. After watching this
video, move on to the Learning Activity 5.1.

Play Video
NDS Victoria. (2012, April 12). “Strategic Business Planning A3 Strategy and
Structure.” [YouTube]. Available at

uu https://www.youtube.com/watch?v=qEAS0QQiyaY

The following non-graded learning activity is meant to gauge the knowledge gained
from the preceeding session. Note that these questions may be discussed within the
unit’s weekly discussion forum.

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 LEARNING ACTIVITY 5.1
Evaluation – Structuring Organisational Structures
After watching Dr. Shrapnel in the aforementioned video discuss structure
and strategy, identify a local organisation and answer the following
questions:

1. Can you identify the organisational structure of the organisation

selected?

2. Does this organisation have a competitive advantage in the

market? Why? Why not?

3. Can you identify organisational strategies currently in place? In

your opinion, are they effective?

4. If this organisation could be restructured to enhance the

organisational strategies, how would you restructure?

Session Summary

Strategy has perhaps the most important influence on organisational design. Strategic
managers must therefore examine a firm’s value chain to establish which activities
form the nucleus of its strategic posture – corporate and competitive strategy. These
activities must form the building blocks of any structure that follows from its espoused
strategy. More so, these strategies assist the organisation in fulfilling organisational
objectives. Managers must also be cognisant of the changing face of structure. Structure
can now be seen as a configuration. This configuration contains three new parts. These
are structure, processes and relationships, which have separately grown in importance
as a result of a dynamic global business environment. Structure has traditionally
been enameled by functional-based thinking. That paradigm has now evolved into
process-based thinking and managing complex relationships. Business process re-
engineering and business ecosystems are practical examples of the new dynamics in
structure. Finally, job design has assumed a new configuration. Managers must have
the appropriate job authority to generate high performance in their quest for and use
of organisational resources. A manager ’s supply and demand for resources must fit
his/her job’s strategic importance. Otherwise, the organisational structure will also
be inappropriate for successful strategy execution. Additionally, managing global
businesses now require an analytical understanding of the underlying eco-systems that
drive success in that arena. These new business types operate almost independently as
most natural eco-systems do.

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 SSession 5.2

Competitive Advantages of Strategic

Management

Introduction
Competitive advantages can be established with a strong strategic manage process.
Delving deeper, a robust strategic management process requires strategic managers
to ensure strategic planning efficiently takes into consideration the resources of an
organisation. Session 5.2 examines how the strategic management of internal resources
can guide an organisation into maintaining sustainable competitive advantage. Internal
resources offer excellent opportunities for an organisation to generate competitive
advantage. The focus on internal resources has gained popularity in the development
of the resource-based view of the firm. It also indicates how a sustainable competitive
advantage can be achieved through company idiosyncratic resources. Finally, we
will examine a theory of knowledge management because knowledge is a key factor
in competitive success in the 21st century given a proliferation of technology-based
product and services.

In examining how competitive advantages can be achieved through leveraging

intangible assets such as human capital, knowledge capital, dynamic capabilities,
organisational learning, competencies and capabilities, a better understanding of
strategic management, and the process in which it is framed can be grasped.

Resource-based View and Competitive Advantage

Strategic development can be driven by opportunities afforded by a changing
environment. Sometimes known as the search for strategic fit, such development
implies the change of internal strategic capabilities to better fit such opportunities
(Johnson, Scholes, & Whittington, 2005). The major upheavals in economic development
in the Caribbean can be traced to the need to make adjustments in strategic capability,
requiring the search for major improvements in labour productivity and the adoption
of new technologies. The early twenty-first century is also dominated in industry,
commerce and the public services by the struggle to keep pace with developments in
information technology (IT) just to stay in business.

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 However, understanding strategic capability is also important from another perspective.
An organisation’s strategic capability may be the leading edge of strategic development.
New opportunities may be created by stretching and exploiting capabilities either in
ways which competitors find difficult to match or to create new market opportunities,
or both. For example, to continue the IT theme, stretching IT capabilities has been the
basis on which organisations have sought to create new services and areas of economic
activity.

In either case, be it through strategic fit or stretch, a key concept to bear in mind is
that if an organisation is to achieve competitive advantage over others, it will do so
because it has capabilities that the others do not have, or have difficulty in obtaining.
These capabilities could be the resources the organisation has. They could also be
the way these resources are used or deployed which is known as the organisation’s
competencies. This explanation of competitive advantage in terms of strategic
capabilities according to Johnson et al, (2005) is sometimes called the resource-based
view of strategy: that the competitive advantage of an organisation is explained by
the distinctiveness of its capabilities. In turn, this helps explain how some businesses
are able to achieve extraordinary profits or returns compared with others. They have
resources or competences that permit them to produce at lower cost or generate a
superior product or service at standard cost in relation to other businesses with inferior
resources or capabilities.

The resource-based view of the strategy arose as an alternative to the school of strategic
planning based on Porter ’s (1980) Five Forces Model, which presented a strategic
positioning for an entire industry based on five positions within their markets,
assuming a field of stable competition.

Knowledge as Resource
Teece (1984) was among the early critics of this view, holding to a model of strategy
based on the economic theory of value based on inherent resources of the firm, of
which knowledge can be considered among the most significant. Various other
researchers have also led the research on the resource-based view of strategy by
integrating notions that derive essentially from the work of Penrose (1959) and the
notion of Penrose rents. Penrose rents (rents being the power to extract revenues from
a market) were based on the notion that a firm’s unique knowledge-based capabilities
were economically unfeasible to replicate so that growth was based on coordination
of resources to develop and maintain advantages based on superior use of knowledge
and competency. Penrose’s fundamental proposition was that the dominant firms
in every sector show a market value far exceeding that of booked assets, which in
simplest terms is considered a measure of added value from intangible resources.

Collective Knowledge
Nelson and Winter (1982) proposed that the firm’s strategic knowledge capabilities
are further developed in collective practice, “embedded in the form of routines and
operating procedures, allowing for the possibility that the collective had knowledge

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 which is unknown to any of its members”(inert page number here). Spender identifies
how both explicit and implicit (tacit) knowledge show up socially and individually,
focusing on the competitive value of social collective knowledge. Collective
knowledge in organisational routines can be viewed as emerging from coordination
among resources, a highly context-specific property of the firm’s resources. The more
knowledge is contextually embedded in practice, the less it can be appropriated by
competitors or even by individuals that leave the firm.

For example, Microsoft has developed unique practices in its forms of software
engineering that have been described and copied by competitors. However, the
coordination of resources between product lines, staff roles, and deep knowledge
of product code, the operating system code, and their internal processes cannot be
replicated by other firms. To the extent that their product lines remain dominant in the
marketplace, Microsoft’s knowledge-based collective operations establish a powerful
beachhead against competition. Both efficient and innovative, their processes keep
their product lines advanced and ahead of competitors to a great extent. However,
firms with less than dominant positions are not well served by establishing processes
that cannot be effectively changed. Innovation is the best defense to ensure advantage
from embedded knowledge because embedded knowledge in collective practice shows
a downside in the form of ultra-stability.

Three Levels of Knowledge

Zack (1999) identified core, advanced, and innovative knowledge as the three levels of
knowledge development related to building knowledge strategy. Core knowledge is
commonly shared by all members of an industry and offers no competitive advantage.
It is the “price to play,” such as web-based companies’ understanding of the internet
technology. This knowledge relates directly to viability. The fundamental problem, the
most critical challenge that a firm faces is that of becoming and remaining viable in its
chosen market. All firms require “table stakes”: a set of goals, resources and capable
people that are appropriate to the sector concerned (Hamel and Prahalad 1994: 226,
Boxall and Steeneveld, 1999) quoted in (Boxill & Purcell, 2003). Decisions about these
‘table stakes’ are strategic. They are make-or-break factors. Get the system of these
choices right – or right enough – and the firm will be viable. The problem of viability
is the fundamental strategic problem.

Advanced knowledge can be differentiated and therefore provides some competitive

advantage. With the same advanced knowledge as competitors, a firm can position
and coordinate that knowledge in different ways, creating value for its customers.
Advanced and usable user interfaces in web products offer an advantage based
on advanced knowledge, but still remains knowledge open to the overall market.
Innovative knowledge allows a firm to lead its industry by significantly differentiating
from its customers. Firms such as Cisco Systems and Qualcomm developed early
core technologies in their products areas, established de facto standards as patented,
licensed intellectual property, and created internal processes for building on these
standards. Until a significant disruption occurs in TCP/IP networking and CDMA
wireless technologies, these firms will remain dominant in their areas.

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 Dynamic Capabilities
Both knowledge content and processes must change and be updated constantly.
Therefore coordination of these resources requires support from a knowledge-
sharing culture and collaborative technology. These knowledge capabilities remain
in a dynamic state almost constantly, which is a complex challenge for organisations,
individuals, and work places. Teece (1998), Pisano, and Schuen (1997) extended the
notion of knowledge resources into dynamic capabilities - the proposition that dynamic
and adaptive knowledge remains the most competitive knowledge. According to
Teece, (1998), “this is the ability to sense and then to seize new opportunities, and to
reconfigure and protect knowledge assets, competencies, and complementary assets
and technologies to achieve sustainable competitive advantage.” (insert page number
here) Developing dynamic capabilities as part of an organisational strategy, allows
responsive adaptation to market change. The ability to shift the organisation when
market dynamics change appears highly dependent on the firm’s ability to dynamically
adapt its knowledge to emerging situations, and to learn collectively.

The resource-based view of strategy implies that sustainable competitive advantage

can be achieved by developing strategic capabilities that provide advantage over
time. They are durable. However, managers often claim that the hypercompetitive
conditions are becoming increasingly prevalent. Environments are changing faster.
Technology is giving rise to innovation at a faster rate and therefore greater capacity
for imitation and substitution of existing products and services. Customers have more
choices and the chances of establishing a sustainable competitive advantage based on
a set of durable competencies becomes less likely. Nonetheless, in such circumstances,
some firms do achieve competitive advantage over others. Organisations must now
therefore place more emphasis on the organisation’s capacity to change, innovate, and
be flexible and to learn how to adapt to a rapidly changing environment.

How firms achieve competitive advantage in such circumstances has been the subject
of study of academics such as David Teece. The term most often used to describe the
strategic capabilities that achieve competitive advantage in such dynamic conditions
is dynamic capabilities. Here, dynamic capabilities are taken to mean an organisation’s
ability to develop and change competences to meet the needs of rapidly changing
environments. These capabilities may be relatively formal, such as the organisational
systems for new product development or standardised procedures for agreement for
capital expenditure. They may also take the form of major strategic moves, such as
acquisitions or alliances by which new skills are learned by the organisation. Or they
may be more informal such as the way in which decisions get taken or, perhaps, how
decisions can get taken faster than usual when fast response is needed. They could
also take the form of embedded ‘organisational knowledge’ (see section below) about
how to deal with particular circumstances the organisation faces, or how to innovate.
Indeed, it is likely that dynamic capabilities will have formal and informal, visible and
invisible characteristics associated with them.

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 For example, Kathy Eisenhardt quoted in Johnson, Scholes, & Whittington (2005)
has shown that successful acquisition processes that bring in new knowledge to the
organisation depend on high-quality pre- and post-acquisition analysis of how the
acquisition can be integrated into new organisation so as to capture synergies and
bases of learning from that acquisition. However, hand-in-hand with these formal
procedures will be more informal ways of doing things in the acquisition process built
on informal personal relationships and the exchange of knowledge in more informal
ways.

The bottom line is that, whereas in more stable conditions competitive advantage might
be achieved by building core competences that may be durable over time, in more
dynamic market conditions, competitive advantage has to be developed by building
the capacity to change, innovate and learn – to build the capacity for dynamic capacity.
And arguably, the more such dynamic capabilities of learning become important, the
more the concept of organisational knowledge becomes relevant.

Competitive Advantage of Dynamic Organisational Learning

If dynamic capabilities give the firm its ability to compete in changing markets, how
do we develop dynamic capabilities? Some factors show as rapid learning, making
mistakes sooner than your competition, adapting to the marketplace direction,
and revising plans based on market feedback. Therefore, dynamic learning may
fundamentally be the most critical factor to knowledge strategy. According to Zack
(1999, pg.5), “the ability of an organisation to learn, accumulate knowledge from its
experiences, and reapply that knowledge is itself a skill or competence that - beyond
the core competencies directly related to delivering the product or service – may
provide strategic advantage.”

An organisation’s learning can be assessed against two dimensions of strategy and

competition. With strategy, the focus is on the speed and depth at which people in the
organisation develop capabilities required by the business strategy. To meet or exceed
goals, organisations must bring new or improved capabilities to market as strategy
dictates, or as customers require.

With regard to competition, organisations must develop a competitive learning rate.

That is, firms must consider whether they can develop depth from learning required
capabilities and technologies faster than their competition. These two learning
motivators enable a third factor, - the capability for breakthrough innovation. Faster
learning plus increased depth and breadth of knowledge sharing significantly
increases the types and opportunities for innovation of services and technologies.
For technologies and professional services organisations, these tools are essential for
creating high value and innovative competencies and services.

Teece, Pisano, and Schuen (1997) also discussed learning in organisations as the dynamic
capability offering the most significant competitive advantage of all organisational
processes. Learning is a process by which repetition and experimentation enable tasks
to be performed better and quicker. It also enables new production opportunities to

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 be identified…Learning involves organisational as well as individual skills. While
individual skills are of relevance, their value depends upon their employment in
particular organisational settings. Learning processes are intrinsically social and
collective, and occur not only through the imitation and emulation of individuals,…
but also because of joint contributions to the understanding of complex problems”
(Jones, 2003, p. 5)

A rapid learning rate brings increasing returns, as faster learning explores the ground of
new technologies earlier, makes and recovers from mistakes earlier, and therefore gains
expertise earlier in the market cycle. Rapid learning organisations will secure first-in
customers, and retain the ability to hold customers over a longer period. Competitive
advantage derives from the rapid integration of core and advanced knowledge with
internal processes, and from accruing insights faster than competitors.

Sustainable Competitive Advantage

In general, capabilities and resources become strengths with the potential to create a
competitive advantage if the following conditions are met:

1. The resources or capabilities are valuable. They allow the firm to exploit
external opportunities and/or neutralise external threats. If a firm’s resource or
capability allows exploitation of opportunities or neutralisation of threats then
it is considered a strength.

2. The resources or capabilities are unique. If only one or a small group of

organisations possess a valuable resource or capability, then that resource or
capability may be a source of competitive advantage. If numerous organisations
possess a particular resource or capability, then the situation is described as
competitive parity – no company has the advantage.

3. The organisation must be suited to the exploitation of the resource or

capability. This means that the structure and systems of the firm are appropriate
for taking advantage of the competitive advantage.

4. The firm’s managers are aware of the potential of the resource or capability to
lead to a competitive advantage and have taken steps to realise the advantage
(dynamic capabilities).

5. The resources or capabilities are difficult or expensive to imitate. In these

situations, competing firms face a cost disadvantage in imitating a resource
or capability. The more difficult or costly a resource or capability is, the more
valuable it is in producing a sustainable competitive advantage. In the case of
an enforceable patent or a trademark, competing firms face an absolute cost
disadvantage.

6. No readily available substitutes exist.

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 A Theory of Organisational Knowledge Creation
Knowledge can be defined as the awareness, consciousness or familiarity gained by
experience or learning. However, in the context of organisations, it is not just individual
knowledge that matters, but the knowledge of groups of people in the organisation,
or the organisation as a whole. Organisational knowledge is the collective and shared
experience accumulated through systems, routines and activities of sharing across the
organisation.

The following video discusses the global power shifts through the evolution of time.
Such important shifts on global markets, affect global competition. After watching this
video, move onto Learning Activity 5.2.

Play Video
Wolters World. (2012, September 29). “Sustainable Competitive Advantages
Explained.” [YouTube]. Available at

uu https://www.youtube.com/watch?v=K9nIH-F0Sjc
The following non-graded learning activity is meant to gauge the knowledge gained
from the preceeding session. Note that these questions may be discussed within the
unit’s weekly discussion forum.

LEARNING ACTIVITY 5.2

Perspectives of Sustainable Competitive Advantage
After watching the video, select an organisation (local and/or
international) and address the following questions:

1. Based on the information in the preceding session, what would

make you classify the selected organisation as one that has
sustainable competitive advantage?

2. Based on the video, in your opinion, which of the four areas

of sustainable competitive advantages align best with the
organisation of your choice? Explain your rationale.

3. Are they any areas where this organisation currently does not
have sustainable competitive advantage, and, if so, how would you
suggest that they attain sustainability?

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 Session Summary

Understanding the various components that surround sustainability in relationship

to organisations’ strategic management can place strategic leaders at an excellent
vantage point when engaging in strategic planning. This requires great thought by
strategic managers to identify the resources and position them in a place that supports
an organisation’s goals, mission, and even organisational culture. Firms that can
maintain a sustainable competitive advantage require ALL of the key attributes within
the conditions that shape the notion of a competitive advantage to be met. Thus, if
formulated correctly, the strategic management process can support a firm greatly in
attaining and maintaining sustainable competitive advantage.

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 SSession 5.3

Strategy Analysis and Competitive

Selection

Introduction
Session 5.3 explores how the strategic management process that David (2007) puts
forth is upheld by a key strategic formulation procedure. The procedure or technique
can be utilised by organisations of all sizes as it can “help identify, evaluate and select
strategies” that can allow companies to maintain a competitive advantage (p. 218). The
framework for strategy formulation consists of three stages, which will be discussed
within this session. In examining the analytical tools within each stage, you will gain
an understanding of how to use and implement various tools, some which you may
be familiar with and others which may allow you to dig deeper.

This session covers the strategic management process and the steps of strategic
management within each stage of the strategic management process. A model for
analysing this process is presented with an in-depth review of the various components.
This review is designed to allow you to develop a correlation between strategic
managers and how they formulate, implement and evaluate strategy in organisations.

The Stages of the Strategy-Formulation Analytical

Framework
Observing David’s (2007) strategy-formulation framework, it is evident that there are
three stages of this framework for a successful analysis. These stages are depicted in
Figure 5.2 below.

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 The Input The Matching The Decision
Stage Stage Stage

Figure 5.2: Strategy-Formulation Analytical Framework

Source: Adapted from David’s (2007) Strategic Management: Concept and Cases. New York: Pearson
PLC

Stage 1: The Input Stage

David (2007) affirms that this stage gathers the “basic input information needed
to formulate strategies,” (p. 219). In doing so, this stage contains tools that gather
data from both the internal and external environment which have been discussed in
previous Units combined. Techniques that contribute to this stage include the Internal
Factor Evaluation (IFE) matrix, the External Factor Evaluation (EFE) Matrix, and the
Competitive Profile Matrix (CPM). Figure 5.3 depicts these tools which contribute to
stage 1.

External Factor
Evaluation
Matrix

Internal Factor Competitive

Evaluation Profile Matrix
Matrix

THE INPUT
STAGE

Figure 5.3: The Input Stage of the Strategy-Formulation Analytical Framework

Source: Adapted from David’s (2007) Strategic Management: Concept and Cases.
New York: Pearson PLC

This stage requires strategic managers to have good judgement while using these
techniques as they are the foundation of the framework.

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 Stage 2: The Matching Stage
Once Stage 1 is successfully completed, Stage 2 which is the Matching Stage can begin.
This stage “focuses upon generating feasible alternative strategies by aligning key
external and internal factors,” (David, 2007, p. 218). In doing this, Stage 2 focuses
on matching the organisations resources with the external factors on a larger scale.
For example, if there is a strong research and development aspect of a company, the
external environmental analysis could give further insight on the demographics.
That is, the changing nature of the population, also known as the target population.
A strategy can be developed to cater to that new demographic by the creation of new
products, or, modifying existing products that can be familiar to the demographic. The
tools used for the Matching Stage include:

1. SWOT Matrix

2. Strategic Position and Action Evaluation Matrix (SPACE matrix)

3. BCG Matrix

4. Internal-External Matrix

5. Grand Strategy Matrix

Figure 5.4 depicts the matching stage of the framework.

Figure 5.4: The Matching Stage of the Strategy-Formulation Analytical

Framework
Source: Adapted from David’s (2007) Strategic Management: Concept and Cases. New York: Pearson

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 The SWOT Matrix
The SWOT matrix produces four types of strategies that can beneficial for a strategic
manager. David (2007) asserts that they are:

1. Strengths-Opportunities (SO)

• Employing a firm’s internal strengths to take advantage of external

opportunities.

2. Weaknesses-Opportunities (WO)

• Improving internal weaknesses by taking advantage of external opportunities.

3. Strengths-Threats (ST)

• Using a firm’s strengths to avoid or reduce the impact of external threats.

4. Weaknesses-Threats (WT)

• Developing defensive tactics aimed at reducing internal weaknesses & avoiding

external threats.

David (2007) further states that in order for the SWOT Matrix to be effective, “specific,
rather than general, strategy terms when developing a SWOT Matrix,” should be
employed (p. 224). Figure 5.5 depicts how the strategies are visually derived.

Figure 5.5: Developing Strategies using the SWOT Matrix

Source: Adapted from David’s (2009) Strategic Management: Concept and Cases.
New York: Pearson

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 There are 3 primary limitations which must be taken into consideration when
addressing the SWOT matrix. David (2007) states that they are as follows:

1. The SWOT Matrix fails to show how to achieve a competitive advantage.

2. The SWOT Matrix only provides a snapshot, or, a static assessment in time.

3. The SWOT Matrix can guide a firm to overemphasise a single internal or

external factor in formulating strategies.

The SPACE Matrix

The SPACE Matrix is a 4-quadrant framework which states which type of strategy is
the best between the following strategy types:

1. Aggressive Strategies

2. Conservative Strategies

3. Defensive Strategies

4. Competitive Strategies

David (2007) describes the axes of the matrix as representing “two internal dimensions
and two external dimensions,” (p. 225). The internal dimensions are: Financial
Strength (FS) and Competitive Advantage (CA), whereas the external dimensions are:
Environmental Stability (EN) and Industry Strength (IS). Organisations can use these
4 quadrant positions to gain an in-depth understanding of their strategic position.
The four quadrants are depicted in Figure 5.6. After constructing a SPACE Matrix for
a company, the directional vector outlines which type of strategy that an organisation
can/should employ, thus, strategic managers can learn which type of strategy (i.e.
market penetration, diversification etc.) to utilise.
FS

Financial Environmental
Strengths (FS) Stability (ES)

CA
IS

Competitive Industry
Advantage (CA) Strengths (IS)

ES
Figure 5.6: The SPACE Matrix Quadrants
Source: Adapted from David’s (2009) Strategic Management: Concept and Cases. New York: Pearson

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 David (2007) goes to on classify this as perhaps the most important determinant in
identifying such a position. At minimum, the SPACE Matrix is populated from the
“factors that were included earlier in the firm’s EHE and IFE Matrixes,” (p. 226).
Common variables included within this matrix are represented in Figure 5.7.

Financial Strength Environmental Competitive Industry Strength

(FS) Stability (ES) Advantage (CA) (IS)
• Return on • Technological • Market share • Growth potential
investment changes • Product quality • Profit potential
• Leverage (borrow) • Rate of inflation • Product life cycle • Financial stability
• Liquidity earnings • Demand variability • Customer loyalty • Technological know-
• Working capital • Price range or • Competition’s how
• Cash flow competing products capacity utilisation • Resource utilisation
• Inventory turnover • Barriers to entry • Technological know- • Ease of entry into
• Earnings per share • Competitive how market
• Price earnings ratio pressure • Control over • Productivity, capacity
• Price elasticity of suppliers & & utilisation
demand distributors
• Ease of exit from
market
• Risk involved in
business

Figure 5.7: Example of Variables Within The SPACE Matrix Quadrants

Source: Adapted from David’s (2009) Strategic Management: Concept and Cases. New York: Pearson

How To Construct a SPACE Matrix

David (2007, p. 226) goes on to outline the steps to develop a SPACE Matrix which are
listed below:

1. Select a set of variables to define FS, CA, ES, and IS.

2. Assign a numerical value:

• From +1 to +6 to each FS & IS dimension

• From -1 to -6 to each ES & CA dimension

3. Compute an average score for each FS, CA, ES, and IS.

4. Plot the average score on the appropriate axis.

5. Add the two scores on the x-axis and plot the point. Add the two scores on the
y-axis and plot the point. Plot the intersection of the new XY point.

6. Draw a directional vector from the origin through the new intersection point.

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 The Internal-External (IE) Matrix
This tool is similar to the BCG Matrix, in that it also involves plotting organisational
divisions into “portfolio matrices,” (David, 2007, p. 233). However, the IE matrix can
only be effective if more information is given about organisational divisions, and (2)
the implications of strategies are notably different. Many strategic leaders suggest that
the IE Matrix be constructed in alignment with the BCG Matrix. Figure 5.8 depicts an
example of Internal-External Matrix.

Figure 5.8: The Internal-External (IE) Matrix

Source: Adapted from David’s (2009) Strategic Management: Concept and Cases. New York: Pearson

David (2009) asserts that the IE Matrix is based on two primary dimensions:

1. The total weighted score on IFE on the x-axis

2. The total weighted score on EFE on the y-axis

And divided into three major regions:

1. Grow and build - Cells I, II, or IV

2. Hold and maintain - Cells III, V, or VII

3. Harvest or divest - Cells VI, VIII, or IX

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 Grand Strategy Matrix
The Grand Strategy Matrix is based on “two evaluative dimensions: competitive
position and market growth, [whereby] appropriate strategies for an organisation
consider are listed in sequential order of attractiveness in each quadrant of the matrix,”
(David, 2007, p. 237). Figure 5.9 depicts the characteristics of each quadrant.

Quadrant II Quadrant 1
• Firms should evaluate present approach • Excellent strategic position
• How to improve competitiveness • Concentration on current markets &
• Rapid market growth requires intensive products
strategy • Take risks aggressively when necessary

Grant Strategy
Matrix

Quadrant III Quadrant 1V

• Competing in slow-growth industries • Strong competitive position
• Weak competitive position • Slow-growth industry
• Drastic changes are needed quickly • Diversification to more promisign growth
• Cost & asset reduction (retrenchment) areas

Figure 5.9: Characteristics of Quadrants Within the Grand Strategy Matrix

Source: Adapted from David’s (2009) Strategic Management: Concept and Cases. New York: Pearson

Figure 5.10 depicts the types of strategies organisations should employ for each
respective quadrant.

Figure 5.10: The Grand Strategy Matrix: Strategy Type By Quadrant

Source: Adapted from David’s (2009) Strategic Management: Concept and Cases. New York: Pearson

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 Stage 3: The Decision Stage
The final stage of the Strategy-Formulation Analytical Framework is the decision stage.
At this point, a thorough analysis should been done, strategies have been matched with
the best possible organisational position, and then strategic managers need to decide
which strategy/strategies to pursue. To do this effectively, David (2007) suggests that
the use of the Quantitative Strategic Planning Matrix (QSPM). This matrix is a technique
that integrates information from Stage 1 (the input stage) and effectively matches it to
strategies that emerged from Stage 2 (the matching stage). David (2007) describes this
matrix as “a tool that allows strategists to evaluate alternative strategies objectively
based on previously identified external and internal critical success factors,” (p. 240).
The strategic managers are expected to integrate this tool with knowledgeable and
sound judgement. Figure 5.11 shows a basic QSPM matrix.

QSPM Strategic Alternatives

Key External Factors Weight Strategy 1 Strategy 2 Strategy 3

Economy
Political/Legal/Government
Social/Cultural/Demographic
Environmental
Technological
Competitive

Key Internal Factors

Management
Marketing
Finance/Accounting
Production/Operations
Research and Development
Computer Information
systems

The key internal and external factors are those derived from stages 1 and 2, the IFE
and the EFE matrix. The strategic alternatives are derived from all of the tools of stage
2, that is, the SPACE Matrix, the SWOT Matrix, the BCG Matrix, IE Matrix and Grand
Strategy Matrix. Strategic managers should use good judgment in deciding which
strategies should be further evaluated and included in the QSPM.

How to Construct a QSPM Matrix

David (2007) outlines how to successfully construct a QSPM Matrix and these steps
are listed below:

1. Make a list of the firm’s key external opportunities/threats and internal

strengths and/or weaknesses in the left column.

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 a. A minimum of 10 critical success factors should be selected.

2. Assign weights to each key external and internal factor.

a. Weights should be identical to those in IFE and EFE Matrix.

3. Examine the Stage 2 (matching) matrices, and identify alternative strategies

that the organisation should consider implementing.

a. Record these strategies in the top row of the QSPM

4. Determine the Attractiveness Scores.

a. Determined by examining each key external or internal factor, one at a time,

and asking the question “does this factor affect the choice of strategies being
made?

b. If yes, then strategies should be compared relative to that key factor. If no,
then indicate the critical successes factor has no bearing on the choice being
made, and do NOT assign an attractiveness score for that row.

c. The range for the attractiveness score should be 1 = not attractive, 2 =

somewhat attractive, 3 = reasonable attractive, and 4 = highly attractive.

d. Repeat A & B row by row.

5. Compute the total attractiveness score

a. This is a product of multiplying the weights (step 2) by the attractiveness

scores (Step 4).

b. The higher the score, the more attractive the strategy is.

6. Compute the SUM total Attractiveness Scores.

a. Add all scores together to see which strategy is the most attractive in each
set of alternatives. Higher scores mean higher attractiveness of strategies.

As with any tool, limitations do exist. A major limitation of the QSPM is that strategic
managers must have educated assumptions and requires sound judgement. A second
limitation is that because the QSPM is dependent on so many other tools, it is only
as good a tool as the perquisite inputs suggests. Finally, perspectives on intuition for
decision making may vary. However, this can also be considered an advantage.

Nevertheless, there are several major advantages of the QSPM that must be noted.
For instance, strategic analyses occur at a simultaneously and/or sequential stage.
Here we can note a deliberate integration of both internal and external factors in the
decision making process for strategic managers.

Figure 5.11 depicts the entire framework.

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 STAGE 1: THE INPUT STAGE

External Factor Competitive Internal Factor

Evaluation (EFE) Profile Matrix Evaluation (IFE)
Matrix (CPM) Matrix

STAGE 2: THE MATCHING STAGE

Strategic Positioning Strategic Positioning Boston Consulting Internal-External Grand Strategy

and Action Evaluation and Action Evaluation Group (BCG) (IE) Matrix Matrix
(SPACE) Matrix (SPACE) Matrix Matrix

STAGE 3: THE DECISION STAGE

Quantitative Strategic Planning Matrix (QSPM)

Figure 5.11: Basic QSPM Matrix

Source: Adapted from David’s (2009) Strategic Management: Concept and Cases. New York: Pearson

Play Video
David, F. (2014, September 11). “Strategy Analysis and Choice”. [YouTube].
Available at

uu https://www.youtube.com/watch?v=3fKk7ulaJd8
In the video above, Fred David provides an overview of Strategy Analysis and Choice
using the Strategy-Formulation Analytical Framework. After watching this video,
move on to the Learning Activity 5.3.

The following non-graded learning activity is meant to gauge the knowledge gained
from the preceeding session. Note that these questions may be discussed within the
unit’s weekly discussion forum.

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 LEARNING ACTIVITY 5.3
Conducting A Strategy-Formulation Analytical Framework
After watching the video, select an organisation (local and/or
international) and use the Strategy-Formulation Analytical Framework.
After completing the analysis, address the following questions:

1. From the SWOT matrix, list and describe one attribute from each
type of strategy.

2. After completing Stage 3, the Decision Stage, based on the

attractiveness score, which top 3 strategies would you suggest that
the organisation employ? Why?

3. Which are the top three strategies you think that organisation
should employ?

Session Summary

Strategy formulation is perhaps the most important stage of the strategic management
process. It requires, time, knowledge, intuition, and sound strategic managers to
conduct thorough analyses using the analytical tools presented. In doing this, it
is evident that formulating strategies is an intricate part of strategic management.
Implementing sound strategies often suggests that organisations have fully thought
out all the pros and cons, and have made sound decisions which will strengthen a
firm’s overall competitive sustainability, productivity, efficiently, and market presence.

UNIT SUMMARY

This unit described the various steps by which organisations can achieve strategic
capability and competitive advantage. In doing so, the depth by which this is achieved
is explored; from identifying sound objectives based on organisational structure to
developing strategies often employed by strategic managers. Key takeaways include:

1. Formulating strategies requires time, varied perspectives and reasonable strategic

managers to guide this process.

2. Identifying sound organisational objectives largely depends on the organisational

structure.

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 3. Organisational strategy execution can be aided largely by the organisational
structure.

4. The framework provided to formulate strategies can be used for an organisation of

any size, and steps should never be skipped

5. The analytical tools are not free from error.

6. Organisational relationships are significant when describing an organisation’s

competitive advantage, and should be thoroughly explored by strategic managers.

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