_______________________________________________________ Aapo Länsiluoto ECONOMIC AND COMPETITIVE ENVIRONMENT ANALYSIS IN THE FORMULATION OF STRATEGY A Decision-Oriented Study Utilizing Self-Organizing Maps ________________________________________________________ Sarja / Series A-14:2004 ISBN: 951-564-230-2 (PDF) 951-564-229-9 (nid.) ISSN: 1459-4870 (PDF) 0357-4652 (nid.) ACKNOWLEDGEMENTS First, I want to thank professor Hannu Vanharanta who gave me the idea to use the technique of Self-Organizing Maps. I greatly appreciate my supervisor, professor Barbro Back, who gave new insights and great support in her encouraging way during the process. I am also grateful to professor Ari Visa (project leader of GILTA) who brought up some critical issues during this research process. I acknowledge my second supervisor, professor Heli Hookana for valuable comments. I am pleased that I had the possibility to work with Tomas Eklund in the evaluation and state of the art surveys. This co-operation enabled me to share ideas, opinions and feelings. Jarmo Toivonen helped me friendly with the problems concerning the SOM method. I appreciate professors Pirkko Walden and Christer Carlsson for their comments in the formulation of the surveys. I also appreciate the scientific support to the macroeconomic part of the survey from Ari Karppinen. I acknowledge my colleagues, people in Pori university consortium and in Turku School of Eonomics and Business Administration for their support. I was also lucky to meet interesting people in the conferences who had time to criticize and support my ideas. I was pleased to have two pre-examiners of this thesis. I acknowledge professor Jyrki Ahola and professor Timo Honkela for their comments. I want to thank Kirsti Honkasalo who had time to read through my papers and correct all the writing strangeness with her precision. I also want to thank Stefan Lindholm for programming the web-based state of the art survey and Tero Lehto for entering the answers of the evaluation survey questionnaires into electronic form. I thank Finnish Cultural Foundation, Foundation for Economic Education, High Technology Foundation of Satakunta and Tekes for their financial support. This support was important from the financial point of view and also from an encouraging point of view. I appreciate the Finnish Forest Industries Federation, the National Consumer Research Centre (Finland) for providing the data and the participating companies in the evaluation process. I want to thank my family and my friends for pleasant free time. Finally, I am happy about the support of my wife, Suvi, who gave her continuous support and understood my ambition to complete this thesis. Without Suvi’s sympathy, sense of humor as well as our invigorating free time this process would have been much more exhaustive and stressful. At Pori, October 26, 2004 Aapo Länsiluoto TABLE OF CONTENTS 1 INTRODUCTION..................................................................................... 7 1.1 Research aim .................................................................................. 11 1.2 Relevance of work.......................................................................... 16 1.3 Bounded rationality ........................................................................ 18 1.3.1 The definition of bounded rationality and its basic concepts .................. 19 1.3.2 Overcoming the negative effects of bounded rationality......................... 22 1.4 Strategic management accounting (SMA) ..................................... 24 1.5 Neural networks ............................................................................. 26 1.6 Research methodology ................................................................... 28 1.6.1 Philosophical assumptions....................................................................... 29 1.6.2 Methodology selection ............................................................................ 31 1.7 Outline of thesis.............................................................................. 34 2 FORMULATION OF STRATEGY........................................................ 37 2.1 Definition and purpose of strategy ................................................. 37 2.2 Different levels of strategy............................................................. 39 2.3 Strategy process.............................................................................. 41 2.4 Environment analysis in the formulation of strategy ..................... 44 2.4.1 The purpose and methods of environment analysis................................. 44 2.4.2 Uncertainty of environment..................................................................... 50 2.4.3 The levels of environment analysis ......................................................... 55 3 BACKGROUND OF ECONOMIC TRENDS ....................................... 65 3.1 Similarities in economic trends ...................................................... 65 3.2 The causes of economic trends....................................................... 71 3.3 Economic growth ........................................................................... 74 4 SELF-ORGANIZING MAP (SOM) AND DATA ................................. 77 4.1 Choice of appropriate technique for the analyses .......................... 77 4.2 Applications of Self-Organizing Map ............................................ 79 4.3 Principle idea of Self-Organizing Map .......................................... 81 4.4 Data................................................................................................. 84 4.4.1 Choice of variables and data.................................................................... 84 4.4.2 Data normalization .................................................................................. 88 4.5 Constructing of Self-Organizing Maps .......................................... 90 5 RESULTS ............................................................................................... 93 5.1 Macro level models ........................................................................ 93 5.1.1 Results of Model 1 ...................................................................................93 5.1.2 Results of Model 2 ...................................................................................94 5.1.3 Model 3 - Trend analysis with nine variables ..........................................95 5.1.3.1 Cluster identification and trend analysis..................................96 5.1.3.2 Conclusions of the trends by nine variables ...........................105 5.1.4 Comparison between macro level models..............................................105 5.2 Industry level models ................................................................... 107 5.2.1 Model 4 – Cycles in the paper industry..................................................107 5.2.1.1 Cluster identification and trend analysis................................108 5.2.1.2 Conclusions of the trends in the industry level .......................116 5.2.2 Model 5 – Comparison of grocery retailers’ pricing policies ................117 5.2.2.1 Cluster identification and analysis of results .........................118 5.2.2.2 Conclusions of the comparisons of grocery retailers .............126 5.2.3 Model 6 – Scenario analysis of retailers’ pricing positions ...................127 5.2.3.1 The description of selected retailers.......................................127 5.2.3.2 Changing prices of all the products........................................128 5.2.3.3 Changing prices of milk products...........................................130 5.2.3.4 Conclusions of pricing position scenarios..............................131 5.3 Comparison between macro and industry environment............... 132 5.3.1 Introduction to the comparisons.............................................................132 5.3.2 The comparison of movements between Models 3 and 4 ......................132 5.3.3 Conclusions of macro and industry level movements............................137 6 EVALUATION OF THE SUITABILITY OF MODEL 3 FOR TREND ANALYSIS............................................................................. 139 6.1 Theoretical background of the user evaluation of Model 3 ......... 139 6.2 Survey process of the current macroeconomic analysis methods 142 6.3 Evaluation process of Model 3 in the Finnish public noted companies..................................................................................... 144 6.4 Respondents’ background information ........................................ 145 6.4.1 Position and work experience................................................................ 145 6.4.2 Information technology experience....................................................... 146 6.4.3 Information overload and macro environment complexity ................... 148 6.5 Current methods for the environment analysis ............................ 150 6.5.1 Importance of factors of information..................................................... 150 6.5.2 Satisfaction with current methods ......................................................... 151 6.6 Model 3 suitability for trend analysis........................................... 153 6.6.1 Content............. ..................................................................................... 153 6.6.2 Accuracy.................................................................................................154 6.6.3 Timeliness.............................................................................................