Business Strategy ThisPageIntentionallyLeftBlank Business Strategy An Introduction Second edition David Campbell, George Stonehouse and Bill Houston OXFORD AMSTERDAM BOSTON LONDON NEW YORK PARIS SAN DIEGO SAN FRANCISCO SINGAPORE SYDNEY TOKYO Butterworth-Heinemann An imprint of Elsevier Science Linacre House, Jordan Hill, Oxford OX2 8DP 225 Wildwood Avenue, Woburn MA 01801-2041 First published 1999 Second edition 2002 Copyright # 1999, 2002, David Campbell, George Stonehouse and Bill Houston. All rights reserved The right of David Campbell, George Stonehouse and Bill Houston to be identified as the authors of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988 No part of this publication may be reproduced in any material form (including photocopying or storing in any medium by electronic means and whether or not transiently or incidentally to some other use of this publication) without the written permission of the copyright holder except in accordance with the provisions of the Copyright, Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, England W1T 4LP. Applications for the copyright holder’s written permission to reproduce any part of this publication should be addressed to the publisher British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 0 7506 5569 0 For information on all Butterworth-Heinemann publications visit our website at www.bh.com Typeset by Keyword Typesetting Services Ltd, Wallington, Surrey Printed and bound in Great Britain Contents Index of key concepts xviii Preface to the second edition xx Part I An introduction to the strategic process 1 Chapter 1 Strategy and strategic management 7 Introduction and chapter overview 7 Learning objectives 7 What is strategy? 8 Definition 8 Mintzberg’s 5 Ps 8 The elements of strategy 11 Chandler’s definition 11 Three components of strategy 12 Strategy: thinking, decisions, leadership and management 13 Defining the key terms 13 The debate about the ‘sources’ of strategy 15 What is the debate about? 15 The planning approach 16 The competitive positioning approach 16 The emergent or learning approach 16 The core competence approach 17 Learning and knowledge-based strategy 17 The approach in this book: learning and knowledge-based strategy 18 vi Contents Strategic decisions 18 Different ‘levels’ 18 Congruency and ‘fit’ 21 Where is a strategy actually carried out? 22 Strategy frameworks 23 How do businesses set strategic objectives? 24 Who ‘owns’ an organization? 24 The stockholder approach 24 The stakeholder approach 26 Stakeholders and objectives 27 References and further reading 28 Part II Internal analysis 31 Purposes of internal analysis 31 What are the components of an internal analysis? 32 Chapter 2 The business organization: competences and activities 33 Introduction and chapter overview 33 Learning objectives 34 Resources, competences and core competences 34 Definitions 34 How core competences ‘work’ 36 Resource analysis 37 Tangible and intangible resources 37 Analysing resources 37 Competences 38 Core competences 39 Distinguishing core competences from general competences 39 Core competences and distinctive capabilities 39 Outcomes of the analyses 41 Analysis of value-adding activities 42 What is value adding? 42 The value-adding process 43 The value chain 43 Analysis of the value chain 44 Contents vii Core activities, non-core activities and outsourcing 46 References and further reading 46 Chapter 3 Human resources and culture 47 Introduction and chapter overview 47 Learning objectives 47 Human resources 48 The importance of human resources 48 The human resource audit 48 The purpose of human resource audit 48 The contents of a human resource audit 50 Formal and informal human resource audits 50 The outcomes of a human resource audit 51 Identifying human resources as critical success factors 52 Organizational culture 53 What is culture? 53 The determinants of culture 54 Why is culture important? 55 The cultural web 55 Cultural typologies 58 Handy’s culture types 58 Miles and Snow’s culture types 60 References and further reading 61 Chapter 4 Financial analysis and performance indicators 63 Introduction and chapter overview 63 Learning objectives 63 An introduction to financial analysis 64 The importance of finance 64 Sources of corporate funding 65 Share capital 65 Rights issue capital 67 Retained profit as a source of capital 67 Loan capital 68 Comparing share capital and loan capital 68 Other sources of capital 69 viii Contents Cost of capital 70 Definitions 70 Costsofdebtcapital 71 Costs of share capital 71 Models of capital costing 72 Why calculate the cost of capital? 73 Financial analysis 74 The basics 74 Longitudinal analysis 74 Cross-sectional analysis 75 Ratio analysis 76 Limitations of financial information 81 Other analysis tools 82 Financial benchmarking 83 Common sizing of accounts 83 References and further reading 85 Chapter 5 Products and markets 86 Introduction and chapter overview 86 Learning objectives 86 Ways of defining and understanding markets 87 Defining markets and market share 87 Definition based on product 88 Definition based on need satisfaction or function performed 88 Definition based on customer identity 89 Combined definition 90 Market segmentation 90 Target marketing and market segmentation 90 Three approaches to segment marketing 91 Product positioning 92 Bases for segmentation 93 What is a segmentation base? 93 Typical bases for segmentation of markets 95 Products 96 Product definition 96 Kotler’s five ‘levels’ of product benefit 97 Contents ix Competition of augmented benefits 97 Copeland’s product typology and strategy 98 Limitations of Copeland’s framework 99 The product life cycle 100 Uses of the product life cycle 100 The introduction stage 100 The growth stage 101 The maturity stage 102 The decline stage 102 Criticisms of the product life cycle 103 New product development 104 The importance of new products 104 New product idea generation 104 Screening 106 Development 106 Product portfolio theory 107 What is a portfolio? 107 The BCG matrix 107 Using the BCG matrix 109 Limitations of the BCG matrix 110 A composite portfolio model: the GEC matrix 110 References and further reading 112 Part III External analysis 113 Chapter 6 Analysis of the macroenvironment 115 Introduction and chapter overview 115 Learning objectives 116 The macroenvironment 116 What is the macroenvironment? 116 Conducting macroenvironmental analysis 116 Limitations of macroenvironmental analysis 117 SPENT analysis 118 Overview of the SPENT influences 118 Socio-demographic influences 118 Political, governmental, legal and regulatory influences 120 Economic influences 122 Natural influences 123 x Contents Technological influences 124 The relationships between the SPENT influences 126 The example of ecological concern 126 Using the SPENT analysis 127 How to carry out a SPENT analysis 127 What to analyse 127 References and further reading 128 Chapter 7 Analysis of the competitive environment 129 Introduction and chapter overview 129 Learning objectives 129 Industries and markets 130 The importance of industry and market identification 130 The industry 130 The market 132 The relationship between a business, its industry and markets 132 Industry analysis 133 What is industry analysis? 133 Porter’s five forces model of industry analysis 134 Force 1: The threat of new entrants to the industry 135 Force 2: The threat of substitute products 136 Force 3: The bargaining power of buyers 138 Force 4: The bargaining power of suppliers 138 Force 5: The intensity of rivalry among competitors in the industry 140 The five forces framework and profitability: a summary 141 Limitations of the five forces framework 142 Competitive and collaborative arenas 143 A resource-based approach to environmental analysis 144 Limitations of existing frameworks of analysis 144 The resource-based framework 145 A summary of the resource-based model 149 Strategic group and competitor analysis 150 What are strategic groups? 150 Industry and market critical success factors 150 References and further reading 151 Contents xi Chapter 8 Competitive advantage: strategies, knowledge and core competences 153 Introduction and chapter overview 153 Learning objectives 154 Sources of competitive advantage 154 Three schools of thought 154 Competitive and collaborative advantage 156 Strategy: the frameworks 157 Knowledge and competitive advantage 157 Michael Porter’s generic strategies 158 Introduction 158 Porter’s generic strategy framework 159 Cost leadership strategy 161 Differentiation strategy 165 Focus strategy 166 Criticisms of Porter’s generic strategy framework 167 A critical evaluation of the framework 167 Hybrid strategies 169 Competence-based competitive advantage 169 Core competence and distinctive capabilities 170 Core competences 170 Distinctive capabilities 171 Core competence, distinctive capability and competitive advantage 172 Core competence, generic strategy and the value chain: a synthesis 172 How the different approaches ‘agree’ 172 Where to exploit core competences and strategies 173 Strategic directions 175 Igor Ansoff’s product^market framework 175 Market penetration 175 Market development 176 Product development 176 Diversification 177 Strategic development and risk 177 References and further reading 177 xii Contents Part IV Strategic implementation and management 179 Chapter 9 Evaluation