Bowman's Strategy Clock

The Strategy Clock: Bowman's Competitive Strategy Options

The 'Strategy Clock' is based upon the work of Cliff Bowman (see C. Bowman and D.
Faulkner 'Competitve and Corporate Strategy - Irwin - 1996). It's another suitable way to
analyze a company's competitive position in comparison to the offerings of competitors. As
with Porter's Generic Strategies, Bowman considers competitive advantage in relation to
cost advantage or differentiation advantage. There a six core strategic options:

Option one - low price/low added value - Likely to be segment specific

Option two - low price - Risk of price war and low margins/need to be a 'cost leader'.

Option three - Hybrid - Low cost base and reinvestment in low price and differentiation

Option four - Differentiation –Without a price premium - Perceived added value by user,
yielding market share benefits
With a price premium -Perceived added value sufficient to bear price
premium

Option five - focused differentiation - Perceived added value to a 'particular segment'

warranting a premium price

Option six - increased price/standard - Higher margins if competitors do not value

follow/risk of losing market share.

Option seven - increased price/low values - Only feasible in a monopoly situation

Option eight - low value/standard price - Loss of market share

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 Gap Analysis

Gap analysis is a very useful tool for helping marketing managers to decide upon marketing
strategies and tactics. Again, the simple tools are the most effective. There's a
straightforward structure to follow. The first step is to decide upon how you are going to
judge the gap over time. For example, by market share, by profit, by sales and so on. This
will help you to write SMART objectives. Then you simply ask two questions - where are we
now? and where do we want to be? The difference between the two is the GAP - this is how
you are going to get there . Take a look at the diagram below. The lower line is where you'll
be if you do nothing. The upper line is where you want to be.

Your next step is to close the gap. Firstly decide whether you view from a strategic or an
operational/tactical perspective. If you are writing strategy, you will go on to write tactics -
see the lesson on marketing plans. The diagram below uses Ansoff's matrix to bridge the
gap using strategies:

You can close the gap by using tactical approaches. The marketing mix is ideal for this. So
effectively, you modify the mix so that you get to where you want to be. That is to say you
change price, or promotion to move from where you are today (or in fact any or all of the
elements of the
marketing mix).

This is how you close the gap by deciding upon strategies and tactics - and that's
gap analysis.

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 Ansoff's Matrix - Planning for Growth

This well known marketing tool was first published in the Harvard Business Review (1957) in
an article called 'Strategies for Diversification'. It is used by marketers who have objectives
for growth. Ansoff's matrix offers strategic choices to achieve the objectives. There are four
main categories for selection.

Ansoff's Product/Market Matrix

Market Penetration
Here we market our existing products to our existing customers. This means increasing our
revenue by, for example, promoting the product, repositioning the brand, and so on.
However, the product is not altered and we do not seek any new customers.

Market Development
Here we market our existing product range in a new market. This means that the product
remains the same, but it is marketed to a new audience. Exporting the product, or
marketing it in a new region, are examples of market development.

Product Development
This is a new product to be marketed to our existing customers. Here we develop and
innovate new product offerings to replace existing ones. Such products are then marketed
to our existing customers. This often happens with the auto markets where existing models
are updated or replaced and then marketed to existing customers.

Diversification
This is where we market completely new products to new customers. There are two types of
diversification, namely related and unrelated diversification. Related diversification means
that we remain in a market or industry with which we are familiar. For example, a soup

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manufacturer diversifies into cake manufacture (i.e. the food industry). Unrelated
diversification is where we have no previous industry nor market experience. For example a
soup manufacturer invests in the rail business.

Ansoff's matrix is one of the most well know frameworks for deciding upon strategies for
growth.

Write notes on each of the following tools of financial appraisal in assessing

alternative corporate strategies.

The financial appraisal of alternative corporate strategies is a key part of the strategy
selection process. Although such financial appraisal may not be carried out by the corporate
planner himself, it is important that the contemporary planner at least understands each of
the following major tools of financial appraisal of alternative corporate strategies.

Return on capital employed

All strategies require some financial investment. The objective, of course, is to generate a
profit on such investment. Indeed corporate objectives will often be couched in terms of
required levels of profit. However, alternative strategies will usually potentially generate
different levels of absolute profit. Because of this, a frequently used measure of evaluating
alternative strategies is to compare forecast profit levels with the investment required for
each strategy and express this as a percentage return on capital employed. In this way
alternative strategies can be ranked in a rational and objective manner with regard to
profitability. In order to calculate return on capital it is necessary to be able to identify and
isolate both the costs and revenues associated with each individual strategy. In practice this
can present difficulties particularly where there are ‘cross-over’ effects into other parts of
the business. It is also often difficult to accurately forecast future costs and particularly
future revenues over the envisaged lifetime of a strategy. If anything, planners have a
tendency to err on the side of over-optimism; with costs, most frequently, being under-
estimated, and revenues, most frequently overestimated. Because of this, it is advisable to
prepare a range of anticipated return on capital employed calculations based on ‘optimistic’,
‘pessimistic’, and ‘expected’ outcomes.

Payback period
As the term implies, the payback period of evaluating alternative strategies involves
estimating the length of time it will take to recoup the investment required by a strategic
option. So, for example, if a company is comparing the two strategies each of which require
identical investment, in general all other things being equal, that strategy which pays for
itself in the shortest time will be the most attractive. However, rarely are ‘all other things
equal’. For example, the appraiser must also consider the cash flow profile after investment
in the strategy has been recouped. Because of this payback should not be used in isolation
from other measures of profitability. Unfortunately, many companies all too frequently set
maximum payback periods as a major criterion for selecting between strategic options. This
can encourage ‘short-termism’ in the evaluation and selection of strategies. What
constitutes an acceptable payback period will of course vary from company to company and
situation to situation. In the case of a major public sector organisation a venture such as

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building new infrastructure may well involve payback periods of 20 years or more. In the
case of the fashion industry payback periods may be assessed in terms of periods of two or
less years.

Discounted cash flow analysis

Often referred to as DCF analysis, this is one of the most frequently used methods of
financial evaluation of strategies. Unlike the previously described payback period method
DCF analysis explicitly takes into account the fact that income received in future years, in
this case from the investment made in a strategic option is, in real terms, not worth as much
as income received today. In other words funds generated early in the life of a strategy are
of greater real value than those generated in later years. In order to reflect this fact the DCF
technique uses a discounting factor in order to reduce the value of future projected cash
flows. Normally the discounting rate is based on the current value placed on money invested
in the strategy. Using this discounting factor each future projected annual cash flow forecast
over the life of the strategy is progressively discounted and then totalled to arrive at the net
present value (NPV) of the project. Because it takes account of the effects of the timing
element of cash return, DCF evaluation is particularly useful in evaluating between different
strategies with varied patterns of expenditure and return.

Cost/benefit analysis
Each of the previous tools of financial evaluation of strategies use tangible measures of
profitability, e.g. cash flow, investment required etc. However, often the evaluation of
alternative strategies will involve the consideration of wider intangible costs and benefits.
For example, Strategy A may be particularly beneficial, say, to the local community where
the organisation is situated. Similarly, Strategy B may have ‘intangible’ costs in the form of
say increased road congestion as a result of a new factory. Cost/benefit analysis involves
placing a money value on all the costs and benefits of alternative strategies. One of the
major advantages of a cost/benefit approach is that it forces the planner to consider the
wider implications of strategic options. However, it is often difficult to actually place a
monetary value on these wider implications of strategies and is often necessarily subjective.
Used with care, however, cost/benefit analysis is a useful addition to the armoury of financial
evaluation techniques available to the corporate planner.

Funds flow analysis

This technique of financial appraisal of alternative strategies essentially assesses the
financial feasibility of alternatives with regard to the profile of funds flow forecast associated
with the strategy or project. Specifically, it seeks to identify the funds which would be
required for any strategy, the likely sources of those funds and any possible funding
shortfalls which will need to be addressed. So, for example, if say a company was
considering expanding its business by opening a new factory in another country, say, it
would need to first of all identify the sources of funds to support this strategy.

This would necessitate a forecasting of possible sources of funds from existing business and
also, of course, a forecast of any additional sources from the proposed new venture. These
sources of funds would then need to be compared with the forecast uses of the funds and in
particular those associated with the new project. So, for example, there will be a
requirement for funds to build a new factory; there will also be additional working capital
costs to cover stock etc. Finally, there will be marketing and tax liability, dividend payment
costs etc. Both sources and uses of funds for the project can then be compared and any
funding shortfalls identified. The company can then look at alternative ways of funding any
shortfall and the extent to which it is able and willing to do this. A project which might, using
profitability or return bases for assessing its attractiveness look to be a winner might well
when considered from a funds flow analysis, be very unattractive or even unviable. When we
take into account the fact that most companies go out of business because of funds flow
problems, this technique of evaluating alternative corporate strategies becomes very useful
indeed.

Benchmarking

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This method goes beyond the industry norms comparisons by assessing the competence of
an organisation against that of the best performers in the sector.

Benchmarks are useful because they can be set for separate activities, which then marks
them transferable from one industry to another. For example, standards of hygiene set for
hospitals can become transferable to hotels, and catering standards for hotels may be
transferred to hospitals.

Benchmarking may also be based on the information of a partnership between organisations

across industries, with one company using a company which is accepted to be the best in a
given activity to help it to improve its own performance. Difficulties can obviously arises
where companies are close competitors, but even here it is possible to use benchmarking
through collaboration.

Benchmarking is particularly useful in the service and not- for profit sectors as a way of
assessing performance, with the objective of future improvement, where quantitative
measures such as financial performance, are either more difficult to apply, or are
inappropriate.

Discuss each of the following strategies based on protecting or building on the

organisation’s current position with its existing products and in its existing
markets.

There are usually many alternative strategies with respect to both direction and method
which a company may choose from with regard to achieving selected objectives. A major
way of distinguishing between alternative strategies is to distinguish these alternatives on
the basis of the extent to which strategies are built around existing versus new products and
existing versus new markets. Even within these broad alternatives strategies there are
several alternative sub-strategies which a company can select from. If a company therefore
wishes to pursue a strategy essentially based on protecting and building within its existing
products and markets, we can identify three sub-strategies, namely withdrawal,
consolidation and market penetration. Each of these is discussed below with regard to
meaning, considerations in choice, and advantages and disadvantages.

Withdrawal
In some ways, of course, this sub-strategy could be said not to be aimed at protecting and
building on current position in as much as this strategy involves complete or partial
withdrawal in current product markets. However, where this is a conscious and planned
strategy it should be designed to ensure an orderly withdrawal from these product markets,
thereby at least in one sense protecting and building on what might be an otherwise very
disadvantageous position. Withdrawal from current product markets is usually indicated
where a company cannot, or in the future will not be able to compete effectively. However,
there are other often compelling reasons for withdrawal from a particular product market
such as, for example, where the company’s objectives change or where the expectations of
certain stakeholders have altered etc. With this strategy the planner must carefully assess
whether or not withdrawal is the best option and what other alternatives there are.
Obviously, the nature and the speed of withdrawal from a market will depend upon the
reasons for this withdrawal. Sometimes immediate and complete withdrawal is the best
option where, for example, a major new competitor has entered or where there has been
some other major change in the market which means the company can no longer compete.
In other cases, withdrawal can be more gradual such as, for example, where we are reaching
the decline stages of the product lifecycle and where the product is to be phased out without
replacement. Wherever possible, withdrawal from current product markets should be
planned and implemented just as rigorously as when entering new product markets. There
are in fact many alternative options for planned withdrawals from markets; so for example,
sometimes companies will withdraw from a market by licensing products to other
organisations. Similarly, sometimes orderly withdrawal will be achieved by a gradual phasing
out of production and stocks. Again, it is important to plan withdrawal from product markets
from a strategic perspective.

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Consolidation
Consolidation is truly concerned with protecting and strengthening a company’s position in
its current markets through its current products. Consolidation is essentially concerned with
the maintenance of market share and sales in existing markets and can be a very profitable
strategy. The PIMS database, for example, shows that firms that can protect and sustain
high market shares earn higher rates of return on capital. At first sight consolidation in
current markets and with current products would appear to suggest simply the protection of
the status quo, with little or no strategies for change. However, this is misleading. Given that
markets and the environment change, consolidation certainly does not mean standing still.
Protecting market share and consolidating it often requires substantial innovation and
improvement with regard to the organisation’s current products or services. Most companies
find, therefore, that simply to consolidate in current markets and with current products can
involve substantial marketing expenditures. Similarly, consolidation may require improved
productivity through capital investment. Market leaders should certainly attempt to
consolidate their position within markets.

Market penetration
Although this strategy is still based upon present products and present markets, it involves a
much more proactive set of strategies based upon attempting to gain or increase market
share. The extent to which this strategy can and should be pursued depends on the nature
of the market and the organisation’s strengths and weaknesses. When the overall market is
growing it is often relatively easy for organisations to gain share, and particularly for small
companies or new entrants. On the other hand, where a market is static market penetration
can be much more difficult to achieve. Very often, such penetration can only be achieved
through aggressive pricing and promotion which in turn can substantially reduce short term
profits. Some companies, however, particularly where they have the resources to sustain
short term losses, will deliberately use market penetration strategies with a view to building
market share and achieving higher rates of return when and if they have become the market
leader. Smaller companies should be looking to penetrate markets by looking for
weaknesses amongst the market leaders. Evidence shows that market penetration
strategies for these smaller companies is often successful where it is based on higher
perceived quality or service. Although market penetration can be a very successful strategy
for the individual company, it can lead to excessive competition throughout a market or
industry with subsequently lower profits for all participants in the market.

Discuss the so-called ‘Balanced Scorecard’ approach to strategic control in

organisations. – ABE Version

The so-called ‘Balanced Scorecard’ approach to the control of strategic plans was developed
in the early 1990s by Robert Kaplan and David Norton. Essentially, the Balanced Scorecard
was developed to overcome the problems and limitations of some of the more traditional
approaches to, and bases of, controlling strategic plans. In particular, the more traditional
approaches to control were felt to focus too much on relatively narrow, quantitative and
therefore easier to measure elements of organisational performance, which were
then translated into and used in control processes. These more traditional control measures
tend to centre more, then, on areas such as financial performance, e.g. return on
capital employed, or perhaps market performance such as, say, market share or growth.
Very often control was based on a few or even sometimes a single measure of performance.
Kaplan and Norton suggested that this focus on more readily measurable and often narrow
areas of performance did not provide a useful way for an organisation to understand and
control what needed to be done in an organisation to make strategies work, and indeed to
evaluate how well these strategies were working. In particular, they suggested that
traditional control measures often concentrated on past rather than future performance, and
that they were unbalanced in focusing only on a Relatively few areas of strategic activity
and performance. The Balanced Scorecard technique to controlling strategic planning was
developed in order to overcome these problems. The Balanced Scorecard, then,
combines both quantitative and qualitative measures of performance. It also
concentrates on evaluating the processes and activities associated with the effective
7
implementation of an organisation’s particular strategies. Finally, the Balanced Scorecard
approach acknowledges the different expectations of various stakeholders in measuring and
controlling organisational performance. A key element of the Balanced Scorecard
approach is the recognition that every strategy is unique. So, as mentioned above,
the specific control processes which an organisation needs to focus on need to be related
and stem from that organisation’s particular strategies.

However, the Balanced Scorecard approach identifies four key strategy areas that need to
appear, albeit perhaps with different specific measures of performance, on every scorecard.
These four areas are as follows:

_ Financial

Examples of possible scorecard measures here would include, eg return on capital,

economic value added, cost reduction, shareholder value, cash flow, financial ratios, etc.

_ Customer

Examples of possible scorecard measures here would include, eg customer satisfaction,

customer retention, acquisition of new customers, customer service, etc.

_ Internal

Examples of possible scorecard measures here would include, eg personnel turnover,

personnel satisfaction, product quality, output, stock turnover, etc.

_ Growth/future

Examples of possible scorecard measures here would include, eg innovation performance,

training and development, application of new technology, employee empowerment, etc. We
can see that by including these four key areas, the Balanced Scorecard immediately forces a
wider perspective on what constitutes effective performance, and therefore what constitutes
effective control with regard to strategies. It also links control not only to short term
performance and outputs, but also to the way in which processes are managed. This can
particularly be seen with regard to the inclusion of the ‘Growth/Future’ category in the
scorecard. There is no doubt then that this indeed is a much more ‘balanced’ approach to
measuring the controlling strategic performance. It also emphasises the interrelationships
between different performance areas in an organisation. However, the Balanced Scorecard
approach to control is not without its problems and limitations. There is still a danger of
measuring or including for measurement those activities and areas of performance which
are most easy to measure and not necessarily those which are crucial strategically. In
addition, the Balanced Scorecard can lead to problems and conflict with regard to what to
include. For example, the marketing personnel of a business may have a very different view
on what constitute important strategic areas of control compared to, say, the accountancy
function. Great care therefore needs to be used in the design of the Balanced Scorecard
technique involving managers throughout the business and securing their agreement with
regard to what should be on the scorecard. Finally, the Balanced Scorecard can lead to
much more measurement and control in an organisation potentially detracting from action
programmes. Overall, however, it is likely that more and more companies will move towards
Balanced Scorecards in an attempt to reflect the inter-dependence of different performance
factors which together will determine strategic success or failure.

What is the Balanced Scorecard? – Nishan version

new approach to strategic management was developed in the early 1990's by Drs. Robert
Kaplan (Harvard Business School) and David Norton. They named this system the 'balanced
scorecard'. Recognizing some of the weaknesses and vagueness of previous management
approaches, the balanced scorecard approach provides a clear prescription as to what
companies should measure in order to 'balance' the financial perspective.

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The balanced scorecard is a management system (not only a measurement system) that
enables organizations to clarify their vision and strategy and translate them into action. It
provides feedback around both the internal business processes and external outcomes in
order to continuously improve strategic performance and results. When fully deployed, the
balanced scorecard transforms strategic planning from an academic exercise into the nerve
center of an enterprise.

Kaplan and Norton describe the innovation of the balanced scorecard as follows:

"The balanced scorecard retains traditional financial measures. But financial measures tell
the story of past events, an adequate story for industrial age companies for which
investments in long-term capabilities and customer relationships were not critical for
success. These financial measures are inadequate, however, for guiding and evaluating the
journey that information age companies must make to create future value through
investment in customers, suppliers, employees, processes, technology, and innovation."

The balanced scorecard suggests that we view the organization from four perspectives, and
to develop metrics, collect data and analyze it relative to each of these perspectives:

The Balanced Scorecard and Measurement-Based Management

The balanced scorecard methodology builds on some key concepts of previous management
ideas such as Total Quality Management (TQM), including customer-defined quality,
continuous improvement, employee empowerment, and -- primarily -- measurement-based
management and feedback.

Double-Loop Feedback

In traditional industrial activity, "quality control" and "zero defects" were the watchwords. In
order to shield the customer from receiving poor quality products, aggressive efforts were
focused on inspection and testing at the end of the production line. The problem with this
approach -- as pointed out by Deming -- is that the true causes of defects could never be
identified, and there would always be inefficiencies due to the rejection of defects. What
Deming saw was that variation is created at every step in a production process, and the
causes of variation need to be identified and fixed. If this can be done, then there is a way to
reduce the defects and improve product quality indefinitely.

To establish such a process, Deming emphasized that all business processes should be part
of a system with feedback loops.

9
The feedback data should be examined by managers to determine the causes of variation,
what are the processes with significant problems, and then they can focus attention on
fixing that subset of processes. The balanced scorecard incorporates feedback around
internal business process outputs, as in TQM, but also adds a feedback loop around the
outcomes of business strategies. This creates a "double-loop feedback" process in the
balanced scorecard.

Outcome Metrics

You can't improve what you can't measure. So metrics must be developed based on the
priorities of the strategic plan, which provides the key business drivers and criteria for
metrics that managers most desire to watch. Processes are then designed to collect
information relevant to these metrics and reduce it to numerical form for storage, display,
and analysis. Decision makers examine the outcomes of various measured processes and
strategies and track the results to guide the company and provide feedback.

So the value of metrics is in their ability to provide a factual basis for defining:

• Strategic feedback to show the present status of the organization from many
perspectives for decision makers
• Diagnostic feedback into various processes to guide improvements on a continuous
basis
• Trends in performance over time as the metrics are tracked
• Feedback around the measurement methods themselves, and which metrics should
be tracked
• Quantitative inputs to forecasting methods and models for decision support systems

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 Management by Fact

The goal of making measurements is

to permit managers to see their
company more clearly -- from many
perspectives -- and hence to make
wiser long-term decisions. "Modern
businesses depend upon
measurement and analysis of
performance. Measurements must
derive from the company's strategy and provide critical data and information about key
processes, outputs and results. Data and information needed for performance measurement
and improvement are of many types, including: customer, product and service performance,
operations, market, competitive comparisons, supplier, employee-related, and cost and
financial. Analysis entails using data to determine trends, projections, and cause and effect
-- that might not be evident without analysis. Data and analysis support a variety of
company purposes, such as planning, reviewing company performance, improving
operations, and comparing company performance with competitors' or with 'best practices'
benchmarks."

"A major consideration in performance improvement involves the creation and use of
performance measures or indicators. Performance measures or indicators are measurable
characteristics of products, services, processes, and operations the company uses to track
and improve performance. The measures or indicators should be selected to best represent
the factors that lead to improved customer, operational, and financial performance. A
comprehensive set of measures or indicators tied to customer and/or company performance
requirements represents a clear basis for aligning all activities with the company's goals.

Through the analysis of data from the tracking processes, the measures or indicators
themselves may be evaluated and changed to better support such goals."

The BSC is a conceptual framework for translating an organization's vision into a set of
performance indicators distributed among four perspectives: Financial, Customer, Internal
Business Processes, and Learning and Growth. Indicators are maintained to measure an
organization's progress toward achieving its vision; other indicators are maintained to
measure the long term drivers of success. Through the BSC, an organization monitors both
its current performance (finances, customer satisfaction, and business process results) and
its efforts to improve processes, motivate and educate employees, and enhance information
systems--its ability to learn and improve.

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Discuss the meaning and uses of two of the following in the context of corporate
strategic planning.

(a) Gap analysis

(b) Synergy
(c) Vertical integration

Gap analysis
Gap analysis is a technique used in corporate strategic planning to identify the extent to
which existing strategies will fail to meet the performance objectives in the future. This is
most easily explained using a simple diagram as shown below.

In the diagram it has been assumed that we are dealing with a single product/single market
company. The company is currently achieving a 15% return on capital and wishes to at least
maintain this level of performance over the next three year period. This is shown by the line,
AC, indicating the required level of return. However, the line, AB, in the diagram illustrates
what the likely rate of return will actually be if the company simply continues with its
existing strategies over the planning period shown. The forecast for this likely level of
performance shows a steadily declining return on capital perhaps due to, say, increased
competition, increasing labour costs and deteriorating plant and equipment. Because of this,
if the company has unchanged strategies over the next three years it will have a ‘gap’
between its desired and actual level of return on capital. Once this gap has been identified
and the reasons for it established, then the corporate planner can decide how to best fill the
gap by developing new strategies. Gap analysis therefore is a useful technique for beginning
to explore required new strategies for the future. The major difficulty with gap analysis is
that the forecasting can be both difficult and time consuming. In addition, some areas of
required future performance are more difficult to quantify than the company return on
capital shown in the example. Finally, it is important to stress that gap analysis does not of
itself suggest how any gaps can be filled. Often of course, there will be a range of
alternatives for filling gaps, but in forecasting and analysing gaps the planner should find
clues as to how these gaps might be closed. So in our example the planner might need to
think in terms of combating the competition, controlling labour costs and/or investing in new
equipment.

Synergy
Synergy is said to occur where the sum of combining resources is greater than the sum of
the parts which are combined. It is frequently referred to as the ‘2+2=5’ effect. But what
precisely does this concept mean and in particular what relevance does it have to strategic
corporate planning? In the context of strategic corporate planning, synergy is generally
applicable when considering combining or reconfiguring two or more activities or processes.
So, for example, the concept of synergy might be concerned with assessing how much extra
benefit (e.g. value for money) can be created by reconfiguring the linkages in the value
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chain. In addition, the concept of synergy also becomes relevant and important when a
company is considering diversification strategies, and particularly where these strategies
involve acquisitions of other companies. For example, consider the case of an organisation
which has an excellent range of products but limited channels of distribution. By acquiring
another company which has strong channels of distribution the effect of the acquisition may
be such as to provide extra benefits to the acquiring company as a result of linking a good
product range with the acquired firm’s strong distribution channels. These extra benefits are
referred to as synergy. Synergy then can arise in several areas and from several sources.
Some of the more frequent areas and sources of potential synergy include for example:

Sales and marketing synergy

As already discussed, this can occur when products and distribution channels are combined.
Similarly opportunities for ‘tie-in’ sales when a company acquires a company with a
complementary range of products can give rise to synergy. One of the most frequent
sources of synergy in this area is where a company can use its strong brand names or
corporate identity to gain extra benefits in new markets.

Operating synergy
Operating synergy is most often the result of increased utilisation of facilities and personnel,
spreading overheads, and large scale purchasing.

Investment synergy
This type of synergy arises from, for example, combining plant and machinery, raw material
inventories, transfer of research and development knowledge.

Personnel synergy
Synergy can also arise through the combination of people and their skills. So, for example, if
a company has extremely competent senior management skilled, say, in strategic planning,
increased performance can result in acquired companies, giving rise to positive synergy.

Financial synergy
Although, as we shall see, one of the possible effects of all the areas of synergy discussed so
far is on financial performance, there can also be opportunities for synergy in the financial
area per se. For example, the cash rich company which acquires another company say to
penetrate new markets may additionally benefit by producing extra profits from otherwise
‘idle’ cash. Although these are some of the major areas for potential synergy in fact the
possibilities and sources of potential synergy are wide ranging. The major implication of this
concept for the strategic planner is that possible synergy effects must be part of the
evaluation criteria of the corporate planner in assessing future strategies, and in particular
strategies involving takeovers and mergers, or in planning product market expansion. The
concept of synergy is also useful when linked to the technique of value chain analysis to
explore how reconfiguring the linkages in the value chain might lead to synergy. In this
respect, however, two problems are worthy of mention. First is the problem of measuring
synergy. Synergy is often difficult to measure, and hence evaluate. So, for example,
although synergy has often proved to be a major justification for proposed takeovers and
diversification quantifying synergy, both pre and post takeover, is difficult. In principle
synergistic effects can be measured against one of three variables: increased sales revenue,
decreased costs, and decreased investment requirements. In practice pre-evaluation of the
likely impact on these three variables is extremely difficult and potential synergistic effects
have often proved to be over-optimistic. Secondly, and related to the above, it is important
to recognise that synergy can also be negative, i.e. the effect of combining resources is
often less than the sum of the parts. Many corporate planners have, in the past, ignored this
possibility to both their own and their organisation’s cost. In summary, synergy is an
important and useful concept to the corporate planner, particularly when evaluating possible
future strategies. Unfortunately it is also a difficult concept to operationalise and measure,
particularly prior to implementing strategies. Nevertheless, corporate planners must try to
evaluate and quantify possible areas of synergy, both positive and negative, whenever their
plans involve the combining of resources.

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Vertical integration
In producing and supplying most products and services there are usually a number of
activities which need to be performed in the chain of manufacture, distribution and
marketing. So, for example, the production of a computer involves design and development
activities, the production and sourcing of raw materials, components and other factor inputs,
the combining of these to produce the computers themselves, and finally the sales
marketing and distribution of the product to final customers. Some companies will function
at only one level of this chain of design, manufacture and distribution and marketing of
distribution. So, for example, a company might only assemble the components in a
production operation leaving design and marketing/distribution to other companies in the
chain. Where a company decides to expand its range of activities to include other activities
in the chain of design, manufacture, and marketing/distribution, we refer to this as ‘vertical
integration’. In fact, vertical integration has been a major strategic option used by
companies to expand their activities and ultimately and hopefully their profits. Vertical
integration can be of two types and a company may pursue both types of vertical integration
in seeking to expand profits. Backward vertical integration is where a company moves into
activities which are concerned with the inputs into the company’s current business, i.e. they
move further back in the value chain. So, for example, a company may decide to produce its
own raw materials or components which previously it had outsourced from another
company.

Forward vertical integration, on the other hand, is where a company moves further up the
value chain towards and possibly even including the final customer end of the chain. So, for
example, if our computer manufacturer moves into distributing and retailing its own
computers this would be forward vertical integration. Many companies have become fully
vertically integrated by moving both backwards and forwards in the value chain. There are
many reasons for both forward and backward vertical integration.
So, for example, McDonalds moved to vertically integrate backwards even acquiring its own
beef farms in order to ensure regularity and consistency of supply of its raw materials. In
fact, ensuring consistency and quality of supply is understandably a major reason for
backward integration. On the other hand, forward integration is often done to ensure control
over channels of distribution including access to customers. Great care must be taken with
both forward and backward vertical integration as both can be high risk strategies. Often
vertical integration takes a company into areas of business and operations with which they
have little or no experience. For this reason, many companies vertically integrate by
acquiring established existing companies which have the necessary skills and resources etc.
On the other hand, vertical integration can add considerably to profits and particularly, as
already mentioned, helps to ensure control where for example consistency and reliability are
required. Another aspect to consider in vertical integration is the extent to which such
integration may attract the attention of watchdog bodies such as, for example, the Office of
Fair Trading who might be concerned about any possible decrease in competitiveness in a
market as a result of vertical integration. Despite the risks of vertical integration, we can
expect this type of strategy to remain popular and perhaps to expand over the next decade
as companies seek new sources of competitive advantage.

“The effective management of change must be based on a clear understanding of

human behaviour at work.” Explain this statement in relation to both:

Resistance to organisational change

Change, whether it originates within the organisation or from the external social or
economic environment, is a constant feature of modern organisational life and
understanding change is a key to successful management. Most managers in contemporary
organisations need to be able to adapt to change themselves, create organisations that are
responsive to change and assist in the introduction of specific change programmes. Knowing
how and why individuals respond to change is essential as it is individuals who either resist
or embrace changes in the organisation. To view resistance to change simply as irrationality,
without understanding the underlying causes is to miss the opportunity to understand better
how to manage such resistance. Individuals may resist new ideas or new practices for a

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number of reasons. People’s perception of events and their possible consequences may be
conditioned by their prior experience or by their general view of the world. The person who
has suffered previously as a consequence of organisational change or who suspects
management of wanting to cut the labour force at every opportunity may be less likely as a
consequence to believe management’s reassurances. Employees may have got into the
habit of working in a particular way and breaking old habits may cause discomfort and
anxiety or may require extra effort that may have an uncertain pay-off. Hostility to some
changes may be due to employees simply calculating that they will be worse-off as a
consequence, whether in terms of pay, working conditions, independence or other rewards.
In an attempt to protect their own self-interests they may not take a long-term view or
consider the wider interests of the company. Fear of the unknown or fear of being unable to
cope with new requirements, (e.g. learning new skills), may also be powerful forces that
make people less inclined to support the changes that are asked of them. Resistance to
change can take many forms. So for instance it may be open refusal to co-operate, or it may
be expressed as dispute with management. However if this is not an option or it has not
reached that stage, then resistance can still be expressed but in more covert and subtle
ways. Withdrawing goodwill for instance, by becoming less willing to work flexibly or give
extra effort when required can be as damaging as the more open protest. Unless
management understand that and can see the decline in goodwill as being a reaction to the
change, then their ability to find a solution will clearly be hampered.

Processes for the introduction of change in organisations.

(b) Mullins makes the point that in managing resistance and in avoiding it in the first place,
account needs to be taken of the prevailing management style in the organisation. In some
cases management may feel that a top-down hierarchical style is called for. In an
organisation where this is the norm or where circumstances require drastic action then a
more authoritarian style may be appropriate. However, if management wishes to ensure
that there is a willingness to co-operate, it is often better that they adopt a more
consultative or participative style. In this way they can probably better understand the
concerns of the employees, and therefore be better able to address them. If we assume that
some resistance is based on people having an incomplete picture of the situation or
incomplete facts about the change, then management needs to ensure that communication
channels are open and accessible. Likewise some resistance may come from employees
genuinely convinced that new techniques or approaches will not work and it is important for
these concerns to be understood and worked through. Let us consider just one example of
organisational change, the introduction of new technology. In discussing the introduction of
IT, Mullins emphasises that there are a number of steps that can be taken to ensure that
employee resistance is understood and minimised. These include the creation of trust in the
organisation so that all parties can reach judgements about the future with some degree of
certainty. Genuine participation of staff in the change can help to remove suspicion and can
ensure that their knowledge and their day-to-day familiarity with the work is taken account
of in the change. In discussing the planning that needs to take place he suggests the need
to ensure that issues such as staffing levels, working conditions and terms of employment
are not left to chance but are seen as part of the process of managing change. Management
may need to recognise that the fear of being unable to cope with new requirements may be
a powerful force and that in designing new training schemes they should recognise the
psychological factors that may get in the way of learning.
Although a change in the IT used within the business may appear to be a ‘technical’ issue,
staff may be more concerned with the ‘knock-on effects’, such as the work rate, the
possibility of more stressful work becoming a consequence and so on. Careful attention to
these social factors may help the change be introduced more effectively. Ultimately
employees may be concerned about their more immediate interests: pay, hours of work,
security and so on. Recognising this management may need to recognise the need to
negotiate these terms and conditions, in order to reach appropriate settlements and gain
appropriate ‘buy-in’ to the changes. (Although the answer above uses the introduction of
new technology as an example one could equally use the introduction of new policies or the
creation of a revised organisational structure, amongst many others, as the basis for
illustrating the answer.)

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 “Innovation is a prerequisite for change.” To what extent is this statement true?
Illustrate your answer with practical examples.

In order to examine the statement in a realistic way, it is necessary to fully understand what
the terms ‘innovation’ and ‘change’ actually mean. Change is defined in the dictionary as
‘the act of making or becoming different’. Therefore, change can be seen as any alteration
of an existing situation, often explained as an alteration in the status quo. A good example
of an organisational change in the UK can be seen in one of the big supermarket chains,
where some of the stores have extended opening hours so that they are open throughout
the night for most of the week. This particular change involves all aspects of the
organisation. For example, there will be a change in the procedures for the incoming
supplies, whilst on the resource side there will be a change in staffing arrangements and
duty rotas. Innovation is defined as bringing in new methods, ideas etc. but an additional
point of making changes is often added. However, the point on making changes is really
about changes resulting from new ideas, rather than changes per se.

In organisational life, innovation would be seen as the development of a new idea which is
aimed at improving a process, product or service. An example of innovation is taken from a
production unit in a small factory that utilised a number of conveyor belts in the production
line. A small take-off area branched off the main conveyor, along which a particular product
would travel. An operator was responsible for ensuring that components were fed from the
branch into containers, which also involved ensuring that a supply of containers was
available. There were often times when there would be a build up of components with
occasional spillage on to the floor, and subsequent breakages. One of the supervisors came
up with the idea of having an electronic sensing device on the conveyor, which would
automatically switch off the conveyor when the numbers of components on the branch area
conveyor exceeded a predetermined figure. There are many examples where innovation has
led to change, on both a small scale and a large scale. A good illustration of large scale
innovation leading to change can be seen in the case of the building of a new car
manufacturing plant. A major concern with the old plant was the availability and continuity
of supply of the various components used in the production process. The idea of having a
supply point, including some manufacturing, on the same site as the production plant was
put forward. The idea was developed to the point of reality when a new production plant was
built and facilities for supplying all of the major components were also built adjacent to the
plant. This resulted in a major change to the way in which supplies were procured for the
production plant. Instead of having to carry large stocks of some items, a system of ‘Just in
Time’ was introduced, resulting in big savings in time and money, and the need for fewer
employees to operate the stores area. However, many changes do not take place because of
some innovative idea. For example, there could be a need to change the structure of an
organisation as a result of takeovers or mergers. A change in markets or the introduction of
new products may trigger off the need for major organisational changes. It can, therefore,
be said that all innovations imply some form of change, but all changes are not necessarily
innovations. Therefore, the statement in the question is not true.

Some have suggested that the most relevant way of assessing and evaluating
alternative strategies is in terms of Shareholder Value Analysis (SVA).

What is Shareholder Value Analysis, and why is it suggested as being the most
relevant way of assessing and evaluating alternative strategies?

It is certainly the case that in recent years it has been suggested that perhaps the most
relevant way of assessing and evaluating alternative strategies is the analysis of
Shareholder Value. The reasons for this are essentially based on the notion that in a market
economy shareholders invest in organisations in order to reap financial returns. Without the
investment of shareholders the plc organisation would not exist. In addition, it is argued that
the best measure of how effectively an organisation is using economic resources, including
shareholder investments, is the return on these resources. In other words, the arguments for
using shareholder value as the main measure for the evaluation of strategic options is an
economic one based on the view that this represents the best measure of the use of scarce
resources and the principal reason for shareholder investment.

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It is the case of course, that if a company does not satisfy its shareholders’ financial
expectations, it ceases in the long-run to be viable. Therefore an organisation must attempt
to enhance its ability to generate returns from the operation of its businesses and to attract
additional funds needed from debt or equity financing. With regard particularly to this last
element, equity financing, a company’s ability to attain such equity financing depends on
the expectations of investors with regard to the firm’s ability to generate returns on these
investments.
Understandably, shareholders willingly invest in a company only when they expect a better
return on their funds than they could get from other sources with a similar degree of risk.
Therefore, it is suggested that a company should pursue business strategies that will
produce future cash flows sufficient at least to satisfy shareholders but preferably to
maximise the value to such shareholders. A company which does not maximise shareholder
value will find that its share price is depressed and it will be unable to attract investment to
fund future operations and growth. It also may render the company more vulnerable to
takeovers by other companies who promise to give greater value to shareholders.
Shareholder Value Analysis, then, it is suggested should be the only way of evaluating and
selecting between different strategic options.

Briefly outline the different ways in which shareholder value may be measured
and evaluated.

Given the reasons for the suggested use of shareholder value as a way of evaluating
strategic options, many companies now set explicit objectives for this purpose. There are
however, various ways of expressing and therefore measuring shareholder value, and it is
important that careful consideration is given to which ones are used. Amongst the most
common ways of expressing and hence measuring shareholder value are the relatively
simple ones of:

– return on shareholder equity

– increase in share price
– earnings per share

These of course are readily understood by most investors and managers, are widely
accepted as measures of shareholder performance, and are relatively easily measured. More
recently, though, some companies have been measuring shareholder
value in terms of what is often termed ‘market value added’ or MVA. A company’s MVA is
calculated by combining its debt and the market value of its shares and then subtracting the
capital that has been invested in the company. The reason, if positive, shows how much
wealth the company has created. Obviously, the greater the positive value of this
calculation, the greater the value to the shareholder. MVA then represents one of the more
recent ways of evaluating different strategic options.

Briefly outline the dangers and limitations of using only shareholder value
analysis to evaluate strategic options.

Whilst there is no doubt that it is important and useful to use shareholder value in
evaluating alternative strategic options, there are distinct dangers in using this as the single
or even overriding means of evaluating and selecting between strategies. The first danger
relates not so much to the actual use of shareholder value, but rather to the dangers of
using this as the only way of evaluating and choosing between strategic options. The reason
for this is that most companies pursue several objectives. So using only shareholder value to
evaluate strategies may lead to neglecting other important measures of strategic options
such as, for example, measures which relate to, say, market share, market leadership,
objectives for innovation, etc. Only using shareholder value analysis, then, is a somewhat
limited and myopic view of what constitutes effective strategies, albeit, as we have seen,
that shareholder value is an important facet of any evaluation of strategies. Related to this
is the fact that, although clearly shareholders are extremely important to a company, there
are other parties whose interests must also be considered in evaluating strategies. It is

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common in companies these days to refer to ‘stakeholders’ in an organisation. Stakeholders
include, for example, customers, suppliers, distributors, local community, employees, etc.
Concentrating only on shareholder interests is a very limited perspective. In particular
focusing on shareholder value may lead companies to neglect or undervalue strategies
necessary to provide value to the range of stakeholders in a company which may, in the
long term, detract from its effectiveness and performance.

A suitable organisational structure is essential to the effective implementation of

corporate strategic plans. Discuss each of the following types of organisational
structure.

There is no doubt that a key element in the effective implementation of corporate strategies
is the design of the organisational structure itself. Without a suitable organisational
structure, decision making is likely to be slow, expensive, ineffective, or all of these.
However, there is no one right form of organisation structure. Needless to say, the type of
structure which will be most appropriate varies according to, for example, the size of the
company, its geographical spread of markets, the rate of change in the environment, and so
on. Regardless, however, of which type of structure is eventually determined as being most
appropriate the corporate planner must obviously first appreciate and understand the
different types of structure which are/can be used. Outlined below are four of the alternative
ways of structuring an organisation, together with some of the main characteristics of each
and their relative advantages and disadvantages.

The Functional Structure

A functional organisational structure is organised around the primary activities that have to
be carried out in an organisation including, for example, marketing, finance, production and
so on. This type of structure is often found in smaller companies, or those with relatively
narrow product and/or market ranges. Sometimes, however, the functional structure is
found within other types of structure such as the multi-divisional one with the divisions
themselves being organized on a functional basis. The main advantages of a functional
structure are first that it is relatively simple to understand, establish and operate. In
addition, it enables functional specialists, with similar areas of interest and expertise, to be
grouped together. However, the functional structure can lead to problems of coordination
between the different functional areas of a business. In addition, such structures are often
poor in coping with diversity and with rapid environmental and market change.

The Multi-divisional Structure

This type of structure is where the organisation is divided into units on the basis of, for
example, products, geographical areas, markets or services. So, for example, one division in
the company may deal with, say, the institutional markets, whereas another division in this
company may deal with, say, the retail sector. The multi-divisional structure is particularly
useful where there is considerable diversity facing the organisation. Each division can

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concentrate on the specific issues and skills required for its particular business environment.
This, in turn, enables strategies to be developed to meet the requirements of each division,
thereby improving competitive strategy. In addition, multi-divisional structures enable
measurement of each division’s performance and can be very useful for developing
managerial and staff expertise. The disadvantages of the multi-divisional structure include:
possible conflict between divisions, potentially high costs of administration and staffing and
potential complexity in achieving co-ordination between the different divisions in the
company.

The Holding Company Structure

This type of company structure usually comprises of an investment parent company which
holds shareholdings in a number of separate business operations with the parent company
exercising simple control. Essentially, the different parts of the business in which the parent
company invests operate independently. This type of structure has been particularly popular
with companies that have grown through merger and acquisition. The main advantage of
this type of company structure is that each of the business units in which the holding
company invests can operate within their own product markets and develop their own
strategies. This, in turn, means that each part of the business is likely to have a high degree
of autonomy in decision making and can operate and develop strategies in ways best suited
to the circumstances of each particular part of the business. The disadvantages of this type
of structure centre around the dangers of poor coordination and cohesion between the
different business units. Often, holding company structures can give rise to duplication of
effort, say, in research and development and innovation between the different parts of the
business. In addition, individual companies within the holding company structure can often
feel isolated and sometimes threatened by the parent company head office.

The Matrix Structure

Originally developed for managing one-off projects such as the development of new
products, this type of structure consists of a combination of structures, so for example, it
may take the form of a product divisional structure operated in combination with a
geographical divisional structure. The matrix structure is usually used where a single
divisional or functional structure would be inappropriate. So, for example, if a company was
extending its international markets whilst at the same time developing new product lines, it
may operate a structure based on divisions combining geographical and product areas. The
advantages of a matrix structure principally lie in the flexibility which such a structure has to
meet the needs of specific situations. So, for example, combinations of product and market
expertise may be achieved. However, matrix structures can be problematical in that they
are more complex to understand and operate. They can also lead to conflicts between the
different personnel and divisions brought together in the matrix structure. Finally, matrix
structures can lead to slower decision making and problems of determining and identifying
responsibilities for decisions and control etc.

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