Corporate Governance Leadership Skills

CORPORATE GOVERNANCE

LEADERSHIP SKILLS

Part II – Strategic Leadership

Module I –

The

Governance

of Strategy

Part 2 – Strategic Leadership

Table of Contents Table of Figures .................................................................................................................. 2 Module 1 – The Governance of Strategy ............................................................................ 3

1. Introduction ..................................................................................................................... 4 2. A Strategic Planning Framework .................................................................................... 5 3. Vision, Purpose, Values, Goals, Objectives Vision ........................................................ 7

4. Strategic Analysis ......................................................................................................... 11 5. Strategic Formulation.................................................................................................... 12 6. Strategy Implementation ............................................................................................... 15 7. Monitoring Strategy Execution ..................................................................................... 16 8. Board Role in Governance of Strategy ......................................................................... 17

9. Benefits of Developing a Strategy ................................................................................ 19

10. Reasons Why Strategies Fail ...................................................................................... 20 Appendix A3.1 .................................................................................................................. 22


Table of Figures Figure 1 - A Strategic Planning Framework ....................................................................... 5

Figure 2 - Definition I ......................................................................................................... 7

Figure 3 - Example - Natura ............................................................................................... 7

Figure 4 - Definition II ........................................................................................................ 8

Figure 5 - Example - Tata ................................................................................................... 8

Figure 6 - Definition III ...................................................................................................... 9

Figure 7 - Definition IV ...................................................................................................... 9

Figure 8 - Definition V ..................................................................................................... 10

Figure 9 - Directors & Strategic Planning ........................................................................ 17

Figure 10 - Involvement in Strategic Decisions ............................................................... 18

Figure 11 - Example - IBM ............................................................................................... 21

Figure 12 - Strategic TechniquesA. THE ANSOFF MATRIX .............................................. 22

Figure 13 - Four Generic Strategies .................................................................................. 23

Figure 14 - Perspectives .................................................................................................... 26

Figure 15 - Product Portfolio Matrix ................................................................................ 28

Figure 16 - Forces Driving Industry Competition ............................................................ 31

Figure 17 - Value Chain .................................................................................................... 38

Figure 18 - PESTLE Analysis........................................................................................... 41

Figure 19 - SWOT Analysis ............................................................................................. 44


Module 1 – The Governance of Strategy

Explain an effective strategy’s components

Analyze the board’s role in the governance of a company’s strategy

Identify the benefits of developing a strategy

Use the appropriate tools to formulate strategy


1. Introduction

A strategy is a plan of action designed to achieve a specific goal. Strategy is all about

gaining (or being prepared to gain) a position of advantage over adversaries or best

exploiting emerging possibilities. As there is always an element of uncertainty about

future, strategy is more about a set of options ("strategic choices") than a fixed plan. For a

company, strategy is how a company orients itself towards its market and its competitors.

Flawed strategic thinking can create massive value destruction and even threaten a

company’s survival.

Many boards feel that their strategic planning and management could be improved. A

McKinsey study1 of more than 700 executives found that only 45 percent of the

respondents said that they were satisfied with their strategic planning process.

For most companies, the strategic planning and management processes are complex. For

example, when Professor Henry Mintzberg2 explored strategic planning processes among

large multinational companies, he was unable to identify a single process that could be

called strategic planning. Instead, he concluded that there are five types of strategies:

Plan

An intended direction or course of action

Ploy

A maneuver intended to outwit a competitor

Pattern

A consistent pattern of past behavior – realized rather than intended

Position

The locating of brands, products, or companies within a conceptual framework

created by consumers or other stakeholders - it is a strategy determined primarily

by factors outside the company

Perspective

A strategy determined primarily by a master strategist

1 “How to Improve Strategic Planning,” McKinsey Quarterly. Availableat: www.mckinseyquarterly.com/strategy/strategicthinking .

2 Henry Mintzberg, The Rise and Fall of Strategic Planning (London: Prentice Hall, 2004).

http://en.wikipedia.org/wiki/Plan


2. A Strategic Planning Framework

A typical framework for developing and articulating a company’s strategic direction is

illustrated in the figure below.

Figure 1 - A Strategic Planning Framework

Envisioning a future state for the company

The board should develop a vision that is operationally useful; in other words, it should

be more than just wishful thinking. This vision needs to be translated into corporate goals

or objectives, usually through a purpose statement.

Strategic analysis

The board should ensure that:

• The company’s competitive advantages have been identified.

• Any gaps between the company’s present capabilities and those needed to fulfill

the vision have been identified. This involves an analysis of the external political,

social, and market environment, and the company’s internal resources. This

analysis may lead to a redefinition of the company's purpose. Boards should be

prepared to ask incisive questions, anticipating rather than reacting to major

issues.

Strategy formulation

The next step is to broadly generate potential options and then make strategic decisions.

This process should involve cooperation between executive management and the board,

with each having an understanding of their respective roles. This activity may not be

necessary every year unless the company operates in a very volatile business

environment.


Implementation

The choice in strategy needs to be translated into detailed operational plans by executive

management for sales, marketing, production, and research and development (R&D).

In a McKinsey survey3, more than a quarter of the respondents said that their companies

had strategic plans but no implementation path. Forty-five percent reported that the

planning processes failed to track the execution of strategic initiatives. These operational

plans should be disseminated throughout the organization by senior executive

management and then widely discussed internally. The board should monitor the

strategy’s execution against milestones and call on management to modify the strategy as

necessary. It is usually not sufficient to track the strategy’s implementation solely by

using financial performance targets.

The planning process should involve the most knowledgeable and influential participants

who stimulate and challenge each others’ thinking. Many companies fail to recognize the

importance of the various elements, and focus instead upon data gathering, neglecting the

crucial interactive components.

3 “How to Improve Strategic Planning,” op.cit.


3. Vision, Purpose, Values, Goals, Objectives Vision

Figure 2 - Definition I

Vision statements:

Are expressed in clear, unambiguous terms that paint a vivid, memorable picture

of a bright future

Underscore the company’s distinct strengths

Act as a driving force for executive management, employees, and investors

Focus the company on working towards the same goal

Give guidance for decision-making

Provide the source for the company’s realistic, achievable goals and objectives

Despite this long, demanding list, the best vision statements are often the shortest. If

people cannot remember the vision, it will not influence their day-to-day behavior.

4

Figure 3 - Example - Natura

4 www.natura.net.


Figure 4 - Definition II

A company’s purpose is often defined in the company’s constitution.

Figure 5 - Example - Tata

Directors frequently recognize the importance of company culture, but have difficulty

describing and discussing its nature and impact. This is because there is no agreed

“vocabulary” with which to discuss the subject. Many words that are used to describe

culture are value-laden and may have connotations of personal bias. From a pragmatic

perspective, a company’s “culture” can be summed up as the beliefs, customs and

practices that are shared by all working in the company. It is often accepted without

question. Culture is sometimes referred to as “the way things are done around here”, or

the “glue that holds the company together”. Typically, culture varies among a company’s

different divisions. Some well-known global companies have attempted to create a

consistent culture throughout their global operations.


Figure 6 - Definition III

Figure 7 - Definition IV

The vision and purpose statements are at the top of a hierarchy of well-considered and

well-articulated goals that translate vision into operational and then tactical plans.

Strategic goals are wide-ranging and may address:

1. Market standing: an indication of the market share desired by the company or

the specification of a competitive niche

2. Innovation: recognizing the need to develop new services, products, internal

processes, and business systems to remain competitive

3. Productivity: a measure of efficiency that relates resources used to output

generated

4. Physical and financial resources: the acquisition and efficient use of resources

5. Profitability: measured by one or more financial indices, such as return on net

assets (RONA)

6. Management performance: effective management competencies and

development of individual potential

7. Staff performance and attitude: effective conduct of rolesat all levels, and

maintenance of a positive, constructive culture

8. Corporate responsibility: consideration of the company’s impact on society


Figure 8 - Definition V

To make the goals more meaningful, the statement needs to be broken down into

corporate, divisional, or functional objectives, depending on the company’s structure, so

that each part of the company can see how it contributes to the overall corporate vision.

As a board member, you should ensure that departmental or functional objectives are

broken down into operational or tactical targets for specific individual senior executive

managers or teams. These targets can then be used to drive and monitor day-to-day

performance. Many companies tie these objectives into the personal appraisal and

development process to reinforce the message.


4. Strategic Analysis

No matter what industrial or commercial sector a company specializes in, the business

environment has many different influences which interact with one another and change

with time. These influences are largely beyond a director’s control, but directors need to

cope with this complexity, unravel the key influences, and understand their effect on

decision making.

Strategic analysis provides an objective, structured approach to the problem. The

objective of using analytical frameworks is to build a clear picture for the board, of the

opportunities facing the company and the strategic threats that must to be overcome or

circumvented.

Strategic analysis normally precedes formulation of strategy. It is very easy to generate a

long list of the changes that may affect the company. To make it useful, however, the

board should focus on the key issues to understand their strategic importance. In other

words, the aim is not to produce a definitive list, but one that focuses the board’s

attention. Useful techniques for analyzing the business environment can be found in

Appendix A3.1 include:

Competitive analysis

PESTLE analysis

SWOT analysis


5. Strategic Formulation

In comparison with operational decisions, strategic decisions may be described as:

Relating to the full scope of a company's activities:

o Which products the board chooses to produce

o Which markets the board wishes to operate in

o Where the board wishes to focus its competitive efforts

o Where to draw the boundaries around which activities are internal or

external to the company

Matching a company's activities to the environment:

o Responding to perceived threats in the environment

o Exploiting identified opportunities

Matching a company’s activities to its resources and its capability to change:

o Building on what the company is capable of today

o Devoting necessary resources to extending and enhancing existing

capability

Allocating major resources in the organization:

o Ensuring that usually scarce resources are focused upon the critical areas

Concerning the company’s long-term direction:

o Looking beyond the next budget horizon, typically three o five years

o The implications are likely to be organization-wide and complex

Many companies see strategy as responding to environmental changes, but frequently,

large leading companies seek to shape that environment through their strategy, rather

than just responding to it.

Useful techniques for formulating strategy can be founding Appendix A3.1 and include:

Ansoff matrix

Balanced scorecard


BCG Matrix

Competitive positioning

Generic strategies

Internal analysis

Scenario planning

Stakeholder mapping

The Strategic Plan

Many directors think of “strategy” in terms of a document, not a thinking process, since

most companies require a written record of their strategic plans in order to communicate

their intentions to stakeholders. The risk is that the document becomes too long, too

detailed, and too complicated, and recipients do not use or even read it.

Strategic plan formats vary widely, but they all contain common elements such as:

Where the company should be:

o Vision, purpose, and strategic objectives

o Basis for competition

o Desired market positioning

o Product or service development priorities

o Ideal organizational culture and values

o Key customer and supplier relationships

Where the company started from:

o Current product/service portfolio

o Current competitive position

o Current people, skills, and culture

o Financial position

o Current customer/supplier relationships and perceptions

o Strengths and weaknesses


How the company will achieve its vision:

Where the company started from:

o Current product/service portfolio

o Product/service development plans

o Marketing plans

o Financial model

o Technical and IT investment plans

o Recruitment, training, and retention plans

o Opportunities to be exploited

o Threats to be addressed

o Milestones and responsibilities

o Business risks

o Key performance measures to monitor progress


6. Strategy Implementation

Implementation involves:

Acquiring requisite resources

Allocation of sufficient resources (financial, personnel, time, technology support)

Establishing a chain of command or some alternative structure (such as cross-

functional teams)

Assigning responsibility of specific tasks or processes to specific individuals or

groups

Developing the process

Training

Integration and/or conversion from legacy processes


7. Monitoring Strategy Execution

Boards must ensure that the strategy is executed. To do so, the board must receive

relevant information regularly. The board should ensure that:

Management is committed to the strategy

Sufficient resources are allocated to fulfill the strategy

Board reports are made regularly

Milestones are achieved, and, if missed, that there are action plans to remedy the

situation

This process will be discussed in detail in Part Two, Module Two, “Evaluating Strategy

and Delivery.”


8. Board Role in Governance of Strategy

A key board role is to ensure that the company is pursuing an appropriate, effective

strategy. The only way to achieve this is for the board to be constructively engaged in

governing the strategy process. A well-developed strategy reduces a company’s risk of

failure and increases its chance of success at the expense of its rivals, who have less-

developed plans or no plan at all.

Questions directors should ask include:

Where should the company be in the long-term? What is the strategic direction?

Which markets should it compete in and what kinds of products and services

should it provide? What are the markets and the scope?

How can the business perform better than the competition in those markets? What

is the source of competitive advantage?

What resources (skills, assets, finance, relationships, technical competence and

facilities) are required to compete effectively?

What external factors within the broad business environment affect the company’s

ability to compete?

What are the values and expectations of those with influence on the company,

such as the stakeholders?

McKinsey research5 indicated that the role of directors in strategic planning was:

Figure 9 - Directors & Strategic Planning

Many companies are typically driven from the top by one or more entrepreneurs whose

“strategy” is simply transferred to the entire company by their decisions and behavior. As

business grows, or market conditions become more complex and competitive, this type of

leadership is, at best, inadequate and, at worst, dangerous. The challenge for directors,

5 “How to Improve Strategic Planning,” op.cit.


therefore, is not just to establish a strategic thinking and planning process, but to ensure

that the process evolves in step with changing business needs.

McKinsey research6 indicated that the parties involved in strategic decisions in a

company involve:

Figure 10 - Involvement in Strategic Decisions

6 Ibid.


9. Benefits of Developing a Strategy

Companies with effective strategies gain advantages over poorly planned and managed

companies. A strategy can:

Predict and sometimes influence the pace and direction of changes in the business

environment to their own advantage

Provide a competitive edge through easily accessible plans and dissemination of

information throughout the company

Focus monitoring on external markets and increase awareness of internal core

competencies, which can help the board and senior management to anticipate

developments, develop reactions, and even preempt developments

Encourage the board, senior management, and employees to accept the need for

continuous change and to better prepare for it, having the right attitudes and

culture in place throughout the organization

Allocate resources rationally, meeting short- and long term goals based on sound

commercial reasons. (As a result, managers have better direction and focus and

are more motivated, accept the objectives, and feel committed.)

Improve inter-functional relations through shared goals and clear objectives


10. Reasons Why Strategies Fail

There are many reasons why strategic plans fail, the most common reasons include:

Failure to understand the customer

• Failure to understand why they buy the product or service

• There is no real need for the product

• There has been inadequate or incorrect marketing research

Inability to predict reaction from the business environment

• Failure to predict what competitors will do (e.g., developing brands, price wars, etc.)

• Government or regulator intervention

Overestimation of resource competence

• Staff, equipment, and processes unable to handle the new strategy

• Company failure to develop new employee and management skills

Failure to coordinate

• Reporting and control relationships inadequate

• Organizational structures too inflexible

Failure to obtain senior management commitment

• Senior management have not been involved right from the start

• Failure to obtain sufficient company resources to accomplish the tasks

Failure to obtain employee commitment

• New strategy not been well-explained to the employees

• No incentives given to workers to embrace the new strategy

Underestimation of time requirements

• No critical path analysis has been carried out

Failure to follow the plan


• No follow-through after the initial planning

• No tracking of progress against the plan

Failure to manage change

• Inadequate understanding of the internal resistance to change

Poor communications

• Insufficient information sharing among stakeholders

• Exclusion of key stakeholders

7 Figure 11 - Example - IBM

“The board should fulfill certain key functions, including: reviewing

and guiding corporate strategy, major plans of action, risk policy,

annual budgets and business plans; setting performance objectives.”8

7 Various new reports.

8 OECD. Principles of Corporate Governance (Paris, OECD, 2004). Available at: http://www.oecd.org/dataoecd/32/18/31557724.pdf

.


Appendix A3.1

A-Z Strategic Techniques

HANDOUT H3.1A

Strategic technique Concepts Involved

Figure 12 - Strategic Techniques


A. THE ANSOFF MATRIX

In 1968, Igor Ansoff9 developed a matrix (figure 1 below) of four generic strategies that a

company might select:

Market penetration

Product development

Market development

Diversification.

Figure 13 - Four Generic Strategies

Market penetration

Market penetration is achieved by gaining market share in existing areas of operation by

taking customers away from the competition. The attractions of achieving market

dominance include economies of scale and reduced unit-production costs. Tactics to

achieve this include:

Improving quality or productivity

9 Igor Ansoff, “Strategies for Diversification,”Harvard Business Review, Vol. 35 Issue 5, Sep.-Oct. 1957: pp.113-124.


Increasing marketing and promotional activity

Market development

This entails extending existing products and services into new markets, while retaining

the security of existing markets. Tactics may include:

Targeting new types of customer or market segments

Exploiting new product users

Penetrating new geographical areas

This strategy is particularly relevant to industries, in which staffs are highly and

specifically skilled in a particular technology, such as computers. It allows the company

to build on its core competencies.

Product development

Product development implies enhancing existing products, or developing new products,

to meet the changing needs of existing markets. Some markets demand ongoing

incremental change as consumer tastes develop and become more sophisticated.

Other product developments may be prompted by a desire to achieve a one-off

differentiation.

Diversification

Diversification is a term used to describe the strategic decision to enter new markets

while introducing new products or services.

Its aim is to lower dependence on any single market, achieve growth, and reduce risks.

Ansoff identified three reasons why firms diversify:

Objectives - The company’s objectives cannot be met by continuing in their existing

markets.

Financial Resources - The company has financial capacity in excess of what they need

in their existing market.

Opportunities - The company has identified greater opportunities in new market areas.

There are two broad types of diversification:

Related: keeping within the broad boundaries of the existing market


Unrelated: entering completely different markets or introducing products and services; a

strategy for rapid growth that large holding companies may employ


B. THE BALANCED SCORECARD

This approach was developed by Robert Kaplan, a Harvard professor of accounting, and

David Norton, an information technology consultant.10

Their alliance has produced

arguably the most successful and widely used “new” approach to total business

performance measurement. Their research was founded on working closely with 12

companies at the leading edge of performance measurement over one year. From this,

they concluded that a balanced presentation of financial and operational measures is

needed. Simple! Yet no one had previously managed to capture this premise as neatly as

Kaplan and Norton.

Their framework is designed to compel directors and managers to answer four basic

questions, which in turn provide four different perspectives. These are:

Figure 14 - Perspectives

The framework also forces directors to focus on the few measures that are critical to

sustainable, competitive success by requiring only one page for conveying the analysis.

Kaplan and Norton propose that the framework meet two needs:

1. It provides a single report of seemingly disparate elements on a company’s

competitive agenda.

2. It guards against sub-optimization, forcing managers to consider how changes in

one area affect the entire company.

10

Robert Kaplan and D. Norton, “The Balanced Scorecard – Measures that Drive Performance.” Harvard Business Review

(January 1992). Available at: http://www.hbr.com.


This framework has many advantages over the otherwise ad hoc approach to bringing

financial and non-financial measures together at a strategic level. It is:

Simple and understandable

Concise

Designed to put strategy and vision, rather than control, at the agenda’s center

Forward looking

Consistent with other contemporary initiatives, such as cross-functional

integration, customer/supplier partnerships, continuous improvement, team, and

individual accountability


C. BOSTON CONSULTING GROUP MATRIX

In the 1960s, the Boston Consulting Group (BCG) developed a tool for analyzing a

company’s portfolio (its range of products and services).11

The BCG has suggested a

model of the product or service portfolio (also known as the growth/share matrix) that

assists managers and directors in considering the spread of their activities and skills.

The model is developed from the concept the “learning curve.” As a product market

evolves from its introduction to its growth, output rises and unit costs fall. This is because

the producers introduce more efficient production methods. It also implies that

dominance in any market by a company will increase profitability through economies of

scale and greater bargaining power. Dominance is most easily achieved at the growth

stage; producers wish to expand their market share faster than the competition, which is

relatively easy in an expanding market. Once the market reaches maturity, overall growth

is slower and customer loyalties may be fixed. However, even at the mature stage,

competition can be fierce to maintain market share and only those producers who are

willing to invest in advertising or customer relations will retain their position.

Figure 15 - Product Portfolio Matrix

The matrix plots market growth rate against market share, and uses four “labels” in the

quadrants to make their significance easier to recall:

Star

High market share and high growth rate. Products/services in this category are typically

supported by heavy expenditure on advertising, sales incentives, and, perhaps, inefficient

production runs in order to dominate a market while there is overall growth. The rationale

is that costs should eventually decline and turn the “star” into a “cash cow.”

11

Boston Consulting Group. Available at: http://www.bcg.com/this_is_bcg/mission/ growth_share_matrix.html.

http://www.bcg.com/this_is_bcg/mission/


Cash cow

High market share in a mature market. Once market dominance is achieved and market

growth subsides, there is less need for high investment, and costs may continue to fall as

experience increases. This provides a high level of cash income for the producer (who is

“milking” the earlier investment). This cash may then be fed back into the business to

create and support the next “star.”

Question mark(or problem child)

Growing market but low share. Products/ services in this category may be tomorrow’s

“stars” if they are given sufficient resource and attention, or they might never blossom

into viable options. It is a difficult management decision to determine which to back and

which to abandon. This early stage in a product’s life can be extremely costly.

Dog

Low-market share in a static market. The BCG model suggests that this situation is not

sustainable in the long run since these products may become a cash drain. The company

has to decide when to divest itself of these business parts. There are occasions, however,

where producers are using their product’s range as a unique selling point.

Hence, a “dog” may be retained in the short term in order to make a product range

comprehensive, or because it represents the foundation of a reputation built on that brand.

The matrix can be used to assess the balance of resources in three ways:

Is the overall mix of products/services balanced across the organization? Some to

provide funds (cash cows) and some to provide for the business’s future (stars and

question marks)?

Are resources being allocated appropriately to each activity? If dogs are receiving

a disproportionate amount of attention while question marks are being starved, the

long-term potential for turning the latter into stars is being undermined.

Does the balance of products and services match the resources available?

If the organization has high R&D skills, but most of its products are in mature

markets, it suggests a need to develop marketing skills.


D. COMPETITIVE ANALYSIS OF THE INDUSTRY ENVIRONMENT

To assist in understanding why an industry may be a good one to be in (or not) and to

help identify possible strategic moves for a firm’s better positioning, you will find it

useful to apply a framework to understand better what influences shape industry trends.

The classic work in the field is by Michael E. Porter12

, who describes the competitive

environment by examining the underlying economic forces. He has identified five

“generic” forces:

Threat of entry

Suppliers’ bargaining power

Buyers’ bargaining power of buyers

Threat of substitutes

Extent of competitive rivalry

Porter’s framework provides a generic structure, which can be overlaid on any industry to

assist analysis of its characteristics. The concept is usually illustrated as follows

12

Michael E. Porter, Competitive Strategy: Techniques for Analyzing Industries and Competitors (New York: The Free Press, 1980).


Figure 16 - Forces Driving Industry Competition

Force 1: The threat of entry

The perceived likelihood of a new competitor will alter the strategies adopted by existing

market players. The extent of the threat will depend on the existence of “barriers to

entry,” which make it difficult or unattractive for new competitors to enter the market.

These barriers may include:

Economies of scale. It is not cost effective to enter and set up in a small way

(e.g., the chemical processing industry).

High set-up costs. New competitors would have to invest heavily and take high

risks on their investment returns.

Lack of access to distribution channels.

A new manufacturer may be able to produce competitive goods, but cannot

distribute them to customers.

Legislation and government action.


These may protect industries from competition, but are less common in many countries

because of the work of the World Trade Organization (WTO) and widespread adoption of

deregulation and privatization policies.

Differentiation: As perceived by the consumer; would-be imitators are discouraged from

trying to compete.

These barriers vary from industry to industry, but are a useful means of focusing on:

Which, if any, exist?

To what extent do they prevent new entrants?

How do they affect your company’s strategy?

Carrying out a structured analysis in this way will help to decide whether the threat of a

new entrant is high, medium, or low.

Force 2: Suppliers’ bargaining power

It is the relative balance of power between the two elements of the supply chain that is of

importance here. In general, where the relative power of suppliers is high, profit margins

are likely to be low. The suppliers will be able to dictate terms to the industry and raise

their prices which, in turn, raises the industry’s costs. The power of suppliers is likely to

be high when:

There is a concentration, with a few large suppliers; it is expensive to switch from

one supplier to another.

The supplier places a low importance on its customers, perhaps particularly

smaller customers, with whom it has little interest in building or sustaining a long-

term relationship.

Consideration of the relative balance of power between an industry and its suppliers will

produce a verdict of high, medium, or low.

Force 3: Buyers’ bargaining power

Again, when there is a balance of power in favor of customers or buyers from an

industry, margins within the industry are likely to be depressed. Buyer power is likely to

be high when:

There is a concentration of buyers, especially if they buy in large volumes

Alternative suppliers are available and it is inexpensive and convenient to switch

between them


Customers are prepared to “shop around” and squeeze prices within the industry,

which they will do if the product represents a major part of their total cost

Customers could decide to “integrate backwards,” that is, to establish their own

suppliers

Force 4: Threat of substitutes

It is not always straightforward to identify a company’s competitors. There may be a

limited number of competitive products, but consumers may perceive other different

products as substitutes (note: it is the customer’s perception that matters here). Obvious

examples include artificial sweeteners for sugar and man-made fiber for natural fiber; less

obvious ones are a second family car for a holiday, and a boxed set of CDs for a theatre

ticket. A company’s strategy needs to reflect a clear understanding of how its customers

perceive their alternative purchasing decisions.

For example, will a low-price policy, or a differentiated policy help to minimize the

threat of substitutes? There is, of course, always a threat of substitutes in any given

market.

Force 5: Extent of competitive rivalry

This force is the “jostling for position” that continually happens between the existing

industry players. Its strength will depend upon:

The overall rate of the industry’s growth.

Competition is likely to be more intense when the overall growth rate is low.

The level of fixed costs. High fixed costs tend to induce price competition in

order to achieve high turnover volumes.

Increments of additional capacity. If it is only possible to expand in large steps,

such as a complete new assembly line, it will lead to over-capacity in the short

term, and depressed profit margins.

Differentiation. If all competing products are viewed as the same by consumers,

and there is little to prevent them from switching, it will lead to increased rivalry.

The existence of “exit barriers.” The converse to entry barriers, it is not always

easy to leave an industry; the costs of closing down organizations in both money

and emotional terms can lead to over-capacity and increased competition within

the whole industry.


E. COMPETITIVE POSITIONING

Once a board has formed a clear view of the forces that shape its industry, the next level

of analysis is the company’s position within that industry. With which other

organizations is it most closely competing, and on what criteria?

Tools and techniques exist for identifying more closely the industry boundaries, but one

of the most practical and useful devices has been proposed by Porter13

, specifically,

strategic group analysis. This is a simple means of grouping companies that share similar

strategic characteristics. The choice of appropriate dimensions will be different for each

industry. A checklist of possible suggestions includes:

Product diversity

Geographic coverage

Number of market segments

Distribution channels

Branding

Marketing effort

Vertical integration

Quality of product/service

R&D capability

Cost position

Utilization of capacity

Pricing policy

Gearing

Ownership structure

Influence groups

Size

Of course, the analysis is only as valid as the initial choice of the characteristics, but it

provides a useful way of identifying your competitors.

13

Ibid.


F. GENERIC STRATEGIES

In the 1980s and early 1990s, Porter gained immense popularity for his simple, concise

approach to competitive strategy. His work has become the most widely adopted

framework for understanding strategic behavior.

Porter14

identified three types of generic strategy:

Low-cost leadership

Differentiation

Focus

Low-cost leadership

A common strategy is to concentrate on achieving lower costs overall than those of your

competitors and, in doing so, develop economies of scale that create entry barriers for

potential rivals. It does not happen by accident, however, and deliberate effort is required

to ensure the strategy is pursued throughout the chain of operation.

Differentiation

This strategy is based upon establishing a consumer perception of unique or superior

products and services, when compared to rival products or services. The emphasis is on

perception. Differentiation is only relevant if it is recognized by the consumers.

This recognition can be achieved in different ways including:

Higher quality

The incorporation of special technical features

Superior customer service

The design of special brand images.

Focus

The third generic strategy is concerned with selecting only certain parts of the market on

which to concentrate efforts. This could be particular products, buyers, or geographical

areas. In a sense, focus is a pre-requisite to the decision about whether to be a cost leader

or a differentiated supplier. By focusing in this way, Porter argues that it becomes

feasible for a firm to dominate its chosen areas.

14

Ibid.


Porter supports the view that the cost leadership and differentiation strategies are distinct

and should not be mixed. Organizations need to define and maintain their generic strategy

as the basis for building and sustaining competitive advantage. Failure to make this

conscious decision will result in mediocre competitive performance.

Although it is possible to find examples that clearly fall into one extreme case or another,

there are also many examples of companies that have successfully combined some

elements of both strategies. In reality, most companies sit somewhere between the two

extremes, offering a balance of quality and price. Nevertheless, Porter’s simple model is a

useful starting point for analyzing and considering strategies.


G. INTERNAL ANALYSIS

This process strives to understand a company’s strategic capability, knowing what

resources it has, how they are balanced, and the interrelationships between them.

Resources that aren’t owned by the company but do influence its strategic capability

should also be considered. Many businesses are only part of the “value chain of tasks”

from a product’s conception through to its consumption. For example, a manufacturer of

food packaging is part of the farming-processing- packaging-distribution-supermarket-

customer chain. The quality and delivery of the product depends on many resource

variables beyond the manufacturer’s control. While internal analysis aims to be objective,

it is not easy to take a dispassionate view. However, a systematic analysis is helpful and

should include:

Value chain

Core competencies

Portfolio

SWOT

Comparative

Value chain analysis

Value chain analysis is associated with Professor Porter15

. This approach describes the set

of activities that are required to satisfy customers’ needs, starting with suppliers and

procurement, and going through production, selling, marketing, and delivery. Each stage

of the value chain is linked to the next one. Each stage should form part of the basis for

competitive advantage. It must either be provided at lower cost or add more value by

superior quality or differentiated features. The figure below illustrates a typical value

chain.

15

Ibid.


Figure 17 - Value Chain

Core competencies

Core competencies can be regarded as the collective learning within a company

especially the knowledge and understanding associated with how to coordinate diverse

production skills and integrate multiple streams of technology. Core competencies were

extremely fashionable in the 1990’s, but have become less so in recent years. To be

valuable, core competencies must:

Add something substantial to customers

Be rare

Be difficult to imitate

Be used effectively by the company

In reality, it is extremely difficult to decide what core competencies are and how to

exploit them within a company. Some critics have also noted that core competency theory

tends to start with the characteristics of the operating business rather than the parent

organization.

Portfolio analysis

See earlier section on BCG analysis.

SWOT analysis

See later section on SWOT analysis.


Comparative analysis

There are three bases for comparing a company’s performance:

Historical analysis

Industrial comparative analysis.

Benchmarking (e.g., best practice comparison)

Historical analysis

A historical analysis examines a company’s current performance by comparing it with

performance in previous years in order to identify any significant changes.

Industrial comparative analysis

This analysis compares the organization’s performance with that of other organizations

within the same industry.

Benchmarking

This process identifies competitors and/or companies that exemplify best practice in

some activity, function or process and then compares one’s own company performance to

the “world class” leaders.


H. PEST, PESTLE ANALYSIS

PEST analysis starts from a broad, general perspective that considers the key influences

to be Political, Economic, Social, and Technological. There is nothing sacrosanct about

the categories or the boundaries between them. For example, if unemployment is

considered to have a strong impact on a company, it may be classified as either a social or

an economic influence. It does not matter in which “box” the influence is put, so long as

it is identified. Many boards now use PESTLE analysis, which stands for political,

economic, social, technological, legal, and environmental analysis.

Either technique works well as a brainstorming exercise, creating a preliminary list of

issues that would be refined through further consideration. At the end, the board should

identify perhaps no more than two or three issues under each heading. They can then be

tabulated against their predicted impact on the company. An example is given in the

adjacent figure.

It is also very important for the board to look for relationships between factors, question

the causes of trends, look for driving forces, and consider the pressures of timeframes for

changes to occur.

The PEST and PESTLE techniques are crude but simple. Several research projects

examined whether such broad environmental scanning actually improves a company’s

performance. Most researchers support the theory that it does. But it may be very difficult

to filter out the other myriad influences on performance. The benefits arise from the

process, rather than purely from the product.

Directors arrive at a better understanding of their company’s environment and are better

able to cope with anticipated changes.


Figure 18 - PESTLE Analysis


I. SCENARIO PLANNING

This technique was brought to fame by Shell during the 1970s and is an important tool

for boards to promote visionary company strategy. Traditional projections are based upon

extrapolations of the past and present and they tend to assume a stable, predictable

environment. Extrapolation-based strategy is, however, very poor at coping with rapidly

changing environments. In contrast, scenarios are a way of capitalizing on change and in

doing so, helping business leaders to cope with uncertainty.

In strategic planning, a scenario is a coherent story about the business environment with

the contemporary situation the starting point. The business environment is impossible to

forecast, but with carefully chosen scenarios, a range of alternative lines of development

can be described and considered. Part of the skill lies in identifying which components

are likely to change, and with what impact.


J. SWOT ANALYSIS

This framework looks at Strengths, Weaknesses, opportunities, and threats.

Although the technique is familiar to many directors, there is a two-fold danger in its

common use:

It is often not preceded by structured, rigorous thought and analysis, and in such

cases it is little more than a summary of current perceptions rather than an

objective analysis

Once completed, it is not often used to best effect as a basis upon which to build

strategic options

If the SWOT analysis is well done, it will provide a clear statement of a company’s

current strategic position. It can then act as a tool for evaluating, selecting, and

communicating the company’s strategy to all concerned.

The value of analyzing strengths and weaknesses is greatly increased if the same is done

for the company’s competitors; since it is the relative strengths and weaknesses that will

point to the company’s distinctive competence (what it is able to do better than anyone

else).

Constructing a SWOT analysis

1. List the key strengths, weaknesses, etc. under each heading. This is best

achieved by the team brainstorming to arrive at the first draft list, which

will inevitably be too long to be manageable.

2. Prioritize the points, aiming for a maximum of two or perhaps three points

under each heading.

3. Tabulate these key points against the impact that they are likely to have on

the company so that the directors and management can ask, “What can we

do about them and how can the company respond?” The strategic options

can subsequently be developed from a firm view of current capabilities

and the key environmental forces. See the Table (below) for an example.


Figure 19 - SWOT Analysis


References

The following references provide additional information.

Please note that the Global Corporate Governance Forum cannot provide assistance in

obtaining books, articles, or other materials Some of the references listed below may be

difficult to obtain and will probably require the assistance of a librarian who is an expert

in business information.

Professional articles

• Kaplan, R. and D. Norton. 1992. “The

Balanced Scorecard Measures that Drive

Performance.” Harvard Business

Review. January

1992. Available at: http://www.hbr.com.

• Townsend, D. 2006. “Balancing

Strategy and Oversight: How Boards

Find More Time for the Long View.”

Directors Monthly,

NACD, January 2006. Available at:

http://www.nacdonline.org.

Books

• Barney, J. 2006. Entrepreneurial

Strategies: New Technologies and

Emerging Markets. London: Blackwell.

• Batts, W. and R. Stobaugh. 2006. Blue

Ribbon Report on the Role of the Board

in Corporate Strategy. Washington, DC:

NACD. Available at:

http://www.nacdonline.org.

• Collins, J. 2001. Good to Great. New

York: Random House.

• Coulson–Thomas, C. 2007. Winning

Companies: Winning People.

Chichester, UK: Kingsham.

• Daniell, M. 2006. Elements of

Strategy: A Pocket Guide to the Essence

of Successful Business Strategy. New

York: Palgrave

Macmillan.

• Garratt, B. 2003. Developing Strategic

Thought — A Collection of the Best

Thinking on Business Strategy. London:

Profile Books Ltd.

• Goldsmith, M. 2006. Vision, Strategies

and Practices for the New Era. San

Francisco: Jossey-Bass.

• Hamilton, S. and A. Micklethwait.

2006. Greed and Corporate Failure:

Lessons from Recent Disasters. London:

Palgrave Macmillan.

• Johnson, G., K. Scholes, and R.

Whittington. 2004. Exploring Corporate

Strategy. Hemel Hempstead, UK:

Prentice Hall.

• Koch, R. 2006. The Financial Times

Guide to Strategy. London: Pearson.

http://www.hbr.com/

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