Strategy Praxis: Insight-Driven, First Principles-Based Strategic Thinking, Analysis, and Decision-Making (Management for Professionals) 3031406915, 9783031406911

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Management for Professionals

George Tovstiga

Strategy Praxis

Insight-Driven, First Principles-Based Strategic Thinking, Analysis, and Decision-Making

Management for Professionals

The Springer series “Management for Professionals” comprises high-level business and management books for executives, MBA students, and practice-oriented business researchers. The topics cover all themes relevant to businesses and the business ecosystem. The authors are experienced business professionals and renowned professors who combine scientific backgrounds, best practices, and entrepreneurial vision to provide powerful insights into achieving business excellence. The Series is SCOPUS-indexed.

George Tovstiga

Strategy Praxis Insight-Driven, First Principles-Based Strategic Thinking, Analysis, and DecisionMaking

George Tovstiga Department of Strategy, Entrepreneurship & Operations EDHEC Business School Paris, France

ISSN 2192-8096 ISSN 2192-810X (electronic) Management for Professionals ISBN 978-3-031-40691-1 ISBN 978-3-031-40692-8 (eBook) https://doi.org/10.1007/978-3-031-40692-8 © The Editor(s) (if applicable) and The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 This work is subject to copyright. All rights are solely and exclusively licensed by the Publisher, whether the whole or part of the material is concerned, specifically the rights of translation, reprinting, reuse of illustrations, recitation, broadcasting, reproduction on microfilms or in any other physical way, and transmission or information storage and retrieval, electronic adaptation, computer software, or by similar or dissimilar methodology now known or hereafter developed. The use of general descriptive names, registered names, trademarks, service marks, etc. in this publication does not imply, even in the absence of a specific statement, that such names are exempt from the relevant protective laws and regulations and therefore free for general use. The publisher, the authors, and the editors are safe to assume that the advice and information in this book are believed to be true and accurate at the date of publication. Neither the publisher nor the authors or the editors give a warranty, expressed or implied, with respect to the material contained herein or for any errors or omissions that may have been made. The publisher remains neutral with regard to jurisdictional claims in published maps and institutional affiliations. This Springer imprint is published by the registered company Springer Nature Switzerland AG The registered company address is: Gewerbestrasse 11, 6330 Cham, Switzerland Paper in this product is recyclable.

Preface

2020 was a pivotal year like no other in modern history. A microorganism brought the world to its knees. Boxing legend Mike Tyson’s quote ‘everyone has a plan 'till they get punched in the mouth’ became the stark reality for organisations and companies around the world. Business strategies in place in January 2020 were obsolete within only a few short months, if not weeks. Nobody was prepared nor left untouched. COVID-19 changed lives, livelihoods, and our thinking. On the mend but still reeling from the pandemic, the world found itself facing another crisis in early 2022. The Ukraine war posed new threats with far-reaching geopolitical and economic consequences. Apart from the humanitarian devastation it unleashed, this crisis exacerbated the fragile global economic recovery efforts under way, triggering new fears of a geopolitical calamity and severe socio-economic repercussions. Vital global supply chains already weakened by the pandemic now faced the added threat of a global energy shock and disrupted distribution of raw materials, manufactured goods, and food. Crises rattle the status quo of established social, political, and economic orders. And while changes to established orders are unavoidable, the extent and impact of these is always uncertain. The economic fallout of the recent crises is expected to be substantial. The Economist Intelligence Unit estimates that the Ukraine war alone sliced $1trn off the global GDP in 2022.1 Research published by the World Bank in March 2023 suggests that both the COVID-19 pandemic and Russia’s invasion of Ukraine have led to a ‘decade of lost growth’ by inflicting lasting damage to the global economy. Perhaps, this rings even more true in light of the financial turmoil of early 2023 and deadly natural disasters like the earthquake in Turkey and Syria.2 Most generations experience at least one crisis. So, what is different about the crises we currently find ourselves in? We can debate this question, of course, but it

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By how much will the war in Ukraine reduce global growth? The Economist, August 4, 2022 Giles, C. (2023). World Bank warns global economy at risk of lost decade of growth, Financial Times, March 27, 2023 2

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appears our current crises differ in their magnitude, complexity, and uncertainty of duration—magnitude in terms of global reach and impact, complexity in terms of perplexing phenomena, and uncertainty in terms of outcome and duration. They hit with little obvious warning, scaled rapidly, and made a significant, immediate, and irreversible impact on people and economies across the globe. Indeed, we are witnessing unique events that have never been part of any organisation’s scenario constructs. Strategy has always been about making choices in the face of uncertainty. Traditional management thinking and approaches, however, break down when uncertainty reaches extreme levels, such as those wrought by the recent crises. The cumulative effect has left organisations profoundly vulnerable. It has exposed serious flaws in how we think about, make sense of, and deal with extreme situations. When the unthinkable becomes reality, pitfalls in established paradigms are laid bare. Market growth projections, revenue assumptions, and analytical models and methodologies relied on by managers in the past are now called into question. This has left many organisations in weak positions and unprepared for the future. The daunting reality of the current social, political, and economic turmoil and the unprecedented challenges for business decision makers today provide the context and impetus for this book. The approach to strategy presented in this book is a culmination of learning, experience, and insights garnered along my professional path which spans industry practice, strategy consulting, and academia. As such, my learning journey has not followed the purely academic trajectory. My engagement with strategy and the way in which the subject is approached in this book reflect this. The ideas and thinking put forward are tempered by an engineer’s predilection for unapologetically challenging the utility and pragmatism of any approach to strategy put forward. The approaches proposed in this book address the practicing strategist. As such they seek to reassert the practice-relevance that gave shape to the field of strategy at its inception by returning to its roots. This book challenges the purely academic excursus currently offered in the strategic management literature and encourages thinking and engaging differently with strategy and strategising. In doing so, this book speaks to the gaps in the current strategic management literature where academia fails to connect with real-world problems in the current business climate. The title ‘Strategy Praxis’ posits the thematic focus of this book. It underscores the pragmatic imperative of strategy in the practice field. Strategy, at its inception, was conceived as a practice-oriented discipline that sought to provide the conceptual means for better-informed decision-making in the field. The thinking I present in this book builds on these very foundations of strategy. Academic thinking has strayed from this primal raison d’être in recent years. But this has not diminished the appeal strategy holds for the practice field or lessened the need for conceptually rigorous guidance in dealing with real-world problems. If anything, the recent crises have thrown a spotlight on the ever-widening theory-practice gap where academic research struggles to provide strategic direction for critical challenges facing strategy practitioners. Strategy as a practice discipline, of course, should resonate with practitioners and scholars alike. Strategy praxis does not exclude a need for

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academic rigour and theory. Indeed, as in any other field of endeavour, pragmatic strategy theory can provide a powerful stimulus to our thinking, problem-solving, and decision-making in the practice field. To that end, the strategy praxis perspective embodies a return to the original core themes of the strategy field and lays the groundwork for a conceptually rigorous yet pragmatic approach to engaging effectively with strategy in today’s challenging competitive environment. The second conceptual underpinning of this book is reasoning by first principles. With its origins in classical antiquity, this approach forms the bedrock of Socrates’ teaching and Aristotle’s philosophy. Reasoning by first principles prompts us to think differently about how we approach problems by understanding a problem’s root causes. Although first principles thinking has a long-established tradition and presence in the physical sciences, its application in the strategic management field is less evident. But, as this book sets out to demonstrate, it is highly relevant when conventional approaches to strategy break down and fail to answer the burning questions facing strategy practitioners in the field today. A first principles approach to strategy and strategising introduces both conceptual rigour and pragmatism to the strategy praxis perspective. In the uneasy reality of the current business climate, reasoning by first principles provides a compelling basis for recalibrating our thinking on strategy. Thus, strategy praxis and first principles make up the conceptual framework for an alternative approach to strategy that is more congruent with the unprecedented challenges facing the practice field. We review the foundational concepts of strategy in Chap. 1 and introduce the first principles-based thinking approach introduced and elaborated on in Chap. 2. These chapters provide the underlying foundations and modus for strategic problem-solving. Chapter 3 offers a distinctively different way of approaching strategic analysis by considering the concept of high-level strategic analysis. The distinction made between high-level and micro-level analysis is a clear departure from the conventional approach to strategic analysis. High-level strategic analysis positions and maintains the focus of an analysis on the purpose of a strategic challenge to be resolved in the context of relevant external and firm-internal factors. As such, this approach to strategising brings significantly enhanced coherence and cohesiveness to an analysis. Moreover, the unique competing space (UCS) analysis framework, one of the three high-level frameworks introduced in this chapter, provides a unique visual conceptualisation of a firm’s strategic and operational boundaries. The notion of firm boundaries embedded in the UCS analysis introduces conceptual rigour to strategic problem-solving. In Chap. 4, we examine micro-level frameworks of strategic analysis. The purpose of this chapter is not so much to introduce the reader to the repertoire of micro-level frameworks of strategic analysis—these, after all, are dealt with comprehensively in most standard strategic management texts. Instead, the purpose is to determine their role and application in insight-driven, strategic problem-solving. We consider the criteria for whether to use a particular framework at all, and if so, how micro-level analyses are applied in a manner congruent with first principles thinking. As such, the micro-level analyses selected for examination comprise only a few of

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the numerous existing frameworks. The emphasis in this chapter is on the integration of micro-level strategic analysis in first principles-based strategic problemsolving. Chapter 5 introduces the tandem mode of strategic problem-solving, whereby the strategic thinking algorithm introduced in Chap. 2 is coupled to strategic analysis. In the tandem approach, strategic thinking prompts and guides the strategic analysis throughout the problem-solving process, from the identification and articulation of a problem through to its resolution. In Chap. 6, we examine the formation, evaluation, and selection of strategic options in response to a strategic challenge. In particular, the chapter elaborates on the transition from analysis to option formation in the strategy process—a critical subject point that is conspicuously absent in the strategic management literature. This chapter presents a procedure for moving from the analysis stage to the option formation stage that is congruent with insight-driven, first principles thinking. The process for the evaluation and selection of strategic options developed in this chapter is based on an application of the five strategy building blocks (5-SBBs) high-level analysis framework introduced in Chap. 3. In the concluding chapter, we reflect on ancillary aspects relating to the core themes dealt with in the earlier chapters of this book. Chapter 7 explores themes that reflect peculiarities of strategy that affect the effectiveness of any strategising endeavour. The book closes with a reflection on what constitutes ‘good’ strategy and the relevance of the insight-driven, first principles thinking and analysis approaches for strategy execution. Each of the chapters in this book features excursus that elaborate on the relevance of particular concepts or methodologies dealt with for strategy practice. Praxis Reflections pose questions aimed at the practitioner; these prompt reflection on the practical implications of concepts and methods introduced within their organisation. Praxis Perspectives provide a deepening excursus on a particular aspect of a concept or approach. Praxis Cases illustrate the application of concepts and methods in the practice field using real-world cases. Paris, France June 2023

George Tovstiga

Acknowledgements

This book presents a chronicle of my own learning journey in the strategy field. As such, I am indebted to numerous former colleagues and mentors in industry, and consulting, with whom I have had the privilege of working with and learning from. Particular mention must go to my former colleagues notably at Bayer (Germany), ABB (Switzerland), and Arthur D. Little (Switzerland) who have helped instil and sharpen the practice thinking reflected in the book. Not any less, though, much of the impetus for my learning has stemmed from teaching the subject. The book presents a compendium of strategy course content that has evolved from courses taught at various institutions around the world over the years. I am particularly indebted to my former doctoral, MBA, MSc, and undergraduate students, notably at Henley Business School, the Graduate School of Management (GSOM) at St. Petersburg University, and EDHEC Business School. Their intellectual curiosity and relentless challenging of the concepts and thinking presented in this book have both inspired and given shape and form to the concepts and thinking presented in this book. It is a privilege to publish this book with Springer Nature. I particularly thank Rocio Torregrosa and her editorial team for the opportunity to publish this book in Springer’s Management for Professionals series and their unwavering support. Last but not least, I am particularly indebted to my daughter, Nicki, for her meticulous scrutiny of the book’s manuscript and for engaging and challenging discussions on its content. Above all, though, my sincere thanks and appreciation must go to my wife, Heidi, for her continual encouragement and support throughout.

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Contents

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Strategy: Foundations and Perspectives . . . . . . . . . . . . . . . . . . . . .

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What Is First Principles Thinking? . . . . . . . . . . . . . . . . . . . . . . . .

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High-Level Strategic Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Micro-level Strategic Analysis . . . . . . . . . . . . . . . . . . . . . . . . . . . .

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Tandem Mode of Strategic Problem-Solving . . . . . . . . . . . . . . . . .

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Strategic Options: Formation, Evaluation, and Selection . . . . . . . .

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Strategy Praxis: Perspectives and Reflections . . . . . . . . . . . . . . . .

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Chapter 1

Strategy: Foundations and Perspectives

It is important to remember that no one has ever seen a strategy or touched one; every strategy is an invention, a figment of someone’s imagination. . . Henry Mintzberg

In This Chapter, We. . . • Examine the foundations of strategy. • Explore competition and competitive advantage. • Develop working definitions of the terms ‘strategy’ and ‘strategic’. • Examine value creation, delivery, and capture. • Explore value differentiation and its relevance for competitive advantage. • Consider the role of stakeholders. • Reflect on challenges and perspectives in strategic management.

What Is Strategy? What is ‘strategy’? Strategy, despite being integral to human endeavour since the beginning of time, still retains an enigmatic aura that evokes associations with rituals, mystical codices, and the unexplainable. This, however, does not seem to hinder its frequent insinuation. Indeed, we find pervasive use of the word strategy to the point where the notion is routinely coupled with any conceivably desirable outcome. Consequently, invocations of the word have been rendered almost meaningless. So much so, that The Times columnist Matthew Parris suggests that in only few circumstances would the omission of the word ‘strategy’ from any passage containing it fail to clarify matters [1]. Its ubiquitous invocation notwithstanding, there does appear to be consensus amongst scholars and practitioners on some defining tenets of strategy. Strategy has always inherently been about achieving a position of advantage in a competitive endeavour—quite irrespective of whether that entails success in conquest or the © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_1

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rebuttal of a threat. For early hunter-gatherers, strategy was a means of survival in hostile environments and circumstances. Typically, this involved primal, on-the-spur-of-the-moment ‘fight or flight’ decision-making. As civilisation evolved, strategy increasingly became associated with military conquest and defence in the face of enemies. Indeed, the word strategy traces its origins to the classical Hellenistic period in which strategos comprised an office held by a military leader or general, who were referred to as strategoi. Many basic principles of strategic management indeed are rooted in battlefield and military operations. But as a formal field of study, strategic management also draws on an eclectic array of contributions from other established disciplines. Economics, organisational theory, sociology, psychology, and other already existing areas in the management field contributed to the emergence of strategic management as a formalised field of study in the 1960s. Although embedded in the social sciences, the influence of engineering thinking on the developing field of strategic management cannot be ignored. Prominent scholars that influenced the field’s development—academics such as Igor Ansoff, Michael Porter, Henry Mintzberg, Richard Rumelt, and influential industry leaders including Intel’s Andy Grove and GE’s Jack Welch—came from engineering backgrounds. In his account of the emergence and evolution of the strategic management field, Kiechel [2] goes so far as to remark that engineering degrees appeared to have been the ‘standard credential’ for its founding thinkers. Contrary to pure military strategy, which links strategy to victory on the battlefield, thinking in business strategy has evolved around key themes that link strategy to competition in enterprises. A central notion, that of competitive strategy, revolves around the achievement of competitive advantage at the firm level. Competitive advantage, while an overarching concept in strategy, must be defined more clearly, however. The notion of advantage is relative and always tied to context—advantage compared to whom or what; in which way, at what point in time, and by what measure? Competitive advantage invokes the notion of competition, a central element of business strategy. Not surprisingly, given its economic origins in the late 1950s and early 1960s, the idea of competition was originally focussed primarily on price competition. Competition, as we view it today, of course, encompasses much more than pricing. Competition is about the endeavour to establish superiority over opponents and the means deployed towards achieving that. This introduces a further key element of strategy—that of asymmetries. The concept of asymmetries highlights an important distinguishing feature between strategy and economics. Whereas the base model in classical economics builds on the assumptions of market perfection and equilibrium, the essence of strategy centres on the exploitation of market imperfections and the pursuit of disequilibrium. Asymmetries play a pivotal role in strategy, which centres on their exploitation in competition. Asymmetries denote disparities in the distribution of factors between opposing parties that, if purposefully leveraged, enable competitive advantage on the part of the competitor in their possession. Sources of asymmetries reflect imbalances and imperfections in the competitive environment. These may result from deliberate effort on the part of

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competitors, though unintentional occurrences of chance and opportunities may also play a role. Asymmetries may reflect differences in strength in quanitifiable physical resources and information. However, asymmetries may also relate to differences in intangible factors, such as intellectual assets and mindset, that are much more difficult to quantify and ‘manage’. This, of course, applies equally to pursuits on the battlefield and commercial enterprises. Given that asymmetries reflect differences in strategic means, strategy has always been about being different. Consequently, asymmetries are critical determinants of the differentiation potential in competition. Another commonly agreed-upon tenet of strategy relates to the need for having one. Not having a strategy when confronting a strategic challenge would be deemed negligent and therefore unacceptable in all but few circumstances. No doubt, all organisations would claim to have a strategy of some sort—or, at the very least, want to be perceived as having one. In many cases, however, the strategy is too vague and obscure to all but a few. This may not always be entirely unintentional. Many corporate leaders view their organisation’s strategy as a sacred reserve, set at the top by the executive team and painstakingly guarded. A recent survey suggests that most corporate leaders share less than a third of their strategic initiatives to managers outside the executive team in cases in which those initiatives target half of their firms’ business activities [3]. Studies have also shown that most executives themselves cannot articulate their business strategy [4]. Research conducted by Sull et al. [5] reveals that only 28% of executives and middle managers could list three of their company’s strategic priorities. This extends to the board level. Non-executive directors are normally tasked with providing strategic guidance to their company. However, as a survey indicated, merely 34% of the directors fully understood their company’s strategy [6]. This is worrisome given that these are the people responsible for setting and steering the strategic course of their companies . So, while firms may indeed ‘have a strategy’, the absence of clarity and shared understanding of that strategy within the firm imposes limitations on its cogency and effectiveness. Praxis Reflection 1.1: Your Organisation’s Strategy In your organisation. . . • How is strategy defined and what are its key elements? • How are these aligned with your organisation’s competitive aspirations? • What measures are in place for ensuring a wide-spread understanding and sharing of your organisation’s strategy?

Strategy: A Working Definition Given the proliferation of publications in the strategic management literature, it would seem reasonable to expect a clear definition of strategy. That is not the case, however. Admittedly, strategy is still evolving as a management concept, but

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decades of academic research have failed to produce a unifying definition. This conundrum spills over into the practice field. The reason why many practicing executives struggle to articulate their firm’s strategy can be attributed to the lack of a clear definition. Does it matter? It does, immensely, for both strategy theory and strategy practice. A clear definition that ties strategy to purpose is the point of departure for coherent strategic thinking. A clear articulation of strategic rationale, purpose, and direction is integral to any strategy. Moreover, a clear definition establishes a foundation for meaningful strategy discourse. Most definitions of strategy in popular strategy writing are variants of ‘a roadmap or set of [aspirational] guiding principles that define [typically, vaguely specified] ‘actions’ that have the objective of achieving ‘desired’ [often unnamed, fuzzy, or unrealistic] goals’. Occasionally, we find an aspirational allusion to a ‘fulfilment of a vision’ thrown in for good measure. Needless to point out, such definitions of strategy are nebulous to the point of being meaningless. Strategy scholars have grappled with a defining statement of strategy since its inception as a formalised discipline. One of the early definitions put forward by Chandler [7] is as follows: The determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the allocation of resources necessary for carrying out these goals. [7]

Chandler identifies elements such as the setting of long-term objectives and deliberate action of the enterprise, particularly regarding the deployment of resources towards achieving goals. The definition, however, is vague on the underlying rationale and purpose tied to those pursuits, and thus does not offer much guidance to practitioners in the field. The development of a defining statement of strategy as the field evolved in the 1960s and 1970s tended to be tied to competing schools of thinking. Ansoff’s emphasis on strategy as a planning process, laid out in his 1965 book Corporate Strategy, set the stage for the strategic planning school which dominated corporate strategy thinking into the 1980s and 1990s. Emerging roughly in parallel, the positioning school, driven primarily by Harvard’s Porter and rooted in the industry-organisation paradigm prevalent at the time, viewed strategy as a choice of where and how to compete in a given competitive environment. Both schools were critiqued for their lack of rigor, deficits in explanatory power, and neglect of the microeconomic reality of real enterprises. McGill’s Mintzberg has argued that strategic planning amounted to little more than the manipulation of numbers and, hence, never really was about strategy at all [8]. Indeed, the shortfalls of early definitions in taking into consideration factors intrinsic to the firm were successively addressed in subsequent strategy thinking. The realisation that strategy derives not only from external factors was addressed by eminent scholars already in the 1980s. Mintzberg [9] in his 1987 ‘Five Ps for strategy’ article, for example, argued for a more encompassing view on strategy that includes fundamental issues intrinsic to the organisation.

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However, it was Barney’s 1991 article [10] that laid the pivotal groundwork for a resource-based view of the firm that triggered the next breakthrough in strategy thinking. In contrast to an orientation on factors external to the firm of the earlier positioning school, the resource-based view focused attention on firm-internal factors such as the firms’ resources, capabilities, and processes and their purposeful exploitation for competitive advantage. Arguably, the resource-based view represents one of the most important paradigms to emerge in the field of strategic management by providing a unifying foundation for subsequent key developments in the field such as the knowledge-based view, the organisational learning school, and the notion dynamic capabilities. Notably, the resource-based view contributed enriching perspectives on strategy that subsequently found their way into eversharper definitional statements. This is evident in Sørensen and Carroll’s [11] definition of strategy as ‘a logical argument that coherently articulates how the firm’s resources and activities combine with external conditions to allow it to create and capture value’. Recent advances notwithstanding, definitions of strategy offered in the extant management literature suffer from a chronic lack of specificity that ties the firm’s aspirations, intentions, and actions to any purpose. Granted, the very nature of the field presents real challenges to its definition. The eclectic array of contributions from diverse and well-established fields and its highly context-dependent character have resulted in an ambiguous and contestable assortment of definitions. This has resulted in little more than an ongoing dialectic discourse that has yet to produce a useful definition. In fact, some management thinkers have argued against a single definition of strategy altogether, suggesting that scholars and practitioners might actually benefit from multiple definitions. A contrarian view, however, appears to be coalescing around the idea of pinning a definition of strategy to the essence of the organisation as a possible unifying anchor, notwithstanding the ambiguity yet associated with this notion [12]. Commensurate with that view, this book posits organisational purpose as the core, unifying element that captures the essence of a strategy—and thus its suitability as a consolidating element towards the articulation of a working definition. Guiding principles, actions, and goals, no matter how aspirational, are void of substance if not tied to some purpose. This is particularly so in strategy. Organisations—whether formal or informal, whether corporations, agencies, institutions, social clubs, or even spontaneous gatherings—come into being to fulfil a purpose. They cease to exist when that purpose is no longer fulfilled. That purpose may, indeed, be as short-lived as the spontaneous formation and dissipation of a flash mob; on the other hand, organisations may endure over centuries [13]. Recognition that organisations exist to serve a purpose is hardly new. Prominent academics have alluded to the centrality of purpose in strategy since the field’s inception. Selznick [14]; Mintzberg [9]; Drucker [15]; Bartlett and Ghoshal [16] take this notion further and establish a clear link between an organisation’s strategy and its purpose. Strategy is unequivocally tied to purpose and always has been. Yet, while many definitions of strategy allude to the notion of purpose, clarification of that purpose is

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still absent in most. The purpose of an enterprise is integral to its raison d’être and gives meaning to its strategy. We can therefore be more precise. As a fundamental premise, the position taken in this book is that an enterprise’s purpose invariably revolves around the enterprise’s value obligations to its stakeholders; that the overarching purpose and raison d’être of any organisation centres on its mandate to create, deliver, and capture differentiated value in response to the needs of its stakeholders. Notably, in strategy, the emphasis is on value differentiation, because competitors conceivably also create value. Building on the foregoing argument, we therefore define strategy as follows: Definition: Strategy is a scheme for purposefully guiding decisions and deliberate, actions with the aims of creating, delivering, and capturing unique and superior value that enable a firm to differentiate itself in the way it fulfils its obligations to targeted stakeholders, and thereby achieving (or defending) a position of competitive advantage. To that end, strategy is as much about what the firm will do as it is about what it will not do. It is important to note that while this definition of strategy refers to a firm in terms of the organisational entity in question, it in principle extends equally to any type of organisation regardless of whether non-profit or profit motivated. This argument rests on the premise that all types of organisations, in fact, have a value mandate at the root of their raison d’être. This proposition and what it implies for the value created by the organisation in question is examined further on this chapter. Praxis Reflection 1.2: Strategy and Purpose In your organisation. . . • How is your organisation’s strategy tied to purpose? • How does the notion of value differentiation factor into its definition? • To what extent does it reflect your firm’s raison d’être?

Strategy or Tactics? As in the case of strategy, the word tactics also has its origins in military thinking. The distinction between strategy and tactics in a military sense can be thought of in terms of timing. A strategy is conceived before the engagement with the enemy, while tactics come into play after the enemy has been engaged. Carl von Clausewitz, the Prussian nineteenth-century military strategist, referred to strategy as ‘the doctrine of the use of individual battles for the purposes of war,’ and tactics as ‘the use of armed forces in a particular battle’. Tactics comprise the smaller immediate steps and actions taken to execute a plan of action mandated by a strategy. Tactics are ‘shaped on the ground’ as a battle unfolds. Changes in circumstances demand the adaptation of an original plan of action. To paraphrase Prussian Field Marshal

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Helmuth von Moltke, ‘no strategy survives contact with the enemy’. Tactics therefore invariably change during the course of an engagement, while the overall strategy remains intact. Another angle on the difference between strategy and tactics: while strategy focuses on effectiveness (doing the right things and moving in the right direction), tactics are focused on efficiency (doing things in the right way with fewer resources, in less time, and with less effort). Moreover, one might also argue that while strategies are essentially conceptual in nature and therefore often difficult to measure and evaluate objectively in advance, tactics tend to be operational and more measurable in the short term. The distinction commonly made between strategy and tactics notwithstanding, their differences may be blurred. Rumelt [17] notes that ‘one person’s strategies are another’s tactics—that what is strategic depends on where you sit’. What is considered to be tactical today may turn out to be strategic tomorrow. In fact, Mintzberg [9] argues for dropping the word tactics altogether, and instead refers to a factor as being more or less strategic. So, What Do We Mean by ‘Strategic’? Business executives and organisations as a rule like to think of themselves as thinking and acting ‘strategically’. But what does that imply? Principally, the adjective strategic implies ‘having to do with strategy’. More specifically, the term ‘strategic’ intimates something of significant importance to a firm’s strategy. We can be more precise by aligning a definition of strategic with key elements identified in the definition of strategy proposed earlier. Definition: ‘Strategic’ refers to anything of substantial significance or importance (in terms of relevance and potential for competitive impact) for a firm’s strategy. Specifically, its ability to create, deliver, and capture differentiated value in a broader sense, to fulfil its (stakeholder mandated) purpose. Strategic might therefore refer to firm-internal factors—such as assets (physical, financial, or intellectual), processes, positions, initiatives, and, not the least, mindsets—that set the firm apart from its competitors and that enable it to build (or defend) a position of competitive advantage. However, strategic may also refer to issues and factors affecting firm’s competitive position that are external to the firm in origin, such as threats and opportunities. This definition of strategic appears to be relatively straightforward; however, it features important nuances. The first is that, while a strategy is intrinsic to a firm, what is strategic in the context of that strategy may in include both internal and external determining factors. Firm-internal strategic factors may include tangibles such as physical and financial resources that are relatively easy to account for. However, they may also include intangibles, such as intellectual assets or complex firm-internal factors such mindset and disposition that defy a more precise specification. Firm-external factors comprise strategic factors in the firm’s competitive environment, and these differ in relevance and impact. Not all are of equal relevance

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Fig. 1.1 Strategic relevance and impact

to a firm’s strategy; neither is their anticipated or real impact. Moreover, the relevance and impact of strategic factors may change as a strategy unfolds and competitive contexts change. As a result, priorities may change as the competitive context evolves. Hence, time introduces variations in the extent to which factors are strategic. A deeper consideration of the two defining criteria—relevance and impact—is therefore useful. Strategic relevance implies immediacy in terms of time and space and refers to the degree to which a factor has a direct bearing on a firm’s strategy. Strategic impact, on the other hand, relates to the magnitude of an effect on the firm’s strategy. The schematic in Fig. 1.1 maps four domains along orthogonal axes representing strategic relevance and impact. Strategic Quadrant To illustrate this quadrant, consider a situation involving a firm-external factor: a governing body introduces new legislation that targets achieving net-zero emissions of greenhouse gases. The new regulations impose a drastic reduction in CO2 emissions on the energy-producing sector, specifically firms producing energy from fossil fuels. The new regulation has a direct bearing (relevance) on firms operating in this sector, since it will force substantial investment in clean energy technology. Non-compliance would result in significant penalties: in the extreme case, potential loss of license to operate altogether (impact). The new legislation is both highly relevant and of high impact for energy-producing firms—and therefore of strategic importance to firms competing in this sector. Out of Scope Quadrant Continuing with the example: since the new CO2 regulation does not directly affect firms in competing in other (e.g. food manufacturing) industry sectors, such

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as pharmaceuticals and food manufacturing, it is of low relevance and therefore not within the immediate scope of firms operating in these sectors. It is not, however, entirely irrelevant to firms not immediately affected, because the regulation imposed on the energy sector, for example, may well only be a first of a series of subsequent regulatory initiatives that in the future might directly affect all energy-consuming industry sectors. Hence, the potential impact remains high even for firms not immediately and directly affected in the immediate term. Tactical Quadrant This quadrant draws out the distinction between tactical and strategic; it is an important one and needs qualification. Tactical, as argued earlier, involves smaller, shorter-duration steps that contribute to the realisation of a strategy. Tactics relate to the operationalisation of the strategy and focus on the efficient deployment of resources and activities. As a rule, factors that affect individual tactical initiatives, while highly relevant to a firm, are not of high potential impact. To invoke the military analogy: ‘losing a few battles does not necessarily mean losing the war’. Small tactical details, however, may well turn out to be strategic. On an aggregate level, however, tactics may well be critical, because the cumulative effect of multiple tactical outcomes may well add up to be strategic. This is particularly the case in operations-focused industries, such as the fastmoving consumer goods sector. For firms in the low-margin commodities sector, such as the fast-moving consumer goods (FMCGs) sector, that compete on operational distinctiveness even marginal improvements in cost-reduction over multiple tactical initiatives add up to become strategic and thereby critical to their competitiveness. For example while a 2% productivity improvement in a single production process by introducing automation in a manufacturing process would normally not be considered significant, when aggregated over multiple operations, serial marginal improvements of modest magnitude such as these can indeed be considered strategic. Irrelevant Quadrant Factors in this quadrant are neither relevant nor of any impact—at a given point in time. Competitive environments change, however. Hence, this space needs to be continually monitored for potential changes to factors currently positioned in this quadrant that might in future position them in one of the other three quadrants. Praxis Reflection 1.3: Tactics In your organisation. . . • How is strategy distinguished from tactics? • What key factors typically drive the evolution of tactics in the course of a strategy’s execution?

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The Notion of ‘Value’ in Strategy In the working definition of strategy proposed earlier in this chapter, the notion of value plays a central defining role. But what is ‘value’? And why is it central to strategy? To answer these questions, we first examine the notion of value, its attributes, and features relevant in a business context. In response to the second question, we subsequently explore the notion of value differentiation and its implications for competitive advantage.

What Is ‘Value’? The notion of value spans a vast range of possible expressions. It has very different meanings, for example, in mathematics, music, art, or linguistics. In a commercial context, value is traditionally tied to monetary worth, although even in commerce, the term may extend significantly beyond its traditional monetary association, of course, to include the worth of immaterial benefits. Some forms of value are measurable and readily quantifiable, others intangible and subjective in their valuation. Commercial value is typically tied to pricing. Value implies some benefit for which a recipient—for example a customer— is willing to pay up to a maximum price. While the concept of a ‘price’ is straightforward, the concept of ‘pricing’ is less obvious as it involves an assessment of the real worth of the benefit, which depends on a customer’s perceived, subjective assessment of the value in question. Praxis Reflection 1.4: Value Definition In your organisation. . . • How is value defined? • To what extent does this definition consider and determine pricing decisions? • How is value measured?

Praxis Perspective 1.1: ‘A Rose by Any Other Name. . .’? Water is—well, water. Or is it, really? One of the most abundant resources in the world, water covers about 71% of the earth’s surface, 2.5% of which is freshwater, mostly locked up in ice and in the ground. A polar inorganic compound that in its pure state is a tasteless, odourless, and virtually colourless liquid at room temperature, water provides neither nutrition nor energy. Though considered a commodity on account of its abundance, it is a precious substance vital for all known forms of life and therefore a strategic global (continued)

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Praxis Perspective 1.1 (continued) resource. Potable water is vital to sustaining human life. While taken for granted in many geographies with readily available fresh water sources, planet earth is being impacted by dramatic changes. Economic, demographic, and climatic factors are increasingly raising concerns about the availability of fresh water. Although desalination technologies and infrastructure have improved access in many regions over the last decades, it is estimated that 2.1 billion people still lack access to safe water (1). Notwithstanding the current dilemma that access to essential potable water poses to many geographies around the world, premium bottled water, particularly of the sparkling type, is a profitable business in fine-dining hotspots in Europe currently with sales of $30 billion that are expected to reach $67.6 billion by 2030. Sparkling water is arguably the epitome of clever marketing that gives new meaning to the notion of ‘value-added’. The humble glass of water is no longer simply water when it comes to fizzy acqua. London-based Acqua Amore markets more than 60 types. ‘Natural mineral water’— accredited the highest grade—is microbiologically pure bottled water tapped from a single source and distinguishes itself both by level of carbonisation and total dissolved solids (TDS) measured in mg/l. Considered by many to be the queen of natural mineral waters, Chateldon 1650 (1.882 mg/l) sells for 4.60 € per 750 ml bottle. Bottled in the Auvergne region in central France since 1650, it was the favoured terroir (to borrow a term from oenology) of Louis XIV, who had it transported to Versailles by mule. Sales of Chateldon 1650 are restricted to just 700,000 bottles each year. The establishment of an online resource and academy that trains water sommeliers and the creation of a stemmed tasting glass specifically for water by the historic Rogaška Glassworks, a historic glassworks in Rogaška Slatina, a spa town in eastern Slovenia, underscore the gravitas accorded to water in the fine dining world. Granted, a sparkling water’s TDS and its source offer high variability in differentiation potential which clever marketing on the part of its producers seeks to exploit and transform into monetary advantage. However, tap water is a lot cheaper and greener. Consequently, in response to increasing economic and environmental concerns, a growing number of Michelin-starred restaurants including Noma and L’Enclume have moved to serving tap water that’s filtered and carbonated in-house. However, a growing partiality for specialty drinking water in advanced economies notwithstanding, even its strongest promoters are inclined to advocate a more solemn perspective that reminds us of water’s essential value to humans. To quote Martin Riese, a leading water sommelier: ‘I want us to all value water more. It is a privilege to have clean and safe drinking water available; more than 770 million people don’t have that’ (2). (continued)

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Praxis Perspective 1.1 (continued) Sources: (1) https://wholives.org/our-mission/mission/# [accessed: August 20, 2022]; (2) ‘The best sparkling waters in the world’ Financial Times, August 2, 2022.

Unravelling the Notion of Value The value mandate of an organisation is ultimately determined by its aspired purpose. Its realisation focuses on the type of value created; how it is delivered, and how the enterprise ultimately captures benefit from the value it creates and delivers. The value realised by an organisation is an expression of the net effect of a value creation effort and can be expressed in terms of the value created, delivered, and ultimately captured: Valuerealised = f ½Valuecreated þ Valuedelivered þ Valuecaptured  Let’s examine the individual components of value equation more closely:

Value Realised: Vrealised ‘Value realised’ represents the net outcome of a firm’s value creation endeavours. Organisations create value on the basis of their understanding of their stakeholders’ needs and expectations. These may vary considerably. Consequently, stakeholders’ perceptions of the ‘value realised’ by a firm may vary accordingly. An organisation’s stakeholders, by definition, are those individuals, organisations, and institutions that have a vested interest in the organisation, specifically, in its value creation activities. Stakeholders’ vested interests in an organisation may vary widely. Stakeholders include recipients that are directly affected by the value created by the organisation, but they may also include institutional stakeholders that play an indirect but no less critical role in the qualification and assessment of that value created. Competitive positions and stakeholder perspectives are, of course, always relative. While stakeholders are normally assumed to have a vested interest in a positive outcome of the value realised, this is not necessarily always the case. Effective strategising inevitably affects the competitive equilibrium of a playing field. This has long been recognised in military circles. To quote former US defence secretary General James Mattis: ‘the enemy [also] gets a vote’ [18]. In a business context, this holds just as true. The competitive impact of a firm’s strategy is invariably tempered

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Fig. 1.2 Stakeholder positions as a function of interest and power

by its competitors’ reactions to the strategy. Hence, in this sense, a firm’s competitors also assume a stakeholder role, even if only indirectly and, obviously, for different reasons. Organisations invariably target multiple stakeholders and, as pointed out earlier on, these can be highly diverse. They can be as diverse as the multiple possible forms of value created by the organisation. Stakeholders’ positions therefore vary accordingly. The simple stakeholder mapping is shown in Fig. 1.2 and it depicts stakeholder positions in terms of two dimensions—degree of interest and power. Interest reflects the importance of a firm’s activities to its stakeholders and relates to the stakeholders’ needs and urgency. Power relates to the degree to which stakeholders have the potential to influence a firm’s activities. Power on the part of stakeholders may be actively exercised or it may be latent. A more complex stakeholder typology proposed by Mitchell, Agle, and Wood [19] identifies seven types of stakeholders that vary according to power to influence decisions, legitimacy of claim, and urgency of needs. As a rule, organisations focus on their key stakeholders: those with the highest degree of urgency (reflecting interests and needs) and the greatest power to influence decisions within the organisation. Importantly, stakeholders’ needs, urgency, and power inevitably change over time. Hence, organisations need to continually engage with and monitor stakeholder positions for movements that may affect their strategy.

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Value Created: Vcreated Value creation is a response to perceived needs regardless of whether these are existent or latent. We distinguish between the analysis of the value created and the process behind the value created. While the analysis of value creation shares commonalities across multiple levels of analysis, the process differs and depends on the source and form of the value creation. Sources of value creation may be individuals, collectives such as organisations, or even societies [20]. Although the focus in business strategy is on economic value and its impact on competitive advantage, we cannot ignore other forms of value creation that in the grand scheme of things are no less important. Value creation occurs in many ways. In business, value can take on numerous expressions in addition to its primary economic objectives. Traditional non-economic value elements include aesthetic and cultural, scientific, and technological forms of value that go beyond the profit motive and address broader societal needs. Indeed, these are becoming increasingly relevant in business contexts. One need only to consider the recent emphasis on environmental, social, and governance (ESG) value creation. These introduce competing and potentially conflicting elements to the traditional economic model. More recently, the dramatic rise in global threats such as climate change, armed conflict, fundamentally changing societal needs and expectations, and the significant rise in stakeholder activism have made Milton Friedman’s ‘the business of business is business’ an anachronism. Value creation and its measure have become much complicated in recent years. Praxis Perspective 1.2: Goodhart’s Law Meets ESG Naked Lunch author William S. Burroughs missed the ESG boom by about two decades when he died in 1997. So, when writing ‘The junk merchant doesn’t sell his product to the consumer, he sells his consumer to his product. He does not improve and simplify his merchandise. He degrades and simplifies the client.’, he could not have been referring to ESGs. Burroughs assertion nonetheless summarises what is being viewed by many as the current ESG marketing industry maxim: ‘don’t improve the merchandise, simplify the client’. ESG (environmental, social and governance) criteria, when they appeared on the investment scene, were to provide socially conscious investors with measures of value creation beyond the traditional maximisation of shareholder returns metric. ESG is increasingly viewed by companies around the world as essential to their social license and crucial to protecting and creating value. In a recent McKinsey survey of more than 1100 respondents in more than 90 countries around the world, more than nine in ten respondents claimed to have ESG subjects on their organisation’s agenda, though only one-third of respondents (continued)

Unravelling the Notion of Value

Praxis Perspective 1.2 (continued) ranked environmental issues as their organisation’s greatest ESG concern. So much, at least, for the intent. Investment decisions, of course, are driven by future expectations of value creation. The time horizon is therefore an important factor in their determination, but it opens the door to conjecture and manipulation. Not that the underlying logic of ESG isn’t sound. ESG criteria address the sustainability and socially responsible behaviour of potential investment targets. ESG investment appeals particularly to a growing number of investors who increasingly are looking to invest in companies with values that match their own. So far, so good. But what qualifies a company to be considered ESG compliant and worthy of investing in? Is it ‘good enough’ for a company to simply show willingness to meet the ESG criteria, regardless of whether or not it fulfils the criteria? The prevailing uncertainty has given rise to an increasing popularity of ‘transitioning’ stocks’ in ESG investment. The underlying economic argument is that it’s OK for funds with ESG mandates to invest in that are not perfect today by engaging with them to improve. The logic is seemingly compelling and a convenient construction for enterprises selling stocks to funds with ESG mandates. But such reasoning challenges the very principles at the root of ESGs. Consequently, many tenets of ESG have been diluted to near meaninglessness and opened the door to ‘greenwashing’. This raises important questions for investment companies: How does a company promote itself as being ESG compliant and ethical without greenwashing? What makes its fund more trustworthy than a competitor’s whose PR, branding and marketing make the same claims? Investment banks such as Berenberg are taking their cues from the UN’s 17 Sustainable Development Goals that find further expression in the EU’s reporting rules that took effect at the start of 2022. By the UN’s standard, at least 45% of a company must be tied to something deemed worthy by the UN criteria in order to be considered ‘good’ and hence worthy of investing in. This sets a bar that is both high and wide—and massively open to interpretation. The line between ‘good’ and ‘probably fine’ is thus exceedingly blurred—and an apt affirmation of Goodhart’s Law, which states that when a measure becomes a target, it ceases to be a good measure. Sources: ESG momentum: Seven reported traits that set organisations apart, McKinsey & Company, May 26, 2023; Elder, B. (2023). ESG meets Goodhart’s Law: Lord make me ESG, but not yet. Financial Times, August 19, 2022; Flood, C. (2023). Investors warned of ‘greenwashing’ risk as ESG-labelled funds double. Financial Times, April 24, 2023.

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The value created by non-profit organisations such as a non-governmental organisations (NGOs), for example, primarily target humanitarian needs. Consider, for example, the case of an NGO that drills and commissions freshwater wells in remote villages of the African Sahel region. The provision of a freshwater source in a village has multiple potential value implications. These, however, are often difficult to objectify in terms of their full value impact. Near-term outcomes might include immediate relief and improvements in day-to-day living conditions. However, arguably more important benefits might manifest themselves only over a much longer time horizon—benefits such as improvements in the local population’s health and well-being due to a reduced risk and incidence of water-borne diseases. Hence, the overall value potential of a freshwater source is often only indirectly ‘measurable’ and over a much longer period. In a business context, value created has traditionally come down to the creation of economic value. The term ‘economic’ is used here in the classical sense and refers to the production, distribution, consumption of goods and services, and (conventionally, monetary) returns derived from these value offerings. Traditionally, these have been driven by profit-maximising interests in a capitalist enterprise sense. This is changing, however. To examine this more closely, consider the economic value created by profitoriented tech giants such as Tesla or Apple. Much of the value that Apple creates derives from a perception of the unique and superior product and user features embedded in its iPhone.1 Although tied to the iPhone’s discernible functional product features, a disproportionate amount of the value associated with Apple’s smartphone is subjective and ‘in the eyes’ of its user. Over the range of its portfolio of value offerings Apple, of course, also creates economic value that targets other stakeholders—for example its shareholders who invest in the company in the hope and expectation of superior investment returns. The assessment and measurement of value impact vary considerably between types of value. Moreover, the time horizon of the value impact may differ considerably, as indicated in Fig. 1.3: The value impact of a humanitarian organisation such as Habitat for Humanity is typically long-term oriented and often measurable only by indirect proxy criteria. The economic value created by a profit-driven enterprise such as Tesla, on the other hand, is typically much more readily quantifiable measures such as its price premium, profit margin, market share, and investment returns that reflect its share price and dividend pay-outs. Moreover, the economic-commercial value creation is typically near-term oriented. In some cases, the creation of value can be tracked almost instantaneously, for example, through reporting of the prices of shares traded on the floor of a stock exchange. Positioned between the two extremes would be a company like Zipline, a Silicon Valley start-up enterprise that designs, builds, and operates

iPhone sales contributed 58% of Apple’s total revenue in the fourth quarter of the company’s fiscal year 2021. Source: https://www.statista.com/statistics/253649/iphone-revenue-as-share-of-applestotal-revenue/ 1

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Fig. 1.3 Value focus and value impact

drones that deliver vital medicines and medical supplies to remote villages in Rwanda. Zipline’s shareholders include both Silicon Valley venture capital investors as well as African government agencies, village clinics, medical professionals, and ultimately patients that benefit from its humanitarian services. Perception plays a key role in defining value. This begins with the perception of needs and opportunities on the part of a firm and extends to the role perception plays in the assessment of value created on the part of its recipient. Perceptions of value may be based on objective metrics, such as directly measurable technical and functional features. Perceptions of value may, however, also be highly subjective and deeply embedded in cultural values and norms. As a rule, the perception of value in aesthetic and cultural contexts tends to be subjective and based on nonmaterial attributes. This poses challenges to the assessment of these value forms. Perceptions of economic value derive from both objective and subjective valuations. They may be grounded in technical and functional value features of a product such as an Apple iPhone, which are readily quantifiable. Arguably, though, the iPhone’s real differentiation potential is tied to features that are subjective and more difficult to quantify—such as its aesthetic design appeal, user interface, and iconic brand. These trigger purchasing behaviour driven primarily by emotions and judgment biases. This is often the case in high-end, premium products and services, such as luxury goods. Clever marketing, of course, seeks to enhance perceptions of premium value. Perception is important in other areas of economic value creation: Stock market value pricing of shares is based on estimations that are derived entirely from perceptions of the share’s anticipated future growth potential. These can be highly

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speculative. Valuations in service-oriented industries are perception-based and derived from subjective measures such as customer experience and satisfaction. The notion of value differentiation is therefore intrinsically relative and begs to be qualified: perceived value relative to what alternative—and in whose perception? To answer this question, we need to examine more closely the role of recipient stakeholders in strategy.

Value Delivered: Vdelivered Value delivery involves getting the product or service offering ‘out the door and into the hands’ of a recipient stakeholder. Value delivery ideally starts with a strong value proposition that articulates the (differentiating) merits of the value offering to its recipients. A value proposition helps clarify what value is to be delivered, how, to whom, and where the value is to be delivered (we examine the value proposition concept more deeply in the following chapter). Importantly, value delivery entails the format in which the created value is made available to the recipient. A value offering is typically comprised of a value bundle consisting of a number of individual value features (we examine the notion of value bundling further on in this chapter). Furthermore, value delivery involves a variety of other activities such as the marketing of the value offering (such its positioning, pricing, promotion, packaging), order processing, delivery fulfilment, troubleshooting, and after-sales support. Value delivery is a critical component of the value equation, because value not delivered cannot be realised—regardless of how superior it might be.

Value Captured: Vcaptured Value capture addresses the potential disparity that may arise in the distribution of the advantage derived from the value created between its creator and its recipient. It is about who ultimately benefits from an organisation’s value creation efforts. This is not always clear. The presumption that organisations always appropriate the full benefits of the value they succeed in creating is mistaken. Organisations, of course, strive to capture full advantage from the value they create, but this is not always the case. Bowman and Ambrosini [21] differentiate between use value and exchange value. The two may differ due to potential differences in perceptions of the utility and attractiveness of the value created by the potential user and the actual monetary return achieved by the value creator. Let’s take the example of a customer’s purchase of a product. From the customer’s perspective, the value captured corresponds to the greatest amount of money they are willing to pay in exchange for the product. While the judgment of the value on the part of the customer may be subjective, the notion per se is relatively clear: the customer is willing to exchange a monetary amount

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based on their perception of the value received. The value return for the product’s creator, however, is often far less conspicuous. As a rule, for economic incentives to create value to prevail, the monetary amount exchanged must exceed the creator’s costs, whereby ‘costs’ is used in the broadest sense of the word. If this condition is not met, the enterprise creating the value fails to capture value and consequently may not be willing to sell. Hence, value capture reflects the difference between a customer’s willingness to pay and the value creator’s willingness to sell. The potential loss of value captured or retained by a creator is referred to as value slippage: Valueslippage = Valuecreated  Valuecaptured Recurring instances of value slippage over time, of course, result in an unsustainable business proposition for the value creator that provides little incentive to continue engaging in value creation. Praxis Reflection 1.5: Value Realised In your organisation. . . • How is ‘value realised’ determined? • To what extent are Vcreated, Vdelivered, and Vcaptured discernible and tracked? • What are the most common sources of ‘value slippage’?

Praxis Perspective 1.3: There Is No Such Thing as a Free Lunch Value captured is frequently the neglected variable in the value equation. We tend to focus on value creation and delivery but sometimes forget that these always come with a price tag. For a producer, value realised is sustainable only when the value captured exceeds the cost of its creation and delivery. The issue at stake concerns the extraction—or capture—of benefits to the producer from the value they generate. A value offering’s monetisation potential is a measure of its revenue-generating capacity and hence an integral component of a firm’s pricing strategy and business model. Monetisation can take on a number of forms. For example in a freemium (a portmanteau of the words ‘free’ and ‘premium’) configuration, basic features of a value offering are offered free of charge but payment (a premium) is charged for enhanced functionality. A freemium business model is often used to build a user base when the marginal cost of producing extra units is low and when little is lost by giving some of the value created away for free. This still leaves the question of how products and services that are offered seemingly free of charge—such as Google’s numerous services, and, indeed, its mobile operating system Android—capture value for its producer. In (continued)

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Praxis Perspective 1.3 (continued) reality, of course, companies like Google and Meta (Facebook) do not give away any of their services for free. The pricing economics of the ‘free’ services they offer, however, are different. Unlike in conventional transactions, Facebook and Google users themselves produce the value that these companies extract and capture—and reap lucrative returns from. There is no such thing as a free lunch. This has given rise to the truism that says, ‘if you are not paying for it, you’re not the customer; you’re the product being sold’. Consumers end up paying for the free services on offer by providing these producers with reams of user data which is processed, repackaged, and sold to advertisers for lucrative returns. The absence of transparent pricing in the ‘free’ economy, however, raises a number of issues that leave economists struggling to work out the real benefits to consumers and elsewhere of the services on offer. Taxation is one area. If professional service providers are not permitted to evade tax by selling their products for benefits in kind, why should consumers not be taxed if they are paid for their data in the form of services? Privacy is another issue. Privacy activists would assert that the ‘free’ label attached to the services provided by Google and Co. encourages poor decisions on the part of its users by enticing them to divulge more about themselves than they would normally feel comfortable in doing. The ‘free’ economy also poses challenges to competition authorities. The elusive pricing of seemingly free services muddles the true nature of competition and opens doors to players in this arena for engaging in cut-throat competition beyond the reach of traditional regulatory oversight. Consumers are thus well advised to consider carefully the real cost of that free lunch on offer. Caveat emptor. Source: The ‘free’ economy comes at a cost. Economist, Aug 24, 2017.

Value Differentiation and Competitive Advantage Strategy is more than simply being different. Nor is it about simply creating any value, because competitors are also capable of creating value. Fundamentally, competitive strategy is about creating better, or differentiated, value. Differentiated value is unique and superior to competitors’ offerings. In business strategy, competitive advantage is derived from value differentiation; specifically, an organisation’s ability to be different—that is, better—in the way it creates, delivers, and captures value. We can take this thought even further: an organisation’s ability to differentiate itself in its value offerings is not only its source of competitive advantage; much more, it constitutes its fundamental purpose and raison d’être, as indicated in

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Fig. 1.4 Strategy, raison d’être, and competitive advantage

Fig. 1.4. Although we often focus only on profit-driven organisations in business strategy, value differentiation constitutes the fundamental mandate of any type of organisation, irrespective of its entrepreneurial orientation or motive. The fundamental value differentiation mandate applies just as much to a non-governmental organisation (NGO) as it does to a profit-driven corporation. Indeed, all institutions, public bodies, even governments, are tasked with a mandate that hinges on their ability to create and deliver superior value. Praxis Reflection 1.6: Strategy, Raison D’être, and Competitive Advantage In your organisation. . . • If you were to distil your organisation’s raison d’être to its essential core, what would it be? • How is your organisation’s strategy tied to its competitive advantage?

Value (De-)Bundling and Value Premium The notion of ‘value’, thus far considered, has been tied to singular components of value, such as a particular technical feature of a product. However, value recipients, such as customers, neither purchase nor make purchasing decisions based on single value features. Value offerings are invariably delivered in the form of bundles comprised of multiple value components embedded in a product or service offering. To illustrate the point, consider the case of a product offering such as smartphone. A smartphone consists of a bundle of individual value components. These include its primary technical, functional, and aesthetic features that collectively comprise the gadget. Primary value features of a smartphone are augmented by secondary peripheral features that further enhance the gadget’s overall value. Purchasers of an Apple

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iPhone, for example, not only acquire a smartphone; they also acquire access to iTunes, Apple’s ecosystem, which adds value to its users’ smartphone experience. We can express the composition of a value bundle in the following way: COMPvalue bundle = V1 þ V2 þ V3 þ V4 þ . . . whereby COMPvalue bundle refers to the composition of the value bundle and variables ‘Vi’ to the individual value components in that bundle. Using the example of a smart phone, V1 might represent a technical feature, such as its operating system; V2 brand; V3 aesthetic design, V4 peripheral value features, such as its embeddedness in an ecosystem, and so on. From the smartphone producer’s perspective, these comprise the product features they choose to include in the value bundle in anticipation of buyers’ needs and expectations. From a buyer’s perspective, however, they are not all equally important. Hence, we introduce weighting factors (a, b, c, and d . . .) to better reflect a potential buyer’s prioritisation of the value features embedded in a product: COMPvalue bundle = aV1 þ bV2 þ cV3 þ dV4 þ . . . Buyers’ needs, tastes, and preferences vary—and they change. A buyer’s perception of the composition of the components featured in a value bundle is important, because it is a determining factor that influences their buying decision. Producers, when configuring a value bundle, try to match the composition of features built into a product or service to what they perceive to be most appealing to their targeted market segment. Market research can provide producers with useful insights into which features to include in their value bundle. However, these insights are only as reliable as the validity of the research. Praxis Perspective 1.4: What Women Want (in a Car) Motoring and motor vehicles have traditionally been male-dominated domains. This has spilled over into the rapidly evolving electric vehicle (EV) automotive market. Demographic studies of EV buyers suggest that men are more likely to purchase electric vehicles: 76% of EV buyers in California, the USA’s largest EV market, are male. It therefore does not surprise that marketing campaigns tend to cater to the male buyer. This is changing, however. Automakers are recognizing that women play an important role not only in buying vehicles but also in influencing males in purchasing decisions. Given this trend, automobile marketeers are scrambling to gain a better understanding of the differences in gender preferences and buying decisions in the highly competitive EV market. They are learning that females value EV features differently than males when making buying decisions. Women tend to be more pragmatic; they obsess less over the hardware and the status of having (continued)

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Praxis Perspective 1.4 (continued) the latest and coolest features, and they tend to be more price-sensitive. Female buyers are more inclined to be attracted by features of an EV that allow them to customise and tailor the experience to their lifestyle. For example a study conducted across five Nordic countries in 2015 found that females were more concerned with emissions than males, and more likely to value the quietness of EVs. Car manufacturers are taking note. Not only are they progressively factoring in female preferences into the design of EV features, but commercials are also now more frequently showing women behind the wheel, not just as a passenger. Indeed, a humorous video ad released by Ford in honour of International Women’s Day in 2023 goes even further to highlight the contributions of women designers to the vehicles we drive every day. The video, purporting to be a commercial for a new ‘men’s only edition’ of the Ford Explorer shows the new model smartly whipping around mountain curves and cruising through cityscapes. The ‘men’s only edition’ of the Explorer featured in the advert is missing a few things, however—such as windshield wipers, turn signals, rear-view mirrors, GPS, and a heater. It just happens to be that all of these parts and technologies were, in fact, invented by women. Sources: Meaker, M., & Marshal, A. (2022). EV makers think they’ve figured out what women want. Wired, July 26, 2022; Grothaus, M. (2023). Bryan Cranston imagines what a Ford Explorer would look like without women inventors. Fast Company, March 8, 2023. The composition of a value bundle is only a first step. It is not the only determining factor in a buyer’s purchasing decision, particularly when the buyer can choose between alternative product offerings. Just as important is the buyer’s perception of the uniqueness and superiority of a product’s value features when compared to other product choices available to a buyer. Uniqueness and superiority are not mutually exclusive, but they do emphasise different quality traits. Uniqueness reflects the singularity or distinctiveness of a value feature, such as a product’s innovativeness. Superiority, on the other hand, alludes to a product’s supremacy over alternative value bundles on offer. Together, these two dimensions reflect the competitive relevance (CR) of a given product value bundle in terms of its perceived uniqueness (U ) and superiority (S): CRvalue bundle = Uvalue bundle × Svalue bundle Competitive relevance is a multiplicative function of uniqueness and superiority, and it reflects the value bundle’s differentiation potential. As such, it further reflects

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the potential value premium (VP) of a value offering of a given composition and perceived uniqueness and superiority: VPvalue premium = CRvalue bundle × COMPvalue bundle The value premium of a value offering can be expressed in several ways. From a buyer’s perspective, it is a measure of the degree to which the value bundle in question is perceived by the buyer to be differentiated—or better—in comparison to alternative bundles. A value premium thus reflects the amount the buyer is potentially willing to pay more for a product or service in question. From an enterprise’s perspective, the value premium represents a performance outcome that provides a measure of the competitive advantage derived from the value offering. Perceptions of value premiums associated with products or services enable enterprises to engage in premium pricing strategies. Premium pricing has several advantages; it enables an enterprise to achieve higher profit margins; moreover, it creates tougher barriers to entry for competitors and it may have a spill-over effect that enhances the brand value of the enterprise’s other value offerings. The foregoing discussion focuses on an individual value bundle and from the viewpoint of a specific stakeholder, the customer. Enterprises, however, typically compete on the basis of a portfolio of value offerings that targets stakeholders other than their customers only. An enterprise’s stakeholders include, for example, their shareholders. These have a vested investment in an enterprise’s performance across the portfolio of its business activities. The value premium equation can therefore be extended to express an enterprise’s degree of differentiation at the enterprise level. An enterprise’s overall value premium can be derived from a summation of the ‘j’ number of value offerings that make up its portfolio: VPvalue portfolio =

½CRvalue bundle × COMPvalue bundle j

A value premium at the enterprise level finds expression in above-market total shareholder returns to the enterprise’s investors. From an investor’s perspective, the higher the perceived value premium, the more attractive the enterprise is as an investment option. Praxis Reflection 1.7: Value (De-)Bundling and Value Premium In your organisation. . . • How is the competitive relevance of a value bundle determined? • How is a resulting value premium measured? • How are intangible elements of a value premium accounted for?

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Value Orientation and Footprint An enterprise’s value creation focus is traditionally determined by its industry orientation. The management literature identifies three primary categories within which enterprises strive to achieve competitive distinctiveness: product distinctiveness, relational distinctiveness, and operational distinctiveness. Product distinctiveness focuses on the value-adding features in a value bundle that differentiate it from competitors’ offerings. Enterprises in this sector category typically serve high-end, premium markets that target high margin sales returns. Relational distinctiveness relates to the value of the relational experience perceived by a consumer and is a determining factor in service industry sectors. Typical sectors include financial services, hospitality, and professional services such as engineering, consulting, and the information, communication, and technology (ICT) industries. Lastly, operational distinctiveness addresses primarily the manufacturing sector that produces low-margin, commodity goods and services. The value focus in this category is on cost-optimisation and efficiency in operations. The three value orientations address different stakeholder target groups and needs. All enterprises, of course, seek to fulfil a plethora of stakeholder needs and expectations at both institutional and individual levels. This notwithstanding, stakeholders associated with the three value categories may be generally reduced to two primary categories. In a first category we find enterprises targeting stakeholders on the basis of high value-added product and relational distinctiveness. These enterprises target both the end users of their premium-priced product or service offerings and investors, who have a vested interest in the profitability of the enterprise. In a second broad category we find enterprises competing on the basis of operational distinctiveness. These enterprises target primarily investors and affiliate stakeholder groups such as regulatory agencies and consumer activist groups, whereby the vested interests of the latter groups is not so much focused on profitability as it is on how the firm’s goods and services are produced and delivered. The value differentiation potential for low-margin, commodity goods and services is marginal at best. To be sure, firms in the operational distinctiveness category often spend considerable effort on enhancing the differentiation potential of their commodity product/service offerings, for example, through marketing. However, efforts directed at cost reduction and the optimisation of operations yield a far greater value differentiation potential than any effort directed at product or service differentiation in this distinctiveness category. Enterprises thus establish a value footprint that delineates their value focus. This footprint can be mapped along the three axes representing the primary value categories indicated in Fig. 1.5. The footprint shown in this figure is illustrative of an enterprise that had its origins (t0) in the traditional manufacturing sector but that has successively enhanced its product offerings with a services component (t1). Companies like Siemens, Alstom, and GE in the energy sector, and Pratt & Whitney and Rolls-Royce in the aircraft engine sector come to mind. In these and similar sectors, revenues from services

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Fig. 1.5 Value footprint and migration

(which rely on relational distinctiveness) now typically exceed those from original equipment (OE) (which draw on product distinctiveness) sales. The footprint profile indicated in the figure prompts several points worthy of note: First, enterprises may pursue more than a single primary value focus at a given point in time. The focus of enterprises like Nespresso is on product and relational distinctiveness. This is typical for high value-added, premium value offerings that bundle a superior product offering with a superior service experience. Nespresso’s success, for example, can be attributed to the pairing of its premium encapsulated coffee with clever marketing and a network of boutiques that enhance its premium image and its consumers’ purchasing experience. Secondly, although the value focus of an enterprise is generally determined by its primary sectoral affiliation, competitive advantage is increasingly derived from unique combinations of this primary focus with elements of the other two value dimensions. Lastly, as competitive playing fields evolve, so too enterprise’s must adapt their value footprint to remain competitive. A cautionary note is warranted here, however: while the foregoing typology generally holds true in a traditional sense, fundamental structural changes in industries and sectors are increasingly challenging its validity. Sectoral and industry boundaries that in the past were clearly delineated are becoming increasingly fuzzy—if not disappearing entirely. Legacy enterprises that in the past defined themselves by industry and sector boundaries are being challenged by tech giants such as Google, Amazon, Apple, and Tesla that play across multiple sectoral boundaries and to which no competitive ground is ‘sacred’. A mapping of these players’ value footprint encompasses all three of the value domains; they derive competitive advantage through multiple unique configurations of the three value dimensions. These new players also happen to have deep pockets, which allows them to enter new competitive territory quickly and with ease. They are defining

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entirely ‘new rules of the game’ that are leaving legacy enterprises scrambling to adapt to dramatically changing competitive landscapes. Praxis Reflection 1.8: Value Footprint In your organisation. . . • What are the key determinants that give shape to your organisation’s value footprint? • How are potentially conflicting interests between stakeholder groups reconciled? • To what extent has your organisation’s value footprint evolved over the years?

Reflections on Strategy: Particularities and Perspectives The notion of strategy encompasses particularities that on the one hand present intellectual challenges to scholars, and, on the other hand, dilemmas to practitioners in the field. These merit closer consideration, since they impose constraints and limitations on the practice of strategy. In this closing section, we introduce some of the intricacies of strategy to round out the discussion of core themes introduced in this chapter. In the final chapter of this book, we revisit some of these and elaborate on their implications for the strategy practice field.

Strategy and the Future Strategy is about the future. At its core, business strategy is about organisations’ continued existence in the future, which may include periods of survival and growth. Yet we have absolutely no certainty about the future. Any certainty we may have— whether based on available facts, figures, or numbers—reflects circumstances that lie in the past, or at best relates to the current reality. Available data is by default historical. Even the most sophisticated analytical models and simulations are limited by this constraint. Strategic decision-making, therefore, by default, occurs in the absence of any certainty about the data upon which decisions are based. We may, of course, extrapolate and project available data and thereby imagine the future—as we do in scenario building—but we cannot predict it. The recent COVID pandemic serves as a sobering reminder of this: who could have predicted its occurrence and its devastating consequences even only a few months before its outbreak? The more dynamic the competitive environment, the higher the risk and the shorter the time horizon over which any existing data can be assumed to be valid. The future can, and often does, unfold in unpredictable ways, as the very recent past few years have

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shown. Herein lies a fundamental dilemma of strategy: strategic decision-making necessarily occurs in the absence of reliable, complete, and perfect information about any point in time in the future. The unpredictability of evolving competitive environments has important implications. Few strategies, regardless of how well conceived, play out as originally intended. In this regard, Mintzberg [22] distinguishes between intended strategy and emergent strategies. The distinction is important and reflects the impact that changing competitive environments have on how strategies play out in the practice field. Intended strategies are deliberate plans of action that that a firm sets out to enact. As a rule, intended strategies are conceived in formal planning processes at the corporate level of an organisation, and rolled out in a ‘top-down’ manner. Unanticipated occurrences in the external competitive environment, however, often render an intended strategy invalid. In its place, an emergent strategy, that more suitably addresses the realities of an evolving environment, and that arises from unplanned actions and initiatives, ultimately becomes the strategy that is realised. In contrast to deliberate strategies, emergent strategies evolve from continual improvisations and adaptations to circumstances at the grass-roots level of an organisation that appropriately address consequences of unanticipated developments in the external competitive environment. Praxis Reflection 1.9: Strategy and the Future In your organisation. . . • When reflecting on strategies realised in the recent past, to what extent did these reflect elements of an originally intended strategy; to what extent were these emergent? • What were the key factors driving the need for an adaptation of a strategy?

Strategy and (Ir)rationality The unpredictability and irrationality of human behaviour, regardless of whether inadvertent or deliberate, introduces distinct challenges to strategy in the practice field. Traditional models and frameworks in strategic management are based on an assumption of rationality in analysis, decision-making, and action. Human behaviour, however, is not always rational and its intent may not even be deliberate. The quandary is that is that we can never be certain; the likelihood of irrationality is everpresent and uncontrollable. We differentiate between intentional and inadvertent irrationality. Intentional or deliberate irrationality has long been an element of military strategy that typically finds expression in the form of ploy and deceit. Inadvertent irrationality is not seldom due to idiosyncrasies of human behaviour and error that are often perhaps best explained by bounded rationality theory. This theory states that what may be entirely rational to one party might appear to be

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irrational to another with greater knowledge. Regardless of whether intentional or not, irrationality imposes limits on the usefulness of theoretical approaches on offer in the strategic management literature that build on the premise of rational human behaviour. This has prompted considerable discourse on the human behavioural aspect of strategy. The likelihood and unpredictability of irrationality add complexity and ambiguity to circumstances within which real-world strategic challenges present themselves. Although the behavioural aspect of strategy has long been recognised, ‘behavioural strategy’ has only recently emerged as a formalised area of study in the strategic management field. Praxis Reflection 1.10: Strategy (Ir-)Rationality In your organisation. . . • To what extent is the presumption of irrationality an issue in strategic decision-making? • What are its key sources? • How is irrationality dealt with and factored into strategic decisionmaking?

Strategy and Intangibles Intangibles play an important role in strategy for a number of reasons. We can begin with the very nature of strategy, which at its core is an intrinsically intangible conception. Mintzberg et al. [23] remind us that ‘no-one has ever seen or touched one’ and that every strategy ‘is in essence an invention and a figment of someone’s imagination’. Taken from this perspective, strategies are abstractions existing only in the minds of those conceiving them, irrespective of whether a strategy is conceived a priori or reconstructed as such after the fact. The abstruse nature of strategy poses numerous managerial challenges in the practice field. These relate to how a strategy is formulated, interpreted, communicated, and put into practice. To be effective, intangible elements of a strategy need to be collectively understood, shared, and ultimately ‘bought into’ within an organisation. The elusive nature of a strategy typically makes the achievement of these objectives difficult in the practice field. Intangibles also come into play in strategy when we consider their important role in providing the means by which firms compete. Intangible means express themselves in a variety of forms. Intangibles in the form of intellectual capital, research capability and technology, and human capital are becoming increasingly important strategic levers in an increasingly dematerialised global economy. Effective strategising demands more than simply investing in intangibles. They must be effectively exploited for competitive advantage. This centres attention on organisational factors beyond a firm’s physical and material resource base.

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Intangible elements of a firm’s culture and mindset, processes and practices, and modes of operation are key determinants of a firm’s ability to extract full competitive potential from both its tangible and intangible resource base. To reap the full benefits of intangibles, organisations need to think carefully about how they nurture and deploy them to create synergies, scale, and ultimately competitive advantage. This poses significant challenges in today’s highly volatile competitive environments, in which the deployment of intangibles more closely resembles a moving target. This demands a continual identification and prioritisation of those intangibles with highest competitive impact. We examine intangible aspects of strategy and their implications for competitive advantage more closely in Chap. 4 of this book. Praxis Reflection 1.11: Strategy and Intangibles In your organisation. . . • Which intangible factors present challenges in strategic analysis and decision-making? • How are they dealt with and to what extent do they introduce uncertainty in analysis and decision-making?

Strategy, Serendipity, and Chance No doubt, serendipity and chance happenings contribute to the enigmatic nature of strategy. Although unpredictable, they can play an important role in strategy. Many of the ‘successful’ strategies we hear and read about are, in fact, favourable reconstructions of the past. Often neglected in these narratives is any mention of the role that pure chance played in a strategy’s realisation. ‘Being in the right place at the right time with the right offering’ can spell out the difference between the success and failure of a strategy. Chance happenings cannot be ‘planned’, of course. Yet they do not seldom determine a strategy’s ultimate outcome. Indeed, serendipity and chance can even compensate for potential deficits in a strategy. More to the point, the potential of serendipity and chance to affect a strategy’s outcome implies that the achievement of competitive advantage is not always due to deliberate effort on the part of a firm. Unanticipated circumstances in a firm’s external competitive environment that cannot be ‘planned’ give rise to unforeseen opportunities or threats, such as, for example, when circumstances lead to an unanticipated demand for a given product or service offering that exceeds supply capacities. Such circumstances favour astute and agile players who are capable of exploiting such opportunities to their advantage. Consider, for example, the sudden high demand for facemasks during the early months of the COVID pandemic and the huge opportunity this created for firms in the nonwoven industrial textiles sector. Firms like Innovatec Microfibre Technology GmbH, a German manufacturer of nonwoven fabrics, that

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quickly regeared its manufacturing operations for the production of facemasks reaped benefits that could simply not have been anticipated in advance. Similarly, BioNTech, the German biotechnology company that prior to the pandemic had been focusing on the development and production of technologies and drugs for individualised cancer immunotherapies, quickly succeeded in adapting its advanced mRNA technology to produce an effective anti-COVID vaccine. Although serendipity cannot be controlled, the adage ‘chance favours the prepared mind’ always holds, of course. Even firms that otherwise lack competitive wherewithal may benefit from chance-driven imbalances—at least temporarily. Competitive firms, though, factor the unpredictability of chance happenings into their strategy by maximizing their preparedness for when these arise. Praxis Reflection 1.12: Strategy and Chance In your organisation. . . • When reflecting on strategies realised in the recent past, to what extent were these affected by the occurrence of chance happenings? • How are chance happenings typically dealt with; how is the probability of chance happenings factored into strategic decision-making?

Strategy and Theory The potential role, relevance, and need of formalised strategy theory in the strategy practice field are subjects of much debate and at the heart of the ongoing theorypractice gap discourse. Much of the practice-relevant theory development in the management field dates to its early days. The early emphasis of scholarly research on pragmatic, real-world problems contributed significantly towards establishing the field’s academic legitimacy. Seminal works, such as the writings of Simon, Penrose, Chandler, and Cyert and March,2 were grounded in research conducted either within or in close consultation with real business enterprises. Along the way, however, strategic management research strayed from its original pragmatic, business relevant purpose. Nowadays, editors and reviewers of top-tier journals routinely reject submissions considered not to include a ‘strong theoretical’ component. Administrative Science Quarterly’s ‘Notice to Contributors’ reads ‘If a manuscript contains no theory, [its] value is suspect’ [24]. Top journals even systematically decline publication of contributions that ‘merely’ set out to test or

2

Writings cited: Herbert Simon (1947). Administrative Behaviour, New York: Macmillan; Edith Penrose (1959). The theory of the growth of the firm: A case study: The Hercules Powder Company. Business History Review, 34, 1–23; Arthur D. Chandler (1962). Strategy and structure: Chapters in the history of industrial enterprises. Cambridge, MA: The MIT Press; Richard M. Cyert and James G. March (1963). A behavioural theory of the firm. Englewood Cliffs, NJ: Prentice Hall.

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replicate theories advanced in earlier publications. Consequently, less than 10% of ‘theories’ published in Academy of Management Review are ever subjected to testing [25]. The academic straitjacket thus imposed by top-tier journals on authors is all the more preposterous in view of the lack of consensus amongst academics on what even constitutes ‘good’ or ‘strong’ management theory. Contributing to the conundrum, of course, are the eclectic origins of the strategic management field, which hail from a variety of disciplines within the social sciences. To assess the theory-practice predicament in the strategic management field more closely, we examine the following three questions: (1) is theory critical to the field— in other words, do we need strategic management theory? (2) assuming its criticality, what is ‘good’ strategy theory?, and (3) if deemed critical, how much theory is needed at all? Before addressing the three questions, however, we need to clarify what we mean by the notion of ‘theory’. The expanse of the literature on theory, theorising, and theory building is extensive. This does not surprise given the importance of theory in numerous fields of study. Irrespective of its thematic context, theory is generally expected to fulfil three criteria: it should (1) explain, (2) be testable, and (3) predict. Kerlinger [26] defines theory as ‘a set of inter-related constructs (concepts), definitions, and propositions that [collectively] presents a systematic view of phenomena by specifying relations amongst variables, with the purpose of explaining and predicting phenomena’. More succinctly, Aguinis and Cronin [27] suggest that ‘theory’ simply addresses the question ‘Do we understand what’s going on?’. Understanding from theory is derived from the identification and elucidation of relevant constructs, and the nature of the interrelationships between these. Do We Need Theory in Strategic Management? Drawing on Aguinis and Cronin’s definition, it stands to reason that theory is needed in the strategy field (as in any other field) to the extent that it serves to advance our understanding of key variables and their interrelationships. Key objectives in the field of strategy ultimately revolve around problem-solving and the pursuit of better-informed decision-making. Hence, the usefulness of strategy theory is contingent on the extent to which it informs and supports problem-solving and decision-making. We recognise, however, that much of what is considered ‘theory’ in the field of strategy fails to stand up to the rigour routinely applied to theory in other fields of study. In part, this is due to the nature of theory building generally in the social sciences. Additionally, complications arise from the fact that the significance of constructs and relationships embedded in strategy theory may vary considerably depending on their use and application. Hence, understanding gained from theory can have quite different implications that ultimately depend on whether a theory is used for research, practice, or policymaking. What Is ‘Good’ Strategy Theory? An examination of the current state of strategy theory from the perspective of the criteria generally deemed to be elemental to ‘good strategy’ reveals a number of gaps and some fundamental dilemmas when these are applied to the strategy field.

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• Explanatory power: Given its primary usefulness for enabling a better understanding, ‘good’ theory ‘addresses logical, causal relationships amongst concepts and variables within a set of assumptions and constraints’ [28]. Good theory should not only provide an explanation of the phenomena in question, but it should also be the most accurate explanation given the knowledge at hand at the time [27]. In the strategy field, phenomena fundamentally revolve around circumstances relevant to organisations’ survival and growth that demand practical solutions in real-time. Good strategy theory should therefore not only illuminate key determinants, but also explicate pragmatic implications of the relevant phenomena. Lewin’s assertion ‘there is nothing more practical than a good theory’ [29] underscores the pragmatic nature of good theory. Good strategy theory should thus provide guidance that is not only useful for research, but also meaningful and applicable to practice. • Testability: Good theory should be verifiable. The verifiability of theory in the social sciences poses a number of fundamental challenges. In contrast to the natural sciences, the variability and unpredictability of contextual factors play a significantly greater role in the social sciences. These have important implications for the degree to which a theory can be verified and validated. Compare and contrast, for example, theories describing change processes—one in the natural sciences and another in the social sciences. In the natural sciences, theory describing a chemical reaction, for example, can be used to precisely track and predict the course and outcome of the reaction—subject, of course, to given boundary parameters. Repetitions of the experiment and measurement of the relevant variables allow for a relatively precise verification of the outcome, and hence the validation of the relevant theory. Contrast that to theory applicable to a change process carried out in a social context: for example, an organisational transformation initiative that invariably comprises an element of a strategy. The highly subjective nature of organisational cultural contexts and irrational factors intrinsic to these introduce a substantially greater degree of variability. These make it very difficult to verify and validate any theory of organisational change, as the disproportionately high failure rate of organisational change initiatives in the practice field readily attests. Indeed, many of the conceptual frameworks and models that have emerged in the field are as yet simply conjectures that have yet to be verified, validated, and integrated into what might be considered a ‘unifying theory of strategy’. • Predictability: The notion of predictability in a strategy context is inherently problematic. In contrast to the exact sciences, in which laws and theories enable accurate prediction within set boundary parameters and a presumption of invariability with those bounds, predictability in strategy (as generally in the social sciences) is limited by its intrinsic characteristics. Strategy is about the future, which can be imagined, but not predicted. The notion of irrationality, which expresses itself in the unpredictability of the human behavioural element and which can never be disregarded, adds to the complexity. Hence, we may at best use theory in strategy to surmise what might happen. This notwithstanding, the ‘predictive’ component of a theory can still be useful—for example in scenario

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building, although used in this way, theory might at best contribute to imagining rather than predicting possible futures. Though often ignored in academic research, a final criterion for ‘good’ theory with importance for the practice field is that the theory be as simple as possible. Simplicity is particularly critical for a theory’s adoption in the practice field. As with any useful, new knowledge, ‘good’ theory should inform action; it should enable, not complicate, better decision-making. How Much (Strategy) Theory Is Needed? In response to the third question, we first recognise that there are multiple ways to advance understanding and use knowledge in a field of study. Not all are tied to theory. In the past, numerous significant advances in a wide variety of fields have occurred in the absence of any theoretical underpinning. Praxis Perspective 1.5: Do We Really Need Strategy? Do we need theory to advance progress in a field—any field, for that matter? While the answer appears to be an obvious ‘yes’, we shouldn’t forget that remarkable advances in various fields have been made in the absence of any foundational theory. Take, for example, simple glass. Glass has been fabricated since the Mesopotamian era dating back some 4500 years. On the face of it, glass is not a very complicated material and its manufacture is quite straightforward. Glass is made by simply melting three abundant ingredients—silica (sand), alkali oxide (soda or sodium carbonate), and calcium oxide (lime). On cooling and solidification, the resulting material exhibits an amorphous structure in which atoms or molecules feature no long-range order. Physicists have yet to produce a theory, however, for why on cooling molten glass forms a hard amorphous substance given that no distinct structural change occurs when the substance transitions between its liquid and glass phases [1]. The notion of ‘colour’ presents another notable example—a seemingly everyday phenomenon that we take for granted. Colour, we know, is not an intrinsic property of matter. Its perception is dependent on an object’s light absorption, reflection, emission spectra, and interference. Yet do we really understand how the human eye perceives colour? It appears not. First described mathematically by Hermann Grassmann, a nineteenth-century German polymath and physicist, Grassmann’s laws described colour mixing using vectors on a flat space. This approach was proven incomplete by Nobel Prizewinning physicist Erwin Schrödinger in the 1920s who, building on the earlier work of nineteenth-century mathematician Bernhard Riemann, argued that using three-dimensional curves rather than flat Euclidean vectors more accurately describes how humans perceive colour differences. The Riemannian colour model thus became the accepted model. That is, until recently. Work by (continued)

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Praxis Perspective 1.5 (continued) Los Alamos National Laboratory computer scientist and mathematician Roxana Bujack suggests that both Schrödinger and Riemann got it wrong. Bujack’s studies indicate that humans are more sensitive to little changes in colour than big changes, a detail not accounted for within the current 3D colour space. Although the problem has been recognised, scientists still don’t really know how to describe this new colour space accurately. The implications for finally getting it right are thought to be hugely important for electronics, textiles, paints, and even the planet. A correct theory of colour could mean a savings potential of millions of dollars and kilowatts of energy for storage and internet bandwidth alone [2]. As a final example, consider the field of aeronautics. When the Wright brothers launched their Wright Flyer, widely credited to be the first controlled and sustained flight of a powered, heavier-than-air aircraft at Kitty Hawk, North Carolina in 1903, they did so in the absence of any aerodynamic theory. Today, 120 years later and in the age of global aviation and lunar space travel, it may surprise that there is still no consensus on a comprehensive theory explaining the mysteries of aerodynamics. To be sure, engineers know how to design aircraft that fly, but the equations they use do not explain the phenomenon of aerodynamic lift. The two competing theories seeking to do so are mathematically correct in themselves but neither provides a complete explanation of lift. The most popular of these, Bernouilli’s theorem, laid out by Swiss mathematician Daniel Bernoulli in his 1738 treatise Hydrodynamica, attributes lift to the area of higher speed and lower pressure of the air on the upper surface of the curved wing. Bernoulli’s theorem, however, does not account for air moving faster across a curved surface. Neither does it say how or why the higher velocity across a wing results in lower rather than higher pressure at its upper surface. A third puzzling problem is that an airplane with a curved upper surface is capable of flying inverted. An inverted wing, according to the Bernoulli theorem, should generate reduced pressure below the wing and result in the overall effect of pulling the plane downward rather than holding it up. Clearly, though, this is not the case and the Bernoulli theorem does not explain this incongruity. The second theory of aerodynamic lift based on Newton’s third law of motion, when applied to aerodynamics, states that a wing keeps an airplane up by pushing the air down. Air has mass. This causes the effect of a wing’s downward push and results in an equal and opposite push back upward. This accounts for lift. Newton’s principle of action and reaction, however, fails to explain the lower pressure on the wing’s surface irrespective of its curvature. In other words, in this age of space travel, we still lack an unambiguous explanation for what keeps aircraft in the air. (continued)

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Praxis Perspective 1.5 (continued) Sources: Cartwright, J. (2022). Five glassy mysteries we still can’t explain: from metallic glasses to unexpected analogues. Physics World (June 8, 2022); Diaz, J. (2022). It could take 20 more years for scientists to truly understand color. Fast Company (August 22, 2022); Regis, E. (2020). No one can explain why planes stay in the air. Scientific American (February 1, 2020). As the foregoing examples suggest, a lack of a unifying theory has not stood in the way of humans deriving great utility and value from phenomena for which there is yet no theoretical explanation. This raises questions regarding the nature of scientific progress and the role that theory plays in it. In response, Saatsi [30] argues the case for a more intuitive and comprehensive approach that takes into consideration ‘how well our theories latch onto unobservable reality’: the premise is that the better theoretical assumptions fit with reality, the more useful the theory for scientific advancement. This more inclusive view factors in empirical and approximative facets of a phenomenon not normally considered ‘theoretical’: such as heuristics (rules of thumb) that are not tied to a theory, yet nonetheless offer pragmatic ways of working around an absence of theory. While this approach is widely established in the technical sciences (as the foregoing examples illustrate), there appears to be an entrenched reluctance in the prevailing management sciences thinking to adopt a similar view. Aguinis and Cronin [27] suggest that to understand whether there is a need for theory, one needs only to reflect on the ‘so what?’ question from multiple perspectives. This perspective prompts the inverse question ‘what do we not need theory for?’. Theory should not focus on problems we do not have. When circumstances are well understood, a theory may not be required. Equally, if a theory does not deliver improved understanding of causal mechanisms underlying a phenomenon, there is little need for it. This notwithstanding, of course, theory may at times help frame problems not yet identified, as much as it can help articulate questions for which there are no answers in sight. The inadequateness of current management research to provide useable theory in no way diminishes its intrinsic appeal and potential usefulness in strategy practice. The sobering reality, however, is that current managerial approaches to decisionmaking in the practice field actually involve little formalised theory. Most high-level critical business decisions today are based on heuristic approaches that draw on practical, experiential knowledge. In the absence of formalised theory, heuristics provide pragmatic approaches to problem-solving and decision-making that though not necessarily optimal, perfect, or even rational are nonetheless sufficient for ‘getting the job done’. If anything, the irrelevance of much of academic research is a sobering testimony to its insignificance for business practice. Management theory and practice, indeed, appear to exist in worlds apart.

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Such a disconnect is unimaginable in fields such as the life sciences and engineering. Academic research in these fields makes no distinction between ‘scholarly’ and ‘practice-oriented’ relevance. In the life sciences and engineering, the value of fundamental research is measured by its potential for impact in the practice field. Small wonder then that business and management research is not taken seriously by the corporate world. Of the US $4.7 billion corporations spent on funding university research in 2018, according to the US National Science Foundation [31], business and management research managed to capture only a mere 1% [32]. Clearly, there is a need for theory in strategy practice. However, theories are a means and not ends in themselves. The academic community’s failure to address deficits in theory development applicable to strategy practice impedes the advancement of critical understanding in the practice field. This calls for a more comprehensive and encompassing approach to academic research that does not exclude phenomena encountered in the strategy practice field for which no theory yet exists. Praxis Reflection 1.13: Strategy and Theory In your organisation. . . • To what extent is formalised strategy theory used in analysis and decisionmaking? • What areas of strategy feature the greatest deficits regarding formalised theory? • How is a lack of theory dealt with and compensated for in your organisation’s strategising?

Chapter Summary This chapter opens with the question what is strategy? We recognise that strategy has always been about determining appropriate actions aimed at gaining or defending a position of advantage in adversarial circumstances. Not surprisingly, strategy has a long history in the military sciences that dates back millennia. In the management field, strategy emerged as a formalised subject area only as recently as the 1960s. Drawing on basic tenets associated with its military origins key themes in strategic management coalesced around the notions of competition and competitive advantage at the enterprise level. Concepts that helped shape the thinking in the new field had origins in various established academic disciplines in the social sciences area that include economics, organisational studies, sociology, and psychology. Early developments, such as the industry-organisation paradigm, doubtlessly contributed to a better understanding of competitive advantage. However, it was only in the 1990s that breakthrough thinking—notably Barney’s resource-based view of the firm [10]—shifted the focus from consideration of factors primarily in enterprises’ external competitive environment to firm-internal constituents of

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competition and competitive advantage. The focus on firm-specific factors marked an important departure from earlier thinking in strategy. Importantly, it shifted the focal point from factors embedded in the external competitive environment that are beyond the control of any single enterprise to firm-internal factors that are very much within firms’ sphere of influence. Earlier work, notably that of Chandler [7] and Andrews [33], had already alluded to the importance of firm-internal factors in formulating appropriate strategic responses, though in the absence of any formalised theory. The revived emphasis on firm-internal factors in the 1990s imparted new impetus to the notions of competitive advantage and differentiation by explicating options available to firms for achieving advantage through astute and deliberate deployment of factors unique to an organisation. This paved the way for subsequent significant developments in strategy thinking that include the notions of the knowledge-based, learning organisation, and dynamic capabilities. These notable contributions notwithstanding, strategic management’s lack of engagement with practice-relevant challenges persists to be one of the canonical problems of the field. Moreover, despite the advances in the field, the definition of strategy remains equivocal. Numerous definitions of strategy in circulation lack sufficient depth and specificity. Though typically invoking enterprising traits such as aspirations, intentions, and actions, they fail to connect any of these to purpose. The working definition proposed in this chapter ties the definition of strategy to organisations’ primary purpose and raison d’être. That purpose invariably revolves around the fulfilment of an organisation’s obligations to its stakeholders. These obligations invariably revolve around the creation, delivery, and capture of some form of value that is relevant and important to the organisation’s stakeholders. More often than not, the value delivered finds expression in the shape of a value bundle comprised of a configuration of individual value elements. To that end, strategy provides the means by purposefully guiding decisions and deliberate actions that harness the organisation’s competitive wherewithal—its mindset, aspirations, goals, resources, processes, and capabilities—that not only enable the organisation to fulfil its stakeholder mandate, but in a way that enables it to achieve competitive advantage. To achieve competitive advantage, an organisation must fulfil these better than its competitors. The notion of differentiation in the way value is created, delivered, and captured is thus integral to the notion of strategy. The degree of differentiation achieved can be expressed in terms of a value premium. In view of these objectives, the term strategic then refers to any means deliberately and purposefully deployed by organisations to achieve value differentiation in the pursuit of competitive advantage. Strategic may thereby allude to physical and financial resources, positions, and intangible factors such as intellectual capital and mindset. The chapter concludes with reflections on some of the idiosyncratic attributes of strategy and the current state of strategic management theory. One of the more complexing features of strategy is its inherent coupling to the future, about which we have neither reliable data nor any certainty. All strategic decision-making thus occurs in the absence of reliable and complete information. Another peculiarity pertains to the role that irrationality plays in strategy. Irrationality introduces

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uncertainties and risks to strategic decision-making that are difficult to account for. The inherent intangibility of strategy per se, and intangible factors that are relevant in strategising, represent further peculiarities that pose managerial challenges. Finally, when all is said and done, we can never discount the importance of serendipity and chance happenings. While these are not plannable, they are nonetheless often critical determinants of a strategy’s success or failure. In the final section of this chapter, we examine the current state of strategic management theory. We identify the prevailing research-practice gap and the everwidening disconnect between the direction taken by academic research and the needs in the practice field that render much of the current academic output irrelevant to strategy practice. A reflection on strategy theory queries the criticality of theory in the field, the criteria for ‘good’ theory, and how much of it is needed. We conclude that, as in any field of endeavour, theory is critical to strategy to the extent that it helps develop a better understanding of a phenomenon encountered in the strategy practice field. We contend, however, that a lack of theory does not necessarily preclude the practical exploitation of phenomena for which no theory as yet exists. ‘Good’ strategy theory, we conclude, can play a vital role in pragmatic problemsolving. The fact that current academic research largely fails to address the needs of the strategy practitioner in no way diminishes the need for theory in the field.

References 1. Parris, M. (2012, May 12). What if the Turkeys don’t vote for Christmas? The Times. 2. Kiechel, W. (2010). The lords of strategy (p. 14). Harvard Business Press. 3. Hill, A. (2021, October). Release strategy from the grip of a corporate priesthood. Financial Times. 4. Collis, D. J., & Rukstad, M. G. (2008). Can you say what your strategy is? Harvard Business Review, April Issue, pp. 82–90. 5. Sull, D., Sull, C., & Yoder, J. (2018, February 12). No one knows your strategy—Not even your top leaders. MIT Sloan Management Review, 59(3), 179–184. 6. Barton, D., & Wiseman, M. (2015). Where boards fall short. Harvard Business Review, January–February Issue, pp. 99–104. 7. Chandler, A. D. (1962). Strategy and structure: Chapters in the history of industrial enterprises. MIT Press. 8. Mintzberg, H. (1994). The fall and rise of strategic planning. Harvard Business Review, January–February Issue. 9. Mintzberg, H. (1987). The strategy concept I: Five Ps for strategy. California Management Review, Fall issue, pp. 11–24. 10. Barney, J. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1), 99–120. 11. Sørensen, J. B., & Carroll, G. R. (2021). Making great strategy: Arguing for organizational advantage. Columbia University Press. 12. Nag, R., Hambrick, D. C., & Chen, M.-J. (2007). What is strategic management, really? Inductive derivation of a consensus definition of the field. Strategic Management Journal, 28, 935–955. 13. De Geus, A. (1997). The living company. Nicholas Brealey.

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14. Selznick, P. (1957). Leadership in administration: A sociological interpretation. Harper & Row. 15. Drucker, P. F. (1994). The theory of the business. Harvard Business Review, September– October Issue, pp. 95–104. 16. Bartlett, C. A., & Ghoshal, S. (1994, November–December). Changing the role of top management: From strategy to purpose. Harvard Business Review, 72(6), 79–88. 17. Rumelt, R. P. (1979). Evaluation of strategy: Theory and models. In D. E. Schendel & C. W. Hofer (Eds.), Strategic management: A new view of business policy and planning (pp. 196–212). Little Brown. 18. Gady, F. -S. (2023, January 25). Will Leopard 2 tanks actually boost Ukraine’s battlefield chances? Financial Times. 19. Mitchell, R. K., Agle, B. R., & Wood, D. J. (1997). Toward a theory of stakeholder identification and salience: Defining the principle of who and what really counts. Academy of Management Review, 22(4), 853–886. 20. Lepak, D. P., Smith, K. G., Taylor, M. S., & M.S. (2007). Value creation and value capture: A multilevel perspective. Academy of Management Review, 32(1), 180–194. 21. Bowman, C., & Ambrosini, V. (2000). Value creation versus value capture: Towards a coherent definition of value in strategy. British Journal of Management, 11, 1–15. 22. Mintzberg, H. (1978). Patterns in strategy formation. Management Science, 24(9), 934–948. 23. Mintzberg, H., Lampel, J., Quinn, J. B., & Ghoshal, S. (2003). The strategy process (4th ed., pp. 7–8). Pearson. 24. Sutton, R. I., & Staw, B. M. (1995). What theory is not. Administrative Science Quarterly, 40(3), 371–384. 25. Kacmar, K. M., & Whitfield, J. M. (2000). An additional rating method for journal articles in the field of management. Organizational Research Methods, 3, 392–406. 26. Kerlinger, F. N. C. (1964). Foundations of behavioral research (p. 11). Holt, Reinhart and Winston. 27. Aguinis, H., & Cronin, M. A. (2022). It’s the theory, stupid. Organizational Psychology Review. https://doi.org/10.1177/20413866221080629. (First published February 21, 2022). 28. Bacharach, S. B. (1989). Organizational theories: some criteria for evaluation. Academy of Management Review, 14(4), 496–515. 29. Lewin, K. (1952). Field theory in social science: Selected theoretical papers by Kurt Lewin. Tavistock. 30. Saatsi, J. (2019). What is theoretical progress of science? Synthese, 196, 611–631. 31. https://www.nsf.gov/about/history/annual-reports.jsp 32. Hamel, G., & Birkinshaw, J. (2023). Searching for significance: The case for reimagining management research. Strategic Management Review, 4(1), 107–126. https://doi.org/10.1561/ 111.00000054 33. Andrews, K. R. (1980). The concept of corporate strategy (revise edition). Richard D. Irwin.

Chapter 2

What Is First Principles Thinking?

The most serious mistakes are not being made as a result of wrong answers. The truly dangerous thing is asking the wrong questions. Peter F. Drucker

In This Chapter, We. . . • Examine first principles thinking and its application in strategic problemsolving. • Distinguish between ‘insight’ and ‘insight-driven’ thinking. • Consider the classical structured problem-solving algorithm. • Develop a new strategic approach that builds on the classical problemsolving algorithm.

Introduction Strategy is about problem-solving . Strategy comes into play when choices need to be made towards resolving problems. Such situations vary considerably, of course, as do the types of the problems prompting a response. Choices may need to be made in response to an acute problem currently being faced. Choices may, however, be required in anticipation of a future problem. To that end, strategy is in essence about identifying gaps between an aspired (future) state and a current (or anticipated) reality—and deriving appropriate choices aimed at closing those gaps. While seemingly simple when viewed this way, strategising in the real-world, however, poses a persistent dilemma. Strategic challenges, regardless of whether driven by threat or opportunity, invariably present themselves in contexts that are ambiguous, muddled, complex, and not seldom infused with irrationality. A difficulty frequently encountered in problem-solving is deciding what not to invest effort into resolving. Good strategic problem-solving concentrates limited resources on critical aspects of a problem that are at its root and that can be decisively © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_2

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affected. This requires clear and unequivocal choices based on critical thinking that cuts through the complexity and the fog. A lot may be at stake, because strategic problems, we recall from the previous chapter, imply significant competitive relevance and impact for the organisation facing the challenge. So, where do we begin? How do we approach solving real-world strategic problems? In this chapter, we address these questions by first examining classical problem-solving from a first-principles, insight-driven perspective. We then extend the basic approach to strategic problem-solving in the latter part of this chapter.

First Principles Thinking First principles thinking, or ‘reasoning from first principles’, is attributed to the Greek philosopher Aristotle. In the Aristotelian sense, a problem’s constituent parts comprise ‘the first causes from which a thing is known’ that themselves cannot be deduced from any other in the system (or circumstances). First principles involves breaking down a complicated problem into its constituent elements, challenging basic assumptions to establish its root causality, and on this basis assembling a solution to the problem from scratch. These ‘first’ or ‘root’ causes thereby provide the baseline for reasoning in problem-solving. First principles thinking leads us through a systematic thought process that consists of • • • • • •

Identifying and making distinctions between and amongst the parts of a problem Challenging underlying assumptions to eliminate potential biases Establishing root causes of the problem Organising and prioritising the parts of a problem in the ‘big picture’ Identifying relationships between the parts of the problem Assembling a suitable solution to the problem

Reasoning from first principles progresses from an initial conjectural scrutiny of factors (subjective reality) to a verifiable assessment of root causes (objective reality). Invariably, when first encountering a new problem, past experiences that shape assumptions, opinions, and beliefs influence our initial perception of the problem. These may distort and mask its true nature. A first principles approach enables us to systematically eliminate conjectural elements that hinder an objective assessment of true cause and effect. The first principles technique differs from analogical reasoning (sometimes referred to as reasoning by analogy), which aims to create understanding of new problems by relating them to previously encountered similar problems, whereby perceived similarities are used to infer further similarities that have not yet been observed. However, the analogy technique, while no doubt useful when applied to familiar problems, is based on the implicit assumption of similarity. Analogies can lead to entrapment in a flawed ‘logic box’ and faulty decision-making resulting from ‘analytically sound choices amongst flawed options’ [1].

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First principles thinking enables us to challenge conventional wisdom by guiding us through a disciplined and systematic questioning process. One such process is named after the Greek philosopher Socrates. Socratic questioning, a critical thinking method that is sometimes referred to as reflective inquiry, enables us to break out of established patterns of thinking by challenging basic assumptions that are founded on potentially flawed biases.

Insight and Insight-Driven Thinking We distinguish between insight and insight-driven thinking in problem-solving. Insight is an outcome in the form of a better understanding of a particular aspect of a problem or the greater context within which it presents itself. Insight-driven thinking refers to the modus operandi of the process by which first principles thinking is applied to generate insight.

Insight The term insight may refer to an elucidation of an individual aspect of a phenomenon or it may be used in a collective sense to refer to a better understanding of the inner nature of a complex situation or problem. This understanding may result from combinations of acute observation and perception, discernment, and intuition. The value derived from insight is dependent on its granularity, depth, and diversity [2]: Granularity of insight enables a differentiated understanding of one and the same problem. Consider the shock wave the Ukraine war has unleashed on global supply chains around the world. Yet different regions around world are experiencing its impact differently. Depth of insight allows us to understand the full impact of a problem, recognising that the real impact of a disruption often comes only from secondary or tertiary effects. This, for example, is currently the case in industry value chains in which upstream supply disruptions triggered by the recent crises are causing bottlenecks in multiple downstream sectors. Diversity of insight involves seeking and broadening perspectives beyond the immediate industry and market scope to avert ‘nobody saw it coming’ situations. Diversity of insight is particularly critical in a world of increasing convergence across sectors. Comprehension and correct interpretation of contributing factors and linkages between the important ones at the root of the situation or problem at hand enable a reconstruction of its cause and effect. Insights that allow this may evolve gradually over time, or it may manifest itself suddenly in an ‘eureka’ moment of revelation— an occurrence referred to in German as an ‘Aha-Erlebnis’.

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Insight-Driven Insight-driven refers to the nature of the inquiry mode at the core of first principles thinking. In real world environments, firms are typically inundated with data. Firms not seldom pride themselves on being ‘data-informed’. No doubt, access to data holds huge potential; however, being purely ‘data-informed’ poses risks. The profusion of data may endow a false complacence of owning a powerful asset. However, the data that ‘data-informed’ firms pride themselves on is often inaccessible or unstructured in the form it presents itself. This opens the door to dysfunctional tendencies such as cherry picking of data that support existing cognitive biases and foregone conclusions that lead to suboptimal choices. Often, the real challenge is the overwhelming amount of data available, which often results in managers ‘losing sight of the wood for the trees’. No doubt, data informs better decisions, but to be useful, it needs to be transformed into insight. Data is not to be confused with insight. Data rarely tell the whole story. If we think of data as the information ‘building blocks’, then insight is the better understanding we derive from an analysis of the building blocks, once these have been scrutinised and assembled in a way that enables us to recognise a meaningful ‘bigger picture’ behind the data. If data represents the ‘what’, then insight provides the ‘so what’ and the ‘why so’ behind the data. Insight unlocks the true value embedded in data. Evidence-based insight provides the requisite clarity, granularity, and confidence for effective decision-making that raw data does not yield. Insight has multiple potential sources. In practice, insight is derived from human analytical thought processes that are tempered by intuition and, not seldom, enhanced by flashes of inspiration. First principles thinking ensures that the insight thus derived addresses the root causality of a problem under investigation. Praxis Reflection 2.1: Data and Insight In your organisation. . . • How is insight differentiated from data? • How is insight typically extracted from data? • To what extent is first principles thinking used to derive insight from data?

Praxis Perspective 2.1: Is Data the New Oil? The analogy between oil and data is enticing. On the face of it, both are used to power technology—the former as a hydrocarbon used directly or in converted forms of energy to electricity and mechanical work; the latter powers much of (continued)

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Praxis Perspective 2.1 (continued) the transformative technology used in artificial intelligence, automation, and advanced predictive analytics. Moreover, both oil and data require processing and refining to unlock their ultimate value. The analogy quickly breaks down when we consider some of the intrinsic properties of data. Data is infinitely durable and reusable, whereas oil is a depletable resource. A closer examination of the scarcity attribute associated with both highlights a particularly telling difference; whereas hoarding and stockpiling of oil in silos is used to increase its value, doing this to data reduces its utility. Indeed, data becomes more useful the more it is used, while oil, once converted to energy or other forms, is depleted. Oil, a material good, consumes huge amounts of resources to be delivered to where it is needed; data, on the other hand, can be moved around the globe at the speed of light via fibre-optic networks. Fungibility and ownership characteristics also differ. Intrinsically, data is not fungible. Data collected on a home’s electricity consumption by an energy provider, for example, is of little use to an online travel booking platform. This notwithstanding, the ownership of data is, of course, nonetheless a highly contentious issue that has given rise to a slew of legal and philosophical issues. The analogy between data and oil breaks down further when considering their renewability. When thinking about data as a source of power, Marr (1) suggests it is more meaningful to consider its similarities with renewable energy sources like the sun, wind, and tides. As with these sources of energy, the real challenge with data lies in its harnessing, capture, use, and reuse in ways that generate value for humanity in the myriad of big issues it is facing in education, healthcare, and climate change. Data, we can safely assume, is certain to be the currency of the future, though not necessarily in the way imagined to date. A new era in which data is powered by artificial intelligence (AI), and which is all but imminent, promises to revolutionise our conception of data. Data hoovered up by bots and repackaged for use by AI opens entirely new opportunities in any business in which machine-generated deep learning plays a role. Autonomous vehicles, medical diagnostics, manufacturing robotics, and insurance-risk management are but few of the areas in which AI is already wielding a profound impact (2). This raises questions of AI’s applicability to problem-solving. AI tools produce content. But content produced by machine-generated learning comprises compilations of existing data that require prompting. Does AI eliminate the need for human analytical thinking? Can it replace human reasoning in decision-making? AI also presents perils. The arrival of artificial general intelligence (AGI) is viewed by many experts as a historical and technological point of no return, not unlike the splitting of the atom and the invention of the printing press (3). It (continued)

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Praxis Perspective 2.1 (continued) encompasses a huge and uncharted territory that has left many experts deeply worried about the risks of powerful digital minds that not even their creators can understand, predict, or reliably control. Historian and philosopher Yuval Noah Harari has voiced fears that AI will change the course of human history by its remarkable abilities to manipulate and generate language (4). At stake, in the view of many experts, is a potential loss of control of civilisation. As the AI arms race intensifies, advances in AI are increasingly perceived to present ‘profound risks to society and humanity’, leaving many experts to fear that humanity is sleepwalking into catastrophe. As much was the tenor of the recent open letter with signatures from hundreds of the biggest names in technology released in March 2023 urging the world’s leading AI intelligence labs to pause the training of new super-powerful systems for 6 months (5). The prospect of an AI-powered future puts an entirely new spin on our conception of ‘data’, the full implications of which we have yet to comprehend. Sources: (1) Marr, B. (2018). Here’s Why Data Is Not The New Oil, Forbes, March 6, 2018; (2) Schumpeter: ‘Napster, remixed’. The Economist, March 18, 2023; (3) Hogarth, I. (2023). We must slow down the race to God-like AI. Financial Times, April 13, 2023; (4) Yuval Noah Harari argues that AI has hacked the operating system of human civilisation, The Economist, April 28, 2023; (5) Perrigo, B. (2023). Elon Musk Signs Open Letter Urging AI Labs to Pump the Brakes. Time Magazine, March 29, 2023.

First Principles-Based, Insight-Driven Problem-Solving We all encounter and deal with problems in our everyday lives. Most often, these are of minor consequence, and we may not even consciously think of them as ‘problems’ in the formal sense. In business contexts, we often encounter problems of a more complex nature. These call for a more systematic and robust approach to their analysis and resolution. First principles thinking entails such a mechanism for guiding the problem-solving process through its various stages. Insights that emerge from this process enable a better understanding of the problem under investigation and ultimately provide the groundwork for deciding on a suitable response.

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Praxis Reflection 2.2: Strategic Thinking and Problem-Solving In your organisation. . . • What role does first-principles thinking play in problem-solving? • How is it applied; how does it interface with and inform the problemsolving process? Over the years, numerous approaches to solving problems have evolved. Humans, after all, have engaged in problem-solving since the beginning of time. Not surprisingly, many tried-and-tested problem-solving approaches share common elements. Structured problem-solving is a systematic and iterative diagnostic process that, when guided by first principles reasoning, breaks down the problem-solving process into discrete stages that culminate in a response to the problem that is derived from verifiable, evidence-based insight.

Classical Structured Problem-Solving We first examine the classical structured problem-solving process more closely. The classical structured problem-solving algorithm depicted in Fig. 2.1 brings together key elements common to many problem-solving approaches. In a subsequent section in this chapter, we then develop and elaborate on its adaptation to strategic problemsolving .

Fig. 2.1 Classical structured problem-solving algorithm

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Problem Definition and Formulation Classical structured problem-solving always starts with a definition of the problem at hand. The aim is to define and formulate the problem at hand ‘as clearly as possible’ at the outset. The objective of defining a problem ‘as clearly as possible’ at the outset alludes to the fact that problems initially often defy precise definition because of their complex nature. Symptoms often mask the true causes of a problem. Moreover, the true nature of a problem may be partly concealed by asymptomatic factors. We need only to think of the COVID-19 crisis to appreciate how perplexingly difficult problems can be when they first make their appearance. Hence, the objective is not to come up with a ‘perfectly correct’ problem definition; rather we aim to come up with a ‘working version’ that allows us to get started with the problem-solving process. The real challenge at the outset is to resist the urge to jump immediately to conclusions. This poses the risk of a flawed resolution of the problem. The systematic and iterative nature of structured problem-solving provides opportunity to sharpen ‘less than perfectly framed’ problem definitions progressively as the process evolves and allows for revisions and sharpening of earlier incomplete versions accordingly.

Issues and Issues Framing Once a problem has been defined and formulated, we break it down into its component parts. We refer to these parts as issues. The term ‘issue’, although characteristically inferring a negative aspect in common parlance, is used in an objective sense in problem-solving. Issues pertain to all factors of a problem, regardless of whether considered negative or positive, since the true character of an issue is often not discernible at the outset. As we will see further on in this chapter this distinction is particularly important when we consider ‘strategic issues’, since these may relate equally to both threats as well as opportunities. What may appear at first glance to be a threat may, in fact, harbour hidden opportunities. Issues, therefore, need to be considered with impartiality and be based on facts, not speculation. We refer to the process of identifying and categorising issues associated with a problem as issues framing. Issues framing involves several stages. The first focuses on breaking down a problem into its component issues. Issues are fact-based, not speculations. First principles thinking at this stage helps us to separate fact from conjecture. Assumptions are challenged and scrutinised for existing biases that may distort the true nature of an issue. Issues are then prioritised according to their contributing impact on the problem. Prioritisation is critical to a problem’s resolution, because complex problems invariably feature multiple issues. In problemsolving, we want to focus on those issues that have the greatest bearing on the problem—the ‘critical few’ that, if resolved, will have the greatest impact on the problem’s resolution. We don’t want to get distracted by those of minor

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consequence; we don’t ignore them entirely, of course, we ‘park’ them, because priorities can change as a problem evolves. But we focus on the ones perceived to be most important at a given point in time. Prioritisation enables us to focus on the important issues. Individual issues, although distinctive, often have a bearing on adjacent issues. Hence, once prioritised, issues are examined for possible interrelationships.

Questions The critical role that questions play in problem-solving cannot be overstated. Einstein purportedly stated, ‘If I had an hour to solve a problem and my life depended on the solution, I would spend the first 55 minutes determining the proper question to ask, for once I know the proper question, I could solve the problem in less than five minutes’. And, not for naught the French philosopher Voltaire remarked that we should judge a person ‘not by their answers, but by their questions’. However, for questions to be effective, they need to be carefully reflected. Questions serve several important functions. Clearly, we use questions to frame contexts which we seek to gain a better understanding of. Contexts within which problems present themselves can be highly complex and prompt questions that cannot be answered. However, even in the inevitable absence of immediate answers to questions posed, the questioning process per se contributes to the better understanding of a problem on a higher level by flagging new factors that are relevant and critical to the problem’s resolution. Indeed, the inclusion in a final summary overview of findings of questions that cannot (as yet) be answered not seldom contributes almost as much value as the verifiable outcomes of an investigation. Open questions flag potentially critical aspects that often have a critical bearing on decisions that need to be made. Questions are at the core of the inquiry process used in problem-solving . If issues framing allows us to break down a problem into its component parts, then questions guide us in identifying aspects of the problem that require a better understanding. These we then proceed to provide answers to. The meaningfulness of the inquiry is ultimately contingent on the quality of the issues framed: the sharper we frame of the issues, the sharper the questions we can articulate—and, hence, the more meaningful the inquiry. When a problem arises, questions are often at a very high level—such as the burning question that doubtlessly was on everyone’s mind when the COVID crisis hit: when and how will this crisis end? However, as poignant as this question and similar high-level questions may have been, questions at this level of abstraction are not of much use in solving the problem. To arrive at the granularity required for effective problem-solving , questions need to focus on the levels of the problem that provide insight into its root causes. Disciplined and systematic inquiry based on the Socratic questioning method referred to earlier in this chapter is used to scrutinise issues identified and reveal further issues, and challenge implicit assumptions. Issue-specific questioning aims at establishing what we know about a problem and what we do not know about

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it. Initiating the process with a simple question: “what do we wish we knew” (about a problem) functions as a catalyst to uncover knowledge gaps in our understanding of an issue and helps establish the level of clarity required at a given point. Articulating questions from the perspective of ‘what do we wish we knew’ grants the questioning space the requisite psychological safety and encourages open exploration [3]. Questioning seeks to drill down to the problem’s root cause and deliver the granularity, depth, and diversity required for first principles reasoning by probing • • • •

The identity of the issues at stake Their contribution to the problem The issues’ specific nature and constitution How they are linked with adjacent issues and relate to the problem’s greater whole To summarise the articulation of questions in problem-solving:

1. Which questions need to be articulated depends on the decisions that need to be made, the immediate urgency of those decisions, and the granularity of insight required for informed decision-making. 2. Clearly, the quality of the issues framing has a direct bearing on the quality of the questions that are articulated. The more precise the issues, the more articulate the questions. Prioritisation of issues when framing issues enables the prioritisation of questions. The objective is to focus on those issues and questions that will make a real difference to the problem’s resolution. 3. Inevitably, some questions will not have immediate answers— we still need to articulate these questions and revisit them regularly as the problem-solving evolves. 4. Questions reveal dependencies between issues. For example potential forced production shutdowns and headcount reductions driven by economic considerations inevitably have social and political implications. Insights Insights embody the deep understanding of a problem and its parts. They are derived from a first principles reasoning approach to a problem’s resolution. Characteristics of insights have been elaborated on earlier in this chapter; hence, we focus attention in this section on its role in structured problem-solving. Insight presents itself on multiple levels. Insights can be thought of as individual pieces of a larger puzzle that represent parts (‘first causes’) of a larger problem. However, collectively, insight can also refer to a better overall understanding of a problem in its greater whole when those pieces are assembled to form the ‘big picture’ relevant to the problem. Insight—or ‘seeing into’—is derived from answers to the questions we pose. While this may appear to be straightforward, the process of deriving insight from answers to questions poses challenges:

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• Questions must be sharp and articulated in a way that allows us to extract the insight we are seeking. Poorly articulated questions produce meaningless responses. • Answers to questions may derive from a wide variety of sources and include both formal (factual data derived from formal research, archival data) and informal formats (informal discussions, social media, and data sourced from user forums). This presents a challenge, because the huge amounts of raw data typically at our disposal are often unstructured and need to be filtered, configured, and transformed into a compatible format to be usable. • The filtering process is particularly critical. Data, once transformed into a compatible format, need to be screened for potentially flawed assumptions that have their roots in deep-seated biases and status quo thinking. Reasoning from first principles allows us to challenge conventional wisdom and search for possible ‘first causes’ beyond the accepted norm. This requires an open mind—and, not least of all, courage. • The more complex the problem, the greater the probability that some critical questions will not result in insights. Missing insights need to be ‘parked’, not ignored—and questions that prompt these need to be revisited on a regular basis as the problem evolves. • Consequently, the ‘big picture’ that emerges when available insights are assembled and integrated into a greater whole will necessarily have missing pieces. We work around the inevitable lack of ‘perfect’ information in problem-solving by examining the ‘big picture’ for patterns that, although incomplete, nonetheless provide sufficient granularity and confidence for informed decision-making. In hindsight, insight often appears to be obvious and to ‘make perfect sense’. Generating it, though, can be quite a different matter. In the practice field, the problem-solving process is often messy, involving “periods of groping followed by sudden sharp insights that lead to crystallisation” [4, 5]. Moreover, while insight per se may occur in a flash of illumination, the deep underlying understanding of a problem may take years to develop and only after periods of incubation during which the unconscious mind continues to work on the problem at stake. Praxis Reflection 2.3: Prioritisation of Issues, Questions, and Insights In your organisation. . . • Which criteria are typically applied when prioritising issues, questions, and insights? • How are these criteria derived? • How are questions to which there is no immediate answer typically dealt with?

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Praxis Perspective 2.2: Swirling Serpents and Molecules Did the discovery of six-carbon ring structure of benzene transpire through a dream? One mid-nineteenth century chemist believed that the flash of insight that led him to correctly identify the ring structure of this molecule occurred while he was asleep. The prevailing assumption of mid- nineteenth century chemists was that an open chain of carbon atoms formed the backbone of all organic compounds. Yet, although its empirical formula was long known, certain properties of benzene seemed to defy the assumption of a straight carbon chain structure. German chemist Friedrich August Kekulé von Stradonitz (1829–1896) had been mulling over the structure of the six-carbon structure of benzene for some time. Kekulé’s flash of insight that led to the correct identification of the molecule’s structure allegedly occurred in a vision while he was dozing in front of the fire, according to his account of that momentous discovery [1]. I was sitting writing on my textbook, but the work did not progress; my thoughts were elsewhere. I turned my chair to the fire and dozed. Again, the atoms were gambolling before my eyes. This time the smaller groups kept modestly in the background. My mental eye, rendered more acute by the repeated visions of the kind, could now distinguish larger structures of manifold conformation; long rows sometimes more closely fitted together all twining and twisting in snake-like motion. But look! What was that? One of the snakes had seized hold of its own tail, and the form whirled mockingly before my eyes. As if by a flash of lightning I awoke; and this time also I spent the rest of the night in working out the consequences of the hypothesis.

What were the elements that ultimately contributed to Kekulé’s flash of insight? We’ll never know for sure. From cognitive neuroscience we do know that our brains, regardless of whether at a conscious or subconscious level, must be in a certain state of readiness for an insight to occur [2]. This is supported by Gestalt theory, which affirms that preparation preceding incubation leads to discovery. In Kekulé’s case we may safely assume that his deep expertise in chemistry and ability to envisage three-dimensional shapes and forms in the abstract were, no doubt, preparatory factors—and that these, playing off a lively imagination that prevailed at the unconscious level, triggered the flash of illumination at the critical moment. Source: Horvitz, L.A. (2002) Eureka! Scientific Breakthroughs that Changed the World. Chichester: John Wiley & Sons Ltd.; The Economist (2009). Incognito—Evidence mounts that brains decide before their owners know about it. (April 16, 2009)

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Response In the final stage of the classical structured problem-solving process, derived insights are aggregated and assimilated in a way that enables the formulation of a response to the problem at hand. The response stage is initiated when the number of insights that have been generated enable a reconstruction of a problem’s greater context, when the contours of the problem’s context take on shape and form. Invariably, the picture that emerges at this stage will feature missing parts. Consequently, response formulation inevitably involves decision-making in the absence of complete information. We proceed with the formulation of a response when the contours of the problem at hand exhibit sufficient clarity and thereby allow a justifiable amount of confidence for decision-making. Aggregation and assimilation of insights enable making sense of a problem in its greater context from a causal perspective. If insights enable ‘seeing into’ parts of a problem; reconstruction of the greater context of the problem through the aggregation and assimilation of the insights generated enables ‘seeing’ the problem in its greater reconstructed whole. Moreover, if issues represent the ‘what’ and insights shed light on the ‘so what’, then the response stage addresses the ‘what next’. The reconstruction of a problem’s greater context enables a derivation of a logical response to the problem. Praxis Perspective 2.3: Correlation and Causation—Or How Not to Fool Yourself Drawing the correct inferences from data is critical in problem-solving. We can have the best data available and yet end up deriving the wrong conclusions. An anecdote dating to World War II illustrates the point: in an effort to minimise the loss of bomber aircraft due to enemy fire, the US military embarked on an investigation of bomber aircraft that had returned damaged from their bombing sorties. Damaged aircraft were examined where they had sustained most damage. Data that was compiled indicated bullet holes per square foot in the various sections of the damaged aircraft. Most damages pointed to the fuselage, while aircraft engines appeared to sustain the least harm. The researchers suggested that the fuselage sections of the aircraft should be reinforced with armour. To optimise the refitting of the aircraft with enhanced armouring the military consulted Abraham Wild, a member of the Statistical Research Group at Columbia University. Wild quickly saw through the fallacy of the military’s inference. Wild suggested that the armour shouldn’t be fitted on those sections of the aircraft that indicated the most bullet holes but rather on the section showing the least, the aircraft engines. Aircraft that sustained damages to their engines were the ones not returning to the base. The flawed thinking of the US military alludes to survivorship bias; (continued)

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Praxis Perspective 2.3 (continued) this happens when facts hidden behind the data are overlooked and correlation is mistaken for causation. Source: Reddy, G. (2020). Survivorship bias—How not to fool yourself. https:// revolutiontalk.substack.com/p/survivorship-bias-how-to-not-fool. Accessed: April 10, 2023 The response stage of problem-solving comprises elements of reconstruction, design, and decision-making. The design of a suitable response after insights have been derived is fundamentally a creative activity. It involves ‘putting two and two together’ when all the cards are on the table, so to say. The creative part of problemsolving has several aspects. First, it involves assembling the insight we have gained differently: in ways that challenge our past thinking about the problem. ‘Seeing things differently’ requires courage—to see what others don’t, for example, seeing patterns in the reconstructed problem that ‘don’t add up’ to conventional wisdom. Second, it entails ‘seeing’ the greater whole despite the missing pieces. Consolidation and recombination of insights enable patterns to be identified. An analogy is apt here: The ability to mentally visualise ‘the finished whole’ before its assembly is particularly prevalent in the visual and performing arts. The master sculptor who envisages the final object in a rough-hewn block of stone before proceeding to ‘. . .chop off whatever I don’t need’ (Auguste Rodin) or the composer creating a musical score. Mozart ascribed his mastery of composing symphonies to his ability to ‘see the whole of it at a single glance in my mind’. The formulation of a response on the basis of insight derived from first-principles reasoning involves a number of additional aspects that are particularly relevant to strategic decision-making. These include the roles of heuristics or ‘simple rules’ and strategic sense-making in the formulation of strategic responses. We elaborate more thoroughly on these and other relevant aspects in a later chapter of this book dedicated to strategy formulation. Praxis Reflection 2.4: Response Formation In your organisation. . . • What factors typically trigger the initiation of the response stage when engaging in problem-solving? • How is the inevitability of incomplete information dealt with in decisionmaking? • What roles do heuristics and intuition play in response formation?

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Strategic Problem-Solving Problem-solving is intrinsic to strategy. Indeed, strategy is per se is about solving problems. Strategy comes into play when there is a problem. If there is no problem or if a strategy delivers a desired outcome, there is no need to search for a new strategy. While situations may vary considerably, strategy is particularly called for when changes in the competitive environment challenge the status quo. In this scenario, the existing strategy is no longer adequate and new choices need to be made that align better with the new reality. In a business context, the resulting strategic problem expresses itself in terms of the gap perceived between the competitive aspirations of the organisation and its current reality [6]. Where do we start? How do we resolve strategic problems? Fundamentally, the key elements outlined for the classical problem-solving approach in the foregoing section are relevant and apply to strategic problem-solving. But there are some nuances. In strategic problem-solving, we are dealing with problems that are strategic in nature. ‘Strategic’, as argued in Chap. 1, implies high relevance and significant impact on an organisation’s competitive well-being. Consequently, a lot is at stake. In the extreme, the problem may be of existential relevance to the organisation. Complexity, ambiguity, the dynamic nature of the context, and, not least, time constraints to come up with an appropriate response to the problem add complicating elements to strategic problems. Particularly in the case of highly volatile and dynamic competitive environments, there is little time for experimentation; there is added pressure to ‘get it right’ from the start. An organisation needs to move quickly and precisely when seeking to resolve a strategic problem—this starts with ascertaining that the perceived problem is indeed a strategic problem and therefore worthy of deeper investigation. Strategic problem-solving builds on the key elements of the classical problemsolving algorithm. The adaptation of the classical problem-solving algorithm to strategic problem-solving is shown schematically in Fig. 2.2. Strategy problemsolving has four key domains with overlapping elements: the challenge, sensemaking, reconstruction, and response domains. Though shown sequentially, the domains are iteratively linked to allow for revision and correction as the solution process evolves. The staged and iterative nature of the strategic problem-solving algorithm ensures that we don’t ‘lose sight of the wood for the trees’ as we move from a problem’s formulation to its resolution. First-principles reasoning is thus integral to the derivation of insights that ultimately allow the formulation of a suitable response to the problem investigated.

Strategic Problem Formulation The importance of problem formulation cannot be understated. Recognition that “the formulation of a problem is often more essential than its solution” [7] is long

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Fig. 2.2 Strategic problem-solving process

established in the physical sciences and engineering disciplines. In the strategic management field, it appears to be neglected. Instead, much of the thinking and methods applied to a problem’s formulation have remained confined to the practice field. This does not surprise in view of academia’s disconnect from practice. Scholarly effort, for the most part, has been limited to optimising methods for solving already well-defined problems. Consequently, the strategy practice field has little to gain from academic enquiry in this area [8]. Strategic problem-solving begins with the definition of the problem. Problems of a strategic nature are often triggered by changes in the external competitive environment. Not seldom, though, they are ‘home-brewed’ and a result of dysfunctionalities within the organisation. Often triggers comprise combinations of external and internal factors; typically, when external perturbations expose firminternal vulnerabilities. The problem at hand needs to be defined as precisely as possible at the outset because an ill-specified problem results in wasted effort and unnecessary loss of critical time. That said, strategic problems are often difficult to define precisely because of the often complex and ambiguous circumstances in which they present themselves. Hence, we need to accept the initial problem definition will never be ‘perfectly correct’. It must nonetheless feature sufficient substance and meaning to serve as a ‘working definition’. The iterative nature of the problem-solving process allows for adjustment, refinement, and a sharpening of the problem definition as it evolves.

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Once the challenge at hand has been defined, we move into the main framework of the strategic problem-solving framework, which comprises four key domains. Praxis Reflection 2.5: Strategic Problem Formulation In your organisation. . . • How is the formulation of a strategic problem approached? • What difficulties are encountered when scoping a strategic problem?

Challenge Domain The primary purpose of the challenge domain is to ascertain that the problem under investigation is, indeed, strategic—and hence, merits the effort of a deepening investigation. Because the true nature of a perceived problem often isn’t clear at the outset, ‘non-problems’ need to be sorted out quickly at the outset. A problem initially perceived as such may turn out not to be strategic after all on closer examination. Moreover, a problem perceived as such may turn out not to be the actual problem at all. Problems typically manifest themselves through symptoms, which mask the real cause of a problem. In strategic problem-solving, we want to make sure that we concentrate effort on establishing the root causes of a problem, and that we not get distracted by its symptoms. When facing a problem, firms sometimes fixate on its symptoms and proceed with trying to alleviate these rather than drilling down to its root causes. To illustrate the point, consider a situation not seldom encountered in the practice field: a company competing in a highly competitive commodity market ‘identifies’ a problem to be the ‘loss of market share’ and, without further analysis, rushes to ‘correct’ the problem. More often than not, the ‘knee jerk’ response in this situation is to further lower the price of a commodity item that is already priced at a cutthroat margin—a flawed response that invariably only further aggravates the real problem rather than resolving it. One can safely assume that ‘loss of market share’ is almost never the real problem in such situations; it is merely a symptom. The real cause of the problem triggering this symptom invariably lies elsewhere. We don’t want to be wasting valuable time on ‘solving’ symptoms and neither do we want to be investing effort into issues of negligible consequence. However, we don’t want to risk ignoring problems that, indeed, need to be addressed either. Hence, strategic challenges are scrutinised for relevance and impact at the outset. In the challenge domain, the strategic nature of the problem is examined by first breaking the problem into its constituent issues and articulating questions prompted by the issues. A secondary function of the challenge domain involves the prioritisation of issues deemed relevant and of high potential impact to ensure the requisite focus on those that are critical to the problem’s resolution. Strategic Issues Framing As in the classical problem-solving approach, the purpose of strategic issues framing is to break the problem into its component parts, or

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issues, by which the problem presents itself. The objective of issues framing is to identify the ‘critical few’ that characterise the problem—those that, if resolved, will make a real difference to the problem’s resolution. Not all issues are necessarily immediately evident, and some may be masked by symptoms. The more complex the strategic problem, the greater the number of issues that will be associated with it, and the greater the probability of complicating interlinkages between the issues. To illustrate with an example, consider again the case of the COVID-19 crisis. The COVID crisis posed a huge multi-facetted problem that raised multiple constituent issues (many of which have yet to be resolved). The pandemic gave rise to a slew of societal, economic, technological, and political issues on multiple levels. A closer examination of the issues associated with the COVID crisis highlights three important attributes of issues: Strategic issues are not equally important at a given point in time: The COVID crisis encompassed multiple issues. However, these were not equally important in various phases of the crisis. Rapidly escalating death tolls around the world in the first months of the pandemic focused attention on its immediate threat to human life and society at large. Effort at this stage was directed at primary emergency medical care of the afflicted and the pandemic’s containment. After several months into the pandemic, the attention shifted to its political and economic impact. The human health issue remained, of course, but its focal point shifted to bear on the search for an effective vaccine. Strategic issues evolve and change in real time: As problems evolve, so do the issues associated with them. While an early economic issue centred primarily on supply shortages of personal protective equipment and emergency medical devices, attention rapidly shifted to the devastating economic fallout resulting from enforced periods of lockdown and disrupted global supply chains. Strategic issues are interconnected: The remarkable scientific breakthrough in response to the scientific-technological challenge presented by COVID that lead to the availability of an effective vaccine barely 9 months into the pandemic triggered new political and economic issues as governments scrambled to implement workable procurement schemes and roll-out policies. The availability of vaccines on a mass scale, however, also triggered latent societal issues in the form of deep-seated resistance to vaccinations in certain pockets of society. An important point regarding issues and issues framing: complex strategic problems typically feature multiple levels of issues, and issues at any level are invariably intertwined with other issues both within the immediate category as well as across issue categories. To illustrate this point, consider again the economic issue associated with the COVID crisis. The economic issue category associated with COVID comprises a diverse array of subordinate issues such as the economic impact of the crisis on businesses across a broad range of sectors, such as economic policy and policy making, disruptions of global supply chains leading to raw material shortages and global financing. Each of these subordinate issues, in turn, may need to be broken down to even deeper levels. Framing of issues therefore typically produces a diagnostic issues tree. Issues at any level within an issue category most often are

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linked to issues in adjacent issue categories. For example economic policy making inevitably has political and societal implications. The objective of issues framing is to break down a problem to a level that allows us to identify its baseline ‘first’ or root causes. The more complex the problem, the greater the number of levels and interrelationships between the levels. The more complex the problem, the greater the likelihood that some issues will remain elusive on first examination. Hence, we strive to compile a prioritised ‘working list’ of issues that can be subsequently revised and updated. Strategic Questions Articulation Issues, we have seen earlier, prompt questions; strategic issues prompt strategic questions. Questions serve to probe the nature of a strategic issue at stake and its impact on the problem. Invariably, questions reveal further issues associated with the problem that may have been initially missed on first examination. As in the case of issues, the objective is to narrow the focus quickly on those ‘critical few’ questions prompted by an issue that have the greatest impact on immediate decisions to be made while leaving open the option for inclusion of further questions as the problem evolves and new aspects of it reveal themselves. How do strategic questions originate? Simply put, as we have examined so far, strategic questions are prompted by the strategic issues that have been framed. The emphasis is on strategic. In strategic problem-solving, we want to ensure that we are probing issues that if resolved will make a difference to the problem’s resolution. To illustrate how issues prompt questions, consider again the economic issue associated with the COVID crisis flagged earlier in this section. At the highest level, the burning questions, of course, are: when will the crisis finally be over, and what will be the ultimate impact of COVID on the economy? However consequential these questions may be, they require further refinement to be of any use. To gain the traction required for meaningful questioning, we therefore revisit issues that were framed further down the issues tree in the economic issues category. For example we narrow the focus of our questioning on the economic impact of disrupted supply chains. Supply chain disruptions manifest themselves at multiple levels, and although driven by the same source, implications at the different levels will vary considerably at the global, regional (or country), sectoral, and, ultimately, enterprise levels. Questions are determined by the level examined and by which insight is required for decisionmaking. A plausible sampling of questions directed at the enterprise level might include • How will the disruptions affect our overall business operations? – Will they force production shut-downs and head-count reductions? – How will they affect projected sales and profit margins in the next quarter? – What adjustments will need to be made to Operations scheduling? Resource planning and procurement?

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– How will the disruptions affect our operations strategy in the short-, mid-, and long-term? • How will the disruptions in the supply chain affect our enterprise’s production operations? – – – –

Which raw materials, parts, etc. are affected? How long can we continue production with current stock? How long will the disruptions last? What alternative materials sourcing options do we have?

• What affect will the disruptions have on our current business model? – To what extent will the disruptions jeopardise existing delivery commitments to our customers? – What options exist for off-setting the anticipated economic damage of disruptions? The fear of asking ‘stupid’ questions at this stage is misplaced and may instil a false sense of confidence that can lead to a pretence of knowing more than is the case. This is counterproductive and jeopardises the problem-solving process. Nor do all questions have immediate answers; the complexity and ambiguity of real business environments don’t allow for this. The COVID crisis illustrates this only too well. The simple and highly strategic question foremost on the mind of businesses around the world following the outbreak of the COVID crisis: “when will the pandemic allow for a resumption of ‘normal’ business?” could not be answered throughout 2020 and most of 2021. Recurring outbreaks of the contagion in some parts of the world and further perturbations caused by the Ukraine crisis have introduced complicating factors that have left businesses in many sectors grappling with the question 3 years on. ‘Unanswerable’ questions are nonetheless kept track of and revisited as circumstances surrounding the problem and an understanding of the problem take shape. The outcome of the scrutiny to which a problem is subjected in the challenge domain determines whether the problem, indeed, merits further investigation, or whether it can be filed away as a ‘non-problem’—at least for the time being. Praxis Reflection 2.6: Relevance, Impact and Uncertainty In your organisation. . . • How is the relevance and the potential impact of a perceived strategic problem established? • How are these (relevance and impact) prioritised? • How are uncertainty and ambiguity dealt with when framing issues and articulating questions?

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Sense-Making Domain Sense-making is the process by which meaning is established and corroborated. First introduced as a concept in organisational studies by Weick in the 1970s [9], sensemaking seeks to derive meaning from issues or events that are ambiguous, equivocal, or confusing. It draws on first principles reasoning, interpretation, and filtering that result in the ascription of meaning to issues associated with a problem as shown in Fig. 2.3. Sense-making may involve a variety of approaches. In strategic problem-solving, it is triggered by the issues and questions articulated in the preceding challenge domain. Meaning derived from responses to questions may be derived from both formal and informal means. Formal techniques include systematic inquiry approaches such as rational analysis of data collected. However, intuition and heuristics may also contribute to sense-making. Rational analysis draws on established theoretical models and methodologies of strategic management to establish causal inference from data. Rational analysis can contribute cognitive rigour and accuracy to sense-making; however, it is futile in the absence of hard data. This limitation is particularly relevant in complex situations of an unprecedented nature. Intuition seeks to extract meaning from available data but without recourse to conscious reasoning. Sometimes referred to as ‘gut feeling’, intuitive cognition is established on the basis of inner sensing and pattern-recognition that are influenced by past experiences and observations. Importantly, intuition factors in irrational

Fig. 2.3 Sense-making domain

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aspects of a problem. However, it may be subject to a variety of biases and therefore needs to be continually scrutinised and adapted accordingly. Heuristics are simple and practical ‘rules of thumb’ that have been shown to work well in the past. They are used for quick decision-making, particularly in the absence of rigorous theoretical underpinnings. As in the case of intuition, heuristics draw on experiential knowledge and are neither optimal nor necessarily rational, but nonetheless sufficient for reaching approximations in complex situations. In strategy practice, heuristics are important not only in sense-making, but also in strategic decision-making. In practice, combinations of rational analysis, intuition, and heuristics often dovetail. The nature of a problem ultimately determines the extent to which each is useful in a particular situation. As a rule, the more complex a problem, the greater the tendency will be to fall back on informal means such as intuition and heuristics. The quality of the sense-making is significantly enhanced when outcomes of the three approaches are triangulated and cross-referenced for validity, consistency, and plausibility. In sense-making, the focus is primarily on the plausibility rather than accuracy of the emergent understanding. Interpretation and Filtering Cognitive outputs, once established and validated, are subsequently subjected to interpretation. The purpose of filtering is to screen out potential biases imposed by systemic errors of judgment. These may derive from multiple influences such as socio-cultural, economic, and political factors. Sociocultural biases may reflect organisational as well as societal prejudices. Subjecting the data to multiple alternative viewpoints—for example by drawing on the expertise of knowledgeable people—may help establish objectivity. Ascription of Meaning Individual elements of a problem examined, once taken through the filtering process and on careful reflection, acquire meaning in the greater context of the problem. Ascription of meaning is contingent on the quality of the foregoing interpretation and filtering regimen. Hence, the meaning ascribed to individual elements of insight is only as valid and as the rigour that went into their derivation. Praxis Reflection 2.7: Strategic Sense-Making In your organisation. . . • To what extent does first principles thinking support sense-making? • What are the trade-offs between rational analysis and intuition typically required? • What mechanisms are in place to filter out biases when ascribing meaning to insights?

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Reconstruction Domain In the reconstruction phase of strategic problem-solving, individual insights gained through sense-making are assimilated and integrated to reconstruct the strategic landscape relevant to the problem examined. The specific nature of the strategic problem, of course, determines which insights are required for this. For example, if the strategic problem relates to a threat triggered by external factors such as new competitors, key insights will include a better understanding of the competitors in question, their value offerings, and the extent to which these pose a threat to the firm. If the strategic problem relates to a new opportunity, key insights invariably include a better understanding of the changing industry and market factors that drive the new opportunity. In both cases, key insights will invariably include firm-internal factors, such the firm’s ability to respond to the problem. The complexity of a strategic problem at hand determines the amount of insight required for a plausible reconstruction of the greater context within which it presents itself. The objective is to gain sufficient understanding of the problem to enable better informed decision-making in the subsequent response domain. Due to residual uncertainties and unanswerable questions that are inevitable in problem-solving, the reconstructed landscape will, of course, never be complete. The resulting landscape will invariably feature gaps. These are like missing pieces of a puzzle. This raises the question: how ‘complete’ does the reconstructed landscape need to be in order to proceed to the response stage? This depends on the criticality of the missing pieces. Re-examination of individual existing insights may provide a basis for making assumptions regarding missing insights. To proceed to the next stage, the landscape’s contours need to feature sufficient clarity and allow decisions to be made regarding a suitable course of action in response to the problem. Reconstruction is achieved through aggregation, consolidation, and assimilation of insights in a way that allows the ‘bigger picture’ relevant to the problem to take shape and form. The sharper the focus of the analysis leading up to this, the more discernible the contours of the emerging reconstructed competitive landscape will be. Praxis Reflection 2.8: Reconstruction In your organisation. . . • At what point in strategic problem-solving is reconstruction initiated; how is this point determined? • Is there a formalised process in place for the reconstruction of a strategic landscape? • How are ‘missing pieces’ of the bigger picture presented by a reconstructed landscape dealt with?

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Response Domain The response domain encompasses the formulation and evaluation of suitable responses to the strategic problem and the selection of one option for execution. The strategy formulation and evaluation stage of the strategy process is dealt with in greater detail in Chap. 6 of this book; hence, we will examine only a few important aspects here. The first point is that the preceding analysis should narrow the choice of viable strategic options to a manageable few. The reality of complex contexts and circumstances invariably limit the available degrees of freedom for actionable responses. For this reason, an analysis that produces innumerable options at this stage suggests flaws in the problem-solving process. A discerning and discriminating analysis narrows the number of suitable strategic options to a handful, at most. One option, of course, is always not to respond to the challenge—at least at a given point in time. Typically, we would expect something of the order of two to three plausible options at this stage of the analysis. The second point is that there is never a ‘perfect’ strategic response to a problem in the real practice world. All potentially suitable options feature liabilities. These may be due to residual uncertainties and the continually changing competitive environment that may render responses deemed suitable invalid. Hence, the objective of the strategic option evaluation is to identify a most suitable or preferred option in view of the better understanding of the problem enabled by the foregoing analysis. Theoretically, the analysis of a problem, of course, can be pursued in perpetuity. Problem-solving is concluded once a suitable option has been derived. Once this has been done, we, of course, continue to monitor for any changes in the external and internal contexts that may jeopardise the validity of the chosen option.

Chapter Summary Strategy is inherently about solving problems. First-principles based, insight-driven strategic problem-solving draws on first principles reasoning to generate insights that elucidate root causes of a problem. There are a variety of approaches to strategic problem-solving. In this chapter, we develop and elaborate on an adaptation of the classical structured problem-solving approach. The purpose and intent of strategic problem-solving is, of course, to ultimately solve a problem. Problem-solving begins with at least some understanding of the problem at hand and of course the resolve to find a solution to it. The old saying ‘if you don't know where you're going, any route will take you there’ does not hold in strategic problem-solving. Solving a problem has the ultimate objective of eliminating, or at the very least, alleviating the problem. The solution to a problem enables meaningful action to be taken towards that end. Problems, however, vary in terms of complexity. Hence, a solution to a problem may occur in stages. What constitutes a

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solution to a problem ultimately depends on the objectives set at the outset regarding its resolution. The nature of strategic problems—their complexity, magnitude, and the dynamic environment within which they presents themselves—vary. Consequently, the path to a problem’s resolution may involve any number of critical stages comprised of part solutions that cumulatively contribute to the problem’s ultimate resolution. Consider the case of COVID-19. A multifaceted and hugely complex problem, COVID has yet to be definitively resolved more than 3 years (at this time of writing) since its appearance. Irrefutably, significant progress has been made on multiple fronts towards its resolution. However, efforts directed at solving the greater COVID problem have raised new questions and revealed new aspects of the problem along the way. Many of these have been effectively dealt, some have yet to be resolved. Strategic problem-solving follows a learning trajectory that progresses from a problem’s inception to a stage in which we can take meaningful action towards its resolution. Peripheral benefits of the learning process underpinning strategic problem-solving are the acquisition of new skill sets, capabilities, and learning that can be applied in future problem-solving . Strategic problem-solving is therefore not a “done-and-dusted” type of endeavour. It is a continual process of learning and discovery.

References 1. Bryant, A. (2021, September 8). Are you stuck in a “logic box”? Strategy-Business. 2. Birshan, N., Seth, I., & Sternfels, B. (2022, August). Strategic courage in an age of volatility. McKinsey Quarterly. 3. Vozza, S. (2022, November 11). This simple question will help you make better decisions. Fast Company. 4. Mintzberg, H., & Westley, F. (2001). Decision-making: It’s not what you think. MIT Sloan Management Review, 42(3), 89–93. 5. Langley, A., Mintzberg, H., Pitcher, P., Posada, E., & Saint-Macary, J. (1995). Opening up decision making: The view from the black stool. Organization Science, 6(3), 260–279. 6. Martin, R. L. (2020). Strategy as problem-solving. Playing to win/practitioner insights. https:// rogermartin.medium.com/strategy-as-problem-solving-5c6fb9291d87 7. Einstein, A., & Infeld, I. (1938). The evolution of physics. Simon and Schuster. 8. Baer, M., Dirks, K. T., & Nickerson, J. A. (2013). Microfoundations of strategic problem formulation. Strategic Management Journal, 34, 197–214. 9. Weick, K. (1979). The social psychology of organizing. McGraw-Hill.

Chapter 3

High-Level Strategic Analysis

Any fool can know. The point is to understand. Albert Einstein

In This Chapter, We. . . • Define strategic analysis, its role, and purpose. • Introduce the high-level, ‘big-picture’ category of strategic analysis. • Consider three high-level frameworks of strategic analysis. • Examine the characteristics, relevance, application, and limitations of these constructs.

Introduction to High-Level Strategic Analysis Strategic analysis is a formalised approach for making sense of a firm’s competitive context and is integral to strategic problem-solving. A firm’s competitive context comprises both external and internal components. An analysis of these components is meaningful only when tied to a clear purpose. In strategy, purpose is provided by a strategic challenge, such as a threat to an existing strategy or the pursuit of new opportunities in the competitive environment. External and internal contexts encompass innumerable aspects that could be analysed and we can spend an infinite amount of time and effort analysing these. We would be wasting precious time doing this, however, in the absence of a clear purpose that ties the contexts to a specific strategic challenge. Good strategic analysis demands clarity of thinking and focus. It focuses attention on the core of a specific strategic challenge in the context of the relevant external and internal factors. This narrowing of the focus underpins the rationale for engaging in analysis. High-level strategic analysis, coupled with first principles, insight-driven thinking, does this for us.

© The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_3

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Praxis Perspective 3.1: Swatting the SWOT Conceptual developments in the field of strategic management have given rise to a proliferation of constructs, models, and frameworks over the years. Many of these are useful in strategic analysis when used appropriately. The field, however, has also seen the emergence of some pseudo analysis approaches that are conceptually flawed. Prominent in this category is the so-called SWOT analysis. Still a wildly popular ‘go-to’ choice of analysis at the drop of the word ‘strategy’ in certain lay circles, the SWOT analysis has the appearance of a high-level framework of analysis. Perhaps, this and its beguiling simplicity explain its wide appeal. The analysis approach is, however, conceptually flawed due to its inherent lack of focus and tie to purpose. Critically, it lacks any consideration of the ‘what’s strategically at stake’ element crucial to any meaningful strategic analysis. As a result, any ‘insight’ derived from its application is highly ambiguous. The origins of the SWOT (acronym for strengths/weaknesses—opportunities/threats) analysis are not clear. It has been suggested that its source may have been an idea sketched on the back of an envelope in the late 1960s—an idea that just caught on. Despite its ambiguity and lack of basis in any theory, its popularity demonstrates remarkable staying power. The SWOT analysis established itself as a popular situational analysis technique in the heady days of the strategic planning era and at best resembles a ‘scattergun’ approach. Its fundamental flaw derives from its lack of specificity and its detachment from purpose. Any situational analysis in the absence of a clearly stated strategic purpose and objective amounts to little more than an intellectually vacuous and hence meaningless exercise. The adage attributed to Lewis Carroll “if you don’t where you’re going, any road will get you there” doesn’t hold true for strategy. Consider German companies where a highly skilled workforce and strong employment laws tend to ensure stable industrial relations. Is this a strength or a weakness? An application of the SWOT analysis might suggest this to be a strength, but on closer examination, it could just as well infer a weakness. If, for example, the purpose and objective of an analysis is to assess the competitive viability of a German company in the face of emerging market opportunities for growing a firm’s business, then the particular characteristics of the German labour market that promote stability might be construed to be a strength. However, when facing the threat of a downturn in the market, the very same German employment laws that normally ensure stability effectively hinder firms’ flexibility in reducing headcount, and hence present German firms with a debilitating liability, which would imply a weakness. So, which is it? Since the SWOT doesn’t incorporate an objective, it could be both. We can, of course, do much better. We have far more powerful—and conceptually rigorous—means at our disposal for generating situational (continued)

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Praxis Perspective 3.1 (continued) insights. We have, for example, the high-level value proposition (VP) framework that we examine more closely further on in this chapter. The value proposition framework incorporates the basic elements of a SWOT analysis. Importantly, though, it ties these to a specific strategic objective from the start. By linking external and internal factors relevant to a challenge to a specific purpose and objective, the VP analysis provides a substantially more purposeful and meaningful basis for a situational analysis. The power of high-level strategic analysis derives from the cohesion it brings to the strategic problem-solving process. Concepts and notions introduced in the Chaps. 1 and 2 lay the conceptual groundwork of the high-level approach to strategic analysis. The high-level analysis approach introduced and elaborated on in this chapter incorporates key concepts—first principles-based, insight-driven strategic thinking, value creation, delivery, and capture at the core of strategy, and strategic problem-solving—in a ‘big-picture’ analysis framework. Importantly, we distinguish between high-level and micro-level analysis. Highlevel analysis encompasses a comprehensive consideration of a firm’s greater competitive context that comprises three key elements: (1) the core of the strategic challenge in question; (2) the external context relevant to the challenge; and (3) the firm-internal factors that reflect the firm’s current reality relevant to the strategic challenge investigated. In micro-level of strategic analysis (which we examine in Chap. 4), the focus is on deepening specific aspects of a strategy brought to light and prompted by the high-level analysis. The high-level analysis informs and guides the choice and application of micro-analyses, and provides the requisite structure, coherence, and cohesiveness to a strategic analysis. Therefore, it is imperative that we begin with the high-level analysis. The micro-level contributes details and specifics—the high-level analysis maintains focus on the greater context of a challenge under investigation. The inappropriate application of micro-analysis is a commonly encountered in in the strategy practice field. A typical faux pas is initiating the strategic analysis at the micro-level by randomly delving into some disjointed aspect of a strategic challenge in the absence of a clear understanding of the ‘bigger picture’ within which the strategic challenge presents itself. This inevitably results in confusion and ‘losing sight of the wood for the trees’. A high-level strategic analysis incorporates three key elements: 1. What’s strategically at stake? In other words, what is at the core of the strategic challenge and why does it merit investigation? What is the nature of the challenge? Is it a threat or an opportunity? What is the anticipated impact on the firm’s competitive position? 2. What is the relevant external context? Invariably, changing external contexts challenge a firm’s strategic status quo. Hence, these are often the source of a strategic challenge. This component of a high-level analysis probes key external

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factors driving and shaping a strategic challenge. External drivers may include disruptions driven by macro-economic perturbations that trickle down to a firm’s industry and market context, changes in the regulatory environment, and new competition that redefines the competitive landscape. 3. What are the relevant internal organisational factors relevant to the challenge? This question addresses a firm’s internal current reality, such as its preparedness, ability, and readiness to respond to a strategic challenge. An organisation’s firminternal basis of competitiveness and its ability exploit it in response to a strategic challenge are ultimately critical determinants of a strategy’s success or failure. High-level strategic analysis addresses the foregoing questions in a systematic, comprehensive, and cohesive manner. In strategic analysis, we necessarily begin with the high-level analysis so as not to ‘lose sight of the wood for the trees’. Moreover, we always begin with the question that addresses the “what’s strategically at stake”. Starting with this element provides sense, purpose, and the underlying rationale for engaging in the strategic analysis from the outset. First principles-based, insight-driven strategic thinking, as we will examine further on in this chapter, provides the requisite guidance through an analysis. High-level analysis scopes and maps the competitive landscape relevant to a strategic challenge that presents itself. It is initiated with the problem formulation, which articulates the “what’s strategically at stake”. In the initiation step, the objective is to bring into the ‘big picture’ pertaining to a strategic challenge the relevant external context and firm-internal factors. Inevitably, the strategic landscape addressed by high-level strategic analysis will feature numerous gaps at the start. However, as the analysis progresses, and as more and more details emerge from the analysis and are integrated into the high-level analysis frameworks, contours of the relevant ‘big picture’ gradually begin taking shape and form. The ‘big picture’ that emerges from high-level analysis is never complete, of course. In strategic analysis, we never have the luxury of ‘perfect’ insight. However, if appropriately applied, the high-level analysis ultimately generates a ‘big picture’ mapping that provides sufficient lucidity and granularity for better-informed decision-making. In this chapter, we examine three high-level frameworks of strategic analysis— the ‘5 strategy building blocks’, the unique competing space, and the value proposition frameworks. All three address the three critical elements of a strategy discussed earlier but differ in their mode of application in strategic analysis. Five Strategy Building Blocks (5-SBBs) framework is the simplest of the three high-level analysis frameworks and primarily descriptive in mode. Although it may be used at any point in the high-level analysis, its primary use in strategic analysis is in the options phase of the analysis in which the five dimensions constitute criteria for evaluating and selecting appropriate strategic options once these have been generated. Unique Competing Space (UCS) framework is essentially a schematic mapping of a firm’s strategic landscape. The UCS framework is used throughout the strategic analysis. It is used at the start to scope a strategic challenge and throughout to track

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the progress of the strategic analysis as insights emerge and are successively integrated into the evolving ‘big picture’ schematically portrayed by the UCS. The UCS also provides the basis for the ‘strategic boundaries analysis’ which plays an important role in the strategic analysis. The Value Proposition (VP) framework comprises both descriptive and schematic elements and is used in conjunction with the UCS framework to deepen and corroborate the strategic analysis at various stages of the analysis. Notably, the value proposition framework addresses strategic timing in the form of the “when?” question, which is not covered by the other two frameworks. The three frameworks of high-level strategic analysis are congruent and complement each other. When applied appropriately in tandem with first principles thinking, they constitute a comprehensive and robust approach to strategic analysis. We examine each of the three high-level analysis frameworks more closely in the following sections of this chapter. Praxis Reflection 3.1: High-Level Strategic Analysis In your organisation. . . • How is a strategic analysis typically initiated? • How are purpose and objectives integrated into a strategic analysis? • How is focus maintained on the greater strategic context of a challenge when engaging in analysis?

Five Strategy Building Blocks (5-SBBs) Framework The five building blocks of strategy framework (Fig. 3.1) represents a simple descriptive breakdown of a strategy into the critical five dimensions or constituent

Fig. 3.1 The five building blocks of strategy

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building blocks that we would expect to find in any strategy. The five dimensions of the 5-SBBs framework collectively address the three key elements introduced earlier in this chapter. The first building block (strategic imperative) addresses the core of a firm’s strategy; the second and third building blocks (stakeholder perspective and external competitive environment) address relevant external factors; and the fourth and fifth building blocks address firm-internal factors.

Elements of the 5-SBBs 1. Building block 1: The strategic imperative captures the essence of the firm’s strategy, its core strategic aspirations, purpose, and objectives, and spells out how these relate to the differentiated, superior value the firm seeks to create, deliver, and capture. 2. Building block 2: The stakeholder perspective addresses the firm’s key stakeholders—the recipients of the value the firm seeks to create and/or other parties that have a vested interest and power to influence the firm’s activities. Principally, the focus here is on the firm’s external stakeholders. 3. Building block 3: The firm’s external competitive environment encompasses all relevant factors external to the firm. These include factors that have their origin in the macro-economic context and manifest themselves in the firm’s industry and market level. Inevitably, factors in the external environment shape and drive a firm’s competitive context. Notably, external factors are beyond the influence of any individual firm. 4. Building block 4: The firm’s basis of competitiveness essentially comprises an audit of the factors at the firm’s disposal and relevant to its competitive endeavours. These factors are in the control of the firm. They include tangible input variables such as the firm’s physical and financial resources and intangibles such as intellectual capital (e.g. knowledge, skills, and capabilities). They further comprise organisational and operational factors such as organisational culture and structure, leadership potential, processes (formal and informal), and practices. Importantly, this building block addresses the firm’s inventory of competing factors; though it doesn’t necessarily mean the firm is using these effectively. The mere presence and ownership of these factors does not imply ability on the part of the firm to exploit them for competitive advantage. 5. Building block 5: The organisation’s ability to execute goes beyond the firm’s simply having or owning the resources and capabilities identified by the fourth building block. It probes reasons to believe that the firm can actually exploit these competitively. Important determinants include intangible factors such as the organisation’s culture and mindset, strategic disposition, and decision-making processes. This building block also addresses an organisation’s ability, proclivity, and state of readiness to act on a strategic challenge.

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Application of the 5-SBBs Framework The five strategy building blocks (5-SBBs) framework breaks down a strategy into five key dimensions. This allows a more granular focus on the three key strategic questions—the (1) ‘what and why?’, (2) ‘where and for whom?’, and (3) ‘how?’ questions raised in the context of a strategic challenge. The five dimensions can be used to map the main contours of a strategy at any point in a strategic analysis, of course. Its greatest utility, however, is in the strategy formation stage of the strategy process. The five dimensions provide the criteria for the evaluation of a narrowed selection of potentially suitable strategic options. This application of the 5-SBBs framework is revisited and elaborated on in Chap. 5.

Limitations of the 5-SBBs Framework The five strategy building blocks framework represents a simple descriptive approach to high-level strategic analysis. As such, it essentially comprises a check list. While it may seem overly simplistic to break down a strategy into ‘only’ five dimensions, such a perspective nonetheless provides a basis for a substantially more intricate analysis if we consider that • Each of the individual building blocks is comprised of multiple possible subfactors. And, while all five dimensions covered by the five building blocks analysis are critical to a strategy, the analysis allows a differentiated weighting of the individual building blocks specific to the source and nature of a strategic challenge. • Although the building block elements represent distinct dimensions of a strategy, they feature interlinkages. The analysis accounts for critical inter-dependencies between the five building blocks at various levels. • The building blocks represent dynamic elements of a strategy that evolve differently as competitive contexts change. Individual building blocks are affected differently by changes in a competitive context at a given point in time and consequently evolve at variable rates. In the aggregate, therefore, the 5-SBBs framework provides the potential for both breadth and depth in an analysis.

Unique Competing Space (UCS) Framework The unique competing space framework represents a visual construct of an organisation’s strategic context in the form of a Venn diagram. The framework incorporates the essential three elements of a strategy defined earlier for a high-level framework of strategic analysis—areas representing a strategic core, and the

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Fig. 3.2 Unique competing space (UCS) framework

relevant external and internal contexts. The framework focuses attention on a single firm. It comprises three main circular areas that represent (1) the firm, (2) its competitors, and (3) its stakeholders. At the core of the framework is the unique competing space (from whence the framework derives its name). The core UCS space maps an area common to the areas representing the firm and its stakeholders. The framework further features and positions elements that comprise the relevant external and internal competitive factors in relation to the organisation’s unique competing space (Fig. 3.2). The power of the UCS derives from the intuitive visualisation it lends to the high-level strategic analysis. The UCS framework is derived from strategy constructs that were introduced in earlier strategic thinking. For the Venn diagram representation, the UCS framework draws on the 3Cs model proposed by Kenichi Ohmae, which identifies company, customers, and competitors as the three key elements in a business strategy [1]. In the UCS framework, the term company is replaced by firm, and customers by the more broadly encompassing term stakeholders. The unique competing space core domain of the framework is a reinterpretation of Collis and Rukstad’s notion of a strategic sweet spot [2]. In the UCS framework, the notion of the sweet spot is reinterpreted as a spatial area comprising a firm’s unique competing space. This extension enables the identification of a firm’s strategic boundaries. Additionally, the UCS analysis framework introduces relevant macroeconomic and industry– market contexts. The conceptual features of the UCS framework substantially enrich and extend the analytical scope of the earlier constructs.

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UCS Framework: Elements Relating to the External Competitive Context The unique competing space framework maps the greater strategic context of a firm at a given point in time. It arranges the key elements of a strategy in juxtaposition to each other. Although we always begin with a scoping of the unique competing space that comprises the core of the UCS framework when carrying out a high-level analysis, for explanatory reasons the individual elements are presented in the following section in quasi-reverse order, beginning with the outer perimeter and successively narrowing the focus on the firm level: 1. Macroeconomic environment: Comprising the outer ellipsoid that encompasses the inner elements, the macro-economic environment consists of the key macroeconomic determinants that include factors representing the political, economic, societal, technological, and legal environment. The macroeconomic factors operate at a global scale and influence all aspects of the global economy, whereby their impact varies within and across regions. Their strategic relevance derives from fact that these factors constitute the key drivers of change in the global competitive environment, and while they affect all industries and markets, the extent to which they do so differs within and across industry sectors and markets. 2. Industry–market context: Represented by the rectangular box that encompasses the circles representing competitors and stakeholders, the industry–market context narrows the focus of the high-level analysis to the relevant competitive industry and market factors of a firm. Although grouped together, the two factor categories represent different levels of analysis. Industries are defined as a distinct collective of productive or profit-pursuing enterprises that are related based on their primary business activities. Industries exist to serve the needs of markets, whereby markets represent the areas and mechanisms within an industry within which the exchange of goods and services between buyers and sellers takes place. The focus of industry analysis is mainly on the relevant factors of production, whereas the market analysis seeks to gain a better understanding of customers and consumption patterns and the dynamics of the evolving market space. Firms therefore compete within industries but face their competitors directly within markets. For example luxury car manufacturer Ferrari and Volkswagen (if one excludes their luxury brands Lamborghini and Porsche) both compete within the same (automotive) industry but do not directly compete against each other. Each of the manufacturers faces different competitors in their respective markets. Complicating the analysis, industry and market boundaries are increasingly blurring, if not disappearing altogether. The definition of what constitutes a primary business activity is no longer so clear. A growing number of firms— primarily in the high-tech sector—no longer define themselves by conventional industry logic. Consider companies like Google, Amazon, and Apple: what is their defining industry? These companies (and a cohort of similar companies) neither define themselves by industry nor do they confine themselves to any sector. Instead, these companies have created consumer ecosystems around their product portfolios that span multiple industry sectors. Apple’s ecosystem, for example,

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comprises a universe that connects its gadgets and enhances these with services such as iTunes and AppleTV. Ecosystems offer convenience that consumers find more compelling to remain in than to step outside of. Cash rich and with an agility that incumbent competitors can only envy, these new players are establishing new rules of competition that transcend traditional industry thinking. 3. Stakeholders and their needs: Positioned within the market context, a firm’s stakeholders comprise a broad category of individuals, parties, institutions, and agencies that have an equally broad array of vested interests in the activities of the firm. Individuals include customers and benefactors, of course, who stand to gain from the value created by the firm. Collectively, customers represent the market space targeted by the firm. Parties and institutions may consist of investors (who may also be individuals) and other enterprises such as financial institutions and supply chain partners which have a direct interest in the profitability of the firm. Stakeholders may also include external parties not directly tied to a firm, such as activist groups. Agencies include regulatory bodies that do not necessarily have a direct interest in the profitability of the firm but rather represent the interests of other individuals and parties affected by the activities of the firm. The objectives of a stakeholder analysis include identifying and understanding (a) Key stakeholders, their needs and interests, and positions of power (b) Potentially conflicting interests amongst these key stakeholders and their implications for the firm (c) Key relational drivers pertaining to the firm’s various stakeholders. (d) The firm’s evolving stakeholder community: in particular, the relevance and implications of changing needs, interests, and influential power of current and potentially new stakeholders 4. Competitors and their offerings: Positioned alongside and overlapping with stakeholders, the circular space depicting the firm’s competitors represents other enterprises competing with firm in the same market space. The overlapping region between the circles representing competitors and stakeholders indicates the degree to which the firm’s competition is adept at delivering on the market needs. The aim of the competitor analysis is to generate what is customarily referred to as competitive intelligence and involves identifying and understanding (a) Who the competitors are currently and those on the horizon (b) The competitive nature of the competitors’ value offerings in view of stakeholders’ interests, needs, and demands and the firm’s differentiated proposition to these same stakeholders (c) Critical strengths and weaknesses of competitors (d) The evolving nature of the competitive field, critical competing factors relevant to the industry and targeted markets; key drivers of change and their implications for competition; potential sources of disruption Collectively, the macroeconomic, industry–market, stakeholder, and competitor dimensions of the UCS are congruent with the third element of the five strategy

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building blocks (5-SBBs) framework, which addresses the external competitive environment.

UCS Framework: Firm-Internal Context The lower circle depicts the firm and its competitive basis. Comprising the elements of the competitive basis are the firm’s physical and intellectual resources, processes and practices, and organisational features, such as its structure, leadership, culture, and mindset. Notably, the term competitive basis implies a competitive potential and not the ability and disposition of the firm to actually exploit its assets and attributes for competitive advantage. In this sense, this circular area implies an inventory of what a firm has at its disposal for competitive purposes. It resonates with the fourth element of the five strategy building blocks (5-SBBs) framework, which addresses the firm’s internal basis of competitiveness. Notably, while previously examined elements of the UCS analysis, namely, the macroeconomic, industry–market, stakeholders, and competitors, are beyond the control of the firm, firm-internal factors comprising its basis of competitiveness are entirely within its sphere of influence. The circular area representing the firm’s basis of competitiveness features three overlapping domains (Fig. 3.3). Domain ‘a’ represents a space in which not only the firm, but also its competitors are positioned to respond to stakeholder needs. However, since both the firm and its competitors can fulfil the market’s needs with their respective offerings, ‘a’ represents a commodity offering that allows little scope for competitive differentiation. Hence, although the firm is capable of competing in this realm, it is an area of competition generally to be avoided by the firm. There are, however, exceptions to this rule in cases in which a commodity may comprise an element of a larger strategic portfolio of offerings. This is discussed further on in this chapter.

Fig. 3.3 Firm-internal basis of competitiveness and overlapping areas

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Domain ‘b’ represents a space that, from a competitive perspective, is entirely irrelevant. It represents offerings that both the firm and its competitors are capable of producing and delivering, but which do not (or no longer) resonate with stakeholder needs and demands. Typically, ‘b’ represents a legacy competing space to which value offerings that were at one time positioned in space ‘a’—or even the ‘UCS’—have been degraded. To illustrate this point, consider the fate of the once venerable office typewriter. A standard fixture in most offices until the 1980s, typewriters were supplanted by personal computers and word processing software within a relatively short period of time. A century of typewriter manufacturing had given rise to an industry with deeply entrenched legacy assets, expertise, and capabilities. The rapid transition to office software left dominant typewriter manufacturers that included Remington, IBM and others with deep production expertise, facilities, and capacities that no longer resonated with a market need. This left typewriter manufacturers with a host of assets and capabilities that were obsolete and competitively irrelevant. Domain ‘c’ represents a space in which stakeholders’ needs are fulfilled by competitors, but which is competitively inaccessible to the firm. It may, however, also be a domain that has been deliberately abandoned by the firm and left to competitors. An example of the latter scenario is IBM’s exit from the personal computer market in 2005 when it sold its PC business and along with it its flagship ThinkPad brand to Lenovo. Alternatively, domain ‘c’ may represent a future business opportunity for the firm. The firm-internal analysis is essentially an audit of what the firm has at its disposal; its objective is to identify and understand • • • •

The overall scope of the firm’s competitive potential Resources that comprise the firm’s physical, financial, and intellectual assets Processes, operations, routines, and practices relevant to value-creating activities Organisational attributes relevant to the firm’s ability to compete such as its structure, culture, and mindset • Potential gaps in resources, processes, and organisational attributes Praxis Perspective 3.2: Trickle-Down Effect of Macroeconomic Factors Strategic challenges that present themselves at the firm level often have their origin in macroeconomic factors that may appear far removed from the day-today competitive endeavours of a firm. As recent global crises aptly underscore, changes in firm-remote factors can quickly manifest themselves at a firm’s boundaries. This can be explained by a trickle-down effect and demonstrated with the UCS framework, as shown in Fig. 3.4. The greater the magnitude of the macroeconomic factor, the greater the impact at the industry–market level. Consequences of these perturbations manifest themselves at the firm-level in the form of strategic challenges that imply potential movement (contraction or (continued)

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Praxis Perspective 3.2 (continued) expansion) of a firm’s unique competing space boundaries and which demand a response by the firm. A case that illustrates the trickle-down effect is the recent energy crisis triggered by the Ukraine war and the effect of the conflict on global natural gas supplies. The crisis which originated in the political realm quickly had economic and societal ramifications. Germany, which had hedged its national energy policy (in which the Nord Stream pipeline projects played a key role) on the predicate of cheap energy guaranteed by a reliable supply of Russian gas, was particularly hard hit. The political fallout of the Russian invasion of Ukraine in early 2022 exposed the consequences of Germany’s deep reliance on a rogue state for its supply of gas. The threat of gas shortages and soaring gas prices left governing bodies, industries, and companies across Germany scrambling to adjust to the disappearance of Russian gas. Typically, trickledown effects associated with predicaments like the current energy crisis, when manifesting themselves at the firm level, focus attention on the immediate impact on a firm’s boundaries indicated as ‘2’ and ‘3’ in Fig. 3.4 (NB. firm boundaries delineated by the unique competing space and their implications are dealt with more thoroughly further on in this chapter). A firm’s competitors are affected by unexpected crises as well but—at least in the early stages—the most pressing issue at hand for the firm centres on the mitigation of the immediate fallout of the disruption in its served markets. A case in point: the German chemical giant BASF. Its Ludwigshafen headquarter site is the largest integrated chemical complex in the world. Natural gas is BASF’s lifeblood. It powers its plants and serves as the feedstock for its chemical processes. The conflict in Ukraine cut out its main supplier. According to BASF’s CEO Brudermüller, a high dependence on piped Russian gas formed the ‘basis for our industry’s competitiveness’. BASF’s initial response was to throttle its ammonia and acetylene production, which produce critical chemical building blocks for a range of production processes further downstream in the industry value chain. Only months later, it became clear that even more drastic measures were needed; measures that required a transformation of BASF’s entire business that included a permanent downsizing of its European operations. BASF’s predicament epitomises the dilemma facing firms within and across a range of industries in the wake of the current energy crisis and aptly underscores how a seemingly remote event can quickly trickle down and have a substantial impact on a firm’s competitive position. (continued)

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Praxis Perspective 3.2 (continued)

Fig. 3.4 Trickle-down effect

Source: Chazan, G., & Nilsson, P. (2022, December 6). Germany confronts a broken business model. Financial Times.

Unique Competing Space Domain Whereas the other elements of the UCS framework represent elements of a firm’s strategic context, the unique competing space domain embodies the crux of the firm’s competitive position and endeavours. The shield-like area positioned at the core of the framework depicts the competitive domain occupied by the firm in which it fulfils stakeholders’ needs in a way that that its competitors cannot. The area depicted by the unique competing space at its core is proportionate to the degree of competitive advantage derived by the firm by its differentiated offerings in this space. Its magnitude can be expressed by a number of relative competitive measures; typical metrics include price premium of the value offer in question, market share achieved, return on investment, and brand premium. Conceptually, the unique competing space can be applied at both an individual value offering level or at an overall firm level. At the individual level the UCS domain reflects the degree of competitive superiority of an individual offering, such as a differentiated single product or service value bundle. This perspective is relevant for a competitive assessment and comparison of individual product and service offerings within a given marketplace. Companies like Apple, Google, and Amazon compete on the basis of diversified portfolios of value offerings. When applied at a firm level, the UCS domain reflects a

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Fig. 3.5 Diversified premium/commodity portfolio strategy

firm’s overall competitive performance that is derived from an aggregation of individual value components that comprise a firm’s portfolio of value offerings. When applied at the firm level, the UCS domain represents a comparative performance of a firm vis-a-vis other firms competing in a given market and industry. Such comparisons are relevant for investment decision-making. Extensions of the UCS Domain in Business Practice From a business perspective, the notion of the UCS domain is an idealisation. Ideally, of course, a firm would seek to position its entire portfolio of value offerings in this space. In practice, however, a viable strategic portfolio of offerings may feature select inclusions of commodity value offerings (as indicated in Fig. 3.5) with which firms seek to fulfil secondary needs of their key account customers. This is customarily the case for firms competing in industries that feature both premium and commodity products and services. As an example, we may consider the chemical industry. Large chemical producers often compete on the basis of a diversified portfolio of offerings that include not only high value-added, premiumpriced speciality chemicals, but also commodity products and services that address the needs of their key accounts. The commodity needs of a firm’s key accounts could of course, be fulfilled by the firm’s competitors. However, both key account customer and producer stand to gain from an arrangement by which a key account sources all of its premium and commodity products or services from a single producer. For the key account, the arrangement provides the benefits of ‘one-stop shopping’, such as a simplified procurement process. From the producer’s perspective, the arrangement provides a means of consolidating the relationship with their key account. At the very least, it removes

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incentives for a producer’s key account customers to engage at all with the producer’s competitors. From a firm’s perspective, the strategic viability of a diversified offering, however, is contingent on several conditions: • The inclusion of commodity offerings in its diversified portfolio needs to be economically justifiable for the producer. Commodity offerings that qualify involve products and services that can be produced at low cost to the producer. Typically, these utilise assets that have been amortised and require minimal capital expenditure on the part of the producer. • Price premiums derived from high value-added value offers to the key account in questions need to offset any diminished margins incurred by ‘at cost’ pricing of the commodity components in the diversified portfolio. • Ultimately, a diversified portfolio strategy makes sense only if the producer can reap bottom-line competitive advantages from such an arrangement. The portfolio’s strategic viability and sustainability therefore need to be continually monitored and calibrated.

Strategic Boundaries of the Firm A powerful feature of the UCS is the visual conceptualisation of a firm’s strategic boundaries that it provides. The notion of the firm boundaries is, of course, not new in management thinking. In his seminal 1937 paper entitled “The nature of the firm” [3] Ronald Coase argued that firm boundaries delineate ‘what to do and what not to do yourself’. Coase’s work, which earned him a Nobel Prize in economics, laid the conceptual groundwork for thinking on the topic. Numerous studies since then have contributed perspectives on the notion that include concepts as diverse as transaction cost analysis, economies of scale and scope, and organisational knowledge. These advances notwithstanding, strategic thinking on the notion for the most part remains nebulous and lacks precision and specificity [4] in the management literature. The notion of firm boundaries is principally an abstract concept in strategy. While intriguing from a theoretical point of view, firm boundaries are never precise in the practice field. The way firms think about their boundaries, however, is nonetheless critical in analysis and strategy formulation.

Operational Versus Strategic Boundaries When thinking about firm boundaries, we distinguish between a firm’s operational boundaries and its strategic boundaries. The distinction is important, and the unique competing space framework enables a visual conceptualisation of the difference between the two. Principally, a firm’s operational boundaries encompass the sphere

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comprising its competitive enterprise. Operational boundaries of a firm are defined by the perimeter of the lower circle representing a its basis of competitiveness in the UCS schematic. Not all of a firm’s means and endeavours represented within this operational perimeter are necessarily competitively, or strategically, exploited for competitive advantage. Figures 3.3 and 3.5 discussed in the preceding sections allude to this. By this we mean, for example, that a firm’s operational boundaries may encompass resources, capabilities, and organisational means that are not being effectively exploited by a firm for competitive advantage. The operational boundaries nonetheless demarcate the scope and reach of a firm’s enterprise. These boundaries spell out where and how a firm chooses to compete, though not how successfully it does so. Within the sphere demarcating a firm’s operational boundaries is a spatial domain representing the firm’s unique competing space, which circumscribes the strategic boundaries of a firm’s enterprise.

Unique Competing Space and Strategic Boundaries The unique competing space domain provides a visual conceptualisation of the boundaries within which a firm seeks to, and is capable of, achieving competitive advantage. A firm’s strategic boundaries define both the opportunities and the limitations of its competitive endeavours. The unique competing space identifies three distinct boundaries as indicated in Fig. 3.6. Boundary 1: Line of demarcation: Boundary 1 represents the competitive demarcation line between the firm and its competitors. It elucidates the differentiation realised by the firm relative to that of its competition. The primary strategic focus at boundary 1 is on defence and protection against attempts by the competition to encroach on the firm’s unique competing space along this boundary. Protective means deployed by firms to achieve this include intellectual property mechanisms Fig. 3.6 Unique competing space and boundaries

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such as patents, copyright, trademarks, and design rights. Other protective measures include premium branding, and innovative and differentiated features of value offerings that resonate with the markets’ needs. Boundary 2: Stakeholder interface: Boundary 2 represents the interface between an organisation and its stakeholders. In a commercial context, this boundary constitutes a firm’s stakeholder interface, which addresses customers (and in this sense, the broader market context), investors, strategic partners, suppliers, fiscal and regulatory bodies. The boundary’s strategic relevance stems from the fact that it is across this interface that a firm ultimately seeks to deliver (and capture value from) the differentiated value it creates. The better the firm understands and ‘manages’ this interface, the better it is positioned to expand and grow its served market. Mechanisms deployed by firms to enhance the strategic relevance of this interface include advanced customer relationship management (CRM) and ethnographic techniques that aim at uncovering unmet needs. Boundary 3: Internal threshold: Arguably, the least conspicuous but strategically the most critical, boundary 3 represents the internal threshold across which a firm must mobilise its competitive capabilities to achieve and retain competitive advantage. Boundary 3 is about the execution of a strategy; in other words, it is about the orchestration of a firm’s internal basis of competitiveness for competitive advantage. Boundary 3 thus resonates with the fifth of the 5-SBBs and highlights the difference between a firm’s mere ownership and/or access to assets and organisational means ( fourth of the 5-SBBs) and its ability to exploit these for competitive advantage. Strategic exploitation requires organisational congruence, alignment, and the effective deployment of a firm’s asset base in line with its competitive objectives.

Characteristics and Features of Firm Strategic Boundaries The strategic boundaries implied by the unique competing space domain exhibit a number of features that are relevant to strategic analysis. Firm boundaries are the outcome of a firm’s choices: Strategic boundaries are consequences of choices and decisions made by firms, regardless of whether these are deliberate or inadvertent. External factors determining a firm’s competitive environment always impose constraints and a firm’s internal reality delineates limitations on options available to the firm in response to a challenge. However, within its scope of manoeuvrability, whether, and if so, how a firm responds are entirely at its discretion. Consequently, within the bounds of these restraints, choices made on the part of a firm determine the perimeter of its competitive boundaries. Firm boundaries are dynamic: Competitive environments are dynamic. Changing competitive contexts inevitably give rise to strategic challenges. These have consequences for a firm’s boundaries. Strategic challenges imply potential

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Changing industrymarket context

Evolving stakeholders’ needs Encroaching competitors’ offerings

Contracting competitive basis of firm

Firm’s contracting unique competing space

Fig. 3.7 Unique competing space contraction in a dynamic competitive context

movement of a firm’s boundaries. New emerging threats exert competitive pressure, particularly at boundary 1. Failure on the part of the firm to respond appropriately results in a contraction of its unique competing space. Likewise, new opportunities (at boundary 2) offer potential for expansion and growth of the unique competing space into new market territory if acted upon suitably by the firm. Evolving industry and market contexts mean that the firm’s strategic boundaries are continually subjected to potential movement. The greater the dynamic of these contexts, the greater the potential strategic impact on the firm’s unique competing space. The effects of dynamic forces acting on a firm’s competitive context and the potential consequences of these for the firm’s UCS boundaries are depicted in Fig. 3.7. For illustration, consider Nokia. At its peak in 2000, the former telecoms giant’s mobile phone brand commanded a market share of 30%, almost twice that of its nearest competitor Motorola. Nokia’s demise serves as a sobering reminder of how once powerful corporate giants can rapidly fade into oblivion. Over the

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years, Nokia had demonstrated remarkable adaptiveness, evolving from producing paper and rubber galoshes to a globally leading telecoms company. Nokia’s decline was a result of its obsession with technology and its failure to recognize and adapt to shifting consumer preferences that increasingly rewarded enhanced software-supported user experience over simply more technology. Instead of re-aligning its strategy accordingly, Nokia turned inward and redoubled its effort to develop physical devices oriented to short-term market demands. In doing so, its basis of competitiveness stagnated, and gradually contracted. Flawed decisions along the way, such as opting for Microsoft’s mobile operating system rather than Android in 2011, only hastened Nokia’s decline. Apple’s iPhone, launched in 2007, however, proved to be Nokia’s ultimate nemesis. Ironically, Apple’s iPhone, which rapidly encroached on Nokia’s mobile phone business, embedded a substantial amount of Nokia’s technology. Apple’s $2 billion cash payment in 2017 to settle patent infringements with Nokia, however, was small consolation to the former telecoms giant which by then had long since exited the mobile devices business. Surprising only, perhaps, was the speed with which Nokia ceded its unique competing space in the face of rapidly changing market demands and new, stronger competition. Praxis Case 3.1: BlackBerry Crumble Research in Motion’s (RIM) BlackBerry is another telecoms giant that succumbed to competitive pressures wrought by changing customer preferences and new competitors that were more adept at fulfilling these. BlackBerry at one point was the go-to mobile device favoured by corporates. Named by FORTUNE in 2009 as one of the fastest growing companies in the world, it boasted an 85% growth that year. By 2015, its market share had plummeted from 50% in 2007 to near insignificance as customers around the world dropped the once ubiquitous BlackBerry for Apple’s iPhone and Androidpowered devices. Numerous missteps on the part of the once premier mobile device manufacturer and genuine tech status icon contributed to its demise. A reconstruction of these in retrospect from a UCS boundaries perspective suggests Blackberry seriously failed to adequately assess the implications of the perturbations that presented themselves at its strategic boundaries. Boundary 1: BlackBerry seriously underestimated its customers’ growing appetite for mobile functionalities beyond the simple e-mail function. New competitors, foremost Apple, envisioned entirely new modes of connected communication that enabled Web-browsing ‘on-the-go’, access to social media, mechanisms that supported the mass adoption of applications (apps), and device features that enhanced user experience. BlackBerry initially ridiculed the iPhone’s touchscreen feature when it was launched on the premise it would never find wide adoption in the corporate world. (continued)

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Praxis Case 3.1 (continued) Boundary 2: BlackBerry ultimately failed to anticipate and recognise the implications of a revolution in the mobile phone market in the mid-2000s: private consumers, not business customers, were the growing source of demand for mobile devices. Private consumers latched onto the significantly broadened array of features offered by up-and-coming competitors’ devices. Boundary 3: Perhaps most critically, internal dysfunctionalities proved to be BlackBerry’s undoing. Turf wars that emanated from its executive suite distracted the company from recognising and assessing the shifts occurring in the market, and ultimately disabled effective decision-making. Obsessed with its keyboard-entry mode and e-mail functionality to the end, last-ditched attempts to launch catch-up products failed to win back customers that had since moved on to competitors offerings. At the height of its success in 2011, Blackberry reported more than $5 billion in quarterly revenues and held a 33% share of the UK smartphone market. By 2021, BlackBerry’s UK market share had dissipated entirely. Sources: Taylor, P. (2022, May 23). BlackBerry OS market share in the United Kingdom (UK) 2011–2021. Statista; Connors, W. (2012, July 2). Multiple missteps caused research in motion’s fall. Wall Street Journal; Gustin, S. (2012, July 16). Blackberry crushed. Time; Blackberry sales at eightyear low. Financial Times (March 28/29, 2015) Strategic issues manifest themselves at the boundaries: Strategic issues, when they arise, manifest themselves at the boundaries of a firm’s competing space. The strategic significance and implications of this for high-level strategic analysis cannot be overemphasised. When framing strategic issues—as we do when breaking a strategic challenge into its component parts in the early stage of an analysis—we need not resort to a random, ‘needle in the haystack’ approach. The strategic boundaries perspective offers a conceptually elegant and robust means of identifying strategically relevant issues, regardless of whether these relate to threats or opportunities arising in the external competitive environment or as a result of firm-internal factors. Strategic boundaries feature interdependencies: Although they address distinct aspects of a firm’s competitive position, the three boundaries of the unique competing space are linked. Issues arising at one boundary have implications for issues at the other two. To illustrate, consider an issue that manifests itself as a threat at boundary 1. For example, the threat might relate to increasing competitive pressure by new competitors seeking to encroach on a competitive position held by the firm. This issue at boundary 1 invariably gives rise to secondary issues at boundary 2, the firm’s interface to its served customer base targeted by

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the new competitors. The issue at boundary 2 then might relate to the firm’s customers’ perception of and reaction to the new competitor’s value offerings in view of their own needs. Moreover, the threat perceived at boundary 1 prompts issues at boundary 3 that relate to the firm’s ability to defend its position against incursions of its customer base by the new competition. Praxis Perspective 3.3: Empirical Research into Firms’ Strategic Boundaries A study conducted by the author in 2014 examined UK senior executives’ perception of their organization’s strategic boundaries and the interrelationships between these. The research was based on the concept of the unique competing space and the firm boundaries depicted by it. A survey of senior executives in 75 UK-based firms representing a cross sampling of industries and firm sizes queried executives’ perceptions of • The importance of the individual boundaries in terms of the frequency of issues arising at these • The nature of the issues presenting themselves at the boundaries • Interrelationships between issues arising at the boundaries • Competitive implications of the issues The research findings confirm that, in the perception of the executives surveyed, strategic challenges when they arise are reflected by issues that manifest themselves at the firm’s boundaries. The findings further indicate that strategic issues most frequently arise as a result of perturbations at two of the boundary interfaces in particular—the boundary to competitors (boundary 1) and the interface to stakeholders (boundary 2). Changes at these (external) interfaces subsequently trigger strategic issues at boundary 3. A principal component analysis suggests issues related to changes in competition explain the greatest amount variance (16.5% of variance explained). This is followed by issues associated with boundary 3 (15.7% of variance explained), which relate to the firm’s ability to formulate appropriate responses to disturbances at boundaries 1 and 2. Issues related to changes at the interface to the stakeholder cluster (boundary 2) account for 14.7% of the variance explained. A correlation analysis provides insight into the nature and intensity of the interdependencies between the firm’s boundaries. Figure 3.8 shows a mapping of the correlations between issues linked to the three firm boundaries. Linkages are indicated by arrows connecting the boundaries; these indicate the nature and frequency of the interrelationships. The significance of the linkages, on the other hand, is indicated by the “p” values that emerge from the statistical analysis. The more significant the interrelationship, the higher the “p” value; highly significant linkages are indicated by bold arrows in Fig. 3.8. The research findings point to the pivotal significance of the firm’s third (continued)

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Praxis Perspective 3.3 (continued) boundary in orchestrating, aligning, and mobilizing resources in response to challenges brought by changes in the firm’s competition and markets. The research findings do not surprise entirely; they are consistent with our intuitive understanding of where firms typically face the greatest challenge in strategy practice. No doubt, firms’ competition and changing market conditions typically trigger strategic challenges. Ultimately, however, the research findings suggest that the greatest challenges facing firms revolve around their ability to get their own act together in response to challenges posed by competitors and markets. Firm’s unique compeƟng

Stakeholders’ CompeƟtors’

Firm’s internal basis of Fig. 3.8 Correlation analysis: empirical evidence indicating nature and intensity of interrelationships between firms’ strategic boundaries [Kendall’s tau (2-tailed); sample size: 75; *p < 0.05; **p < 0.01]

Source: Tovstiga, G. (2014). Strategic boundaries and issues: summary of research findings (White paper). Henley Business School, UK.

Strategic boundaries are congruent with first principles, insight-driven thinking Last but not least, the firm boundaries angle integral to the unique competing space domain is congruent with first principles, insight-driven thinking: • The boundaries perspective helps maintain focus on the crux of the strategic challenge (the ‘what’s strategically at stake?’) throughout an analysis.

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• The premise that strategic issues present themselves at the firm’s strategic boundaries enables an expedient means of ‘cutting to the chase’ when framing issues. In problem-solving, the boundaries focus centres attention on potential root causes of a problem. In the ensuing analysis the boundaries perspective maintains this focus and thereby substantiates first-principles, insight-driven thinking throughout the analysis. • In the reconstruction stage, insights derived from the analysis ultimately allow a more precise conception of the boundary perimeter of the firm’s unique competing space. The better understanding of where the boundaries actually lie endows the analysis with greater clarity regarding the root causality of a strategic challenge and ultimately enables better-informed decision-making in the response stage. • Finally, a ‘three boundaries analysis’ derived from the boundaries perspective provides a suitable basis for scrutinising strategic implications of an option once it has been selected. The application of the UCS domain and its three boundaries to the assessment of options is more closely examined in Chap. 5.

Praxis Reflection 3.2: Strategic Boundaries In your organisation. . . • To what extent is a distinction made between operational and strategic boundaries? • How are your firm’s strategies boundaries defined? • Which of the boundaries are most difficult to determine—and why? • Which boundaries typically present the greatest challenges from a competitive perspective?

Application of the UCS Framework The power of the unique competing space framework derives from its functional utility as both a visual representation of a firm’s strategy and strategic context, and as a frame of reference in strategic problem-solving: 1. Visualisation of a strategy: The UCS framework enables an intuitive visualisation of the key elements of a strategy at a glance. The UCS framework allows a depiction of a current strategy, the reconstruction of a strategy in the past, or the scoping of a hypothetical future strategy on the premise of ‘what if. . .’. It lends a high-level perspective to a strategic analysis that helps identify and track both insights generated and critical insights that are missing. 2. Strategic problem-solving: When applied in tandem with first-principles, insightdriven thinking, the UCS framework provides an intuitively functional frame of reference for strategic problem-solving. The tandem application of strategic thinking and analysis is elaborated on in Chap. 5.

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Limitations of the UCS The unique competing space framework depicted in Fig. 3.2 represents a simplification and abstraction of reality, as all frameworks do. This imposes conceptual conditions on the framework that require qualification: • The notion of ‘uniqueness’ integral to the unique competing space concept requires qualification. The term ‘uniqueness’ in the context of the UCS analysis is used in a relative sense. Firms seldom (short of a monopoly situation) have the advantage of exclusive access to markets. More realistically, the unique competing space reflects a ‘blue ocean strategy’, a strategic outcome whereby a firm derives competitive advantage from unconventional configurations of their value offering in terms of utility, cost, and price [5]. A firm may share this space with a limited and select number of other viable competitors. A more suitable qualifying criterion for the degree of competitive advantage achieved and represented by the UCS therefore relates to the return achieved by a firm and its (relatively few) competitors relative to average players competing in the same markets. More realistic return measures of competitive impact therefore relate to the extent to which the firm generates a return on investment in excess of prevailing marketaverage returns and its ability to sustain this gap. Ultimately, though, the competitive uniqueness achieved by a firm reflects the degree to which the firm’s competitive endeavours in this space make the competition irrelevant. • The depiction of three circular areas representing the firm, its stakeholders, and its competitors as identical in size is, of course, an abstraction. In reality, the magnitudes of the circular areas may vary considerably. Hence, their depiction in the UCS framework is primarily a symbolic representation that requires further qualification. The real magnitude of any of the circles may relate to a number of measures such as effect, viability, or growth potential. • Nor are they static in reality (as illustrated in Fig. 3.7). The UCS represents a snapshot in time because competitive environments are continually in flux. Multiple side-by-side projections are required to capture the full dynamic nature of a relevant evolving competitive context. • Moreover, the UCS framework is subject to the conventional limitations imposed by two-dimensional projections: a flat-plane perspective makes it difficult to capture the potentiality of a firm competing in multiple markets with multiple value offerings. To depict a truer ‘big picture’ analysis of a firm competing in more than one market, multiple side-by-side projections are required.

Value Proposition (VP) Framework Strategy is about being different. Congruent with this stipulation, a value proposition is an articulation of extent to which and the ways in which a firm’s strategy is different. The value proposition (VP) framework enables the elucidation of a

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strategy on the basis of its value proposition. A proposition per se is a proposal presented for consideration. When used in conjunction with the term value, a value proposition is an articulation of the better value that that a firm proposes to its current and potential stakeholders. In a business strategy context, a value proposition is an articulation of a firm’s strategic intent regarding the differentiated value the firm seeks to create, deliver, and capture. A viable value proposition not only spells out the superior value, satisfaction or utility of a value offering to be derived from its differentiating features, it also provides plausible and convincing ‘reasons to believe’ that it can be realised. The ‘reasons to believe’ endow the value proposition with substance and plausibility that seek to ensure that a firm’s value proposition is not simply a clever sales pitch. Value propositions are formulated by firms; the validity of a value proposition, however, is ultimately determined and verified by the recipients of the value the firm creates and delivers to these. This leaves the question regarding the value capture. The focus of a value proposition often centres exclusively on the ‘customer’ - to the extent that the term is often understood to imply ‘customer value proposition’. No doubt, a value proposition that fails to resonate with buyers’ needs and demands is not viable. However, to be sustainable, a valid value proposition needs to cater not only to customers; it must also offer feasible means of capturing value for the producer of the value. As a formal management concept, the notion of a value proposition is a relatively recent development in the field of strategic management that dates to the early 1990s. This is not to suggest that successful firms have not understood and put into practice principles embedded in the notion well before its formal adoption as a management concept. Strategy thinkers such as Peter F. Drucker [6], Gary Hamel, and C.K. Prahalad [7, 8] are credited with laying out the basics tenets integral to the concept. Drucker’s ‘theory of the business’ captures the essence of a value proposition. Key elements of his theory revolve around basic assumptions made by a firm “that shape [its] behaviour, dictate its decisions about what to do and what not to do, and define what the [firm] considers meaningful results.” These assumptions centre on stakeholders generally, though more specifically on markets and customers, and what they value. Assumptions about competitors and their behaviours broaden the perspective on the wider competitive environment and introduce factors that account for the dynamics of the evolving industry and macro-economic contexts. Drucker argues that a firm’s assumptions are ultimately about what it gets paid for. Firms fail when assumptions underpinning their thinking, decisions and actions are no longer valid; when competitive context evolve, and firms fail to grasp and act on the implications of these changes.

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Praxis Reflection 3.3: Value Proposition In your organisation. . . • How clearly is your organisation’s value proposition formulated? • What are its component elements and whom are these directed at? • How regularly is it reviewed and revised?

Components of the Value Proposition Framework The configuration of the value proposition framework derived in this section builds on key elements of the value proposition concept introduced by Drucker, and Hamel and Prahalad. As in the case of the 5-SBBs and unique competing space high-level frameworks presented earlier in this chapter, the value proposition framework integrates the three key elements of a strategy—the “what’s competitively at stake?” at the core of a strategy, and its relevant external and internal elements. Additionally, the value proposition introduces a time dimension to the high-level analysis by addressing the “when?” question—as in when a firm should make a strategic move. The timing of a strategic response or initiative is crucial to its success. The value proposition framework depicted in Fig. 3.9 features five key elements. At its core are the elements that address the “what?” and “when?” questions. Together these comprise the value proposition and time horizon half of the

‘Reasons to believe’

Value proposition & time horizon

Value proposition

Why do we think we can make a difference? Aspirations, vision, values & guiding principles

FUTURE?

NOW? TIME HORIZON

When What unique, superior (dif ferent iated) value of fering do we aspire to create, deliver and capture – and for WHOM?

Where do we see opportunities for making a dif ference?

Why? Where? How? When?

External context (opportunities & threats)

How and on what basis are we going make that dif ference? Internal basis of competitiveness (strengths & weaknesses)

Fig. 3.9 Value proposition framework

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framework depicted on the right side of the schematic. ‘Reasons to believe’ indicated on the left side of the framework and feeding into the value proposition—the “why?”, “where?” and “how” elements—address specifics that substantiate and lend credibility to the strategic intent articulated by the value proposition.

Value Proposition: The ‘What?’ Component A firm’s value proposition is an articulation of its strategic intent. At its core, it addresses the “what?” question: “what unique, superior value offering does the firm aspire to create, deliver, capture, and for whom?”. A good value proposition not only lays out the differentiated features of the firm’s value offering(s) that set the firm competitively apart from its competitors, but it also provides the underlying rationale for why the firm is positioned to deliver these. It is, nevertheless, intrinsically a proposition. As such, a value proposition needs to be both realistic and realisable. The basic assumptions that substantiate its realisability (that Drucker refers to in his theory of the business) need to reflect the reality of the firm’s competitive context and the firm’s wherewithal to fulfil its competitive obligations. The “what?” at the core of the value proposition framework is congruent with the first element of the five strategy building blocks (5-SBBs) framework—the strategic imperative that captures the essence of the firm’s strategy; its core strategic aspirations, objectives, and purpose—and how these reflect the differentiated, superior value the firm seeks to create, deliver, and capture. In the unique competing space (UCS) framework, the “what?” of the value proposition provides an explication of what the UCS domain depicts schematically in the UCS framework. Praxis Reflection 3.4: Value Proposition—The ‘What’ at the Core In your organisation. . . • How clearly does your organisation’s value proposition spell out the ‘what’ at its core? • To what extent does it establish the features that set your organisation apart from its competition?

Value Proposition: The ‘When?’ Component The time component of the value proposition framework addressed by the ‘when?’ question distinguishes it from the other two high-level frameworks of analysis. Timing is crucial in strategy. Since antiquity, timing has played a critical role in military strategy. Themistocles, the ancient Athenian strategos who engineered the stunning defeat of the Persian navy at the Battle of Salamis in 480 BC, allegedly

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consulted the Delphian Oracle for guidance. He timed his attack to coincide with the fresh sea breezes that were favourable to the Greek coalition fleet whilst fatal to the enemy. Timing is critical in business strategy too, yet there are no clear rules. Business managers today have no oracles to turn to (at least none they would willingly admit too). But neither does strategy theory have much to offer regarding the timing of strategy moves. The consequences of flawed timing can be dire. Microsoft discovered this when attempting to launch its Tablet PC in 2001. It was too early by almost a decade, and never took off. Apple’s iPad, launched in 2010, took the market by storm. While timing matters in strategy, several factors compound the problem: • The firm’s ability to ‘read’ the market context correctly is critical. Microsoft envisioned its Tablet PC as a full-fledged computer forced-fitted with its Windows XP platform and assumed people would want to use the tablet in the exact same way as they would a desktop or laptop. Apple, on the other hand, envisioned its iPad as a consumer device that came with a unique operating system and ecosystem that were much more in sync with the evolving digital media revolution. • The future is becoming less certain than ever. The future has moved from ‘complicated’—where variables are still relatively clear—to ‘complex’, a very different and darker future where even basic defining contours are elusive. Many industries face a complex future; however, legacy energy giants like Shell, BP, and Exxon-Mobile are particularly hard hit. They are facing a future that will demand a fundamental shift from ‘dirty molecules’ to ‘clean electrons’. The proverbial writing is long since on the wall. The question as to when remains elusive. • Response-time windows are shrinking. Not only are futures becoming more complex, but windows of response are also shrinking. Firms are being left with little time to experiment. Rapidly emerging technologies in the hands of agile newcomers are shutting out legacy players who are incapable of adapting quickly. • Chance and serendipity contribute to success. Ultimately, we can never entirely ignore the role that chance and serendipity play in competitive environments —‘being at the right place with the right offering at the right time’, particularly in the face of increasingly uncertain and complex futures. To maximise their chances at exploiting unforeseeable circumstance, agile players nurture adaptive mechanisms that enable them to respond faster and more intelligently when chance opportunities present themselves. Time Horizon Value propositions conform to time horizons. Conceptually, the timing aspect is congruent with the aspirational nature of a value proposition, which finds expression in the articulation of the strategic intent at the core of a value proposition. Time horizons resemble roadmaps into the future; they project a value proposition into the future. A time horizon embed in a value proposition reflects assumptions regarding the evolving nature of economic, technological, societal and political trends that collectively pose both opportunities and threats in

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view of a firm’s strategic intentions. A firm’s value proposition specifies when it is in a position to deliver the value it aspires to. Time horizons range from what the firm is capable of delivering today to what it aspires to create and deliver in the future. Firms’ strategic time horizons vary considerably. As a rule, legacy firms tend to operate on shorter, more expedient time horizons that conform to the prevailing industry logic. Enterprises like Amazon, Apple, Google, and business magnate Elon Musk’s corporate imperium, on the other hand, do not confine themselves to industry definitions. These players compete on the basis of diverse portfolios of value offerings distributed over a time horizon that extends well into the future. Elon Musk’s eclectic portfolio of companies, for example, include businesses as diverse as The Boring Company, a tunnelling company, and SpaceX, which designs, manufactures, and launches advanced rockets and spacecraft that one day aspire to enable interplanetary space travel. Nonetheless, while SpaceX’s ‘moon-shot’ aspirations may seem lofty and farfetched, its disruptive impact on the space industry is much closer to earth and is already now being felt in the industry. SpaceX is already generating value, not so much on account of the technology it is developing, but its mode of doing business. SpaceX’s fixed price contracting technique is revolutionising the space industry, which is notoriously plagued by delays and cost over-runs incurred by traditional cost-plus contracts. By NASA’s calculation, SpaceX’s Falcon 9 rocket was developed for less than a tenth of what it would have cost to design and build the rocket under NASA’s traditional contracting terms and conditions. In a clear demonstration of its confidence in the young space company, NASA in 2021 awarded SpaceX a $2.9 billion contract to develop the company’s Starship rocket to deliver astronauts from lunar orbit down to the moon’s surface, and a further $1.15 billion contract in late 2022 to develop an advanced lunar lander and fly a second crewed mission. The time dimension prompts a closer examination of two further concepts that are relevant to the value proposition notion: path dependence and synergistic effects. Path dependence emphasises the dependence of a firm’s value offerings on past decisions taken by the firm and their outcomes. History always matters; in strategy, particularly so. Path dependence is a dynamic concept whereby decisions and actions taken by a firm in the past either constrain or enhance present or future choices. Path dependence can relate to technical, resource, or organisational factors. The notion provides an explanation for a firm’s current competitive basis and serves as an indicator of its competitive potential in the future. The competitive potential of a firm’s value offerings today and in the future is tied to firm-internal factors such as its capabilities. These cannot simply be momentarily conjured up. They need to be developed and nurtured over time as events unfold and the firm evolves. Hence, the success of a value proposition has a historical dimension. Apple’s iPhone may appear to be an anomaly in this regard, given that the company had no history in telecoms prior to the launch of its smartphone. However, we might also argue that the iPhone’s remarkable success was predicated not so much by Apple’s technological prowess (after all, it ‘borrowed’ much of the technology that found its way into its smartphone from Nokia), but by its previous history of successfully developing and launching unique and innovative technology platforms integrated in its iTunes

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ecosystem. Apple’s ability to build on and exploit its past successes (and learning from a few failures) was a determining factor in the success of the iPhone. From a value proposition perspective, path dependence is a critical determinant for several reasons. Not only does it endow plausibility to a proposed value offering, but it also sets viable precedents for future value offerings further along the time horizon. Synergistic effects relate to outcomes from interactions that give rise to a whole that is greater than the simple sum of its parts. In management, synergistic effects are most often associated with organisational factors, such as coordinated action focused on cross-leveraging distinct capabilities embedded in a firm’s processes. Synergistic effects are difficult to imitate by competitors due to their dependence on combinations of factors unique to a firm and their dynamic character. They thereby enhance the differentiation potential of a value offering. Praxis Reflection 3.5: Value Proposition—Time Horizons and Path Dependence In your organisation. . . • How are time horizons that feature in your organisation’s value proposition established? • To what extent does path dependence affect the determination of a time horizon?

Value Proposition: ‘Reasons to Believe’— The Why, Where, and How? A firm’s value proposition conveys an aspiration. As such, it articulates a strategic intent, not a fait accompli. To convince targeted stakeholders of its validity, a value proposition needs to provide plausible ‘reasons to believe’ that lend credence to its achievability. Firms frequently fail to take into consideration all constituents of their stakeholder community, and often have only end-users and consumers in mind when conjuring up “reasons to believe”. They frequently forget key stakeholders beyond their immediate customers; stakeholders such as their own employees. For example enterprises often proclaim their employees to be their “most valuable asset” yet provide few if any “reasons to believe” to back up this claim. Patagonia, a high-end, earth-conscious retailer of outdoor clothing, stands out as an exception. In 2021, Patagonia started a tradition of closing its stores and paying its employees during the final week of the year. A small sign posted on the front door of all its stores says simply, “We believe in quality of life. Our stores will be closed December 25th thru January 1”. Such an act walks the talk. The value proposition framework features three categories of “reasons to believe”. These address the why, where, and how elements of a value proposition.

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Integral to these questions are the underlying assumptions that Drucker postulates in his ‘specifications of a valid theory of the business’. Why? The “why?” element represents the most ethereal of the three ‘reasons to believe’. It addresses the factors determining a firm’s mindset, and ultimately its actions. The why question captures assumptions that comprise a firm’s understanding of its raison d’être; what the firm believes to be its purpose and why the firm believes it can make a difference to its stakeholders with what it can do and has on offer. The “why?” collectively encompasses a firm’s aspirations, vision, mission, values, and guiding principles. As such, it is an anchoring point for decisions on what to do and what not to do. To be believable, a firm’s activities need to be perceived to be true to its professed guiding core values. Google, for example, early on adopted and embedded the mantra ‘don’t be evil’ in its code of conduct. As some would claim, this was directed as an affront to Microsoft, which Google’s founders reviled for its allegedly abusive dominance of the software market. In contrast, Google’s professed ethos centred on using innovative technology to ‘make the world a better place’. That appears to have become increasingly complicated as Google outgrew its idealistic roots to become— at least in eyes of antitrust regulators—a cutthroat behemoth with unbridled ambition and intent on maximising profits. Currently in the crosshairs of a US Justice Department lawsuit, the tech giant stands accused of misuse of its immense power as an internet search engine and digital services provider to bludgeon competition and thwart innovation to the detriment of its billions of users. Incidentally, Google quietly replaced its founding mantra in 2018 by a less restrictive commitment to ‘ethical business conduct’ following the resignation of a number of employees who cited ethical concerns raised by the company’s involvement in a controversial Pentagon project involving the development of AI technology for military purposes. The “why?” comprises an essential component of a firm’s strategy; it is crucial for setting the strategic direction taken by a firm. However, it constitutes only one dimension of a firm’s strategy. Not infrequently, firms’ management conflate ‘aspirations’, ‘vision’ or ‘mission’ with ‘strategy’ when these erroneously entail the sole elements of a firm’s value proposition and strategy. In the absence of additional substantiating ‘reasons to believe’ both amount to little more than wishful thinking. Praxis Reflection 3.6: Value Proposition—The ‘Why’ In your organisation. . . • How clearly does the ‘why’ component of your organisation’s value proposition reflect an understanding of its purpose? • To what extent is the ‘why’ component congruent with the ‘what’ of your organisation’s value proposition?

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Praxis Case 3.2: Tesla on the Wane Firms need to tread carefully when rolling out their value proposition. Stakeholders react sensitively to what they perceive to be inconsistencies in a firm’s realisation of its value proposition. They are also perceptive to contrarian behaviour exhibited by a firm and its management. In recent years, Tesla stakeholders have had their fill of the latter. Tesla CEO Elon Musk’s erratic behaviour over the years has sometimes been amusing, at other times obnoxious. Despite these, Tesla’s value proposition remained intact. The man’s behaviour was put down to idiosyncrasies of his character. To some, this even added to his appeal. Tesla and Musk seemed to be genuinely concerned about offering alternatives in the face of growing anxieties about climate change, personal carbon footprints, and outdated power structures—and this was what mattered. Many buyers of a Tesla bought into a set of beliefs that manifested itself in the form of a sleek electric vehicle, believing they were part of a progressive movement pushing for cleaner technology. Tesla investors sank money into what they considered to be the future of the auto industry. The company’s iconic brand and market value flourished as a result—without Musk spending a dime on traditional advertising. Tesla broke through the $1 trillion dollar market cap ceiling in October 2021. Musk’s immunity to repercussions to his eccentricities appears to be waning. In the view of many, his takeover of Twitter in October 2022 marked a watershed moment where he turned his back on Tesla’s creed and the very people who propelled him to success. His espousing of conspiracy theories and posting of pictures of guns by his bedside in the aftermath of the Twitter acquisition ostensibly appealed more to his new Twitter followers, many of which would never consider driving a Tesla nor, for that matter, even believe in climate change. Stakeholders’ reactions to Musk’s Twitter antics were swift and merciless. Tesla stock lost 62% of its value between August 2022 and January 2023. Comparisons of Tesla’s unit car sales in March 2022 and March 2023 show a decline of 33%; its market capitalisation is only about a half of what it was at its peak in January 2021. Source: Squeo, A. M. (2022, December 21). Tesla owners didn’t buy a car: We bought a set of beliefs Elon is trashing. Fast Company.

Where? The “where?” addresses assumptions embedded in a firm’s value proposition that relate to factors in its external environment. These factors may prompt opportunities for making a difference, alternatively, they may give rise to threats to competitive positions held.

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Factors that comprise a firm’s external competitive environment include • Macroeconomic drivers shaping political, economic, societal, technological developments • Industry-level factors reflecting maturity, volatility, and dynamics of evolving industry landscapes • Market-level factors determining the evolution of stakeholder demands and preferences • Competitors and the nature of the competition • Prevailing legal, regulatory, and fiscal contexts Notably, it is an individual firm’s choice whether, where, and how to compete; however, it has no control over factors that determine the external competitive circumstances of the playing field it chooses to compete in. The “where?” component of the value proposition framework resonates with the second and third elements of the five strategy building blocks (5-SBBs) framework— the building blocks representing the stakeholders and the external competitive environment. In the unique competing space (UCS), the “where?” corresponds to four of the domains representing the macroeconomic environment, industry–market level, competitors, and stakeholders. How? The “how?” component of a firm’s value proposition reflects the internal basis of competitiveness of the firm and addresses ‘reasons to believe’ that the firm is, indeed, capable of delivering on its value proposition and how it proposes to achieve its promise to stakeholders. From a value proposition perspective, critical aspects of a firm’s basis of competitiveness reflect • The firm’s resource base, including tangible resources such as its physical and financial assets, and intangible means such as the firm’s intellectual capital • Process capabilities and practices • Organisational structural features, such as the way the firm is organised, structured, and managed • Soft organisational attributes such as the firm’s culture, mindset, disposition to compete, knowledge base and learning ability, and agility • Importantly, the firm’s history—its past successes and failures, and the implications of these for the firm to compete successfully in the future An audit of a firm’s basis of competitiveness may reveal both strengths and weaknesses. To be strategically meaningful, such an audit needs to be focused specifically on the strengths and vulnerabilities relevant to a particular strategic challenge the firm may be facing, or those tied to the differentiated value the firm aspires to create, deliver, and capture.

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Praxis Reflection 3.7: Value Proposition: The ‘Where’ and ‘How’ In your organisation. . . • How do the ‘where’ and ‘how’ components align with the ‘what’ of your organisation’s value proposition? • How do the assumptions defining the ‘where’ and ‘how’ align with the realities of the competitive environment? • What endows these with credible ‘reasons to believe’?

Application of the Value Proposition Framework As a high-level framework of strategic analysis, the value proposition (VP) framework is congruent with the five strategy building blocks (5-SBBs) and unique competing space (UCS) frameworks. It is used on its own or in conjunction with the other two high-level frameworks. The value proposition framework may be used to scope a strategy in its entirety or to examine specific elements of a strategy. When used in conjunction with the other high-level frameworks, it contributes a time dimension to the analysis that the other two don’t feature. It also serves to substantiate the value proposition underpinning the core unique competing space domain featured in the UCS framework. The value proposition framework provides a powerful tool for scrutinising the effectiveness of a value proposition pertaining to a particular value offering. It is also an effective means of communicating a strategy, for example, in a pitch to targeted stakeholders. The framework, if used and applied appropriately, provides the basis for a compelling storyline that singles out a value offering’s salient differentiating features and delivers plausible ‘reasons to believe’ for a firm’s ability to make good on its proposition. When applied to strategic problem-solving, the value proposition analysis centres attention on the elements of a strategic challenge that are critical to a problem and its resolution—such as the ‘what?’, ‘why?’, ‘where?’, and ‘how?’ questions at the core of the problem. Strategic challenges invariably relate to circumstances that reflect potential changes to a firm’s strategic position. The comprehensive breadth and depth that the value proposition analysis approach offers make it an indispensable element of any strategic analysis.

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Limitations of the Value Proposition (VP) Framework As in the case of any framework and analysis approach, the use of the value proposition framework comes with caveats. These, however, relate more to its misappropriation in the practice field rather than its conceptual limitations. Integrity Limitations presented by the value proposition framework relate primarily to the use—or rather misuse—of the concept at its core in business practice. Three decades on since first introduced in the management field, the term value proposition has become one of the most ubiquitous clichés in business, and frequently little more than an advertising slogan. To be more than a ‘feel good’ statement, the value proposition needs to clearly articulate the differentiation potential of a value offering. It needs to spell out the distinguishing performance attributes, outcomes to be expected, and the inherent value (however measured) to be derived from it by targeted stakeholders. In business practice, value propositions frequently target only end users and customers. Specificity Furthermore, a single value offering may offer multiple value propositions, each targeting unique stakeholder needs and competitor combinations. Failure to focus and position a value proposition appropriately diminishes its effectiveness. Smartphone manufacturer BlackBerry ultimately fell prey to a flawed assumption that centred their attention on corporate users of mobile phones only. They failed to understand and seize the opportunities presented by the shift to mass consumerism in the smartphone market. To be effective, however, a value proposition needs to be specific and focus on only one target segment at a time. To avoid the trap of inflating a single value proposition with a potpourri of ‘one size fits all’ value statements requires focused and shrewd thinking. An important consideration when articulating a value proposition, particularly in the business-to-business (B2B) marketplace, is the distinction between technical and economic buyers. Technical buyers may be enamoured with a value offering, however, economic buyers ultimately make the purchasing decision. Trade-Offs Value propositions invariably demand trade-offs. Trade-offs are often overlooked when articulating a value proposition. Superior performance comes with a ‘price tag’. For example opting for an Apple iPhone over alternative smartphone choices provides a user with a premium branded gadget that seamlessly integrates multiple phone functionalities with media and messaging. But this offering comes at a price—the price of foregoing potential benefits that alternatives (such as Android systems) offer. Trade-offs between positive and negative points of difference need to be clearly spelled out, since they are relevant to both producer of the value and its user.

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Chapter Summary Strategic analysis is a systematic and formalised means for making sense of a firm’s competitive context, which comprises elements both external and internal to a firm. To be effective, strategic analysis demands clarity of thinking and focus that tie the analysis undertaken to a specific purpose and objective. In strategy, purpose and objectives invariably relate to strategic challenges that arise in a firm’s competitive context. Strategic challenges broadly consist of either threats or opportunities that, as such, warrant closer examination as to their cause and competitive implications. Strategic analysis provides the means for such an investigation. At the core of a strategic analysis are one or more aspects of a firm’s strategic position or ability to compete that comprises the ‘what’s competitively at stake’. The ‘what’s competitively at stake’ at the core of a strategic challenge provides both the motivation, rationale, and ultimately the purpose for engaging in strategic analysis. We distinguish between high-level and micro-level strategic analysis. In this chapter, we focus on high-level analysis. In contrast to micro-level analysis, which delves into specific aspects pertaining to either external or firm-internal factors, highlevel strategic analysis provides a comprehensive ‘big-picture’ perspective that focuses attention on three key elements: (1) the ‘what’s strategically at stake’, or the core of a strategic challenge to be examined, (2) relevant external factors, and (3) relevant internal factors pertaining to the strategic challenge in question. These three elements relate to a strategy per se in as far as they comprise its key constituents. In strategic problem-solving, these elements of a strategy point to key determinants and potential sources of a challenge under investigation. Importantly, strategic analysis is always initiated with a high-level analysis; in particular, with the ‘what’s strategically at stake’ element. This helps ensure focus on the essence of a strategy or strategic challenge to be investigated from the start. As an analysis unfolds, the focus provided by the high-level perspective ensures that we ‘don’t lose sight of the wood for the trees’. The three high-level frameworks of analysis introduced in this chapter—the ‘5 strategy building blocks’ (5-SBBs), ‘unique competing space’ (UCS), and value proposition (VP)—encompass the three key elements that define a high-level strategic analysis. The three frameworks are congruent and complementary. Their distinguishing features determine their application in strategic analysis. The unique competing space framework offers an alternative perspective on the notion of firm boundaries that allows a distinction between a firm’s operational and strategic boundaries. This feature of the UCS framework adds depth and breadth to our thinking and conceptual understanding of a firm’s competitive positioning. Table 3.1 provides a summary overview of the frameworks introduced and elaborated on in this chapter, their distinguishing features, and their primary application in strategising and problem-solving. Notably in strategy and strategising, we distinguish between content and process. The high-level frameworks of analysis presented in this chapter address the content component of a strategy, notably though, content that is tied to purpose. Applied to

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Table 3.1 Overview of high-level frameworks of strategic analysis High-level framework 5 strategy building blocks (5-SBBs) Unique competing space (UCS)

Value proposition (VP)

Character Descriptive

Distinguishing features • Criterion defining key elements of a strategy

Primary application Evaluation and selection of strategic options once derived

Schematic

• Visualisation of degree of competitive advantage • Conceptualisation of firm boundaries • Articulation of value proposition tied to a strategy • Scoping of time dimension of a strategy

Scoping of strategic challenge at start; strategic boundaries analysis and reconstruction of strategic landscape In conjunction with UCS for substantiation and extended scoping of strategy elements

Descriptive and schematic

strategising, the frameworks discussed in this chapter are used to generate insights that help build a better a better understanding of a problem. The frameworks per se, however, do not inform us how they are applied. The process part of strategising, which addresses the application of the frameworks, is given by the first principles, insight-driven strategic thinking approaches introduced in the previous chapter. In strategising, content and process are brought together by a tandem application of strategic thinking and strategic analysis, whereby strategic analysis is informed and guided by strategic thinking. We explore this tandem approach to strategy and strategising more closely in Chap. 5 of this book.

References 1. Ohmae, K. (1982). The mind of the strategist: The art of Japanese business. McGraw-Hill. 2. Collis, D. J., & Rukstad, M. G. (2008, April). Can you say what your strategy is? Harvard Business Review, 86(4). 3. Coase, R. (1937). The nature of the firm. Economica, 4(16), 386–405. Blackwell. 4. Dumez, H., & Jeunemaitre, A. (2010). The management of organizational boundaries: A case study. Management, 13(3), 151–171. 5. Kim, W. C., & Mauborgne, R. (2004). Blue ocean strategy. Harvard Business School Press. 6. Drucker, P. F. (1994, September–October). The theory of the business. Harvard Business Review, 72, 95–104. 7. Hamel, G., & Prahalad, C. K. (1989, May–June). Strategic intent. Harvard Business Review. 8. Hamel, G., & Prahalad, C. K. (1990, May–June). The core competence of the corporation. Harvard Business Review, 68(3), 79–91.

Chapter 4

Micro-level Strategic Analysis

All models and frameworks of analysis are inherently flawed; some are nonetheless useful. (Anonymous)

In This Chapter, We. . . . Examine micro-level strategic analysis and its purpose in strategy. . Consider the function of micro-analysis in relation to high-level strategic analysis. . Introduce two categories of micro-level analysis: external and firminternal. . Apply select frameworks of micro-analysis representative of the two categories. . Assess the role, application, and limitations of these frameworks in strategic analysis.

Introduction to Micro-level Strategic Analysis Micro-level strategic analysis provides the basis for a deeper examination of specific aspects of a strategic challenge that pertain to external and firm-internal factors relevant to a strategic challenge under investigation. The micro-level of analysis focuses exclusively on either external or firm-internal factors. In doing so, the micro-analyses are used to generate individual ‘pieces of the puzzle’ representing insights relevant to a strategic challenge. They address the contextual components of a strategic challenge, but do not embed the rationale for their use. As such, microlevel frameworks of analysis per se are detached from purpose. Micro-analysis attains purpose only in the greater context provided by high-level analysis. High-level analysis, as elaborated in the preceding chapter, provides a comprehensive, ‘big-picture’ perspective that encompasses both the rationale and the contextual elements of a strategic analysis. Thereby, high-level analyses give © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_4

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sense, purpose, and direction to the choice and application of micro-level analyses. High-level analysis does so by virtue of its focus on the core of a strategic challenge, which micro-analyses do not feature. This is why we necessarily initiate and end a strategic analysis with the high-level of analysis. Difficulties inevitably arise in strategic problem-solving when strategic analyses are initiated at the micro-level. The absence of purpose when this is done inevitably results in an aimlessly disjointed effort. The term ‘micro’, used in this sense, refers to the level of detail of the analysis, not necessarily the character of the factors the analysis seeks to shed light on. Indeed, some micro-level frameworks examined further on in this section—the PESTLE analysis framework for example—are used to investigate factors that relate to macroeconomic aspects relevant to a strategic challenge. In this sense, the distinction ‘micro-level’ derives from its singular focus on specific strategically relevant factors. The Critical Distinction: High-level analysis provides both context and rationale and, hence, endows sense, purpose, and direction to an analysis. Microanalysis contributes deepening context only. Micro-level analysis is thus subordinate to high-level strategic analysis and is used only when prompted by high-level analysis. We therefore initiate and terminate a strategic analysis at the high-level of analysis. In the traditional strategic management literature, micro-level analysis typically involves the application of formalised frameworks of analysis that address either external or internal aspects of a strategy or a strategic challenge. A number of these are indeed useful in the practice field. However, the complexity of problems and circumstances encountered in real business environments often imposes limitations on their applicability. Therefore, heuristics and intuition are often used to compensate for the deficits of formalised approaches. These informal approaches therefore often comprise important elements of a micro-analysis.

Formalised Frameworks of Micro-level Strategic Analysis The repertoire of frameworks, models, and conceptual constructs pertaining to micro-level analysis in the management literature is vast. Many of the micro-level frameworks in circulation are indeed very useful. But their usefulness depends on when, how, and whether at all to apply a particular framework. Micro-level analysis frameworks are utilised effectively when prompted by strategic thinking, not simply because they happen to appear in a repertoire of available models. The purpose of this chapter is not to replicate what is readily and abundantly available in the traditional strategic management corpus. Rather, the aim of this

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chapter is to examine the application of the micro-level of strategic analysis in the context of first principles-based, insight-driven strategic thinking, analysis, and problem-solving. To that end, this chapter examines only a few select frameworks applicable to micro-level strategic analysis. The selected frameworks serve well to demonstrate how the micro-level of analysis can effectively be integrated into first principlesbased, insight-driven strategic analysis when guided by strategic thinking. Individual frameworks of analysis generate distinct insights. The significance of a particular insight derived from a micro-level analysis, however, is immensely enhanced when seemingly disparate ‘pieces of the puzzle’, guided by strategic thinking, are correlated with other insights, and integrated into a more comprehensible and coherent greater context. This aspect of strategic analysis is often neglected in the management literature. As in the case of all models and frameworks, micro-level analysis approaches feature limitations: they represent simplifications of reality and are based on assumptions that must be continually challenged for validity. Moreover, regardless of an analysis model’s sophistication, any data used in its application is by default historical. Micro-level frameworks and models can nonetheless provide meaningful insights when applied discriminately. Praxis Reflection 4.1: Micro-level Frameworks of Analysis In your organisation. . . . What primary purpose does micro-level analysis aim to fulfil in strategic problem-solving ? . What considerations go into the selection of the micro-level frameworks used for analysis? . Which frameworks of analysis are typically used—and why? . What roles do heuristics and intuition play in micro-analysis? . How are limitations of formalised frameworks and approaches dealt with?

Micro-level Strategic Analysis: External Competitive Environment Externally focused micro-analysis frameworks and models are broadly classified into three categories: those that probe macroeconomic factors, those that probe a firm’s industry context, and those that examine characteristics of the market space in which the firm chooses to compete. An analysis of a firm’s external competitive environment is used in strategic problem-solving to generate insights that provide a better understanding of . Particularities of external factors and their implications for a firm’s strategic aspirations

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. The effect of interactions between these factors . The dynamic character of the factors determining a firm’s external competitive environment . The relevance and impact of external factors on a firm’s competitive position

Macroeconomic Analysis: PESTLE Framework The PESTLE (acronym for political, economic, societal, technological, legal, and environmental or ecological) framework comprises key macroeconomic factors that affect all industries, markets and enterprises—in some, though not necessarily the same, way. The framework, shown in Fig. 4.1, is more than simply a checklist of these factors, particularly when taking into consideration that: . The six categorical labels indicated in the PESTLE framework are indicative only—that is to say, they allude to a substantially more complex underlying array of factors. Each category comprises multiple subordinate groupings of factors. Collectively, the six dimensions of the PESTLE. framework therefore encompass a potentially enormous spectrum of factors at multiple levels. . Individual factors represented by the PESTLE framework are not equally relevant in the context of a strategic challenge. Particularities of the challenge and the relevant industry and market contexts determine the significance of a particular dimension for a given industry, market, and enterprise at a given point in time and circumstance. . Individual factors covered by the PESTLE dimensions evolve differently in different contexts. Contexts defined by political, economic, societal, and regional geography feature variations in their rates of change.

Legal

Polit ical

. . .

• . .

legal code law enforcement judicial

regulatory policy f iscal

Economic . . .

labour / resources capital compet it ion

Technological . . .

innovat ion dif fusion standards

Fig. 4.1 PESTLE framework

Environmental / Ecological

PESTLE

. .

climate change carbon footprint

Societal . . .

income distribut ion demographics welfare

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. PESTLE dimensions are interconnected. Although depicted as standalone elements in the framework, individual dimensions are inevitably intertwined. For example increasing societal concerns regarding the impact of carbon emissions on the natural environment exert increasing pressure on political bodies to introduce and enforce appropriate legal (i.e. regulatory) measures aimed at the reduction of firms’ carbon footprint. Legal and regulatory measures in the form of economic penalties and incentives in turn affect the development and adoption rates of new ‘green’ technologies. In the practice field, macro-economic factors are often monitored with the help of dashboard tools that track trends and flag key drivers that give shape to a firm’s external competitive context. A more in-depth PESTLE analysis is used in strategic analysis when strategic thinking and high-level analysis prompt a deepening probe into macro-economic factors that are particularly relevant to a strategic challenge. A deepening analysis of these factors helps build a better understanding of their origin and their implications for a strategic challenge under investigation. The PESTLE framework may at first glance appear to be a simple analysis framework. However, when applied at an appropriately deep level that takes into consideration the variable dynamics of individual factors and interrelationships between the factors, its versatility provides profound analytical scope. The six dimensions of the PESTLE framework comprise the critical determining factors that give shape to the complex global competitive context. Ultimately, these factors—either directly or indirectly—affect the competitive environment of every enterprise. This endows the PESTLE analysis with a rudimentary role in practically any micro-level strategic analysis. Praxis Reflection 4.2: Macro-economic Factors In your organisation. . . . How are macro-economic trends typically tracked and monitored? . What prompts the use of a PESTLE analysis? . How is the PESTLE analysis integrated into an overall strategic analysis?

Industry and Market-Level Context The industry–market level of micro-analysis narrows the focus of an analysis on factors relevant to an industry or market context. In some way or another, all industry and market contexts are influenced by factors that have their origin in the macroeconomic environment, although the impact on industries and markets invariably differs. The deepening focus of the industry–market level micro-analyses probes the effects and consequences of the macro-economic environment on specific industries, markets, and firms competing in these. As always in strategic problem-solving, industry–market level micro-analyses are implemented only when prompted by

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insight-driven strategic thinking. Used appropriately, they can deliver valuable insights into the immediate external competitive environment of a firm. The following sections present only several frameworks of analysis applicable to the industry and market context. Numerous further frameworks can be found elsewhere in the strategic management literature. The objective here is to exemplify how relatively few frameworks of analysis, when used appropriately, can contribute highly useful insights in problem-solving. The micro-level of analysis, however, derives its full potential from a cross-correlation of insights derived from individual analyses. A further purpose of the following sections is, therefore, to explain how this can be done on the basis of relatively few, but suitably selected, analysis frameworks. Praxis Reflection 4.3: Market- and Industry-Level Analysis In your organisation. . . . How are industries and markets defined? . How are market- and industry-level analyses typically carried out? . What prompts the choice of frameworks used in these analyses?

Competing Factors (CFs)–Critical Success Factors (CSFs) Analysis Arguably one of the most powerful of the micro-level frameworks of strategic analysis, the competing factors (CFs)–critical success factors (CSFs) analysis addresses the prevalent ‘rules of the game’ that define a firm’s competitive environment. While not a framework per se, the concepts underpinning the CFs–CSFs analysis are integral to a number of other micro-level frameworks and analyses. CFs and CSFs are characteristics of a firm’s industry/market environment, not of any individual firm. They are not to be confused with key performance indicators (KPIs) or objectives and key results (OKRs), which are instated by and entirely at the discretion of a firm. CFs and CSFs are set by the external competitive environment; KPIs and OKRs are put in place by a firm. One can think of KPIs and OKRs as defining the criteria that a firm uses to measure how well it performs on the CFs and CSFs relevant to its industry and market context. All firms competing in a given market space are subject to the same CFs and CSFs. Indeed, CFs and CSFs may ultimately be used by a firm to identify and define its competitors. The important distinction between CFs and CSFs, however, is that while CFs are common to all competitors in a given competitive playing field, CSFs define the factors that a firm must fulfil to achieve competitive advantage. Competing factors and critical success factors are derived by scrutinising the relevant industry–market environment. This necessarily requires a dual approach that entails both ‘inside-out’ as well an ‘outside-in’ points of view. The analysis of CFs and SCFs factors is usually initiated with an inside-out perspective by a firm;

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Compet ing factors (CFs) & key success factors (KSFs)

Analysis of the compet it ion

Stakeholder analysis

. industry & market evolut ion . key drivers of compet it ion . ef fect on compet it ion

. current stakeholders’ needs and how these are changing . potential future stakeholders

‘Inside-out’

Today? Future?

?

. How can we better fulf il current stakeholders’ needs? . Who will be the future stakeholders?

‘Outside-in’

? . How are competit ive dynamics shaping CFs and CSFs? . What do we need to do to better than the compet ition?

Competing factors (qualif iers) Key success factors (order-winners)

“license to play” “license to win”

Fig. 4.2 Derivation of competing factors (CFs) and critical success factors (CSFs)

factors identified are then verified by taking an outside-in view. Care must be taken by the firm not to fall into the trap of limiting the analysis to an introspective consideration of only those factors a firm may perceive itself to be ‘good at’. Such an exercise would amount to little more than navel-gazing on the part of the firm. Hence, to avoid drawing flawed inferences from a CFs and CSFs analysis, the ‘inside-out’ view needs to be substantiated with an ‘outside-in’ perspective, as indicated by the two-pronged approach depicted in Fig. 4.2 (derived from a scheme proposed by Grant [1]). While the ‘inside-out’ perspective centres attention on a firm’s perception of its current served market, an ‘outside-in’ angle introduces qualifying inputs to the analysis that reflect the dynamics of the firm’s competitive reality. A two-pronged approach counteracts potential biases introduced by an inward-only focus. When aggregated, the two perspectives thus enable a tenable identification of CFs and CSFs. While firms, of course, choose which industries and markets to compete in, they have no control over the rules of competition in those industries and markets. These are defined by the CFs and CSFs in those industries and markets. That being said, however, individual firms can influence the evolution of these factors in certain circumstances. Individual firms, for example, can introduce competitive benchmarks that influence the evolution of CFs and CSFs in their industries and markets. Consider the impact that Apple’s launch of its iPhone in 2007 had on the smartphone market. The iPhone essentially redefined the market’s conception of a smartphone. Once established in the marketplace, however, the distinguishing features of the iPhone set critical standards that shaped consumers’ expectations and demands in subsequent generations of smartphones. Collectively, CFs and CSFs comprise the set of requisite competitive factors stipulated by an industry and market. Individually, however, CFs and CSFs differ distinctly. The distinction has important strategic implications. Competing factors

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Table 4.1 Competing factors (CFs) and critical success factors (CSFs)—distinctions Dimension Strategic focus Operations

Finances Human resources Marketing

Competing factors (CFs) . Focus on qualifications required to play . Focus on efficiency . Conformity with prevalent industry standards . Regulatory compliance . Access to financing . Access to labour pool . Primarily customer centric . Product, production, and selling oriented

Critical success factors (CSFs) . Focus on competitive advantage through value differentiation . Focus on effectiveness . State-of-the-art processes, capabilities, and technology . Agility and adaptiveness . High liquidity . Superior credit rating (e.g. ‘AAA’) . Ability to attract, develop, and retain top talent . Focus on stakeholders (beyond the customer) . Superior stakeholder relations . Premium branding

comprise factors that qualify a firm to compete. CFs can be thought of as the minimum requirements a firm must fulfil to be considered a contender in an industry and market at all. Fulfilment of CFs does not, however, provide a firm with any competitive advantage; a firm’s competitors also fulfil these. Critical success factors, on the other hand, define conditions critical to the achievement of competitive advantage in a given industry–market context. CSFs comprise those factors that, if fulfilled, differentiate a firm from its competition. CSFs are therefore highly strategically relevant. Arguably more so than any other factor rubric, CSFs define the value differentiation potential of a marketplace. Fulfilment of competing factors provides a firm with a ‘license to play’; fulfilment of critical success factors endows a firm with a ‘license to win’. It is important to note that all firms are subject to both CFs and CSFs. As a rule (but, as always, with some exceptions), competing factors (CFs) reflect industryrelated factors and generally reflect operational requirements. Critical success factors (CSFs), on the other hand, tend to centre on strategic requirements relevant to an immediate marketplace—bearing in mind that firms operate within an industry environment, but compete directly at a market level. A firm endowed with a ‘license to win’ fulfils not only the relevant CSFs defined by a market but, of course, also the CFs prevailing in the relevant industry. Table 4.1 summarises some generic attributes that distinguish CFs and CSFs. The degree of competitive advantage achieved by a firm is ultimately determined by the extent to which the firm fulfils CSFs in addition to the CFs prevalent in a given marketplace. This can be shown in the unique competing space (UCS) framework as depicted in Fig. 4.3. To illustrate the point, consider the case of the airline industry. To qualify in this industry, an airline must have access to aircraft, crew (pilots, service crew, ground staff), basic infrastructure (aircraft maintenance facilities, baggage-handling), landing slots, and must fulfil the basic regulatory requirements set by IATA, FAA, and

Competing Factors (CFs)–Critical Success Factors (CSFs) Analysis

Industry/market context

Industry & market level micro-analysis

Stakeholders’ needs

Competitors’ offerings

113

Where f irm fulf ils qualifying CFs

Where f irm delivers on order-winning CSFs

2 1 UCS 3 Firm’s competit ive basis

Macro-economic context

Fig. 4.3 Competing factors (CFs) and critical success factors (CSFs)

EASA authorities. These (and other factors) define competing factors (CFs). A mere fulfilment of these requirements does not assure competitive advantage, it simply provides an airline with a ‘license to play’—that is, to qualify as an ‘airline’. To understand what makes an airline successful, one needs to examine the relevant critical success factors (CSFs) that set an airline competitively apart from its competitors. These might include ultra-low cost and lean operations, exceptionally high levels of service offered, strategic routing (e.g. point-to-point), and strategic partnering. Southwest Airlines’ remarkable success, even during the period of the COVID pandemic, can be attributed to its ability to fulfil and exploit these (and further) CSFs. Note that in Southwest’s case, its ultra-low cost, lean operations abilities fulfil more than simply a qualifying competing factor despite being operational in character. For example Southwest’s low-cost baseline enables it to offer high levels of service at competitive pricing. Competing factors and critical success factors evolve as industry and market contexts mature. Disruptions in industries and markets spawn entirely new sets of CFs and CSFs. Similarly, changing competitive contexts can degrade CSFs to CFs. This is the case when once differentiating features of a particular CSF become commonplace within a maturing industry or market. This may happen through imitation and replication of a CSF by competitors. The CFs–CSFs analysis is an indispensable element of a first principles-based, insight-driven strategic analysis. The CFs-CSFs analysis addresses, arguably better than any other micro-level analysis, the causes of a firm’s success or failure. CSFs point to the critical determinants of competitive advantage. Firms invariably lose their competitive advantage when they ignore, neglect, or fail to recognise changes in the prevalent CFs and CSFs—when industries and markets evolve, new ‘rules of

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the game’ emerge, and firms fail to adapt and get locked into obsolete sets of ‘rules’. When properly carried out, the competing factors—key success factors analysis thus opens a powerful window onto the key determinants of firms’ success or failure.

Application of the Competing Factors (CFs)–Critical Success Factors (CSFs) Analysis The utility of the CFs–CSFs analysis derives from its applicability to other microlevel frameworks of analysis, such as the industry–market maturity (or ‘S-curve’) and value chain analyses (presented further on in this chapter). In the comparative competitor analysis presented in Fig. 4.4, critical success factors (CSFs) provide the rationale and criteria for a competitive comparison of a firm and its competitors. The rationale hinges on the premise that a firm and its competitors are subject to the same CSFs in a given industry–market context. The criteria in this analysis are restricted to CSFs in order to ensure a focus on strategically relevant factors. The comparative competitor analysis begins with the identification of the relevant critical success factors. In practice, these are typically no more than a handful. Some of the identified CSFs may relate to industry-level factors. Generally, however, marketlevel CSFs often comprise the differentiating features that enable greatest traction and resolution when carrying out the analysis. Once identified, CSFs are ranked and weighted according to importance. Weighting scales can be arbitrarily assigned. In Fig. 4.4, weightings are shown on a range of ‘1’ (least important) to ‘5’ (most important). For the comparative performance analysis, the performance of the firm on each of the CSFs is entered in the third column. The performance scoring may also be scaled arbitrarily, but it needs to be consistent with the scaling assigned to the weightings. In Fig. 4.4, performances are scored on a 5-point scale with ‘1’ corresponding to ‘poor’ and ‘5’ to ‘excellent’. Performances on each of the CSFs are then multiplied by the respective weightings assigned to the CSFs. The resulting scores are then summed up to yield an overall score for the firm (column 4). The

Fig. 4.4 Comparative competitor analysis

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procedure is repeated for each of the competitors. The overall scores reflect the relative degree of competitiveness of the firm vis-à-vis the competitors selected for the analysis. Clearly, the cogency of the analysis is contingent on a number of factors: . Choice of CSFs: CSFs selected need to reflect truly veritable and verifiable differentiating factors of the competitive context in question. Typically, these are no more than a handful. . Weightings: Weightings assigned to each of the CSFs need to offer sufficient granularity and resolution to the analysis. . Performance scoring: Performance scores need to reflect realistic assessments of performance. Diligence is critical to the conclusiveness of the analysis. Performance assessment of competitors’ performance is typically limited to estimations. When carrying out the comparative competitor analysis, inside-out perceptions need to be verified with outside-in appraisals to ensure that biases do not influence the outcome. When appropriately carried out, the comparative competitor analysis provides a powerful means of generating insight on a firm’s competitive positioning vis-à-vis its competitors. The analysis highlights a firm’s relative strengths and vulnerabilities, and provides a meaningful basis for reflection on the competitive implications of these for the firm. Praxis Case 4.1: De Beers—Are Diamonds Really ‘Forever’? De Beers, the world’s largest diamond mining company by sales, reported a 44 percent drop in sales of rough diamonds in 2019 from a year earlier. Not only is De Beers facing stiff competition from traditional mining companies like Alrosa, Russia’s giant diamond company, and numerous smaller miners in Canada and Africa, but also from a growing number of companies producing lab-grown stones . A recent wave of undetectable synthetic diamonds flooding the global gem market is yet another threat to the traditional engagement ring market—De Beers core competitive territory. The company no longer has the monopoly on diamond sales that it held on to for most of the twentieth century. These threats have prompted numerous responses from De Beers. The company has introduced blockchain tracking of diamonds to provide consumers with more transparency about where the stones come from. It has also announced its aim to mine and produce diamonds more carbon-neutrally. In one of its biggest strategic decisions in its 131-year history, De Beers in 2018 announced that it would start selling lab-grown diamonds directly to consumers and for a fraction of the price of natural ones. De Beers’ watershed decision has triggered not only accolades, but also critique. In the view of many critics, De Beers’ de facto legitimisation of lab-grown diamonds clashes with the sentiment evoked by its iconic ‘diamonds are forever’ advertising pitch. (continued)

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Praxis Case 4.1 (continued) The perturbations driving De Beers historic about-face reflect rapidly changing consumer demands, attitudes, and consumption patterns in the diamond market. These changes are reshaping the critical success factors (CSFs) that for many years defined the relatively staid diamond industry. Changing CSFs at the industry and market levels of the diamond industry are affecting not only De Beers, of course. They are defining the new rules of the game that apply to all players in the industry. A critical success factor (CSF) analysis when paired with a competitor analysis allows us to gain insight into company’s competitive performance vis-à-vis that of its competitors in a current or anticipated future competitive context. Note that the comparative competitive analysis depicted in Fig. 4.5 showing a comparison of De Beers with some of its competitors is meant to be illustrative only. The CSFs and their weightings, and the performance scoring indicated, while plausible, are not based on rigorous market research. The purpose of the exercise is solely to illustrate the application of CSFs in a comparative competitor analysis. Some points worthy of note: . The focus of a competitive competitor analysis is on CSFs (not CFs). . All competitors are subject to the same CSFs; this is the underlying premise that qualifies the use of CSFs as a comparative basis. . The CSFs listed include both market- and industry-relevant success factors. A CSF such as ‘global market presence’ reflects both market and industry features. . In the illustrative case, only four CSFs are indicated. In practice, a few more may apply, but not these would not number significantly more. As in any strategic assessment, differentiation typically boils down to relatively few distinguishing factors. . CSFs weightings are always subject to debate. In the exercise the values indicated reflect plausible perceptions of their importance. A validation of these requires substantiation by independent market and industry verification. This, of course, also applies to the scorings assigned in the performance assessments. The CSF labelled ‘technological agility’ primarily reflects the adaptation of technology used in the laboratory production of diamonds in the context of this case exercise. As such, this factor represents a new, emerging CSF. A weighting of ‘3/5’ is, of course, debatable, though arguably justifiable in view of the as yet uncertainty of the diamond market’s acceptance of artificial stones. For this reason, it just as much remains to be seen whether De Beers’ about-face was a master stroke or strategic blunder. (continued)

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Praxis Case 4.1 (continued)

Fig. 4.5 Comparative competitor analysis on the basis of critical success factors (CSFs)

Source: Sanderson, H. (2019, August 30). Bruce Cleevers: De Beers CEO mines a tricky seam. Financial Times.

Praxis Reflection 4.4: Critical Success Factor (CSF) Analysis In your organisation. . . . How are CFs and CSFs determined? . How are CFs and CSFs verified, validated, and factored into a strategic analysis? . How are evolving CFs and CSFs tracked and monitored?

Industry–Market Life Cycle Analysis The industry–market life cycle analysis, sometimes also referred to as the ‘S-curve’ analysis, is used to map the evolution of an industry or market. The analysis is frequently also applied to other factors such as technology, business, and product life cycles. The framework features a sigmoidal curve (hence ‘S-curve’) with two inflection points, as depicted in Fig. 4.6. The abscissa tracks maturity of an industry or market along a time horizon. Despite its apparent simplicity, the life cycle analysis offers significant explanatory power on closer examination.

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Emergent phase; high opportunity but high risk and low returns

Growth phase; high opportunity for value dif ferentiation

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Mature stage; competition based on cost/price;, diminishing returns

Obsolescent stage; end of life-cycle; loss-making

Reflecting evolving… technology / demand / competition / value migration / CFs and CSFs

Emergent

Growth

Mature

Obsolete

Industry (or market) maturity Fig. 4.6 Industry—market maturity (S-curve) analysis framework

The maturity phases are subject to dimensional variables that include technology, market demand, nature of the competition, dynamics and implications of value migration, and the prevalent competing factors (CFs) and critical success factors (CSFs). Each of the dimensions exhibits varying characteristics in the four stages of a life cycle. The ordinate reflects measures of performance; these might include sales, returns on investment (ROI), or other metrics that indicate relative attractiveness. These vary along the time horizon of an industry or market. The rate of evolution within a life cycle is tied to factors unique to the industry sector or market segment. Industry sectors such as power generation may evolve over decades; highly dynamic sectors such as the telecommunications industry generally exhibit a significantly shorter life span. The four stages comprising the life cycle comprise: The emergent phase marks the launch and early development of a new industry or market. Uncertainties that characterise this stage include the functional and economic viability of the value offering at the core of the newly launched industry or market. Driving the emergence of a new industry or market are typically innovative new product and service concepts enabled by new technologies. Often, these compete and inevitably fail and disappear. Consequently, the new competitive playing field is highly fragmented at this stage. Towards the end of the emergent phase, an early-stage shakeout gives rise to a consolidation around a dominant form of a value offering in the form of a particular technology or

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business concept. For participating firms, investment costs invariably exceed revenues and thus returns to stakeholders are low. Opportunities are high in this phase, but also the risk of failure. In the growth phase, industries and markets expand following the establishment of a dominant version of the new value offering. Demand increases exponentially as opportunities for differentiation of the value offering are realised. Differentiation opportunities manifest themselves in multiple attributes of the value offering. Characteristically, these are not primarily focused on pricing because this phase offers significant opportunities for premium pricing of a value offering. This attracts and incentivises increasing number of competitors to join the industry or market. Towards the end of the growth phase increasing competition gives rise to a de-acceleration of growth as industry and market saturation sets in. This marks an inflection point in the progression of the S-curve. The mature phase of an industry or market is characterised by diminishing returns to participating players. Value offerings are reduced to a commodity status and competition is centred on pricing and cost-reduction. Opportunities for premium pricing diminish significantly—to the point where the pricing of a value offering is ultimately at the discretion of the marketplace, not any individual player. Pricing is established by the market; players choose to compete or to exit. The resulting competitive pressure on incumbents typically leads to a late-stage shake-out and consolidation in the industry and markets. In the narrowing competitive field, weaker players succumb to cost-leaders capable of offering products and services at a lower price. Weaker players frequently become acquisition targets of stronger players or exit the industry and market altogether. Obsolescence marks the inevitable end stage of any industry or market. The competitive playing field has moved on. Efforts to compete in this stage amount to a pointless Sisyphean endeavour. Any firm still operating in this phase of an industry or market is all but marked for failure. Industry Maturation and Ambidexterity Inspection of the life-cycle analysis framework raises the question of what happens when industries and markets near the end of their lifetime. What strategic options present themselves to incumbents? Clearly, strategic options are all but depleted when an industry reaches the obsolescence stage. This is a stage no enterprise would ever want to find themselves locked into. Viable strategic options, however, do exist for firms operating in the late growth and early maturity stages. These options, though, are contingent on a number of factors. An extension of the life-cycle framework (as in Fig. 4.7) can be used to examine these factors and chart viable courses of action open to a firm in these stages. The extension of the framework features two S-curves that categorise business endeavours into exploitative and exploratory stages. The ongoing business (indicated by curve ‘1’ in Fig. 4.7) in the late growth and early mature stages in an industry or market is geared towards exploitation of current positions held by players. Competitors play by the rules of the prevailing industry logic and seek to exploit established business and operational practices. These are stable, routinised, and reflect the relative predictability of the competitive environment. Increasing competitive

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Performance

Emergent

Growth

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Growth

Mature

Exploitative (ongoing business)

2

Exploratory (business of the future)

ambidexterity

1

Time Fig. 4.7 Industry–market life cycle analysis: exploitation, exploration, and ambidexterity

pressures as market saturation sets in typically place players in a quandary. The inflection point marking the de-acceleration of the growth phase doesn’t necessarily present a crisis situation; it does, however, invariably mean that firms face important decisions. Obviously, the industry context ultimately determines possible courses of action to be taken by players at this stage. One option at this stage is to augment a value offering with enhanced value attributes (dashed line extension of curve ‘1’) by expanding a primary product offering with service features. GE Health, for example, developed and offered remote on-site sensing and equipment monitoring to customers using its medical equipment. GE was thereby not only able to reduce service costs and increase benefits to users, but it also gained access to a wealth of valuable user data. Such an option may extend the growth phase, though any advantage gained is usually temporary. Competitors typically follow suit quickly. As a business matures, increasing market saturation and competitive pressures inevitably trigger crisis situations of an existential nature. Firms face critical decisions in a narrowing field of options. One option, of course, is to exit an industry or market altogether and many firms do at this stage. IBM’s departure from the personal computer business in 2005 with the sale of its flagship ThinkPad brand to Lenovo marked an end to an almost quarter century long period during which it at one time dominated the PC business. A much riskier option at this stage is for firms to ‘jump the curve’ to an emerging new industry variant. New industry variants (indicated by curve ‘2’ in Fig. 4.7) are typically driven by revolutionary innovative technologies that make their appearance at the fringes of an existing industry. These usher in entirely new business opportunities in the form of new value propositions and business models. A new industry curve also introduces an entirely new set of

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competing factors (CFs) and critical success factors (CSFs) that incumbents often fail to recognise and understand. Emerging industries pose a threat to incumbents while offering immense opportunities to new entrants that are unencumbered by legacy thinking and assets. Incumbents face difficult choices at this point—such as whether to—and if—when and how to make the leap to the new curve. Incumbent players cannot abruptly switch from an exploitative to an exploratory industry mode. Legacy thinking, established asset bases, and routinised modi operandi invariably present immense strategic hurdles that incumbents often fail to overcome. Successful repositioning to a new business invariably demands a transition period during which incumbents must operate in both the old and new business variants. The ability to compete successfully in both the exploitative and exploratory business modes requires organisational ambidexterity. Organisational ambidexterity refers to an organization’s ability to effectively and efficiently manage the demands of the ongoing business while adapting to the new business of the future. While not difficult to understand in principle, it is inordinately difficult to achieve in practice. This requires firms to simultaneously operate on the basis of two very different sets of competing factors (CFs) and critical success factors (CSFs). Firm-internal clashes arising from competing value propositions, business models, and resources pose challenges that relatively few firms manage to resolve successfully. The automotive industry presents a classic example. Growing concerns over the environmental impact of carbon emissions and the imposition of new regulations are forcing an end to a century-old industry built around the fossil fuel powered combustion engine. Traditional automobile manufacturers are scrambling to position themselves in the electric vehicles market whilst phasing out their fleet of hydrocarbon powered vehicles in the face of stiff competition by new all-electric entrants like Tesla. Adding to the complexity of the transition are entirely new business concepts and models that challenge notions that have been at the core of the automobile industry for over a century. Shifting perceptions driven by growing societal sensitivity to the ecological impact of hydrocarbon powered automobiles are giving rise to new conceptions of mobility. Rethinking of the mobility concept, for example, challenges the need for owning as opposed to sharing a vehicle. These and similar trends are irreversibly reshaping the entire automotive industry. They present exciting opportunities to aspiring new industry entrants and agile incumbents, whilst posing existential threats to entrenched traditional players. Praxis Reflection 4.5: Industry Maturation and Ambidexterity In your organisation. . . . In terms of which dimensions is an industry or market maturity typically defined? . How is the point at which to transition to a new industry variant typically established? (continued)

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Praxis Reflection 4.5 (continued) . What challenges does a transition typically entail? . How are internal conflicts between exploitative and exploratory business typically resolved?

Industry Maturation and Disruption Contrary to popular belief, disruption of a business comes neither ‘with a bang’ nor does it have its origins in the immediate affected industry or market. Disruption typically makes its appearance by stealth and originates beyond the perimeter of an originally served market. The industry–market life-cycle analysis provides a unique angle on disruption as already indicated in Fig. 4.7. As shown in Fig. 4.8, disruption of a served market typically occurs in the advanced stages of a mature business when most firms in a sector play by the rules of the same industry logic and end up doing the same thing. Imitation by incumbents within a sector leads to convergence around value offerings that feature little in terms of differentiation and increasingly fail to meet the evolving needs of a targeted market. The onset of disruption occurs when a superior new variant of the value offering that better fulfils the evolving needs of the market emerges outside of a currently served market. This explains why incumbents are often slow to recognise a disruption’s potential relevance and impact. A disruptor’s value offering increasingly attracts users away from the originally served market. This triggers a net migration of users to the new market space and a gradual contraction of the originally served market until it disappears altogether. The rationale behind the emergence of a new market and demise of the originally served market often becomes clear only in retrospect—and as often regrettably the case, too late for incumbents.

t1

Evolving market

t2 Expanding market around disruptor’s new, superior value of fering

Incumbents

Served market (original)

Migrat ion from originally served market

Disruptor

Fig. 4.8 Disruption of an industry or market

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Praxis Reflection 4.6: Industry Maturation and Disruption In your organisation’s industry. . . . What are the key potential sources of disruption? . How are these determined and tracked? . What are the competitive implications of disruption?

Praxis Case 4.2: Encyclopaedia Britannica Disrupted The decline of Encyclopaedia Britannica is a parable about how even the most stable of industries, the strongest of brands, and the most focused of business models can succumb to disruption. It is also a stark reminder that competition is not a zero-sum game and that even the strongest players can fail dramatically. Britannica, once considered one of the most venerable brand names in the English-speaking world, was blindsided by developments and events entirely outside of its perceived market industry and market space. The company’s demise follows a classical pattern of disruption. Over the course of its more than 200-year history, Britannic had grown into a serious commercial enterprise. Regular revisions of its high-quality intellectual content and brand extensions such as atlases and yearbooks had established the encyclopaedia as the most prestigious, comprehensive, and authoritative knowledge compendium in the English-speaking world. On the commercial side, the company had built one of the most aggressive and successful direct sales forces in the world. At its peak in 1990, sales of Britannica’s multi-volume sets reached $650 million. Britannica’s value proposition was as compelling as the intellectual content of its encyclopaedia. It targeted middle-income families and played on parents’ aspirations for their children. As such, its sales pitch centred on helping parents assuage their anxieties about ‘not doing enough’ for their offspring. The fact that their product was seldom used once the initial pride of ownership subsided was seemingly irrelevant. Britannica’s own research confirmed that the typical encyclopaedia was opened less than once a year once the novelty of its purchase had worn off. So, what went wrong for Britannica? On the face of it, the perpetrator of Britannica’s demise had the appearance of a cheap, shiny disc. But this doesn’t tell the real story. Granted, the appearance of Microsoft’s Encarta encyclopaedia on a CD-ROM disc played a role, but it ended up being only a small part of the much greater information technology revolution that was taking shape in the 1980s and 1990s. The revolutionary advances in information technology of the 1980s and 1990s didn’t appear to factor into Britannica’s collective mental framework, at (continued)

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Praxis Case 4.2 (continued) least initially. Britannica, after all, was in the business of selling premium printed encyclopaedias. When Microsoft’s Encarta, a CD-ROM encyclopaedia, made its appearance, Britannica’s executives initially scoffed at the idea of a digital-format encyclopaedia. To create Encarta, Microsoft had licensed the text from Funk & Wagnalls, a third-rate, all but defunct encyclopaedia that periodically graced supermarket aisles as a promotional item. In fact, its brand was perceived to be so pathetic that Microsoft renamed its digital encyclopaedia Encarta. Britannica, however, did not lose out to Encarta. Encarta was simply a minor detail of the much greater sweeping changes wrought by the advent of affordable personal computers. As the price of PCs dropped and their use became increasingly widespread, parents were presented with an alternative means of assuaging their guilt. The fact that the cost of a PC happened to be about the same as that of a Britannica set made the choice an easy one for many households. For Microsoft, the marginal cost of producing a CD-ROM was negligible; in the vast majority of PC sales, a copy of Encarta was simply thrown in for free with the purchase of a PC. Britannica gradually caught the drift of the new emerging playing field. As sales of their encyclopaedia sets plunged, they began to realise that regardless of whether or not they ought to, PCs presented serious competition. After some soul searching, Britannica executives considered launching their own CD-ROM version of their encyclopaedia. The idea was ditched, however, when they realised that the content of Britannica was too big to fit on a CD-ROM. Ironically, Encarta’s seven million words easily fit onto a CD-ROM and left sufficient space for illustrations and interactivity. Britannica’s 40 million words, however, exceeded the capacity limits of a CD-ROM. Within a remarkably short period of little over 5 years, sales of Britannica and other printed encyclopaedias collapsed by more than 80%. The Britannica parable offers some important morals: . The most venerable and strongest businesses can end up being the most vulnerable. . Legacy and strong corporate cultures are no guarantors of continued competitive advantage; indeed, these often blind business executives to developments that do not fit into their collective mental framework. . Even if established businesses grasp the significance and implications of events and circumstances driving change in their industries and markets, they more often than not face competitive disadvantage precisely because they are incumbents. When competitive playing fields shift, legacy assets often present insurmountable barriers to incumbents. The very lack of (continued)

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Praxis Case 4.2 (continued) legacy systems, assets, and mindsets, on the other hand, presents a huge advantage to insurgents who have nothing to lose. Source: Evans, P., & Wurster, T. S. (2000). Blown to bits. Harvard Business School Press.

Industry Value Chain Analysis A value chain analysis tracks the creation of a value offering from its inception through to its delivery. While the analysis can principally be applied at both the industry and market levels of analysis, it is most commonly applied in industry analysis. The value chain analysis breaks down an industry into a series of valueadding segments. Generally, each industry segment features different players, although certain players may operate in several adjacent segments along the value chain. To illustrate, Fig. 4.9 depicts a simplified overview of the electric battery value chain. Value creation is initiated with the sourcing of raw materials and proceeds through primary and secondary stages of manufacturing in the production phase. Industry segments contribute differently to the overall value created along the value chain at a given stage of industry maturity. This gives rise to value creation ‘hotspots’. In Fig. 4.9, for example, the latter (secondary) stages of production contribute up to 70% of the overall value created along the electrical battery value chain. Value contributions in the various stages of a value chain have important consumption

production

Raw materials Value contribution

Chemicals & salts

Processed materials*

Battery cell & packs

~30%

~40% / ~20%

~10%

Downstream applications

2nd life use & recycling

*includes electrodes (8%)

Precursor materials

Cathode Materials

Nickel ore

Nickel sulphate

Cathode materials

Cobalt ore

Cobalt sulphate

Anode materials

Lithium carbonite/ hydroxide

Electrolyte materials Separator materials

Lithium ore

Cell

Pack

Battery cell Battery management system

Fig. 4.9 Industry value chain analysis: electric battery industry

Electric vehicles

Energy storage Consumer electronics Regulatory credits

2nd life energy storage Battery recycling

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Vertical integration Raw materials

Primary production

Secondary production

Assembly & packaging

Retail & distribution

End user

Horizontal integration

Fig. 4.10 Value chain analysis: Horizontal and vertical integration (at the secondary production stage)

strategic implications. They are relevant for pricing and operations. Value creation ‘hotspots’ along the chain offer the greatest potential for premium pricing. Stages featuring low value contributions demand a greater focus on operational efficiency. Value Migration Distributions of value contributions along an industry value chain are not stagnant. As a rule, value tends to migrate downstream as an industry evolves. There are notable exceptions, however, particularly in the case of commodities deemed ‘strategic’. The energy crisis triggered by the Ukraine war presents a case in point: sharp increases in energy prices triggered by bottlenecks in the supply of gas and oil abruptly reversed a global downward pricing trend and left governments around the world scrambling to secure sufficient energy supplies in the face of perceived shortages and escalating prices. Shell’s record annual profit for 2022 of almost $40bn, for example, represented more than a doubling of its previous adjusted earnings record in 2008 [2]. The six largest western oil companies reportedly raked in greater profits in 2022 than in any year in the history of the industry. Ironically, the profits were largely from the production of the very fossil fuels these producers are under immense political pressure to curb in view of the current climate crisis [3]. Oil and gas, as well as some other traded goods that include many metals, although commodities, are considered strategic, and hence prone to speculative pricing fluctuations even in mature industries and markets. Generally, though, value ‘hotspots’ tend to migrate downstream as industries evolve and mature. Value migration along a value chain triggers two types of structural changes in an industry landscape as indicated in Fig. 4.10, which illustratively positions the locus of restructuring in the secondary production stage. Industry restructuring can, of course, occur at any stage along the value chain. Industry restructuring is triggered by increasing competitive pressure at a particular stage of the value chain. Restructuring results in a consolidation of the competitive playing field and generally occurs by one of two forms. Horizontal integration involves a consolidation within a value chain stage. This occurs when weaker players within an industry segment are either forced to exit the industry or become acquired by stronger competitors. This leaves fewer stronger players operating within a particular segment of the value chain.

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Further downstream migration of a value ‘hotspot’ may trigger vertical integration which results in a consolidation of adjacent segments along the industry value chain. Vertical integration allows stronger players to diversify by acquiring one or more players operating either upstream or downstream in the value chain. Motivations for a player to opt for a vertical integration strategy may vary. A player may, for example, choose to acquire an upstream supplier simply to gain greater control over an input material deemed to be ‘strategic’ to their ongoing business operations. Frequently, however, an expansion along the value chain enables a player to capture (or recapture) a greater share of the value potential along the chain as a value ‘hotspot’ continues to migrate. Praxis Reflection 4.7: Value Chain and Value Migration A value chain analysis raises a number of strategic questions. . . . Where along your industry’s value chain is your firm positioned? . What are the strategic implications of the evolving value chain? . How strategically interesting is the value chain segment within which your firm is competing—from a value creation and capture perspective? . What options present themselves in view of value migration along the chain?

Integration of Externally-Focused Micro-level Analyses In an examination of external factors, individual micro-level analyses focus on and highlight specific aspects of the external competitive context of a strategic problem. These comprise and lend insight into individual ‘pieces of the puzzle’ relevant to the external context of a greater problem at hand. As such, these provide useful insight into individual aspects of the external context of a problem under investigation. Maximum potential is derived from micro-level analysis, however, when individually derived insights are aggregated and integrated into a more comprehensive picture of the greater whole of the external context within which a strategic problem presents itself. The utility derived from a particular micro-level analysis can be substantially enhanced when individual ‘pieces of the puzzle’ derived from an analysis are cross-examined with the help of other analyses. Insights gained from one analysis can augment and help explain insights derived from other analyses. When appropriately cross-correlated, insights derived from combined analyses enable a substantially enhanced understanding of the root causes of a problem under investigation. An integrative approach when carrying out micro-level analyses

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Table 4.2 Cross-correlation and integration of analyses for enhanced insights

Analysis PESTLE analysis

Competing factors (CFs)– Critical success factors (CSFs)

. . .when correlated with. . . Unique competing space (UCS) analysis Scenario analysis Unique competing space analysis (UCS) Life cycle analysis

Competitor analysis Scenario analysis Life cycle analysis

Value proposition

Business modelling CFs—CSFs analysis Analysis of disruption Value chain analysis Value chain analysis

CFs–CSFs analysis

. . .yields enhanced insight into the... . Trickle-down effects of macroeconomic factors at industry, market, and firm levels . Scoping of anticipated future scenarios (in strategy formulation) . Threshold-level versus differentiating determinants of competitive advantage . Distribution and implications of CFs and CSFs at UCS boundaries . Identification of CFs and CSFs; CFs and CSFs as functions of life cycle stage . Strategic implications of CFs and CSFs in various maturity stages; transitioning of CSFs to CFs as a function of maturity stage . Key comparative determinants of competitive advantage; sensitivity of individual CFs and CSFs . Scoping of future determinants of competitiveness (in strategy formulation) . Evolving character of a value proposition over a life cycle . Temporal implications of a transition from ‘exploitative’ to ‘exploratory’ modes of competing (cf.: ‘When?’) . Business model adaptations required as a business matures . Implications for CFs and CSFs when operating in ambidextrous mode . Mechanism of market migration relevant in late growth and early mature stages of a market . Value migration and the rationale for industry consolidation via horizontal and vertical integration . Strategic implications of CFs and CSFs in industry segments along the value chain

thus embraces the essence of first principles, insight-driven strategic thinking and problem-solving. As argued in the introduction to this chapter, even relatively few analyses, when appropriately cross-correlated, stand to deliver powerful inputs to the problem-solving process. Table 4.2 provides a summary of enhanced insights to be gained from cross correlations of a sampling of analyses examined in this section.

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Micro-level Analysis: Firm-Internal Organisational Factors No doubt, factors in the external environment play an important role in defining opportunities and threats facing firms in their industry and market contexts. On balance, however, firm-internal factors are recognised to comprise the more critical determinants of a firm’s success or failure. Empirical research findings reported by Rothaermel and Hill [4] suggest that external industry effects explain about 20%, while firm-internal factors account for between 30 and 35% of firms’ performance. The relevance of firm-internal factors to firms’ success or failure makes the analysis of firms’ internal basis of competitiveness a critical component of any strategic problem-solving endeavour. The analysis of firm-internal factors draws heavily on resource-based theory. The resource-based view (RBV) or theory of the firm introduced in the 1990s marked a major breakthrough and a clear departure from earlier strategic thinking that focused primarily on firm-external factors. The RBV, which states that firms can build and maintain positions of competitive advantage by exploiting bundles of resources that competitors cannot readily imitate, provides the conceptual foundations for the micro-level analysis of firm-internal factors. The notion of exploitation implicit in the RBV prompts consideration of a firm’s abilities to effectively deploy its resources. As such, it prompts an analysis of organisational factors such as a firm’s structure, processes, practices, culture, and ultimately, leadership. The micro-level analysis of firm-internal factors is used in strategic problemsolving to delve into the internal competitive reality of a firm in view of a strategic problem. As such, it probes factors relevant to a strategic challenge that have their origins—that is to say, their root causes—within the firm. An analysis of firminternal factors sheds light on these when guided by first principles-based, insightdriven strategic thinking. The analysis of firm-internal factors necessarily begins with a clear conceptualisation of an organisation or firm (NB: the terms organisation and firm are used interchangeably in this book; see endnote for further clarification of this point1). Principally, a firm or organisation is a collective of people unified by a common purpose and engaging in activities towards fulfilling that purpose. Organisations, however, are complex entities and feature multiple levels of complicatedness. Many of the important factors determining the success or failure of a firm lie deep within the organisation and are very difficult to access and to assess due to their intangible character. The complex nature of organisations poses great challenges to any firm-internal analysis. Hence, where, and how do we even begin making sense of an organisation?

1 Note: Although the terms ‘organisation’ and ‘firm’ are used interchangeably, the term ‘organisation’ is, in fact, the more encompassing of the two expressions since it does not exclude organisational entities that do not pursue a profit motive, whereas ‘firm’ generally refers to a commercial enterprise.

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Fig. 4.11 Simple model of an organisation

Strategy

Organisational culture

Processes Functional organisation

Resources (traditional)

Capabilities

The management literature on organisational structuring is vast. The literature offers a wide range of models that highlight different functional and structural aspects of organisations at various levels of sophistication. The choice of a model, of course, ultimately depends on its intended purpose. For the purpose of this section, we opt for the simple model depicted in Fig. 4.11. The model, which has its origins in strategy consulting, features sufficient scope and breadth for demonstrating the application of the micro-level analysis of firm-level factors presented in this section. Although simple, the model depicted in Fig. 4.11 identifies five constituents of an organisation. These represent the key firm-internal factors invariably at play when a strategic challenge presents itself. Strategy: Numerous features of a firm’s strategy have been dealt with in previous chapters. In the context of the simple organisational model, strategy comprises the element that provides sense, purpose, and direction to an organisation’s activities. An effective strategy provides a clear and compelling rationale for the activities of the firm in view of the organisation’s current reality. Processes: Processes comprise the functional core of a firm. Processes comprise activities that are both formalised and informal. Processes need to align with the objectives defined by the firm’s strategy to be effective; to be viable, they also need to be efficient. Processes are supported by both formal and informal organisational and functional routines and practices. Resources: Resources in this element of the model refer to traditional physical and financial assets. Traditional resources can relatively easily be accounted for and are typically reported in a firm’s balance sheet. They represent what a firm has at its disposal. Capabilities: Although technically also resources, the capabilities element addresses an organisation’s knowledge, learning and skills base, and thereby, the people component of an organisation. Capabilities are intangible resources that are embedded in a firm’s intellectual assets—and hence substantially more

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challenging to account for. They are manifestations of organisational knowledge. Capabilities reflect what a firm is capable of doing with the traditional resources at its disposal. Collectively processes, resources, and capabilities comprise the functional part of an organisation. Implicit to the functional organisation are further organisational aspects—such as a firm’s organisation structure, routines, practices, and mode of operating. These encompass both formal and informal dimensions. Organisational culture: Sometimes referred to as an organisation’s ‘DNA’, organisational culture reflects a firm’s collective disposition, underlying beliefs, assumptions, values, and ways of interacting. These collectively comprise a firm’s unique social and psychological context. An organisation’s culture expresses itself at multiple levels of the organisation. If a firm’s strategy defines its raison d’être, organisational culture can be thought of as its manifestation. The direct assessment of a firm’s organisational culture is all but impossible. Analysis approaches are typically limited to qualitative expressions of a firm’s cultural attributes. Conceptualising an entity as complex as an organisation in terms of only five factors may appear simplistic. Indeed, organisations can be depicted in much more complex and sophisticated ways; one need only to consult the management literature to get a sense of this. Ultimately, however, the choice of a particular organisational model comes down to its intended purpose. The primary intended purpose here, as in the previous section, is to demonstrate the application of the micro-level analysis of firm-internal factors in first principles, insight-driven strategic thinking, and analysis. The choice of the simple organisational model depicted in Fig. 4.11 for the purpose of examining firm-internal factors rests on the following premises: . The five elements in the simple model cover the essential constituents of any organisation. The five elements adequately address the relevant factors that invariably come into play in a firm-level analysis. . Despite the model’s apparent simplicity, interrelationships between the elements, in fact, present significant scope for an elaborate analysis of causal factors at the firm level. . Availability and validity of data ultimately limit the utility of any model— regardless of its sophistication. Intrinsic complexities of organisations—such as those related to a firm’s culture—always pose challenges and limitations to any analysis, regardless of its sophistication. The frameworks and analysis techniques presented and elaborated on in this section pertain to particular aspects of the five elements that comprise the model depicted in Fig. 4.11. As in the preceding section that deals with externally focused micro-level analysis, the primary emphasis in this section is on the role of first principles-based, insight driven strategic thinking and analysis in firm-internal micro-analysis. The choice of frameworks therefore focuses on a relatively narrow selection of frameworks that adequately serve this purpose. The few frameworks

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selected, nonetheless, offer considerable scope and address aspects most frequently prompted in an analysis of firm-internal factors. With the simple model of the organisation in mind, the analysis of firm-internal factors entails a closer examination of the five factors depicted in Fig. 4.11. Clearly, the strategy element establishes the rationale and determines the direction of the micro-level analysis. The inclusion of the strategy element in the organisational model emphasises the centrality of a firm’s strategic orientation in the analysis. In this sense, the remaining four elements of the organisational model are subordinate to the strategy element. Since the firm strategy element has already been comprehensively dealt with in Chap. 1, the focus in this section is primarily on the remaining four elements and their relevance for the firm-internal context of a strategic problem. The analysis of firm-internal factors can be initiated with an examination of any of the remaining four elements. However, since a firm’s traditional resources represent the most readily accessible, quantifiable, and therefore most straightforward of the four elements, an analysis typically begins with an examination of the resources element. The process element is examined next. Processes comprise the series of interdependent activities that a firm engages in to create value. A firm’s processes draw on its traditional resources and capabilities—and, as such, encompass both formal and informal aspects. The capabilities element focuses the micro-analysis on factors primarily embedded in the informal part of a firm. While outcomes of capabilities may be evident, the intrinsic composition of capabilities is much more difficult to establish in an analysis. The analysis of a firm’s culture presents the most difficult challenge of the firminternal micro-level analysis. Determinants of a firm’s culture often lie deep within the informal part of an organisation and are therefore all but inaccessible. Consequently, a micro-analysis of a firm’s culture is typically limited to qualitative expressions that reflect particular aspects of the firm culture. In micro-level analyses of firm-internal factors, accessibility and quantifiability of factors tend to correlate inversely with their strategic relevance. The most critical factors are typically the most difficult to analyse. For example factors relating to a firm’s informal processes, capabilities, and culture, while often key determinants of a firm’s success or failure, pose the greatest challenges in an analysis. This, of course, customarily imposes limitations on the extent to which meaningful insights can be established from a micro-level analysis of firm-internal factors. Praxis Reflection 4.8: Organisational Model In your organisation. . . . Which organisational model is typically used to under-pin a firm-internal analysis? . What limitations does this choice of organisational model impose on the analysis?

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Analysis of Firm Resources Firms’ resources comprise the physical, financial, and intellectual means by which they compete. A firm’s resource base consists of assets which the firm owns, controls, or has preferential access to. As shown in Fig. 4.12, a firm’s pool of resources consists of traditional resources comprising physical and financial assets and intellectual assets and capital. A firm’s physical assets typically include property, production plants and facilities, location, equipment, land, and natural reserves such as oil, gas, or mineral reserves. Financial assets are economic resources in the form of money, credit, securities, or funding. Physical and financial assets are quantifiable and are traditionally reported in a firm’s balance sheet. Intellectual assets and capital comprise the firm’s intangible resources. A firm’s intellectual capital can be broadly broken down into the following: . Relational capital such as reputation, informal networks, customer relations, supplier relations, stakeholder relations at large, ‘know-who’, alliances and strategic networks, and relations with regulators . Structural capital embedded in informal processes, tacit routines, brand, patents, copyright, organisational structure (informal) and culture . Human capital encompassing primarily capabilities and skills, ‘know-how’ and ‘know-why’; experience; expertise, learning, motivation; these reflect an organisation’s innovativeness and creativity The three intellectual capital categories exhibit multiple interlinkages. For example although ‘brand’ is usually categorised as a structural asset, it is intertwined with aspects linked to a firm’s relational capital—such as its reputation. Similarly, human capital is inextricably linked to elements of a firms’ relational and structural capital. These interrelationships add substantial complexity to an analysis of a firm’s intellectual capital.

(External competitive environment)

Competing factors (CFs)

Critical success factors (CFs)

(qualifying)

(order-winning)

Firm’s pool of resources & and capabilities

Physical & f inancial assets

Fig. 4.12 Firm resources

Firm’s stock of strategic resources and capabilities

Intellectual assets & capital

Competitive advantage

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A firm’s pool of resources and capabilities consists of both enabling and strategic resources. Resources of an enabling type qualify a firm to compete and resonate with competing factors (CFs) in a firm’s external competitive environment. A firm’s strategic resources constitute its primary source of competitive advantage. Strategic resources comprise a subset within a firm’s pool of resources and resonate with critical success factors (CSFs) defined by the external environment. Without doubt, physical and financial assets are critical determinants of a firm’s ability to compete, and in certain circumstances they may be of high strategic significance. For example the physical presence of Dior’s flagship store on the Champs-Élysées in Paris is indisputably of strategic importance for the French luxury fashion brand. A firm’s industry context, of course, always matters in this regard, and ultimately defines the criticality of a firm’s physical and financial assets. Traditional assets of the tangible type play enabling and supporting roles in firms’ portfolio of assets. Intellectual assets, however, increasingly constitute the primary source of competitive advantage for firms in many industries. Changing industry contexts are increasingly shifting firms’ competitive focus on their intellectual assets, even in traditionally (physical) capital-intensive sectors. Driving this shift in focus is the digital transformation of industry sectors which is giving rise to a new industrial order in which intellectual assets constitute the primary source of competitive advantage.

Resources Auditing and Mapping The analysis of a firm’s resource base begins with an audit and mapping of its portfolio of assets. Resources are classified in terms of tangibles and intangibles, and further categorised by asset type. The mapping procedure depicted in the illustrative example presented Fig. 4.13 suggests a straightforward approach to making sense of a firm’s resource base. Resources are first identified and appropriately allocated to an asset type. Clearly, firms typically possess a myriad array of assets. The objective of the audit is to focus attention on those particularly relevant to the firm’s endeavours; hence, only resources with significant presence in the firm are included in the analysis. Resources, once identified, are subsequently appraised on the basis of two criteria: their strategic relevance and the firm’s relative strength in the respective resource. Strategic relevance relates to the competitive differentiation potential of a resource; how important and relevant the resource is to a firm for competitive advantage. Relative strength, on the other hand, reflects both how heavily a firm has invested in this resource as well as its ability to fully exploit the resource competitively. The appraisal of the resources can be based on an arbitrary scale. The illustrative example presented in Fig. 4.13 indicates a scaling range of 1–10. Tabulated resources are then mapped onto a simple four-quadrant matrix according to strategic strength and strategic relevance. The mapping can be

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Illustrative example Resource Category

Resource with significant presence (examples)

Strategic Relevance1

Firm’s relative strength in this resource2

10

Strategic resources

Superfluous resources PC1

Intangibles

Physical Capital

PC1 (factories) PC2 (machines)

3 6

8 6

Financial Capital

FC1 (financial liquidity)

9

3

Human Capital

HC1 (deep expertise) HC2 (unique knowledge)

4 6

7 4

Relational Capital

RC1 (strategic networks) RC2 (supplier relations)

8 7

9 7

Structural Capital

SC1 (patents) SC2 (brand)

8 7

4 6

Notes: 1) Strategic relevance: 1 = irrelevant; 10 = highly relevant 2) Relave strength: 1 = very weak; 10 = very strong

RC1 HC1

Relative strength

Tangibles

PC2

HC2

*indicated by sphere size

1

SC2

SC1 FC1

Irrelevant resources

1

RC2

Under-developed resources

Strategic relevance

10

Fig. 4.13 Resources audit and mapping example

arbitrarily enhanced—for example, (in the mapping shown in Fig. 4.13) by indicating the relative strength of a resource by the size of a sphere. The mapping provides a relatively clear perspective of the firm’s portfolio of resources and its distribution across the four quadrants of the matrix. Resources allocated in the upper-right quadrant comprise the firm’s strategic resources. These are the resources that the firm must nurture, protect, and exploit for competitive advantage. Resources mapped in the lower-right quadrant feature strategic potential but require further investment on the part of the firm in order to elevate them to strategic resources. The upper-left quadrant identifies resources that are superfluous to the firm’s current competitiveness. Often, these include legacy assets that in the past were positioned in the upperright quadrant but that due to the firm’s changing competitive environment have outlived their purpose. Superfluous resources are a drain on a firm’s asset base and are therefore frequently divestment candidates. Any assets identified in the lower-left quadrant are irrelevant to a firm’s activities and liabilities to be disposed of. The assessment of the relative strength of a resource can be carried out on the basis of a systematic audit of a firm’s resource base. Measures that apply to tangible resources include capital expenditure, R&D investment, and human resources (such as headcount) allocated to a particular resource. The assessment of a firm’s the strength in intangible resources poses a greater challenge; the ‘measurement’ of these is typically restricted to qualitative descriptions. The assessment of the strategic relevance of a resource for a firm is more encompassing and requires an inside-out perspective that considers a firm’s strategic intent in view of the realities of the external competitive environment. In a preliminary assessment, estimated values can be used to gain a first impression. More sophisticated methods, such as Grant’s assessment framework and the VRIO analysis—which are presented and elaborated on in a further section in this chapter—allow considerably more depth and granularity in an assessment of a resource’s strategic relevance.

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Praxis Reflection 4.9: Resource Analysis In your organisation. . . . How are resource audits typically carried out? . Which criteria are used to distinguish between strategic and enabling resources? . How are strategic resources monitored?

Capabilities

Core capabilities

Dynamic capabilities

(changing)

Competitive Environment

Capabilities comprise one of the most critical components of a firm’s competitive means. Arguably, they provide firms with their greatest potential source of competitive advantage. Capabilities are essentially manifestations of organisational knowledge. Distinguishing capabilities from firms’ traditional physical and financial resources is their intangible character and the fact that capabilities are resources of a ‘doing’ type. In other words, capabilities enable firms to do something with the physical and financial assets they possess. Capabilities represent a firm’s actionable knowledge. Indeed, the evolution of capabilities is closely linked to a firm’s organisational knowledge processes. Capabilities evolve through learning and therefore exhibit a high degree of path dependence. Capabilities do not make their appearance overnight. They are a result of deliberate effort on the part of a firm that may take years to unfold. A firm’s capabilities manifest themselves in various forms and they feature a hierarchy of strategic importance. The taxonomy indicated in Fig. 4.14 suggests three levels of capabilities.

Fig. 4.14 Firm capabilities

(primary source of competitive advantage)

Enabling capabilities (threshold-level, supporting but nondifferentiating)

Supplemental capabilities (add value to core capabilities but can be imitated)

Competitive advantage

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Core capabilities represent knowledge assets that constitute a firm’s primary source of competitive advantage. Consequently, they are of high strategic importance. Core capabilities characteristically embody proprietary knowledge that distinguishes a firm from its competitors. Their intrinsic tie to organisational knowledge has several important implications: core capabilities feature a high degree of path dependence and may take years to evolve. Moreover, their high degree of embeddedness in a firm’s informal routines and practices means that they cannot be easily imitated. While often associated primarily with firms’ technological prowess, core capabilities may pertain to all functional areas of firms’ competitive endeavours. Supplemental capabilities are not distinctive as such, but they feature elements that complement and enhance a firm’s core capabilities. Consequently, they contribute value but can be imitated by competitors. Enabling capabilities qualify a firm to compete. They are necessary since they fulfil entry-level requirements for a firm to compete at all. Enabling capabilities, however, do not distinguish a firm competitively from its competitors. Frequently, enabling capabilities include capabilities that at one point in time constituted core capabilities. Dynamic capabilities represent a special grouping of capabilities that relate to a firm’s capacity to shape and configure its portfolio of resources. Dynamic capabilities play a primary role in strategic renewal and repositioning [5]. They comprise three key activities that centre on the firm’s ability to change and adapt in response to changing competitive contexts. These activities enable a firm to: (a) sense, that is, to make sense of the reality of the competitive environment; (b) seize opportunities that present themselves; and (c) reconfigure strategic and enabling assets accordingly [6]. Dynamic capabilities operate at all levels of a firm’s hierarchy of capabilities. Because of their intangible nature, capabilities are notoriously difficult to nail down conceptually, and even more difficult to ‘manage’ in practice. LeonardBarton’s [7] thinking on capabilities offers one of the more useful elucidations of the capability concept. According to Leonard Barton, a capability is comprised of four components: people-embodied knowledge and skills, physical–technical systems, managerial systems and infrastructure, and organisational culture, values, and norms. As depicted in Fig. 4.15, two of the components—people-embodied knowledge and skills and physical–technical systems—comprise resource inputs. The remaining two components—managerial systems and infrastructure and organisational culture, values, and norms—represent elements of a capability that resonate with an organisation’s context and infrastructure. The inextricable connectedness of the four dimensions contributes substantially to the complex nature of a capability: People-embodied knowledge and skills represent primarily the human capital dimension of a capability. People-embodied knowledge and skills manifest themselves in the knowledge and abilities that people contribute to a capability. Knowledge

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People-embodied knowledge & skills

Managerial systems and infrastructure

Micro-level Strategic Analysis

Physical – technical systems

Capabilities

Organisational culture, values, and norms Ordering-winning enabling/ g/strategic enabling/strategic contributions (strategic)

Value creating Processes

Activities Qualifying contributions (enabling / supporting)

Fig. 4.15 Capability concept

and skills reflect expertise and know-how, experience, and learning. This component features a high degree of tacitness. Physical–technical systems define the hardware and procedural means deployed in the execution of an activity. The dimension includes process elements that may feature deeply embedded proprietary knowledge. Generally, though, the physical–technical systems component represents one of the most evident of the four dimensions. Managerial systems and infrastructure represent the formal organisationalfunctional context of a capability. Managerial systems consist of a range of organisational functional elements that support a capability. Infrastructure contributes organisational structural elements such as routines, practices, and the channels that provide access to an organisation’s knowledge and support the flow of knowledge critical to a capability. Generally, attributes of managerial systems and infrastructure can be explicated and therefore analysed, hence this dimension of a capability also represents one of the more obvious ones. Organisational culture, values, and norms define an organisation’s social context. An organisation’s social context sets the informal rules, norms, and boundary conditions that define an organisation’s value system relevant to a capability. These collectively act as informal control mechanisms that affect the performance of a capability. Attributes of an organisation’s cultural makeup may be perceived but are difficult to quantify. As a rule, an organisation’s social context defies deep analysis.

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Where Do Capabilities Reside Within an Organisation? There is considerable debate in the management literature over where capabilities reside within an organisation. The debate centres on whether core capabilities necessarily reside only at the corporate level of an organisation or whether they can be thought of as being distributed across various levels. The view taken here is that if the qualifying distinction of core capabilities is their ability to endow competitive advantage, then it stands to reason that they may well reside at multiple organisational levels of a firm. The debate on where capabilities reside within an organisation notwithstanding, there appears to be general consensus that a capability necessarily involves more than one individual. The fact that ‘a capability cannot walk out the door’ implies that the people-embodied knowledge and skills component of a capability entails a collective of people and not a single individual. Tacitness of Capabilities The tacit character of capabilities derives from their intrinsic link to organisational knowledge and deeply embedded informal organisational factors. The tacit nature of capabilities presents significant challenges in their analysis. On the one hand, the tacitness of capabilities provides protective mechanisms by presenting barriers to their diffusion. For example the knowledge component of capabilities which encompasses deeply embedded expertise, experience, routines, and practices is difficult to replicate and transfer outside the firm. On the other hand, same characteristics of capabilities that pose barriers to their diffusion outside the firm frequently impose limitations on their effective deployment and exploitation within a firm. Firms often don’t know the full extent of what they know and are capable of doing. Consequently, some capabilities lie dormant and are unused. Dysfunctionalities within an organisation frequently add obstacles to the effective deployment of capabilities. That being said, capabilities can take on a variety of forms that exhibit varying degrees of tacitness. The degree of tacitness of a capability is ultimately determined by its composition. While all capabilities feature elements of the four defining dimensions, the contributions of these dimensions to a capability are, as a rule, not equally distributed. For example highly knowledge-intensive capabilities which rely on deep expertise are disproportionately dependent on their people-embodied knowledge component and much less so on their physical–technical systems constituent. Knowledge assets generally, and individual constituents of a capability in particular, feature varying degrees of tacitness—from those ‘just under the surface’ to those deeply embedded in an organisation’s cultural realm. The tacitness of capabilities is therefore more appropriately described in terms of a spectrum which ranges from barely discernible to highly obscure, as suggested in Fig. 4.16 [8, 9].

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Has knowledge asset been explicated?

yes

no

no

yes

Is it easy to articulate? no

yes

Is it endemic to the firm’s culture? yes

Degree of ‘tacitness’

Is it easy to replicate?

no

Are its origins deep and obscure?

no

yes High

Fig. 4.16 Degree of tacitness of a knowledge asset

Assessment of the Strategic Relevance of Resources and Capabilities A firm’s arsenal of resources and capabilities is a critical determinant of its competitiveness, and therefore an inevitable element of any firm-internal micro-level analysis. The strategic relevance—that is, the competitive differentiation potential— of individual resources and capabilities in a firm’s pool of assets varies considerably. The illustrative example examined earlier in this chapter (cf. Fig. 4.13) identifies assets in a firm’s portfolio that range from ‘irrelevant’ to highly ‘strategic’. But how do we ascertain the strategic calibre of a resource or capability? Complicating any assessment of an asset’s strategic potential, of course, is the disproportionately intangible character of most highly strategic assets. In this section we examine two approaches that qualitatively appraise an asset’s strategic calibre on the basis of criteria that resonate with attributes of resources introduced in the preceding section. VRIO Framework The VRIO (acronym for value, rarity, imitability, and organisation) framework is a highly useful approach to think about the strategic potential of a firm’s resources and capabilities that is integral to the resource-based view (RBV) of the firm. Originally developed by Barney [10], the framework identifies these as four attributes essential to an asset in order for it to be considered a source of sustained competitive advantage. An adaptation of the framework shown in Fig. 4.17 in the format of a decision tree is used to appraise a particular resource or capability on the basis of the four criteria.

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O Is the Organisation set up to exploit it?

no

Sustained competitive advantage

no

I yes

yes

Is it easily Imitated?

Temporary competitive advantage

yes

(a)

yes

R no

Is it Rare? yes

no

Competitive parity

yes

V Is the resource or capability Valuable?

no

no

Competitive irrelevance

Fig. 4.17 VRIO framework (based on Barney [10])

Resources and capabilities to be appraised are systematically taken through the algorithm individually and in a stepwise manner. The appraisal begins with first criterion, which probes a resource’s value to the firm. A resource’s value relates to its competitive and differentiation potential. If of no value to the firm, a resource or capability is competitively irrelevant. If valuable, the algorithm prompts an appraisal of its rarity or scarcity. This criterion addresses the exclusivity of the asset to the firm. If valuable but not rare, an asset is not unique to a firm; and hence it provides a basis of competitive parity. If an asset, however, is valuable and rare, the algorithm probes its imitability. Resources and capabilities that are valuable and rare, but easily imitated provide temporary competitive advantage. If valuable, rare, and not easily imitated, an asset is subjected to the final test that probes the organisation’s ability to actually exploit the asset. An asset may fulfil the requirements that identify it as a potentially strategic resource or capability, but its ultimate contribution to a firm’s strategic endeavours is contingent on the organisation’s ability to exploit the asset. The vertical trajectory (designated by ‘(a)’ in Fig. 4.17) allows for an enhanced qualification of assets that do not fulfil the primary criteria. The trajectory links the value and rarity criteria to an organisation’s ability to deploy its assets. For example an asset which is not valuable in of itself, but which an organisation is capable of deploying in a particularly advantageous way—perhaps in combination with other strategic assets or in a reconfigured form—may, in fact, be upgraded to competitive parity status. Similarly, an asset which is valuable and rare, but easily imitated, may provide temporary competitive advantage to the organisation if exploited in an exceptional way by the organisation. Another way of thinking about the four criteria of the VRIO analysis, and in particular, the difference between these is to consider that the first three criteria (the ‘V’, ‘R’, and ‘I’) define properties or attributes of an asset that allude to their ownership. In essence, they are about having an asset. The fourth criterion (the ‘O’), on the other hand, is about the ability of a firm in possession of an asset to do something with it—to exploit the asset for competitive advantage. The possession of

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a strategic asset implied by the first three criteria is, no doubt, important. A firm may possess an asset, but the asset, for all intents and purposes, may be residing dormant in the firm’s asset portfolio. The fourth criterion addresses an organisation’s ability to mobilise and fully exploit an asset in its possession for competitive advantage. An analogy to illustrate the difference between simply having and the ability to exploit an asset: Consider an authentic Stradivarius violin and its ultimate value—in the hands of a virtuoso musician as opposed to a novice player or, perhaps, layman collector of fine period instruments. In either case, the object’s economic value, rarity, and inimitability remain unaltered. But only when played—that is, “exploited”—by the virtuoso does the violin reveal its full aesthetic value. We note that the fourth criterion in the VRIO framework—a firm’s ability to exploit an asset—resonates with concepts introduced in Chap. 3, in which the highlevel frameworks of strategic analysis were examined. The fourth VRIO criterion— the ability of a firm to execute and exploit an asset—corresponds to the fifth of the five strategy building blocks in the 5-SBBs framework. For comparative purposes, the first three VRIO criteria relate to the fourth of the five strategy building blocks, which addresses a firm’s ownership of potentially strategic assets. Likewise, the fourth VRIO criterion resonates with the third boundary of a firm’s unique competing space (UCS), which addresses a firm’s ability to mobilise and orchestrate its asset base for competitive advantage. A final important point concerns the sustainability of competitive advantage achieved by an organisation on fulfilling the ‘O’ criterion. Although indicated as ‘sustained competitive advantage’ in the VRIO framework (Fig. 4.17), in reality, no competitive advantage is ever indefinitely sustainable. In Chap. 7 we revisit this point and elaborate on the transience and contestability of competitive advantage. Fulfilment* 1

2

3

4

5

Scarcity Degree of competitive advantage established

Strategic potential of a resource or capability

Relevance Durability

Degree of competitive advantage sustained

Transferability Replicability Property rights

Degree of competitive advantage appropriated

Relative bargaining power Embeddedness *Fulfilment: ‘1’ = low; ‘5’ = high

Fig. 4.18 Grant’s framework for appraising the strategic potential of an asset (based on Grant [1])

Processes

143

Grant’s Framework Also congruent with the resource-based view (RBV) of the firm, Grant’s [1] framework for appraising the strategic importance of resources and capabilities attributes an asset’s strategic potential to three key criteria: the extent to which it establishes, sustains, and appropriates competitive advantage, as depicted in Fig. 4.18. Each of the three key criteria is broken down into further qualifying criteria. The eight qualifying criteria featured in Grant’s framework essentially offer an expanded perspective on the first three criteria (value, rarity, and imitability) of the VRIO framework. As in the VRIO analysis, resources or capabilities are individually subjected to a scrutiny of their strategic potential in accordance with the eight defining criteria. A qualitative scoring of an asset’s fulfilment of the eight criteria (as indicated in Fig. 4.18) can be used to flag inherent strengths and vulnerabilities of a particular resource of asset; this added insight can be highly relevant to an analysis of a firm’s portfolio of strategic resources and capabilities. Grant’s appraisal framework offers unique insight into the qualitative nature of factors that constitute an asset’s ultimate strategic value a firm. When used appropriately in a micro-level analysis of a firm’s asset base, it can contribute valuable insights into the features of an asset that are difficult to ascertain on account of their intangible character. Two qualifying remarks, however, regarding Grant’s framework: first, Grant associates an asset’s strategic importance primarily with its profitearning potential. While the notion of profit begs to be defined, of course, its applicability in the appraisal framework needs to extend beyond its purely economic expression for an appropriately comprehensive perspective. Second, the Grant framework does not explicitly address a firm’s ability to actually exploit an asset. Used in conjunction with the VRIO framework, however, the enhanced granularity of the Grant framework, when augmented by the organisational element embedded in the VRIO framework, offers substantial scope for a deepening micro-analysis of a firm’s strategic assets. Praxis Reflection 4.10: Organisational Capabilities In your organisation. . . . How are capabilities defined and determined? . How is the strategic relevance of capabilities assessed?

Processes Processes are generally defined as systematic and structured sets of activities that are deployed within a firm to create value by transforming inputs into value-enhanced outputs. Activities that make up a process are powered by capabilities. Processes define a firm’s internal value chain. A firm’s value chain is comprised of both enabling and strategic process elements. The degree to which a particular process

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Primary value-creating activities

R&D

Engineering & design

Production

Sales & distribution

After-sales Service

Supporting activities (e.g., accounts, human resources, procurement, etc.)

Fig. 4.19 Process flowchart of a firm’s internal value chain

element in a value chain is strategically important ultimately depends on the firm’s value-creation focus, which in turn reflects the firm’s industry and market context. Contributions of individual process elements to a firm’s value-creation endeavours are not necessarily equally distributed along the firm’s value chain. Processes are comprised of both formal and informal constituents. Formalised descriptions of processes explicate how ‘things should be done’; they define an operational norm. Formalised processes can be complex; however, they can be—and typically are—explicated, for example, in process flowcharts and manuals. Process flowcharts and manuals define operational norms. Figure 4.19 depicts a simple process flowchart that might be representative of a traditional manufacturing firm. In practice, of course, firms’ processes are substantially more complex. Individual elements of a firm’s internal value chain invariably feature multiple levels of sub-ordinate processes. The point is, however, that firms’ formalised processes, despite their complexity, can be charted. Their explicit character therefore allows them to be analysed. In strategic problem-solving, an analysis of a firm’s formal value chain—if perceived to be relevant to the problem and prompted by first-principles thinking— is inevitably a starting point. An analysis of a firm’s formal processes might be used to generate a variety of insights. Depending on the strategic challenge at hand, the extent to which process elements contribute to the problem, and the nature of their contribution, the analysis of a firm’s formalised processes might be used to reveal insights that relate to . Operational bottlenecks along the firm’s value chain and their strategic implications . The effectiveness of individual process elements in terms of their contributions to the overall value created along the firm’s value chain; benchmarks against bestin-class performance standards can be used to enhance this analysis . Capability gaps in individual process elements that restrict a firm in exploiting its full competitive potential, particularly in view of changing competitive environments

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Hence, an analysis of a firm’s formal processes, if called for, can no doubt generate insights relevant to a strategic problem. However, a process’s formal manifestation represents only part of the picture—and, not necessarily the most critical one at that. Process-related problems typically lie at a deeper level. In dayto-day practice, formal processes are shadowed by an array of informal processes that reflect the way ‘things are really done’ in day-to day practice. Informal processes may—and often do—deviate from the norms spelled out in a firm’s formal process manuals. Informal processes represent a truer picture of a firm’s activities. Consequently, when strategic problems facing a firm involve process-related elements, insights pertaining to the firm’s informal processes are often substantially more critical to a problem’s resolution than insights pertaining to the firm’s formal processes. Not that these are easily come by. An analysis of a process’s intangible components invariably invokes an examination of intangible factors that are difficult, if at all possible, to elucidate—such as capabilities embedded in the process. In summary, a firm’s processes are critical to its ability to create value; hence they constitute a critical element of a firm’s internal basis of competitive. Consequently, their scrutiny is invariably indispensable in a micro-level analysis of firm-internal factors. In practice, however, the analysis of firms’ processes is limited to aspects of a firm’s processes that can be explicated. Strategic problems often feature causal elements that have their source in the informal execution of activities. This imposes limitations on the ultimate utility of any process analysis, and ultimately, on the meaningfulness of insights that can derived from a process analysis in strategic problem-solving. Praxis Reflection 4.11: Organisational Processes In your organisation. . . . To what extent is a distinction made between formal and informal processes? . How does this distinction relate to the value creation potential of individual process components along the value chain? . What challenges do informal processes present; how are these ‘managed’?

Organisational Culture, Values, and Norms The organisational cultural element of a firm’s constitution is the most elusive of the five organisation components depicted in Fig. 4.11. An organisation’s culture is not unlike the wind; its presence is unmistakably felt, but not seen. Organisational culture is often a key determinant of a firm’s success or failure. Take, for example, characteristic organisational cultural traits such as disposition and cunning. Numerous events chronicled in the annals of military history attest that success and defeat are not determined by the material might of an opponent alone, but also by the cunning and disposition of a contestant in the circumstances. Nelson’s monumental

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Artefacts; visible organizational structures and processes; symbols (e.g., Logo)

Formal organisation

Language; management style; written rules, espoused values; mannerisms

Knowledge, capabilities, informal practices, norms and and routines

Informal organisation

Lived values; rituals; myths, stories; mental models and frameworks

Subconscious; taken-for-granted beliefs; perceptions; thinking; emotions

Fig. 4.20 Organisational ‘ice-berg’ model (based on Schein [12])

victory over the opposing French-Spanish coalition fleet in the Battle of Trafalgar in 1805 is a case in point. Nelson’s fleet was materially outnumbered by his opponents’. His fleet counted fewer ships and these were smaller in size. Nelson’s cunning and the disposition of his men-at-arms, however, outmatched those of his opponents’. These ultimately determined the outcome of the naval engagement. Cunning and disposition to engage are expressions of an organisation’s culture but, of course, not the only ones. An organisation’s culture is comprised of a complex interplay of factors such as the organisation’s values, knowledge, beliefs, rituals, experience, assumptions, and unwritten rules. These define an organisation’s social context and the ‘the way things are done around here’ [11]. While some attributes of an organisation’s culture may be visible—such as the language used, symbols, and explicated norms—most lie deep within the informal and hidden part of the organisation. Schein’s [12] organisational iceberg model, depicted in Fig. 4.20, indicates multiple levels of an organisation’s culture. These range top-down from the visible to the unconscious. The visible parts include artefacts and features that one can readily perceive, such as an organisation’s formal structure and processes. The model suggests, however, that the greatest part of an organisation’s culture resides in the tacit, informal realm. Informal elements of organisational culture lie submerged beneath the organisation’s ‘waterline’. Levels of organisational culture at increasing depths encompass elements that are increasingly indiscernible. At the lowest levels, an organisation’s culture subsists in the subconscious state. This level features elements such as deeply embedded beliefs, mindsets, and knowledge that evade conscious reflection. Knowledge residing at the lowest levels represents deeply embedded institutional-specific knowledge that has been accrued, sometimes over years, and comprises an organisation’s ‘institutional memory’. Organisations are at risk of losing this reserve of

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Table 4.3 Differences between formal and informal organisation Organisational feature Purpose Structure Organisational knowledge

Execution of activities Control mechanisms Authority

Communication channels Decisionmaking

Formal organisation Tied to explicit business objectives Organisation chart; formalised and documented Explicated (documented); accessible

Informal organisation Tied to individuals’ economic, social, and psychological needs and values Social networks

Established by explicit rules and regulations Tied to formal hierarchy and explicated; concentrated and based on chain-of-command Official top-down

Inextricably integrated at multiple levels; tied primarily to human capital and manifested in capabilities; at lowest level comprising ‘organisational memory’ Informal processes, routines, and practices, improvisation Established by implicit social norms, values, and beliefs Based on unwritten rules; distributed and established by social order at grass-roots level; based on trust Grapevine, casual social interaction

Controlled, directed, and instituted from top level; deliberate

Distributed within social networks; spontaneous improvisation

Formalised processes and routines

knowledge when ‘corporate amnesia’ sets in. Corporate amnesia is attributable primarily to the loss of human capital; when key knowledge carriers leave to join other organisations, retirement of key individuals, and redundancies. Knowledge at this level of an organisation can play a particularly critical role. Loss of human capital interrupts an organisation’s ability to learn and develop. The effects of human capital drain often become apparent only after some time and can have costly consequences [13]. Table 4.3 summarises some of the attributes of organisational culture and key differences of these attributes between formal and informal levels of an organisation. Numerous other differences between formal and informal characteristics of an organisation exist, of course. For example differences between an organisation’s written rules—directives that explicitly set out the norms and expectations on the part of the organisation—and an organisation’s unwritten rules, which spell out ‘how things really are done’. Unwritten rules often deviate from the explicit norms. An organisation’s unwritten rules manifest themselves at various levels of the informal organisation. Unwritten rules existing at higher levels of the informal organisation tend to be consciously exercised. The further down they exist in the informal organisation, the more they are processed unconsciously. At the subconscious level, unwritten rules are taken for granted. They are no longer reflected and they may engender a sense of entitlement. An organisation’s informal structures, processes, and practices exemplify the challenges encountered in the micro-level analysis of an organisation’s culture. A better understanding of an organisation’s culture is crucial in strategic problem-solving. Organisational cultural factors are

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often at the root of a firm’s problem and therefore highly critical to its resolution. Invariably, though, these frequently defy meaningful analysis. Praxis Case 4.3: ‘Cultural Branding’ at Bayer AG [cultural: with reference to the complex of typical behaviour or standardized social characteristics peculiar to a specific group, occupation, profession . . .; branding: to mark with a brand; a mark of a simple easily recognized pattern made by burning with a hot iron. . . (Webster’s Third New International Dictionary)] Corporate cultures express themselves in unique ways. Legacy-rich companies tend to nurture strong corporate cultures. I am reminded of one of my first exposures to corporate culture. On completion of my chemical engineering studies and with PhD diploma in hand, I had joined the venerable Zentrale Forschung (central research laboratory) of Bayer AG, one of the three big German chemical conglomerates. Bayer’s research laboratory in Leverkusen at the time was one of the largest industrial research facilities in Europe. This was in 1986 and Bayer was still an archetypal German industrial behemoth deeply entrenched in the ‘Rhineland Model’ mindset. One of my more memorable impressions from those early days was being informed by my mentor that considerable effort would be invested by the company over the next 5 years into my assimilation into the ‘Bayer family’. It was to be an experience—and this was only partially meant in jest—that would essentially amount to being virtually ‘branded’ with the iconic ‘Bayer-Kreuz’, the firm’s world-wide renowned cross-shaped logo (Germans tend to have a way with vivid imagery). What was being implied? Several things. I was to be groomed for a life-long career with the company. Life-time employment at one and the same company was an unspoken assumption in German industry at the time. And, why not? Bayer was intent on fulfilling its commitments—commitments that included excellent compensation, benefits that included world class health care in on-site clinical facilities, and numerous perks such as low interest-rate mortgages for homeowners and numerous other cultural and recreational subsidies . A strong commitment to work–life balance and corporate identity underpinned the company’s loyalty to its employees. Bayer ’04, its sponsored premier league football team, was only one of Bayer’s many indulgences. The model had worked well over the years. Employees’ loyalty to ‘the Bayer family’ was not seldom expressed in terms of years and generations a family had worked for ‘the family’. Job mobility in the prevailing German employment context meant rotation within the Bayer Group. Bayer’s ‘cultural branding’ was not left to chance, and the company was more than prepared to invest in what was expected to be a 30 or more-year career with the company. The corporate and cultural grooming involved a rich blend of mandatory events that included corporate initiation rituals and week-long off-site cultural (continued)

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Praxis Case 4.3 (continued) induction seminars. But it also included rigorous in-house managerial training in subject areas such as financial management and leadership. This was carried out in week-long seminars at Kaderschmieden such as the Universitätsseminar der Wirtschaft (USW) housed in the medieval Schloss Gracht, a management training academy modelled on American business schools funded and shared by a consortium of German industry conglomerates (MBAs were largely unknown in German industry at the time). Cultural integration, alignment of mindset, and the embedding of Bayer’s legacy values and norms were at stake. The physical setting of my cultural induction was the conglomerate’s headquarter Bayerwerk, Bayer’s industrial quarter in Leverkusen. The company’s Leverkusen site comprised not only an agglomeration of myriad production plants, but also the prominent BayerHochhaus headquarter building that looked onto the Carl-Duisberg-Park with its historical Japanischer Garten and Bayer-Kasino, a restaurant and 4-star hotel built in the Art Nouveau style. The rich corporate tapestry that formed the backdrop of the Bayer’s identity and culture conjured up the company’s legacy and storied past—for example, Bayer chemist Felix Hoffmann’s discovery of Aspirin in 1897, the not entirely uncontested part it played in the Second World War IG Farben industrial complex, and the phenomenal growth and post-war success following its re-emergence as Bayer AG. In short, in true loyalty to its employee stakeholders, Bayer provided all that was required for a fulfilling life-long career, in return for which the company expected, of course, the reciprocal performance and loyalty of its employees.

Praxis Reflection 4.12: Organisational Culture In your organisation. . . . How is organisational culture defined? . What are the distinguishing features of its formal and informal parts? . What challenges are presented by the informal organisation, and how are these dealt with?

Integration of Internally Focused Micro-level Analyses As emphasised in the preceding section that dealt with externally focussed microlevel analyses, the analysis of micro-level factors in problem-solving is significantly enhanced when outputs of analyses are appropriately cross-correlated and integrated.

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Cross-correlation and integration enable a connecting of seemingly unconnected insights that enhances our understanding of a problem’s context. There is, however, a proviso when dealing with firm-internal factors: the predominantly intangible nature of many firm-internal factors adds complexity to the exercise and predicates insights gained from analysis to be of a qualitative nature. Cross-correlations of insights derived from firm-internally focused micro-level analyses nonetheless offer significant opportunities for substantially enhancing our understanding of causal factors. Table 4.4 presents a sampling of cross-correlations of firm-internal microanalyses and indicates enhanced insights these can yield.

Table 4.4 Cross-correlation and integration of firm-internal analyses for enhanced insights

Analysis Resource analysis

Capability analysis

. . .when correlated with. . . Mapping VRIO analysis Grant’s analysis framework Tacitness analysis Resource analysis Tacitness analysis

Process analysis

VRIO analysis

Organisational Culture

Resource analysis

Capability analysis Grant’s analysis framework 5-SBBs Unique competing space (UCS) Resource analysis Capability analysis Process analysis

. . .yields enhanced insight into the... . Identification of strategic resources (visual) . Strategic potential of a resource and firm’s ability to exploit the resource . Strategic potential of a resource in terms of 8 criteria . Level of the firm at which resource exists . Significance and contribution of resource components (e.g. knowledge assets) for a capability . Tacit nature of a capability . Implications of a capability’s tacitness regarding its ‘manageability’ . Strategic potential of a resources in various activities along an internal value chain . Maturity of resources and implications for their differentiation potential . Strategic significance and contribution of a particular capability to a process . Determining criteria of a resource’s strategic potential . Relevance of a firm’s ability to exploit a resource (5th strategy building block) . Relevance of a firm’s ability to mobilise and exploit a resource for competitive advantage (3rd boundary) . Identification and (qualitative) analysis of intangible resources embedded in an organisation . Identification and (qualitative) analysis of capabilities embedded in the informal organisation . Identification and (qualitative) assessment of informal processes, routines, and practices

Chapter Summary

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Chapter Summary When insight-driven and guided by first-principles thinking, micro-level analysis is an indispensable component of strategic problem-solving. Micro-analyses serve to generate a better understanding of specific factors relevant to a strategic challenge by shedding light on their characteristics and probing the nature of their contribution to the challenge. The real challenge encountered in micro-analysis lies not so much in the availability of frameworks of analysis. There are many frameworks in circulation. Rather, the challenge revolves around the choice and application of frameworks—knowing whether, and if prompted, how to use a particular framework appropriately. To be effective in problem-solving, the choice and application of analysis approaches need to be guided by first principles-based, insight-driven thinking. Despite their potential utility, rational frameworks and models of analysis though are never a substitute for discerning judgement and critical thinking in problem-solving. The analysis of external and firm-internal factors is ultimately limited by the fact that many of the really critical aspects of a problem relate to factors that are inevitably qualitative in nature. Their analysis is therefore subject to errors of judgment and perception. These limitations are often encountered in strategic problem-solving. While this does not necessarily detract from the potential usefulness of micro-analyses, it does introduce variable margins of error and uncertainty in the outcomes of an analysis. Cross-correlations of micro-analyses can help reduce the residual uncertainty attached to analysis outcomes, and thereby enhance their overall effectiveness and usefulness. Analysis serves a number of potential functions in strategic problem-solving. Our focus is often limited to its role in generating content (i.e. insights). Often overlooked is the discipline analysis that can contribute to thinking and discourse in problemsolving. This aspect of analysis is particularly important in the practice field. Effectively used, analysis can be used to focus and channel discourse in a problem-solving session. Discourse in strategic problem-solving is effective only when it is established on the basis of a clear and shared understanding of an issue at stake. In problem-solving roundtables, discussion viewpoints often vary considerably. Diversity of opinion in discourse is per se not necessarily a problem, of course. It does become a problem, however, when opinions voiced are inadvertently misconstrued and when, as a result, discussions drift off course. It doesn’t help, of course, that listening skills in many organisations tend to correlate inversely with hierarchy. Discussants around the table often assume they are talking about the same issue or aspect of a problem and that their voiced views on these are perfectly understood around the table. In reality, however, this is often not the case. Consequently, discourse around the table often amounts to little more than meaningless verbalisations devoid of sense and meaning. When used effectively, analysis centres on attention and pins discourse to a specific aspect of a problem, with the effect that discussants around the table are ‘singing off the same hymn sheet’. And, while discussants may ‘agree to disagree’ on a particular detail of a problem, the important

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point is that the disagreement is centred on one and the same point of discussion. Indeed, the coherence and congruence that analysis can contribute to problemsolving are often as valuable as the insights generated by the analysis.

References 1. Grant, R. M. (2016). Contemporary strategy analysis (9th ed., p. 84, 127). Wiley. 2. Wilson, T. (2023, February 2). Shell profits more than double to record $40bn. Financial Times. 3. Wilson, T., & Brower, D. (2023, February 10). What Big Oil’s bumper profits mean for the energy transition. Financial Times. 4. Rothaermel, F. T., & Hill, C. W. L. (2005). Technological discontinuities and complementary assets: A longitudinal study of industry and firm performance. Organizational Science, 16, 52–70. 5. Helfat, C. E., Finkelstein, S., Mitchell, W., Peteraf, M. A., Singh, H., Teece, D. J., & Winter, S. G. (2007). Dynamic capabilities (p. 4). Blackwell. 6. Teece, D. J. (2009). Dynamic capabilities. Oxford University Press. 7. Leonard-Barton, D. (1995). Wellsprings of knowledge. Harvard Business School Press. 8. Birchall, D. W., & Tovstiga, G. (2005). Capabilities for strategic advantage. Palgrave Macmillan. 9. Birchall, D. W., & Tovstiga, G. (2004). The strategic potential of a firm’s knowledge portfolio. In S. Crainer & D. Dearlove (Eds.), Financial times handbook of management (3rd ed.). FT-Prentice Hall/Pearson. 10. Barney, J. B. (1991). Firm resources and sustained competitive advantage. Journal of Management, 17(1). 11. Deal, T. E., & Kennedy, A. A. (1982). Corporate cultures: The rites and rituals of corporate life. Addison Wesley. 12. Schein, E. H. (1992). Organizational culture and leadership (2nd ed., p. 17). Jossey-Bass. 13. Kransdorff, A. (1998). Corporate amnesia. Butterworth-Heinemann.

Chapter 5

Tandem Mode of Strategic Problem-Solving

Reason does not work instinctively, but requires trial, practice, and instruction in order to gradually progress from one level of insight to another. Immanuel Kant

In This Chapter, We. . . . Introduce the tandem mode of strategic problem-solving. . Examine the problem-solving mechanism of the tandem mode and its application.

Introduction to the Tandem Mode of Strategic Problem-Solving In this book so far, we discuss strategic thinking and strategic analysis as indispensable elements of strategic problem-solving that serve different purposes. Strategic thinking, introduced in Chap. 2, addresses the procedural part of problemsolving, the way we approach problem-solving. Strategic analysis, covered in Chaps. 3 and 4, on the other hand, addresses the content part of problem-solving, the derivation of insights that provide a better understanding of a strategic problem and its context. Now, in Chap. 5, we examine how strategic thinking and analysis are integrated in a tandem modus in which the two are brought together in a systematic and coordinated approach in strategic problem-solving. First principles-based, insight-driven strategic problem-solving involves an interplay of strategic analysis and strategic thinking. In the tandem mode, first principles strategic thinking provides the algorithm that systematically guides the strategic analysis. The high-level strategic analysis approaches introduced in Chap. 3 contribute to the structural elements of a strategy pertaining to the context of a strategic problem to be solved. Micro-level analysis prompted by the high-level analysis enables a deepening analysis of specific factors that relate to either the external or © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_5

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internal context. Strategic thinking ensures that we maintain focus on the right elements from the start and that we don’t ‘lose sight of the wood for the trees’ throughout the analysis. The tandem mode of strategic analysis and strategic thinking ensures coherence and congruence in strategic problem-solving.

Strategic Thinking Algorithm In Chap. 2, we examined the classical problem-solving algorithm and its adaption to strategic problem-solving. The strategic thinking algorithm component applied in the tandem mode is a further adaptation of the strategic problem-solving process. Depicted in Fig. 5.1, the strategic problem-solving algorithm leads through seven stages comprising the problem-solving process. Although the numbered stages are indicated sequentially, the algorithm allows for iterations between the stages at any step of the process. The problem-solving algorithm features two domains. These correspond to the two levels of strategic analysis dealt with in Chaps. 3 and 4—the high-level analysis domain and the micro-level analysis domain, respectively. In the tandem mode, strategic problem-solving is initiated and terminated in the high-level domain. The high-level of analysis maintains the focus on the greater context of the problem to be resolved. The micro-level analysis domain provides a deepening analysis of external and internal factors that are identified and prompted by the high-level analysis at stage ‘6’. Consequently, the micro-level domain is subordinate to the high-level High-level, ‘big-picture’ analysis domain

2

3

1 What’s at the core of the

Strategic challenge

strategic challenge?

(opportunity or threat)

4

What are the relevant

strategic issues? Does the analysis provide sufficient clarity for effective decision-making?

5

6

What are the relevant

strategic questions?

What critical

strategic insights are required?

Critical insights:

External factors? Internal factors?

7

Aggregation of insights and reconstruction of relevant of

strategic landscape Strategic options

Fig. 5.1 Strategic thinking algorithm

Micro-level analysis domain

What strategic options present themselves for the problem’s resolution?

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domain in the strategic problem-solving process. Insights derived in the micro-level analysis domain are integrated into the ‘big-picture’ perspective provided by the high-level analysis frameworks. The amalgamation of insights in the final reconstruction stage enables a reconstruction of the strategic landscape relevant to the strategic challenge under investigation. This reconstructed strategic landscape, while never complete in practice, of course, on account of inevitably missing insights, nonetheless provides a better understanding of the elements of a problem that are crucial to its resolution. Praxis Reflection 5.1: Strategic Thinking in Problem-Solving In your organisation. . . . What role does strategic thinking play in problem-solving? . How is it applied? How does it interface with and inform strategic analysis?

Strategic Problem-Solving Process: Tandem Mode The tandem mode of strategic problem-solving encompasses an approach whereby the focus of the problem-solving endeavour oscillates between strategic thinking and strategic analysis. Strategic thinking guides the overall analysis process by prompting appropriate strategic analyses at various stages in the problem-solving process. To set up the tandem mode, the strategic thinking algorithm is positioned alongside the three high-level strategic analysis frameworks, as depicted in Fig. 5.2. In the tandem mode, the strategic thinking algorithm guides the strategic analysis, for which the UCS and VP high-level frameworks are utilised. Strategic options, once derived on the basis of the reconstructed strategic landscape (stage 7 of the strategic thinking algorithm), are subsequently evaluated on the basis of the 5-SBBs highlevel framework. The application of the tandem mode in problem-solving involves a series of steps that alternate between strategic thinking and analysis, whereby strategic thinking systematically guides the analysis stages carried out in the UCS and VP frameworks. The stage-wise process by which this is done is depicted in Fig. 5.3. Admittedly, the process depicted in Fig. 5.3 looks complicated. Strategising and problem-solving, however, are unapologetically messy in the practice field; the greater the complexity of the problem at hand, the more complicated is its analysis. Complex problems typically present themselves at multiple levels and in ways that defy a simple unravelling of their cause and effect. The stage-wise structuring imparted by the tandem application of strategic thinking and analysis provides a pragmatic way of cutting through the fog that typically envelopes complex problems.

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Strategic THINKING

Strategic ANALYSIS Industry/market context

UCS

Competitors (and their offerings)

Stakeholders (and their needs)

1

High-level, ‘big-picture’ analysis domain

2

3

Firm

1 Strategic challenge

strategic challenge?

(opportunity or threat)

4

strategic issues?

5

3

What’s at the core of the

What are the relevant

2 Unique competing space

(and its competitive basis)

What are the relevant

strategic questions?

What critical

strategic insights are required?

7

Critical insights: External factors? Internal factors?

TIME HORIZON

When What unique, superior (differentiated) value offering do we aspire to create, deliver and capture – and for WHOM?

Where do we see opportunities for making a difference?

Why? Where? How? When?

STRATEGIC INTENT

How

Micro-level analysis domain

and on what basis are we going make that difference? Internal basis of competitiveness (strengths & weaknesses)

Aggregation of insights and reconstruction of relevant of

1

5-SBBs

Strategic imperative

strategic landscape Strategic options

FUTURE?

NOW?

Aspirations, vision, values & guiding principles

Insight-driven analysis

VP

Value proposition

Why do we think we can make a difference?

External context (opportunities & threats)

6

Macroeconomic environment

Options evaluation

2 Stakeholder perspective

5 strategy building blocks (5-SBBs)

4 Internal basis of competitiveness

3 External competitive environment

5 Organisation’s ability to execute

Fig. 5.2 Tandem problem-solving mode set-up

Problem-solving is initiated by positioning the strategic challenge under investigation in the high-level, ‘big-picture’ frameworks of analysis. With reference to Fig. 5.3, tandem problem-solving approach proceeds in the following manner: Stage ‘1’: Strategic Challenge Strategic challenges invariably present themselves when circumstances give rise to anticipated changes to the status quo of a firm’s strategic position. Challenges present themselves as either perceived opportunities or threats. The emphasis is on ‘perceived’. Challenges are ‘strategic’ if they feature sufficient potential to affect a firm’s competitive position in a significant way. The strategic thinking algorithm launches the problem-solving process that delves into the investigation of the strategic challenge. In stage ‘1’ of the strategic thinking algorithm, strategic thinking prompts closer investigation of the strategic challenge facing the firm by directing the focus of the investigation on an examination of the high-level, ‘big-picture’ context in which the strategic challenge presents itself. On the basis of this cue, the focus of the problem-solving process shifts to either the UCS or VP high-level analysis frameworks. In the high-level unique competing space framework, a strategic challenge invariably implies a potential expansion or contraction (depending on the nature of the challenge) of the firm’s UCS domain at its core. In the VP framework, a strategic challenge implies a potential impact of the strategic challenge on the firm’s strategic intent and ability to deliver on its value proposition.

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Strategic THINKING

Strategic ANALYSIS Industry/market context

UCS

Competitors (and their offerings)

Stakeholders (and their needs)

6 1

1

High-level, ‘big-picture’ analysis domain

2 2

3

3

Firm

Strategic challenge

strategic challenge?

(opportunity or threat)

strategic issues?

1 6 4

4

What are the relevant

Why

strategic questions?

do we think we can make a difference?

What critical

strategic insights are required?

FUTURE?

NOW? TIME HORIZON

When

Analysis

5

VP

Value proposition

What are the relevant

Aspirations, vision, values & guiding principles

5

Macroeconomic environment

(and its competitive basis)

3

1 What’s at the core of the

2 Unique competing space

What unique, superior (differentiated) value offering do we aspire to create, deliver and capture – and for WHOM?

Where do we see opportunities for making a difference?

Why? Where? How? When?

External context (opportunities & threats)

7

STRATEGIC INTENT

How

6

Critical insights: External factors? Internal factors?

and on what basis are we going make that difference?

Micro-level analysis domain

Internal basis of competitiveness (strengths & weaknesses)

7

7

Aggregation of insights and reconstruction of relevant of

1

Strategic options

5-SBBs

Strategic imperative

strategic landscape

Options evaluation

2 Stakeholder perspective

5 strategy building blocks (5-SBBs)

4 Internal basis of competitiveness

3 External competitive environment

5 Organisation’s ability to execute

Fig. 5.3 Tandem application of strategic thinking and analysis in strategic problem-solving

Notably, strategic thinking focuses problem-solving on the high-level, ‘bigpicture’ context of a strategic challenge from the outset. It thereby enables consideration of the perceived strategic challenge in the ‘big-picture’ context within which it presents itself. All three high-level frameworks of strategic analysis provide this ‘big-picture’ perspective. However, the visualisation of a strategic challenge in its greater context enabled by the UCS analysis framework (and to a lesser extent by the VP analysis framework) from the outset makes the UCS and the VP frameworks the analysis frameworks of choice in the tandem approach. The 5-SBBs framework is applied primarily in a later stage in an evaluation of strategic options once these have been derived. Stage ‘2’: Explication of the Strategic Challenge When challenges present themselves to a firm, their strategic relevance and potential impact are often not entirely clear. Indeed, what might initially appear to be a strategic challenge may well turn out not to be strategically relevant after all. The strategic thinking algorithm in stage ‘2’ therefore prompts a closer examination of the perceived strategic challenge. Stage ‘3’: Strategic Issues Framing In this stage, the strategic thinking algorithm prompts framing of the issues relevant to the strategic challenge. Technically, issues could be framed using a random brainstorming approach, but that would be akin searching for ‘the needle in a haystack’. Sorting issues into categories corresponding to their external and internal sources would be a better approach. However, the highlevel frameworks of analysis offer an even more elegant and expedient method for

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framing issues. Hence, as prompted by strategic thinking in stage ‘3’, the problemsolving process refocuses on the high-level strategic analysis; in particular, the unique competing space framework. Strategic issues associated with the strategic challenge, as argued earlier in this chapter, manifest themselves at the boundaries of the UCS domain. Consequently, each of the three boundaries of the UCS domain is examined for issues relevant to the strategic challenge. Identified issues are clustered and catalogued according to their UCS boundary affiliation. Stage ‘4’: Articulation of Strategic Questions Stage ‘4’ of the strategic thinking algorithm prompts the articulation of questions triggered by the issues framed in the preceding stage. Following this prompt, the focus reverts to the high-level analysis frameworks. Both the UCS and VP frameworks are used to articulate strategic questions. While the UCS framework lends a visual perspective to the exercise, the value proposition framework enables a broader frame of reference. Used in conjunction, the two high-level frameworks provide a comprehensive basis for articulating relevant strategic questions. Notably, a single issue invariably raises multiple questions. As in the foregoing stage, strategic questions prompted by issues are sorted and catalogued according to the UCS boundaries at which they arise. Stage ‘5’: Identification of Insights Strategic questions prompt a return to the strategic thinking algorithm. The strategic questions articulated in stage ‘3’ indicate the type and nature of the insights required for solving the problem at hand. Broadly categorised with the help of the high-level analysis frameworks, strategic questions raised in the preceding stage pertain to specific external and internal factors relevant to the strategic challenge. These factors focus attention on the specific insights required for the strategic challenge’s resolution. Stage ‘5’ thus prompts moving from the high-level analysis frameworks to the micro-level of analysis in order to generate the identified insights. Stage ‘6’: Micro-level of Analysis In stage ‘6’, the focus of the strategic problemsolving algorithm moves from the high-level to the micro-level of analysis. Microlevel analyses specifically focus on either external or internal factors relevant to the strategic challenge. Numerous frameworks and models addressing various aspects of the external competitive context and firm-internal factors have emerged in the management literature over the years. Not all are equally suitable or, indeed, informative. Discernment is critical at this stage; micro-level analyses are necessarily prompted by the insights identified in the preceding stage. Which of the microanalysis frameworks is selected is ultimately determined by the insight sought after. Not infrequently, the nature of a strategic challenge is such that only a limited number of the available formalised micro-analysis frameworks prove to be applicable and suitable. For this reason, micro-level analysis may also draw on non-formalised approaches such as heuristics and intuition. Insights generated in the micro-analyses representing external and firm-internal factors pertinent to the challenge at hand are inserted in the respective elements of the high-level, ‘big-picture’ analysis frameworks, notably the UCS and VP frameworks. As the problem-solving process progresses and as more and more insights emerge from the

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micro-analyses, an increasingly lucid ‘big-picture’ of the strategic context of the challenge at hand begins to take shape and form in the UCS and VP frameworks. Stage ‘7’: Reconstruction of the Strategic Landscape In stage ‘7’ of the problemsolving process, strategic thinking reverts to the ‘big-picture’ perspective and prompts a reconstruction of the high-level, ‘big-picture’ strategic landscape that reflects the firm’s current reality relevant to the strategic challenge under investigation. Insights that have been derived from the micro-level analyses are sorted, aggregated, and integrated in the emerging high-level, ‘big-picture’ representing the strategic landscape depicted in the UCS and value proposition frameworks. Several points worthy of note regarding the reconstructed current reality: 1. As pointed out earlier, reconstructed strategic landscapes invariably feature missing ‘pieces of the puzzle’ on account of missing insights. Not all questions result in immediate answers. Hence, the critical question in this stage revolves around whether the resulting ‘big picture’ features sufficient clarity for decisionmaking and whether the basic contours of the strategic landscape reconstructed from the generated insights offer sufficient granularity to allow the formation of appropriate strategic options in response to the strategic challenge. If this is not the case, the strategic thinking algorithm prompts the reiteration of pertinent earlier stages until the transparency required for effective decision-making is achieved. 2. A firm’s current reality reveals ‘where it presently is’, competitively speaking, that is. Clearly, externalities impose competitive constraints on firms in terms of what they can or cannot do. However, within those constraints ‘where a firm currently is’ ultimately comes down to decisions and actions taken by the firm in the past, regardless of whether these were deliberate or inadvertent. As such, a firm’s current reality is a consequence of its path dependence and the enduring influence of choices that can persist long after circumstances determining those choices have changed. A firm’s current reality is rarely what the firm would like it to be. Strategic challenges often expose deficits in past decision-making. Alternatively, a firm’s current reality may confirm the appropriateness of choices made in the past. Whatever the case may be, from a problem-solving perspective, a firm’s current reality represents the point of departure for the scoping of suitable strategic options in response to a challenge that demands to be resolved. Praxis Reflection 5.2: First Principles-Based Problem-Solving In your organisation. . . . To what extent—and how—is first principles thinking incorporated into strategic problem-solving? . Which stages of a problem-solving process normally used present the greatest difficulties, and why? (continued)

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Praxis Reflection 5.2 (continued) . How are ‘missing pieces of the puzzle’ typically dealt with in the reconstruction stage?

Strategic Options A reconstruction of the strategic landscape relevant to the strategic challenge under investigation concludes the tandem application of the problem-solving process. A question frequently encountered in problem-solving revolves around when we know enough about a problem to proceed to the decision-making stage. In principle, of course, an analysis could continue in perpetuity. In the practice field, though, expedience is always a critical factor. Hence, we terminate an analysis when the insights derived enable us to discern and understand the key factors contributing to a problem’s cause. This is when insights derived in the course of the tandem problem-solving process, when sorted, consolidated, and amalgamated in a high-level, ‘big-picture’ perspective allow us to identify the basic contours of a strategic problem’s root causes and the context within which the problem presents itself. This better understanding provides the basis for identifying and scoping of suitable options in response to the problem. A sufficiently lucid reconstructed strategic landscape effectively narrows the choice of strategic options to a viable few. In practice, the aim is to be left with a handful at most at this stage of problem-solving. A coherent and consistent application of first principles-based, insight-driven thinking from the start and throughout the analysis enables this. A consequent application of a first principles approach also ensures the requisite confidence that options in the narrowed set indeed address the root causes of the problem under investigation—and that, hence, these provide viable choices for decision-making. In the subsequent stage of problem-solving, the narrowed set of strategic options resulting from the preceding analysis is subjected to further scrutiny that aims to identify the ‘most suitable’ strategic option within a narrowed set of options. The process by which the evaluation is carried out is introduced and elaborated on in Chap. 6. Praxis Reflection 5.3: Termination of a Problem-Solving Process In your organisation. . . . How is the point at which an analysis is terminated determined? . How are residual uncertainties that arise from missing insights dealt with?

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Chapter Summary Problem-solving encompasses both procedural and content components. The procedural part of problem-solving involves the process by which outputs, or content in the form of insights relevant to a problem’s resolution, are generated. In strategic problem-solving, the procedural component is driven by the strategic thinking algorithm, which guides strategic analysis in generating insights. Insights, when aggregated, enable the formulation of a solution to a strategic problem at hand. The strategic thinking algorithm applied in the tandem approach is derived from the first principle-based, insight-driven strategic thinking process introduced and elaborated on in Chap. 2. Content in problem-solving is derived from the application of appropriate analysis approaches. The tandem approach encompasses a structured, stage-wise problem-solving process wherein strategic thinking prompts and guides the application of strategic analysis. Although relatively simple in its conception, the tandem problem-solving approach when applied to problem-solving typically involves numerous seemingly complicated operations. But strategic problem-solving is invariably an arduous task: The systematic structuring that the tandem approach imparts to problem-solving provides the requisite means for avoiding the pitfalls that commonly beset problem-solving in the practice field. The overall strategic analysis is initiated and terminated at the high level of analysis. Micro-level analyses are applied to generate specific insights relevant to external and firm-internal aspects of a problem as prompted by the strategic thinking algorithm. Once generated, these insights are integrated into the high-level, ‘big-picture’ perspective. When aggregated in the ‘big-picture’, they enable a reconstruction of the context, or landscape, relevant to the strategic challenge under investigation. Notably, the UCS and VP high-level frameworks function as the frameworks of choice in the tandem problem-solving process, whereby the UCS framework is particularly effective for visualising the framing of issues and the articulation of questions. An analysis is terminated when the insights generated allow sufficient understanding of the problem and its causes, and when these provide an adequate basis for decision-making. The 5-SBBs framework is applied in a subsequent stage when evaluating strategic options once these have been derived on the basis of the reconstructed ‘big-picture’ that emerges from the strategic analysis.

Chapter 6

Strategic Options: Formation, Evaluation, and Selection

No strategy survives contact with the enemy. Prussian Field Marshal Helmuth Graf von Moltke

In This Chapter, We. . . . Explore the process of decision-making that leads to the formation of strategic options. . Examine the critical transition from analysis to the formation of options. . Investigate the role of scenarios in a future context within which strategic options are positioned. . Elaborate on the application of first principles, insight-driven thinking, and analysis in deriving strategic options. . Examine the three steps of formulating a strategic option: scoping, dimensioning, and crafting. . Apply the ‘five strategy building blocks’ (5-SBBs) concept, the framework for evaluating the suitability of strategic options, and the selection of a ‘most suitable’ strategic option. . Introduce the application of the ‘3-boundaries analysis’ derived from the unique competing space analysis for verifying and validating a strategic option, once selected.

Introduction to Strategic Option Formation In strategy, problems and challenges revolve around creating, defending, or expanding a position of competitive advantage. Therefore strategy, at its core, is a search for viable options in response to either threats or opportunities impacting a firm’s competitive position, endeavours, or aspirations. Leo Tolstoy, one of the giants of Russian literature, opens his novel Anna Karenina with the following line: ‘All happy families are alike; each unhappy family is unhappy in its own way’. Translated to a business context, all strategic © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_6

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challenges—much like unhappy families—are unique in their own way. No doubt, many challenges feature commonalities and follow broad patterns. This allows a broad categorisation of problem types, which is often helpful when getting started on solving a problem. However, the minutiae of circumstances and factors that give rise to a problem make every strategic problem unique in its own way. The important inference of this is that there is no prescriptive, ‘one size fits all’ approach to solving strategic problems. Strategic problem-solving would be far easier if that were the case. While there are no tried-and-tested templates for solving problems, we do have at our disposal the first principles-based principles and methods introduced in earlier chapters. These provide conceptually robust means for thinking about a problem and a cogent way of approaching the solution to a problem in a structured and systematic way. We elaborate on this point further on in this chapter. Strategic decision-making encompasses a process by which a set of potential responses identified in a preceding analysis stage is narrowed down to a most suitable option. The designation ‘most suitable’ implies that there is never a ‘perfect’ solution to a strategic problem—at least not in the practice field. All potential options entail inherent risks and liabilities; the objective of strategic problem-solving is to identify an option that represents a most justifiable course of action—at a given point in time and in view of prevailing circumstances. Decision-making is undeniably one of the most important of a firm’s strategic activities. A firm’s ability to draw plausible inferences from an analysis and to make the right decisions on the basis of these is a critical determining factor in strategising. Not surprisingly, therefore, decision-making per se is exhaustively dealt with in the strategic management literature. Entire journals are devoted to the subject. What is not so clear in the management literature, however, is how analysis is linked to, and informs, strategy formulation—that is, how strategic options are actually derived from a foregoing analysis. Many textbooks on strategic management customarily devote entire chapters to the topic of strategic analysis and yet provide little, if any, guidance on how to effectively bridge the gap between analysis and the formulation of strategic responses. A closer examination of the strategy literature offers some possible explanations for the apparent disconnect between strategy analysis and strategy formation. On one hand, strategy formation in the past, particularly during the 1960s and in some cases to the present day, has often been confounded with strategic planning, even though there is little evidence suggesting that this entailed any systematic process of strategic formulation. A second plausible explanation rests on the fact that, in practice, strategy is seldom a consequence of deliberate choices made by a company. Granted, formal analysis is habitually used in the derivation of an intended strategy; the analysis underpinning an ultimately realised strategy, however, is often obscure. Consequently, the strategies of many companies are not an outcome of a deliberate grand design. This includes even highly successful ones. Apple is a case in point. Its remarkable success is often attributed to a brilliant strategy of configuring hardware, software, and aesthetics into a value bundle that offers its customers a unique and superior user experience. Yet there is little evidence that this ever has

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been a result of a deliberate strategy. Apple CEO Steve Job’s reply in 1998 when asked about his strategy was simply: ‘I am going to wait for the next big thing’ [1]. The sobering realisation that the success (or, indeed, failure) of a company is often not a consequence of deliberate and calculated strategising has led some prominent scholars in the field to question the very rationale of the use of analytical approaches in strategy formulation. Indeed, such criticism is not without justification. In Mintzberg’s estimation, only 10–30% of intended strategies are realised. This would suggest that strategy for the most part is not the result of rational deliberation but rather the outcome of a complex process in which an intended strategy is continually adapted to changing circumstances. This would imply that strategy, as a rule, is primarily emergent rather than deliberate, and that a strategy is more often than not discernible only in retrospect. Such a view, of course, fundamentally challenges the need for strategic analysis in strategising and justifiably raises the question: why then bother at all with analysis? Such a viewpoint, however, ignores the critical function that first principles thinking plays in strategic problem-solving. The primary purpose of first principles thinking is not to formulate strategic options; its role is to lay the foundations for better informed decision-making. It does this by providing effective means for identifying, scrutinising, and sorting insights—which in a subsequent step are used to formulate a response to a problem. In line with this view, Grant [2] provides a plausible counterargument to the emergent view on strategy by highlighting the crucial elements that systematic strategic analysis can contribute to the strategy process, irrespective of whether strategising follows a deliberate or emergent path. These are the secondary beneficial features of a systematic analysis approach that were alluded to in a preceding chapter, features that effect the efficiency and, ultimately, effectiveness of any strategising. Analysis, Grant argues, counteracts potential dysfunctional tendencies such as power battles, individual whims, and speculative thinking that counterproductively influence the outcome of strategising when done in the absence of a systematic approach. Systematic analysis counterbalances such tendencies by providing a basis for meaningful discussion, interpreting data, and developing consensus around a better understanding of a problem. Rational, formalised strategic analysis is not an end in itself, and frameworks and models are never a substitute for critical thinking. Praxis Reflection 6.1: Intended and Realised Strategy In your organisation. . . . When reflecting on strategies that were implemented in the past, to what extent did these include elements of an originally intended strategy? . What are key factors typically encountered that necessitate a recalibration of an intended strategy? . To what extent does first principle thinking contribute to the formation of an emergent strategy?

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From Strategic Analysis to Strategy Formulation Irrespective of whether strategy formation is deliberate or emergent, the real challenge facing the strategy practitioner today goes beyond the nature of a strategy’s mode of formation. The conundrum that as yet remains largely unresolved in the strategy field concerns the critical link between strategic analysis and strategy formulation. The crucial question—which the existing strategic management literature is manifestly silent on—centres on the transition from analysis to actual decision-making, as indicated in Fig. 6.1. A closer examination of the transition step from analysis to decision-making throws the spotlight on two essential questions: The first of these concerns the question of when an analysis is appropriately concluded. In principle, an analysis could ‘go on forever’. Competitive pressures in real practice obviously don’t allow for this. From a first principles perspective, nonetheless, this raises the questions about how much insight is ultimately required and how do we know when we have sufficient insight for an appropriate decision to be made? The context and complexity of a problem ultimately determine this, and there are no hard-set rules. This often presents a conundrum to the practitioner. In the practice field, there is no substitute for experience and good judgement for ultimately determining when to conclude an analysis. A second—and substantially more critical—consideration concerns the how question; how do we move from analysis to decision-making? This entails the process by which the outputs of a foregoing analysis are integrated into the decisionmaking process once an analysis has been concluded. Not seldom, a considerable amount of effort is invested in analysis with little thought given to how the results of an analysis are to be actually used; that is, how an analysis in effect informs strategic decision-making. Notably, these considerations are relevant not only to systematic strategic analysis. Emergent strategising also encompasses an element of ‘analysis’ which, Fig. 6.1 From analysis to decision-making

Strategic problem

Strategic analysis ? Strategy formulation (decision-making)

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although spontaneous, nonetheless involves a processing of insights relevant to a strategic problem at a given point of a strategy’s evolution. Notwithstanding that such processing might be significantly more complex and distributed at the grassroots level of an organisation, emergent strategy nonetheless also incorporates a point at which deliberation transitions to formulation. The glaring omission of conceptual guidance in the strategy literature on how to ultimately move from analysis to decision-making has significant implications for the strategy practice field. Aside from throwing into question the ultimate usefulness of the numerous analysis approaches on offer in the literature, the lack of guidance presents strategy practitioners with a conundrum. The resulting situation often encountered in practice is that a company spends an exorbitant amount of effort on carrying out all sorts of analyses—all too often for no better reason than that a particular analysis approach is considered a ‘necessary’ part of an analysis—only then to resort to what amounts to little more than handwaving when it comes to taking the analysis results forward to the formulation stage. Praxis Reflection 6.2: Transitioning from Analysis to Option Formulation In your organisation. . . . When engaging in strategic problem-solving, how is the point of ‘knowing when to stop’ determined? . How are residual uncertainties factored into the formulation of strategic options at this point? . How are the outputs of a foregoing analysis stage taken forward and incorporated into the formulation of strategic options? Is there a structured, systematic process for this, or is it done in an ad hoc manner?

Strategy Formulation: First Principles-Based, Insight-Driven Approach Needless to say, we need to and we can do a lot better than handwaving in the critical transition stage between analysis and option formation. After all, a lot is at stake. Moreover, the first principles thinking approaches introduced in previous chapters of this book provide the means for a substantially more coherent approach to strategy formation. First principles-based, insight-driven strategic thinking provides an approach to strategy formulation that is conceptually grounded while innately intuitive. The efficacy of first principles thinking in strategic problem-solving, as we have seen in previous chapters, derives from the logic, clarity, and guidance it imparts to an analysis. First principles thinking is equally applicable to strategy formulation. In this chapter, we examine how and why this is so. This chapter introduces and

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Fig. 6.2 First principles thinking, analysis, and strategic option formation

elaborates on a systematic approach to strategy formulation that is congruent with, and builds on, the first principles-based, insight-driven strategic thinking approach to problem-solving introduced in earlier chapters of this book. First principles thinking plays multiple roles in strategic problem-solving. In the analysis stage, as we have seen in the preceding analysis, it focuses and guides the analysis that enables the derivation of the reconstructed strategic landscape pertinent to a strategic problem a firm is facing. In the analysis, the reconstructed strategic landscape emerges from insights generated through a tandem interplay of strategic thinking and strategic analysis, whereby the thinking guides the analysis, as depicted in Fig. 6.2. The reconstructed landscape reflects the current reality of the firm in question. A firm’s current reality reflects firm-internal factors and the external environment relevant to a problem the firm is facing at the present time. The best that an analysis can deliver with any degree of certainty is a reflection of a current state. Insights garnered in the course of an analysis reflect a firm’s current reality. Strategy, however, is about a positioning of a firm in the future. Hence, while an understanding of the firm’s current reality is a crucial starting point for a problem’s resolution, it provides an insufficient basis for deriving a solution resolution to a problem that is to play out in the future. A strategic option therefore needs to be congruent not only with a firm’s current reality, but it must also take into consideration the future context within which it is to be enacted. While the occurrence of the future is inescapable, its shape and form, of course, are far from certain. Notably, the uncertainty inherent to any future context levels the competitive playing field for all contenders.

Strategy Formulation: First Principles-Based, Insight-Driven Approach

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(insight) Firm’s current reality (reconstructed)

(foresight)

Anticipated most probable future scenario

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Fig. 6.3 Strategy formation: insight and foresight

The inevitability and uncertainty of a future context within which a strategy is to be formulated and ultimately enacted raises a number of questions: . What is the conceivable future? . What is the likelihood of its happening? . What would be the impact of that future if it were to happen? These questions highlight the difference between insight and foresight. Insight is fact and evidence based. We cannot have ‘insight’ on events or circumstances that have yet to transpire. Foresight, on the other hand, is based on conjecture. It is a ‘best-guess’ supposition of a future that is yet to happen and hence intrinsically uncertain. Strategy formulation draws on both insight and foresight. While insight provides a baseline reflecting a current reality, foresight involves a projection of that current reality onto a future time horizon. Foresight mandates careful consideration of potential future contexts, or scenarios. The outcome of a foregoing analysis of a firm’s currently reality is then projected onto an anticipated most probable future scenario. Suitable strategic options are subsequently derived by taking into consideration the firm’s current reality in view of an anticipated most probable future scenario identified, as indicated in Fig. 6.3. Praxis Reflection 6.3: Future Uncertainties and Strategy Formulation In your organisation. . . . How are the uncertainties of a future context factored into the formulation of strategic options? . To what extent can foresight help in mitigating residual missing insights about the future?

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Scenario Analysis: Scoping the Probability and Impact of the Future To paraphrase an old Arab proverb: ‘he who predicts the future lies even if he tells the truth’. Indeed, if futures were predictable, much of the mystery surrounding strategy would be removed. Futures can, nonetheless, be contemplated and imagined. Given that strategy is inherently about positioning and enacting a course of action in the future, a careful reflection on the factors that are most likely to determine a future context is crucial for a strategy’s formulation. But how do we identify these factors and how do we scope their cumulative impact on a future context? In strategy, scenario analysis provides a technique for scoping alternative future contexts. Scenarios are not predictions, neither do they merely extrapolate trends of the present. First and foremost, the scenario technique encompasses a disciplined and systematic approach to thinking differently about the future. An important function of scenario thinking lies in its ability to help surmount thinking limitations and biases that frequently lock firms into a fixed mode of thinking [3]. In essence, scenario analysis amounts to a formulation of hypotheses about the future environment. Notably, scenarios focus attention on factors in the external environment, and hence exclude a consideration of any particular firm. Scenarios are formed by examining driving forces that are most likely to shape a future competitive environment by imagining how they might shape alternative future environments at a given point along a time horizon. The origins of scenario analysis can be traced to the work of Herman Kahn, who, while at the RAND corporation, developed a technique for the US Military in the 1950s for describing future contexts in terms of narratives called ‘scenarios’. Royal Dutch Shell adopted this technique in the late 1960s and significantly contributed to its development. The oil multinational still uses this technique regularly in 4–5-year intervals to scope scenarios that reflect the potential influence and impact of economic, social, technological, and political trends in the energy sector up to 50 years into the future. At Shell, scenario analysis involves more than simply scoping narratives that describe alternative futures. The technique constitutes an integral element of the multinational’s cognitive and learning processes. Narratives that emerge from careful and deep reflection on how macroeconomic factors shaping the global energy environment might play out are used to help focus thinking and, ultimately, to inform decision-making. In a scenario analysis, key driving forces are identified and projected onto a fixed future time horizon. Scenario analysis is not restricted only to existing forces. It also prompts thinking on new driving forces that might emerge in the future. Time horizons may be arbitrarily chosen, but more often than not a time horizon is tied to circumstances imposed by the cumulative effects of multiple macroeconomic factors. An example is the net zero emissions target imposed upon oil multinationals by a combination of environmental, economic, societal, and political factors. A 2050

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time horizon set for this target will require billions of dollars of oil and gas assets to be written off by players in the energy sector over the next decades. Scenario analysis is levelled at an industry sector context and addresses three aspects of an alternative future scenario: . The nature of an alternative future in view of a given horizon . The likelihood of its happening . The anticipated impact of the cumulative effect of factors shaping that future context A scenario analysis begins the identification of the factors that underlie the key driving forces that ultimately shape a future context. To identify these factors, the analysis draws on the macroeconomic factors that comprise the PESTLE framework examined in Chap. 4. Each of the driving factor dimensions is individually examined under three cluster headings that represent postulates of a future in view of a chosen time horizon: 1. ‘Status quo’: there is little if any change to a factor when compared to the present 2. ‘Moderately different’: a factor exhibits moderate change, but its basic contours are discrete and discernible 3. ‘Radically changed’: a factor exhibits change in multiple dimensions and its expression lies along a continuum bounded by a range of potential outcomes Driving factor dimensions are then examined by considering corresponding limits of the possibility of a dimension at an end state corresponding to each of the cluster headings. The outcomes are summarised and presented in a matrix array (as indicated in Fig. 6.4). The matrix comprises ‘boxes’ under the cluster headings that provide a brief description of the attributes and their implications for each of the factor dimensions. Once factor dimensions have been scoped under each of the cluster headings, the next step in the scenario analysis focusses on creating cohesive and coherent storylines or narratives. Narratives are derived by combining various end states of the factor dimensions to form a scenario. For example (with reference to the illustrated example depicted in Fig. 6.4) scenario ‘1’ represents a future state that is comprised of a moderately different economic context, a societal context that is essentially unchanged compared to the present, and moderately different technological, ecological, and political—regulatory environments. Scenarios resemble multiple versions of a short ‘history’ of the future, each of which captures the essence of a particular future scenario in terms of its constituent factor dimensions as defined at a particular end state. Although each of the scenarios relates to a distinct and coherent narrative, they nonetheless form a related set that is contingent on the ‘limits of the possibility’ that the imagined future entails. Furthermore, scenarios are not evaluated on their merit; one scenario is no better than another, even if a particular scenario may be viewed to be more ‘favourable’ from a present perspective. In a final step, scenarios are appraised in terms of their likelihood of happening. To the extent that scenarios are not about predicting the future, but rather about imagining futures in the present, an estimation of a scenario likelihood is

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Fig. 6.4 Derivation of scenarios

inordinately subject to perception. Pierre Wack, a Shell strategist who played a key role in developing the scenario technique in the early 1970s, is quoted as stating: ‘Scenarios deal with two worlds, the world of facts and the world of perceptions. They explore for facts but they aim at perceptions inside the heads of decision makers. Their purpose is to gather and transform information of strategic significance into fresh perceptions’ [4]. Scenarios should therefore be used to recalibrate perceptions of the future and open up a firm’s thinking regarding the future to the probability that the real future will lie somewhere within the boundaries of the postulated extremes. Moreover, the scenarios identified must not be viewed as the only possibilities. One scenario is nonetheless selected for the subsequent formulation of strategic options. The scenario selected is the one considered to be the most likely to occur and with the greatest impact on the business, as indicated in Fig. 6.5 (with reference to the illustrative example depicted in Fig. 6.4). An appraisal of a scenario’s likelihood and impact can at best be a conjecture of the future that is limited by perceptions in the present. We can, of course, never entirely discount the possibility of a ‘black swan’ scenario (scenario 3), which, although highly unlikely, if it were indeed to happen, would precipitate an immense and irreversible disruption of the status quo. Given the low probability of its occurring, such a scenario is considered least likely though. Factors that are considered to be key drivers of moderately and highly unlikely scenarios are nonetheless continually monitored. The scenario ultimately selected to provide the backdrop to the formulation of strategic options in the subsequent stage of problem-solving is one deemed to be most probable and with the highest anticipated impact.

Scenario Analysis: Scoping the Probability and Impact of the Future

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Fig. 6.5 Mapping of scenario probabilities and impact

Praxis Reflection 6.4: Time Horizons and Macroecenomic Drivers In your organisation. . . . What are the characteristic time horizons relevant to your business sector? . How are these determined and decided upon? . Which of the key (macroeconomic) drivers typically pose the greatest risk of uncertainty, and why?

Praxis Case 6.1: Shell’s ‘Four Worlds’ Scenarios Faced with the prospect in 2018 of the global demand for oil peaking in as little as a decade—which in an industry that plans in quarter-century increments essentially translates to tomorrow—and increasingly competitive fossil-fuel alternatives, Shell’s scenarios team set out to imagine and scope possible futures. A lot was at stake. For Shell, a colossus employing 90,000 people in 70 countries, the writing on the wall spelled out a threat to its very existence. Failure to successfully transform from ‘Big Oil’ to ‘Big Energy’ in time would send the fossil-fuel conglomerate the way of the extinct dodo. Facing a new era of ‘radical uncertainty’ that was all but certain to be the reality of the global oil industry Jeremy Bentham, scenarios chief at Shell, and his team set out to map the radically uncertain future of the oil industry. In their diagrammatic ‘Four Worlds’ depiction of possible futures, four scenarios form a quadrant that is defined by an axis showing global demand for energy of all (continued)

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Praxis Case 6.1 (continued) sorts and an axis indicating the penetration of technologies that reduce the demand for fossil fuels, as indicated in Fig. 6.6. In the ‘Live Now’ quadrant, continuing high global energy demand and low penetration of alternative energy technologies suggest a future in which global oil demand won’t peak until the late 2040s. Under this assumption, global energy demand will continue to grow and oil, coal, and natural gas will deliver about a quarter of the total energy demand, while solar and wind energy will account for approximately 5%. In contrast, if indeed the future entails low energy demand and a high penetration of alternative technologies, the ‘Brave New World’ scenario foresees the global demand for oil peaking as early as the mid-2020s. In this scenario, the global demand for energy will have stalled, with oil and gas each accounting for a quarter of the total demand, coal a fifth, and wind and solar for 15%. The underlying assumption in this scenario is that the world will have become much more energy efficient. Shell’s dilemma is that it has no clue which of the ‘Four Worlds’ will pan out. In Bentham’s words, Shell’s challenge as it tries to navigate an uncertain future is to ‘minimise the maximum regret’. High

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Fig. 6.6 Shell’s ‘four worlds’ scenario mapping of the oil industry

Source: Ball, J. (2018, January 14). Inside oil giant Shell’s race to remake itself for a low-priced world. Fortune Magazine.

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Current and Future Realities: Insight and Foresight We distinguish between insight and foresight. Insight, in essence, relates to the past. Even if it relates to present events and circumstances that determine a current reality, any evidence on which insight is based is by default historical. Foresight, on the other hand, is based on a projection of a current reality into the future. As such, it is at best a postulation of what might happen, but with no certainty. Foresight, derived from a scoping of a most probable future environment, sets the contextual backdrop to strategic options to be derived by a firm. A number of the macroeconomic factors that went into determining a most probably future scenario inevitably coincide with those already considered in the analysis of a firm’s current reality. However, the way they express themselves and the way they are used differs. In the assessment of a firm’s current reality, macroeconomic factors taken into consideration reflect existing circumstances. They can be ascertained with a reasonable degree of certainty, but they also feature a historical dimension, even when reflecting an up-todate present situation. This is because any data used in determining a current reality is by default historical. By the same token, external factors used in a scenario analysis suggest an anticipated future state of affairs that can at best be imagined. The set of factors used in a scenario analysis may include factors not taken into consideration in a current reality analysis. Differences in the way macroeconomic factors express themselves in a current reality and in a future scenario ultimately depend on the severity of the postulated future scenario. Some factors may exhibit a gradual (linear) evolvement, while others may represent outright disruptions of the status quo. The anticipated future reality, as construed in a scenario, sets the context within which a firm’s response to a strategic challenge is formulated and ultimately enacted. The key question at this stage of strategy formulation revolves around the alignment and integration of insights derived from a foregoing analysis of a firm’s current strategic reality with the postulated reality of the firm’s future competitive environment based on foresight, as depicted in Fig. 6.7. Praxis Reflection 6.5: Current and Postulated Future Realities In your organisation. . . . When formulating strategic options, to what extent—and how—do projections of a future reality inform the decision process? . What are the typical points of contention encountered when aligning a current reality with a postulated future reality?

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Strategy formulation

Postulated future reality future

. Macroeconomic context . Industry-market context . Firm’s internal basis of competitiveness

current

Firm’s current reality

. Macroeconomic context . Industry – market context . Future competitive playing field

Key driving forces

Fig. 6.7 Strategy formulation against the backdrop of a firm’s current reality and a postulated future reality

First Principles-Based, Insight-Driven Strategy Formation So, how do we take the results of a foregoing strategic analysis forward into the strategy formulation stage? To answer this question, we revisit the first principles, insight-driven problem-solving approach introduced in Chap. 2 and its application in a tandem application with high-level frameworks of analysis introduced in Chap. 5. In particular, reference is made here to Figs. 5.1 and 5.2, respectively. Let’s recall how we structure a first principles-based, insight-driven strategic analysis. We begin, of course, with a strategic problem. A strategic problem, we recall, merits the effort of an investigation by virtue of its anticipated relevance and impact on a firm’s competitive position, and thus demands a resolution. With the first principles-based, insight-driven approach in mind we proceed by: 1. Identifying the strategic problem (or challenge) and scoping of the problem. This is done by framing the problem in the greater strategic context within which it presents itself. We use the high-level frameworks of analysis—the unique competing space (UCS) and value proposition (VP) analysis frameworks—to represent the greater strategic context. 2. Articulating the strategic problem to the extent possible, recognising that the way in which complex problems initially present themselves may not reveal all their intricacies. The purpose of this step is to ascertain that the problem is indeed of strategic relevance and hence worthy of further investigation. 3. Breaking down the problem into its constituent parts by framing issues that are deemed relevant and important to the problem. To frame the issues, we refer to the three boundaries of the unique competing space (UCS) domain by noting that issues relevant to a strategic problem invariably manifest themselves at a firm’s boundaries.

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4. Articulating strategic questions that are prompted by the issues framed and identified in the preceding step. 5. Identifying insights to be generated in response to questions articulated in the preceding step. In this step, the analysis moves from the high-level analysis to the micro-analysis level. Appropriate micro-analysis approaches are identified. 6. Generating insights on the basis of both rational and informal approaches, including micro-level analyses, intuition, and heuristics. 7. Reconstructing the strategic landscape reflecting the current reality of the firm relevant to the strategic problem it is facing. In effect, we tie the investigation of a firm’s strategic problem to be resolved to a high-level analysis of the firm’s unique competing space, for which we use the highlevel unique competing space analysis framework. This has several advantages, as we recall from Chap. 3: . First, a unique competing space perspective on a problem enables us to scope the problem visually in the greater competitive context within which it presents itself; we thereby substantially reduce the risk of ‘losing sight of the wood for the trees’. . Second, if the problem is, indeed, ‘strategic’, then it has an (anticipated) impact on the firm’s competitive position. The unique competing space perspective provides a visual representation of a firm’s competitive position. A strategic problem invariably introduces the prospect of change to a firm’s competitive position, and hence, unique competing space. A problem is therefore considered ‘strategic’ if it is anticipated to have an impact on the magnitude of the spatial area representing the firm’s competitive position. In the case of a threat, the problem revolves around a possible contraction of the spatial area of the UCS, while a growth opportunity, on the other hand, represents a possibility to expand the space. . Third, changes to a firm’s competitive position inevitably imply movement at its unique competing space (UCS) boundaries. The nature of the strategic problem (whether threat or opportunity) points to where we might anticipate the greatest movement, but as we will see further on, a strategic problem invariably implies potential movement at all three boundaries. Hence, we initiate an analysis of a strategic problem with an examination of the firm’s unique competing space and its boundaries. Approaching the analysis of a strategic problem in this manner is consistent with first principles thinking in that it narrows the focus of the problem-solving process considerably from the start to bear on factors that invariably lie at the root of the problem. In other words, we don’t need to start the analysis with a random search for the proverbial ‘needle in the haystack’. Moreover, this approach sets the context and guides subsequent steps of the problem-solving process that involve the articulation of questions, the identification of insights considered important, and the appropriate choice and application of deepening micro-level analyses for generating the insights identified.

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3. Insights (relevant to stakeholders’

needs)

3. Insights (relevant to competitors’ offerings)

Competitors’ offerings

1

2. Questions

1. Issues

1. Issues

2. Questions

Stakeholders’ needs

2

(relevant to stakeholders’ needs)

(relevant to stakeholders’

needs)

(relevant to competitors’ offerings)

(relevant to competitors’ offerings)

Firm’s unique competing space (relevant to strategic challenge)

Firm’s competitive basis

3

1. Issues (relevant to firm’s competitive basis)

3. Insights (relevant to firm’s competitive basis)

2. Questions (relevant to firm’s competitive basis)

Fig. 6.8 First principles-based, insight-driven derivation of an option space

The resulting process, as depicted in Fig. 6.8, resembles sets of closed loops at each of the three boundaries of a firm’s unique competing space. Each loop begins with the framing of issues, which prompts the articulation of questions, which in turn prompts the generation of insights that ultimately link back to the issues framed at the boundaries. The insights generated in this manner ultimately demarcate the boundary contours of the firm’s unique competing space domain. To illustrate, let’s examine boundary ‘1’, which demarcates a firm’s competitive position vis-à-vis its competitors. Consider, for example, typical issues that arise at this boundary of a firm’s unique competing space: . Increasing competitive pressure on the part of an existing key competitor, which might result from the competitor’s enhancement of their value offering . New competitors entering the playing field . Emergence of competitor coalitions due to restructuring in a maturing industry and market These issues all represent potential threats to the firm’s currently held competitive position, the result of which may lead to a contraction of the firm’s unique competing space at boundary ‘1’. Issues framed accordingly prompt questions. A consideration of the first issue raises questions such as . How does the enhanced value offering of the key competitor compare with the firm’s comparable (as yet) differentiated value offering on which it is staking its competitive position, and by whatever measure appropriately applied?

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. Is the competitor’s value offering now perceived to be ‘as good’ as the firm’s? . What does this imply for the firm’s differentiation potential with regard to this value offering? . How is the competitor’s enhanced value offering perceived by the market and, in particular, by customers that the firm is currently serving with its value offering? The illustrated case, of course, raises numerous further issues and questions. Nonetheless, working with the few listed above, we already see that to address the threat it is facing at boundary ‘1’, the firm requires a number of insights prompted by the questions that, when generated, help the firm to develop a better understanding of, for example . The characteristics of the competitor’s enhanced value offering, in terms of its product or service features and quality—and how these compare with the firm’s corresponding value offering . The extent to which these pose a threat to the firm’s value offering; that is, the extent to which the competitor’s value offering ‘measures up’ to, or perhaps even exceeds, the firm’s offering . The reaction of the firm’s established customer base in response to the competitor’s new value offering What such an analysis—which in practice, of course, would encompass a much more exhaustive enquiry—enables the firm to establish is a much clearer understanding of the demarcation line between its (as yet) differentiated value offering and that of its competitors. This better understanding allows a firm to more precisely establish the perimeter of its unique competing space at boundary ‘1’. This perimeter defines the relative positioning of the firm’s value offering vis-à-vis that of its competitors’. Similarly, insights generated at boundaries ‘2’ and ‘3’ allow a clearer and more precise elucidation and explication of the perimeters of these boundaries. In the case of boundary ‘2’, the perimeter that defines the limits of a firm’s ability to fulfil stakeholders’ needs, and in the case of boundary ‘3’, the limits of the firm to exploit, mobilise, and ultimately orchestrate its competitive basis for competitive advantage. In effect, the insight-driven approach described above enables a delineation of a firm’s unique competing space boundaries, whereby insights help identify benchmarks points along a boundary’s perimeter. Although the conception of firm boundaries is per se an abstraction, the first principles, insight-driven analysis approach applied in this way enables us to concretise the notion. Boundaries take on a concrete form when tied to insights. Insights translate to concrete benchmarks along the firm’s boundaries; collectively, they define a firm’s current competitive reality, and hence, the contours of its competitive boundaries.

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Praxis Reflection 6.6: Insights and Their Relevance for Strategy Formulation In your organisation. . . . How are insights derived from strategic analysis used to inform the formation of strategic options? . In the context of a strategic challenge, how do these relate to and correlate with anticipated movements of your firm’s strategic boundaries?

Strategic Options: A Three-Boundaries Perspective The formation of a strategic option encompasses three key activities: the positioning, dimensioning, and crafting of a strategic response.

Scoping and Positioning of a Strategic Option Having established the contours of a firm’s strategic boundaries, we can now proceed to scope strategic options by considering where we would want to position these within the range of choices available to the firm. Where a firm positions its strategic options is, of course, entirely at its discretion. From a competitive perspective, however, there are clearly ‘no-go’ positions that can be eliminated from the outset. We may recall that these considerations were dealt with in Chap. 3. As depicted in Fig. 6.9, a firm could conceivably position a strategic option in the spaces designated ‘a’ and ‘b’. Positioning an option in space ‘a’, however, would amount to little more simply than a duplication of what the firm’s competitors are equally capable of doing. The space designated as ‘b’ is, of course, irrelevant to stakeholders’ needs and hence not an option, and ‘c’ is beyond the immediate scope of the firm’s wherewithal. Hence, the only viable space to position a strategic option is within the unique competing space domain. This is the only space within which an option in response to a strategic challenge has the potential for competitive impact.

Dimensioning of a Strategic Option Based on the premise that an option, in order to be considered ‘strategic’, is necessarily positioned within the boundaries of a firm’s unique competing space, we proceed to examine its constituent boundary elements. A strategic option (designated option ‘n’) features three component dimensions, represented by the three

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Industry/market context

(c) Competitors’ offerings

Stakeholders’ needs

✘ ✘

(b)

✘

(a) 1

2

…space within which strategic response to strategic challenge has potential for competitive impact

UCS

3 Scenarios reflecting possible futures

Macro-economic context

Firm’s competitive basis

Fig. 6.9 Positioning of strategic options

bidirectional vectors indicated in Fig. 6.10 that address the three boundaries of the unique competing space. Boundary ‘1’ component: The component of a strategic option corresponding to boundary ‘1’ takes into consideration factors that address the impact of an option at this boundary. These factors address the differentiation potential (vis-à-vis the

Competitors

Stakeholders

relevant to option ‘n’

relevant to option ‘n’

2

1

Competitors’ offerings

Option ‘n’

Stakeholders’ needs

Firm’s unique competing space (relevant to strategic challenge)

3

Firm’s competitive basis

Reconstructed current reality

Alignment of organisation & mobilisation of resources relevant to option ‘n’

Fig. 6.10 Dimensioning of a strategic option

(relevant to strategic challenge)

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competition) inherent to the strategic option, its sustainability over a targeted time horizon, and the competition’s reaction to the strategic option. Boundary ‘2’ vector: Similarly, the component of a strategic option corresponding to boundary ‘2’ takes into consideration factors relating to the option’s effectiveness in achieving objectives that target the fulfilment of the firm’s stakeholders’ needs. For example, the extent to which the strategic option enables a sufficient basis for the differentiation of a firm’s value offerings in view of its stakeholders’ needs. Given that stakeholder needs evolve, an important consideration of a strategic option at this boundary dimension revolves around the option’s sustainability potential. The component, however, also addresses the potential reaction to the strategic option on the part of the firm’s key stakeholders. Stakeholder reactions to a firm’s strategic response may vary considerably. It may fulfil the needs of some stakeholders while infringing on the vested interests of others. For example, a strategic option that targets the profit interests of a firm’s key investors may be perceived to violate ethical principles of certain activist stakeholders. Regulatory authorities may also take a dim view of such an option. Given that stakeholder interests can vary considerably, a strategic option may thus trigger mixed reactions that, in turn, may necessitate a recalibration and adjustment of the strategic option to better fit the demands and expectations of a firm’s key stakeholders. Boundary ‘3’ boundary: The third and final component of a strategic option addresses the firm’s ability to actually execute the strategic option. Inevitably, this component carries the greatest weight of an option’s three components and resonates closely with concepts introduced in earlier chapters that address a firm’s ability to execute the option in question. Notably, this component of a strategic option is congruent with the fifth of the five strategy building blocks (5-SBBs) and the quintessence of the third boundary of the unique competing space featured in the UCS framework introduced and elaborated on in Chap. 3. Needless to point out, a strategic option is viable only if it can be carried out. Hence, the boundary ‘3’ vector of a strategy takes into consideration the firm’s ability to align, mobilise, and orchestrate the transfer of its competitive wherewithal across the third boundary of its unique competing space in response to the strategic challenge at hand. We need to bear in mind that no strategic option is ever ‘perfect’, nor is there ever a guarantee of a strategic option’s success. All strategic options feature inherent risks. The breakdown of a strategic option into its constituent dimensions allows a granular appraisal of the risks associated with the option. An appraisal of an option’s three boundary dimensions can be used to pinpoint wherein the option is most likely to fail. A strategic option may fail as a result of deficient elements in any of its constituent dimensions. Deficiencies might relate to omissions or flaws in the prioritisation assigned to elements of a strategic option.

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Crafting of a Strategic Option Thus far we have examined the configuration of a strategic option in terms of its positioning and its constituent elements. But how do we actually design and craft a strategic option in response to a strategic challenge? In order to answer this question, we need to revisit the origins of a strategic challenge. Strategic challenges, as depicted in Fig. 6.11, are invariably triggered by changes in a firm’s competitive context. A firm’s competitive context comprises both external and internal factors, a number of which were elaborated on in Chap. 4. Although strategic challenges generally appear as either threats or opportunities, they seldom arise from perturbations of only one of the two contextual factor categories. To illustrate the point, consider a situation in which a firm perceives a threat; say, arising from the arrival of new competitors that threaten to erode the firm’s competitive position. Although instigated by an external factor, a challenge of this sort frequently throws a spotlight on firm-internal issues, such as problems that may relate to latent deficiencies and dysfunctionalities that become apparent only in light of the threat. Regardless of the nature of the challenge, its relevance and significance are determined by the impact it is anticipated to have on the firm’s competitive position. Strategic challenges imply potential movement of a firm’s strategic boundaries, which may result in a contraction or expansion of its unique competing space as depicted in Fig. 6.11. Strategic challenges prompt responses. Strategic challenges generally arise in one of two possible circumstances. They may be triggered by perceived threat that bodes a possible contraction of firm’s Changes in firm’s external competitive environment

Changes in firm’s internal basis of competitiveness

Triggers…

Strategic challenge

Leading to…

Potential impact on firm’s UCS Prompting…

Strategic Response

‘Make’ or ‘buy’ options

…either/or

Primarily defensive

Fig. 6.11 Strategic responses

Primarily expansionary

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unique competing space. Alternatively, a challenge may relate to an opportunity, which holds of the prospect of an expansion of a firm’s competitive position. While either of the two represent primary triggers which ultimately prompt and give shape to a strategic response, the distinction is often more equivocal in reality. Threats may harbour opportunities, and what appears to be an opportunity may well conceal threats. Despite the eventual ambivalence posed by a strategic challenge, a challenge nonetheless prompts a response on the part of a firm that addresses the primary essence of a challenge, while taking into account conceivable secondary idiosyncrasies. In the following section, we examine more closely the primary characteristics of defensive and expansionary strategic options. Defensive response: Threats elicit a defensive reaction on the part of a firm. A defensive response to a perceived threat focuses attention primarily on the competitor interface at boundary ‘1’ of its unique competing space; consequently, the emphasis of a strategic option aimed at a defensive response rests on the boundary ‘1’ dimension of the option. The shape and form of such an option ultimately depends on the nature of the threat. Defensive moves focus first and foremost on protecting and strengthening a firm’s competitive position at boundary ‘1’. A strategic response begins with an appraisal of the nature, magnitude, and time horizon of the threat perceived. A threat may present itself in the current competitive context of a firm, or it may be anticipated in the future. A current threat, of course, triggers a significantly higher degree of urgency and demands to be addressed in the near-term future. A threat anticipated in the future, on the other hand, raises the uncertainty of its occurrence. Not all anticipated threats pan out. Consider, for example, the widespread fears in the 1970s precipitated by the belief that the world was rapidly depleting its reserves of fossil fuels, and the perceived threat of a world depleted of its primary source of energy in the nearterm future. That imagined future never did play out. To the contrary, fuel reserves have continued to grow. By the year 2000, estimates of the global crude oil reserve-to-production (R/P) ratio were higher than for most of the time in its recorded history. In 2023, global proven reserves were estimated to be equivalent to 46.6 times the global annual consumption levels, which translates to about 47 years of oil left at current consumption levels and excluding as yet unproven reserves [5]. Expansionary response: Opportunities offer the prospect of growing and expanding a firm’s unique competing space. While a firm’s growth strategy may also involve an encroachment of its competitors’ space, growth opportunities present themselves primarily in a firm’s market space. Hence, a strategic opportunity focuses the spotlight principally on boundary ‘2’ of a firm’s unique competing space and thus the boundary ‘2’ elements of the corresponding strategic option vector. As in the case involving a threat, the formulation of strategic options in response to an opportunity begins with an appraisal of the perceived opportunity that invariably includes the scope of the growth potential it encompasses, a specification and

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assessment of the market environment, and an appraisement of the opportunity’s time horizon. The latter is particularly important, as the correct timing of a strategic response is crucial to its success.

Strategic Options: 3rd Boundary Considerations and Gap Closure Regardless of whether directed primarily towards the defence or expansion of a firm’s unique competing space, the third-boundary component of a strategic option is the critical element in either case. An option’s viability ultimately rests on the firm’s ability to execute it; hence, this component of a strategic option merits closer examination. A gap analysis as shown in Fig. 6.12 reveals a firm’s current competitive position—in terms of its current reality and strategic intent—in view of the realities of the competitive environment. A firm’s current reality reflects the competitive means at its disposal—the processes, resources, and capabilities at its disposition. The extent to which the firm actually exploits these towards fulfilling its strategic intent ultimately depends on the firm’s ability to utilise and transfer the competitive means at its disposal across the third boundary of its unique competing space. Several important points worthy of note: The decision to respond to a strategic challenge is entirely at the discretion of a firm. No external force can coerce a firm to act on a challenge. Likewise, it is at a firm’s discretion when to respond if it chooses to act on a challenge. Circumstances that prompt a reaction on the part of a firm play out very differently. Every strategic challenge is unique in its own way. Some occur suddenly and entirely unexpectedly, one need only to think of the multiple challenges that the COVID crisis triggered. Dramatic occurrences such as these, however, are relatively rare. Generally, strategic challenges unfold and present themselves much more gradually. Even ‘disruptions’, as discussed in Chap. 4, do

Gap analysis (…where are the gaps?)

Firm’s current reality . Pool of resources, capabilities & processes . Stock of strategic resources, capabilities & processes . Competitive relevance and calibre of resource base & processes

Firm’s strategic intent

Fig. 6.12 Gap analysis

Strategic environment

Strategy

Organisational culture

Processes Functional organisation

Resources (traditional)

Capabilities

. Dynamics of the competitive Changing nature of environment competition . Competing factors (CSs) Emerging opportunities . Critical success factors CSFs) Perceived threats . Emerging opportunities Marketthreats dynamics . Perceived

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not make their appearance ‘overnight’. Firms’ abilities to recognise and correctly interpret the onset of a strategic challenge, however, and their state of readiness to respond to a challenge are often a very different matter. The materialisation of a challenge often catches a firm off guard and unprepared, which leaves a firm with little time to assemble an appropriate response. A firm’s state of readiness to respond to a strategic challenge is determined primarily by the competitive means at its disposal and its ability to utilise these effectively and efficiently. These comprise the key constituents of a firm’s firminternal current reality. A gap analysis, as indicated in Fig. 6.12 is used to reveal gaps between a firm’s current reality in terms of what it currently can do, and what it should be capable of doing in positioning a strategic option in the context of an anticipated future reality. Gaps indicate deficits in a firm’s ability to formulate and ultimately execute an appropriate response to a strategic challenge. Competitive means at a firm’s disposal: A firm’s competitive means encompass its arsenal of resources, capabilities, and processes. Strategic challenges invariably expose gaps in the means required for a formulation of a strategic response. A gap analysis may reveal dated or altogether missing elements in the firm’s array of means currently at its disposal. Ability to utilise means: The ability to utilise the means at its disposal is arguably the more important of the two determinants—and the less discernible of the two. It addresses factors that relate to a firm’s ability to mobilise, orchestrate, and ultimately exploit its means for competitive advantage. ‘Ability to utilise’ touches on organisational elements that include the more explicit performance-related factors such as the way it in a firm is structured, and how it aligns and manages its asset base. Importantly, though, it also encompasses intrinsic factors that are deeply embedded within a firm’s culture, such as its competitive astuteness, mindset, and disposition to act. These determine the agility with which a firm is capable of responding to a challenge. A firm’s readiness to act on a strategic challenge is determined by (1) the nature and extent of the gaps between its current reality and an anticipated future reality, (2) its ability to close the critical gaps, and the speed with which it is capable of doing so, and (3) the firm’s ability to fully utilise its augmented competitive base once the gaps have been closed. The outcome of a gap analysis is used to broadly scope and categorise strategic options available to a firm as indicated in Fig. 6.13. Scoping of options is carried out on an element-by-element basis, whereby elements may relate to either means (resources, explicit organisational factors) or particularities relating to a firm’s ability to exploit its means. Aspects included in the latter category are, of course, much more difficult to discern, quantify, and itemise. The matrix array depicted in Fig. 6.13 indicates four broad categories representing possible course of action open to a firm. The exercise is reminiscent of the auditing and mapping technique discussed in Chap. 4, where it was applied to the examination of a firm’s resource base. In this application of the technique, the analysis is extended to include elements that relate to a firm’s ability to deploy its

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. Competitive means at the firm’s disposal . Resource-based . Organisational . Firm’s ability to mobilise, orchestrate, and exploit its competitive means

Anticipated future reality

Strategic options (on element-by-element basis)

2

High

GAP analysis Key elements of firm’s current reality in view of anticipated future reality

. Contours of anticipated future environment . Time horizon & dynamics . Likelihood of happening

1 Reinforce & protect

Invest & build

Strategic relevance*

Scenarios

Analysis

Firm’s Current reality

3 Outsource

4 Divest

Low Low

High

Current strength of position *strategic relevance: differentiation potential and competitive impact

Fig. 6.13 Generic options derived from a gap analysis

means. The matrix is derived on the basis of an estimation of an element’s strategic relevance and a firm’s position of strength in view of this element: Quadrant 1: Reinforce and protect: Elements in this quadrant are highly strategically relevant and the firm is already in a strong position to exploit them in response to a strategic challenge. A gap analysis may reveal minor deficits that require reinforcement; this might be achieved through further investment and consolidation in their development. Given their strategic relevance, these elements above all demand to be protected. Protective measures may include improving the intellectual property protection of the elements and strengthening their competitive differentiation potential through enhanced innovative efforts. Quadrant 2: Invest and build: Elements identified in this quadrant feature high strategic relevance in view of a firm’s competitive aspirations. Typically, these elements include new developments in an early stage of an innovation pipeline. Hence, to move these elements into quadrant ‘1’ requires substantial and purposeful investment effort on the part of a firm. Investment efforts present two options. A firm may opt to build these elements on the basis of internal effort only, which would represent a ‘make’ option. Alternatively, a firm may choose close gaps in this element by ‘buying in’ missing elements. ‘Buy’ options involve acquiring a missing element from external sources through strategic partnering or outright acquisition. Generally, ‘make’ options represent lower risk of failure but feature longer realisation time frames. Buy options, on the other hand, present the prospect of a ready-made solution to a deficit but carry a significantly higher risk of integration failure. ‘Buy’ options also invariably attract the attention of regulatory authorities, who may choose to exercise their stakeholder rights by blocking such a move by a firm. Quadrant 3: Outsource: Elements of a firm’s wherewithal that are essential to its operations but do not directly contribute to its strategic aspirations drain its resources. More often than not, these can be more economically managed by

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external suppliers. Hence, elements in this quadrant represent outsourcing options. Quadrant 4: Divest: Firms cannot afford to maintain elements that no longer serve a competitive purpose. Elements in this category often comprise resources, capabilities, or business-relevant activities and investments that are either already obsolete or no longer fit with a firm’s anticipated future intentions. Divestment of these elements allows a firm to recapture any residual embedded value and to rid itself of unneeded assets. A strategic option encompasses an integrated array of elements and actions which are directed at individual component elements that comprise a firm’s current competitive state. A strategic option derived for countering a threat, for example, may include multiple, integrated initiatives that target a reinforcement of some elements and a divestment of others. Such measures are not mutually exclusive, of course. Moreover, in the course of a strategic option’s formulation, individual elements comprising an option feature variable weightings. A final important point regarding the three boundary dimensions of a strategic option concerns their interrelatedness. The interconnectedness of a firm’s boundaries and how it might be visualised with the help of the unique competing space has already been discussed in Chap. 3. The interrelationships between a firm’s boundaries is highly relevant to the formulation of strategic options. Although discrete in their orientations, the three boundary dimensions of a strategic option are inextricably linked. Actions provoke reactions. This maxim is applicable not only in classical Newtonian physics. A strategic action taken by a firm directed at boundary ‘1’ invokes a reaction on the part of a firm’s competitors. This to be expected. However, a strategic action levelled at the competition also invokes a reaction on the part of the firm’s stakeholders at boundary ‘2’. A firm’s stakeholders represent multiple expressions of vested interests. An action taken by a firm that is directed at its competition may therefore trigger a range of reactions on the part of the firm’s stakeholders. These impose limitations on the range of defensive options available to a firm. Consider, for example, the legal action taken by Nestlé in the face of increasing competition after 2012. Many of Nestlé’s roughly 1700 patents were expiring, threatening its lucrative Nespresso brand premium coffee capsule machine concept. An injunction sought by Nestlé against Ethical Coffee Company, a rival firm set up by former head of Nespresso Jean-Paul Gaillard, was struck down in Germany by a Düsseldorf regional court. At stake was the exclusive use of Nespresso coffee machines with Nespresso capsules. Gaillard’s capsules happened to work perfectly in a Nespresso machine and were selling for prices up to a third cheaper than those on offer by Nespresso. Nestlé’s intention was to protect its value offering, but in the view of the court, the company was infringing on the right of consumers to operate their Nespresso machine as they saw fit [6]. Similarly, a move taken by a firm to exploit a market opportunity will not escape the attention of its competitors and may trigger individual or concerted actions on the part of the competition. Anticipated or real-time reactions to a strategic option at a

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firm’s boundaries ‘1’ or ‘2’ therefore have important implications for the composition of the firm’s third boundary strategy element.

Strategic Option Evaluation Strategy formulation, appropriately carried out, identifies a narrowed set of potentially tenable strategic options that represents ‘the smallest set of choices to optimally guide other choices’ towards the resolution of a strategic challenge [7]. As a rule, these number no more than a handful. ‘Appropriately carried out’ implies that the options have been derived on the basis of first principles thinking and analysis. As such, they address root causes of a strategic problem they aim to resolve. Also implied is that the strategic options on the table at this stage have been subjected to the analytical scrutiny intrinsic to a first principles approach to problem-solving. Hence, the options in this narrowed set represent discrete and viable courses of action in response to a strategic challenge. A firm, however, cannot pursue multiple strategic directions simultaneously: it must narrow the choice of available options to one option that it will then proceed to execute. One option always open to a firm, of course, is not to respond to a challenge at all. The purpose of a strategic option evaluation is to further narrow the set of potentially viable options down to a single option that represents the most suitable given the circumstances within which a strategic challenge presents itself and in view of the future context within which the option is to be enacted. The question at this point is: how do we identify a most suitable option within a narrowed set of potentially viable options? The suitability of a strategic option rests upon several criteria. First and foremost, an option, of course, must provide a solution to the problem at hand. For this to be the case, its constituent elements must address the root causes of the strategic problem it is intended to resolve. This underscores the critical role that first principles-based strategic thinking plays in the analysis that leads to the formulation of strategic options. However, as emphasised earlier this chapter, all strategic options feature liabilities and risks. No strategic option is ever ‘perfect’. Hence, in addition to identifying options that address the root causes of a problem, further evaluation enables us is to identify within a set of potentially suitable options the one featuring the least number of liabilities and the most justifiable amount of risk. The evaluation of strategic options proceeds in two consecutive stages, both of which draw on and are congruent with the first-principles approach applied in the foregoing strategic analysis. In a first step, strategic options are subjected to the scrutiny of a 5-SBBs analysis. The outcome of this analysis allows us to narrow the choice of strategic options to a single most suitable option. In a second step, the option identified as such is subjected to a final verification on the basis of a ‘3boundaries analysis’ that draws on the unique competing space concept. This final check is used to probe a chosen strategic option for potential issues, liabilities, and contingencies. The outcome of the analysis allows us to identify and conceive of

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effective means for mitigating residual risks and liabilities associated with a strategic option of choice. Praxis Reflection 6.7: Option Evaluation In your organisation. . . . How are strategic options typically evaluated? . On what basis and by which criteria?

Strategic Option Evaluation and Selection: 5-SBBs Approach To narrow the set of potentially viable strategic option to one option, we once again turn to first principles thinking for guidance. First principles thinking in combination with the five strategy building blocks (5-SBBs) high-level analysis framework introduced in Chap. 3 enables us to define criteria that are used to identify the most suitable of the options within the narrowed set of options on the table. We recall from Chap. 3 that the five dimensions defined by the 5-SBBs framework comprise the five essential elements of a strategy. These are the critical elements we would expect to be appropriately addressed and fulfilled by any strategy. We now draw on these five dimensions to derive criteria for discriminating between options in the narrowed set of options. We do this by subjecting each of the strategic options identified to further scrutiny that probes the extent to which they address and fulfil the five criteria defined by the 5-SBBs criteria (Fig. 6.14). Given that the strategic options identified were derived from first principles, all options in this set are potentially viable in principle. The further evaluation therefore focuses on detecting discriminating nuances between options that allow us to ultimately narrow the choices to the one most suitable option. The evaluation is

1 Strategic imperative

2 Stakeholder perspective

Criteria for option selection

3 External competitive environment

(based on 5-SBBs)

4 Internal basis of competitiveness

5 Organisation’s ability to execute

Fig. 6.14 Strategic option evaluation on the basis of 5-SBBs criteria

Strategic Option Evaluation and Selection: 5-SBBs Approach

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carried out in two stages. In a ‘first pass’ assessment, strategic options are subjected to a high-level check that delves into their compatibility with the criteria set out by the 5-SBBs criteria overall. The purpose of this step is to narrow a set of options even more. The ‘first pass’ assessment typically further narrows the field of options to no more than two or three options. In a second step of the evaluation, the remaining two or three options are subjected to a further detailed assessment that ultimately allows us to identify the most suitable amongst these. Praxis Reflection 6.8: Option Selection In your organisation. . . . What are the criteria that go into the narrowing of a set of potentially viable strategic options to a single ‘most suitable’ option? . How are these derived?

‘First Pass’ Evaluation of Strategic Options In a ‘first pass’ assessment each strategic option is scrutinised for clarity and the degree to which it compellingly addresses each of the five criteria. A strategic option may be clear but not entirely convincing to some key stakeholders. Likewise, an option may be compelling, but lacking in clarity. A ‘first pass’ appraisal serves two purposes: it allows us to flag ‘red light’ issues associated with a particular strategic option, which might jeopardise the option. We use a systematic approach as depicted in Fig. 6.15. Each strategic option is appraised on the basis of its clarity and degree to which it compellingly addresses each of criteria defined by the five building blocks criteria. Figure 6.14 indicates a 5-point assessment scale. The outcome of an appraisal can be reduced to a ‘traffic light’ representation of an option component’s

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Fig. 6.15 ‘First pass’ appraisal of strategic options

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status. ‘Red lights’ indicated in any of a strategy’s components provide justification for the option’s rejection. Praxis Perspective 6.1: Stakeholder Alignment and Engagement An assessment of a strategic option is inevitably qualitative in nature since many of the factors that go into the derivation of a strategy defy quantification. Hence, the outcome of a ‘first pass’ appraisal is characteristically subjective in nature. We can, nonetheless, enhance the subjective outcome of an option’s appraisal by a qualitative calibration of its component elements. Let’s consider, for example, the ‘stakeholder perspective’. Stakeholder perceptions of a strategic option are difficult to gauge quantitatively and they may vary considerably. Getting all key stakeholders ‘on board’ is ultimately critical to a strategic option’s viability. Stakeholder perceptions can be qualified with the help of a simple and effective technique that probes stakeholders’ perceptions of a strategic option’s key attributes in view of particularities that relate to the context in which it is to be deployed. The technique, depicted in Fig. 6.16, is based on an equation that shows the effectiveness (‘E’) of a strategy as a function of (1) the sense of urgency (‘U’) associated with the circumstances within which a strategic option is to provide a response, (2) the clarity of the goals or objectives of the strategic option (‘Cg’), (3) the clarity of the strategic option (‘Cs’), and (4) perceived barriers standing in the way of the option. Although the underlying equation may appear to be highly conceptual, its application is relatively simple and it lends itself well to the practice field. The effectiveness equation has a number of highly pragmatic implications. First, the equation suggests that for a strategy to be effective, the multiplicative product of the variables U, Cg, and Cs must exceed any perceived barriers (B). Second, the equation suggests that a strategy is bound to fail if any of the variables U, Cg, and Cs ‘tend to zero’. In other words, the effectiveness of a strategy is highly dependent on the perceived magnitude of the three variables U, Cg, and Cs. The application of the technique is relatively straightforward. In my own strategy consulting practice, the setting has typically been a boardroom meeting in which the appraisal of individual board members’ perceptions is conducted in the background of an ongoing strategy discussion. The exercise is easily carried out in the course of a morning or afternoon. Importantly, the exercise is carried out under the guarantee of anonymity. Before commencing with the exercise, it is important, of course, to ascertain the strategy in question. Stakeholders are then queried individually as to their perceptions of the three variables U, Cg, and Cs. Responses are scored and tabulated as shown in the figure. In the exercise, variable ‘B’ translates to a simple question: ‘are you on-board or off?’ (continued)

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Praxis Perspective 6.1 (continued) Although simple, the appraisal technique fulfils several important functions. First, it signals to key stakeholders that their views are valued. This helps engender trust and engagement in circumstances that are not seldom contentious in view of the urgency of the problem demanding to be resolved. The outcomes of the appraisal also provide crucial insights: they indicate the concerns that individual stakeholders may harbour regarding a strategy, and they provide a better understanding of the degree to which respondents ‘buy into’ a strategy under discussion. More importantly, the outcomes of the appraisal exercise can be taken forward to derive remedial measures that address concerns raised by stakeholders. The aim of such actions is to re-engage individual stakeholders who might otherwise dissociate, or worse, obstruct the problem solving process.

E = f (U x Cg x Cs) > B Effectiveness of strategy

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Fig. 6.16 Stakeholder calibration and engagement

Strategic Option Selection A ‘first pass’ evaluation of strategic options allows us to narrow a set of potentially viable options to a more manageable number. Typically, we are left with two or three options at this stage. The objective is to identify within this reduced set the single most suitable option which the firm then proceeds to execute. To determine this one option, we subject the few remaining options to a final comparative assessment. For this evaluation we also apply the 5-SBBs criteria, but at a much more granular level.

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The 5-SBBs criteria are further broken down into sub-criteria that provide a greater degree of resolution of each of the five criteria, as indicated in Table 6.1. The list of sub-criteria included in the table is not exhaustive, of course. Neither do all the sub-criteria shown necessarily apply in every case. The particularities of the strategic challenge to be resolved ultimately determine the sub-criteria required for the evaluation. For the comparative assessment, we use an approach not unlike the one introduced for the comparative competitor analysis in Chap. 4. Sub-criteria chosen for the evaluation are extracted from a breakdown of the 5-SBBs as indicated in Table 6.1. As indicated in Table 6.2 (note this is an illustrative example only), weightings assigned to the sub-criteria enhance the resolution of the assessment. Strategic options are in turn assessed and scored on the basis of the sub-criteria defined for each of the 5-SBBs dimensions. Individual scores on the sub-criteria are multiplied by the respective weighting assigned to them. Care must be taken to score sub-criteria consistently. Weighted scores, when tallied, provide an overall score attained by each of the strategic options. The most suitable strategic option is the one that achieves the highest overall score; in the illustrative example shown in Table 6.2, this is strategic option ‘2’. The comparative option evaluation described above prompts some qualifying commentary with regard to its application in practice: . The outcome of a comparative evaluation is only as valid as the amount of prudence that has gone into the selection and weighting of the sub-criteria and the scoring of the options. Sub-criteria need to reflect features that are congruent with the strategic challenge to be resolved, but they must also offer a sufficient basis for discerning critical differences between options. . Many, if not most, of the sub-criteria customarily applied in option evaluations address factors that are subjective in nature. This introduces elements of risk and uncertainty to the analysis. The subjective character of many critical sub-criteria raises the risk of flaws in the perception of their relevance and impact. Flawed perceptions are not seldom further exacerbated by biases that are prone to lead to errors of judgement. . Outcomes of the comparative analysis that suggest a high degree of similarity in overall scores of two or more strategic options are problematic, particularly if the similarities relate to high-scoring options. While such an outcome suggests that the options in question are essentially equally suitable, a more likely explanation points to flaws in either the choice and weightings of sub-criteria or the scores assigned to these. This situation calls for a careful review and revision of the sub-criteria and the scoring, and a repetition of the analysis. Another explanation for a high similarity of overall scores might be that the ‘strategic options’ in question are, in fact, potentially compatible constituent elements of a single strategic option that are not mutually exclusive. . At the end of the exercise, lower-scoring strategic options are not discarded. Circumstances inevitably change, particularly in highly dynamic environments.

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Table 6.1 Evaluation criteria for detailed scrutiny of strategic options Criteria Strategic imperative

Stakeholder perspective

External competitive environment

Internal basis of competitiveness

Firm’s ability to execute

Sub-criteria Strategic impact

Elaboration Potential for expansion (or defence) of unique competing space Congruence Alignment with overall strategic objectives Value creation & Potential for maximisation of value creation and capture capture Value proposition Extent to which option enhances value proposition Sustainability Potential for achieving sustainable competitive advantage Strategic risk Residual strategic risk of failure Key stakeholders Alignment with key stakeholder interests and positions Needs and Fulfilment of key stakeholder’s needs and expectations expectations Conflicting Reconciliation of potential stakeholder’s interests conflicting interests Reputation & Enhancement of firm’s reputation, image, and brand image Market dynamics Congruence with key drivers of change in competitive environment Opportunities/ Extent to which option addresses opportunities threats and threats Competitor Anticipated competitor reaction to strategic option reaction Differentiation Extent to which options provide potential for potential competitive differentiation Key success Extent to which option enables effective delivery factors on key success factors Resource Extent to which option maximises utilisation of utilisation existing asset portfolio Resource Extent to which option enhances current asset portfolio enhancement Gap closure Extent to which option enables closing of existing gaps Process & Compatibility of option with existing processes practices and practices Vulnerabilities & Extent to which option eliminates current liabililiabilities ties and vulnerabilities Residual risk Residual operational risk associated with option Congruence Congruence with organisational culture and mindset Synergies Extent to which option maximises firm-internal synergies Feasibility Feasibility of option in view of organisation’s current reality Cultural Alignment with organisation’s current culture, mindset, and mental model congruence (continued)

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Table 6.1 (continued) Criteria

Sub-criteria Timing of the response Gap closure Residual risk Change readiness

Elaboration Appropriateness of option in terms of organisational mobility and agility Extent of gap and firm’s ability to close gap Residual organisational risk (of not being able to ‘pull it off’) Degree of change required in view of organisation’s change readiness

Table 6.2 Comparative strategic option assessment (illustrative example)

Weighting (1–5) 1. Strategic imperative 4 1.1. Congruence with overall strategic objectives 5 1.2. Value creation potential of option 4 1.3. Strategic risk of option (low risk = high score!) 2. Stakeholder perspective 4 2.1. Alignment with key stakeholder needs 5 2.2. Conflicts of interests (low conflict = high score!) 3 2.3. Impact and implications for reputation & image 3. External competitive environment 5 3.1. Delivery on key competing factors 4 3.2. Alignment with industry and market dynamics 3.3. Anticipated competitor reaction 3 4. Internal basis of competitiveness 4 4.1. Maximisation of resource utilisation 5 4.2. Compatibility of option with existing resource base 4.3. Residual operation and finan4 cial risk of option 5. Firm’s ability to execute 5.1. Cultural congruence 5 5.2. Gap closure 4 5.3. Amount of change implied/ 4 change readiness Σ (scores):

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Hence, lower-scoring options are viewed as potential alternative ‘plans B and C’ in the event of changing circumstances. This point also underscores the importance of continual monitoring of the factors that underpin the sub-criteria selected for an evaluation. . Last but not least, as with all appropriately applied systematic approaches, the comparative evaluation technique offers an effective means of channelling and focussing the thinking and discourse of decision makers around the table. While disagreement on individual elements of an evaluation is inevitable, the technique helps ensure that the discourse centres on one and the same element.

Strategic Option Verification and Validation As emphasised already, there is no such thing as a ‘perfect’ strategy. All strategies, including those considered ‘most suitable’, feature liabilities and risks. Circumstances that define a context within which a strategy is to be enacted invariably feature uncertainties that can never be fully ascertained and accounted for in the formulation of a strategic option. Consequently, features of a strategic option that aim at achieving specific objectives may not pan out as intended due to unanticipated circumstances. Hence, the vexing questions decision makers are inevitably left with at the conclusion of a search for a solution to a problem centre on ‘where might it go wrong?’ and if so, ‘why, possibly?’. Just as importantly, this raises the question of what might be done to resolve if not mitigate issues in the event that they arise. ‘3-Boundaries’ Analysis To probe a strategic option for potential liabilities and residual risks, we again resort to a ‘3-boundaries’ perspective on the strategic option in question. We examine each boundary element of the strategic option more closely in view of the strategic objectives it is to fulfil and against the backdrop representing the realities of the future context within which it is to be enacted, as depicted in Fig. 6.17. Each boundary component is examined for potential issues that might arise, potential risks, and the implications of these for the success (or failure) of the option at the respective boundary. We keep in mind that the three boundary components of a strategic option, although discrete per se, are inextricably linked. Consequently, issues arising at one boundary may well have implications for one or even both of the other boundaries. Once potential issues, risks, and implications have been scoped, the focus shifts to identifying possible contingencies that address the issues and risks in the event that they manifest themselves. The implication of potential movement of a firm’s boundaries associated with a strategic challenge—that a challenge invariably entails an expansion or contraction of a firm’s unique competing space—is intuitively compelling though nonetheless abstract in conception. The concept can be made much more palpable when illustrated with a real case. We therefore close this section with an application of the concepts discussed to the case of an acquisition strategy.

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Boundary ‘2’ component . Potential issues . Risks & implications . Contingencies . Contingency measures

Boundary ‘1’ component . Potential issues . Risks & implications . Contingencies . Contingency measures

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Competitors’ offerings

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Boundary ‘3’ component . Potential issues . Risks & implications . Contingencies . Contingency measures

Fig. 6.17 ‘3-boundaries’ verification and validation of a strategic option

Praxis Reflection 6.9: Validation and Verification of an Option In your organisation. . . . What are the critical criteria for verifying and validating a strategic option once it has been selected? . How are residual risks associated with an option selected for execution factored into its execution? . What measures are in place for continual monitoring of a strategic option once selected?

Praxis Case 6.2: AB InBev–SABMiller: Strategic Growth Through Acquisition Global brewing giant Anheuser-Busch (AB) InBev’s acquisition of Londonlisted rival brewer SABMiller in 2016 aptly exemplifies and highlights a number of the conceptualisations discussed in this chapter. A closer examination of these imparts substantially more tangibility to the notion of firm boundaries and their relevance for strategy formulation. The £79bn deal was to become the third-largest deal in history when it was announced in 2015, and the largest ever takeover of a London-listed company. When completed in October 2016, the merger of the global number one and (continued)

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Praxis Case 6.2 (continued) two brewers produced the world’s first truly global brewing behemoth. AB InBev’s new asset-enhanced global presence meant that it now stood to earn about half the industry’s profits and sell one in three pints worldwide. AB InBev’s ‘Megabrew’ strategy, as it was referred to in the beer industry, was clearly a strategy of growth in response to opportunities for expansion of its already global footprint. If successful, the deal offered the prospect of expansion of AB InBev’s unique competing space at all three of its boundaries, as indicated in Fig. 6.18. AB InBev’s acquisition strategy, predicated on a triple rationale of sales growth, global diversification, and corporate ambition, was to complete a two decade-long aggressively pursued acquisition stint that was to turn the Belgian-Brazilian owned brewer into the undisputed world’s largest. A closer examination of the circumstances underlying the strategy’s rationale lends more granularity to its conceivable justification. The first of these was the slowing growth of global beer sales over the previous years. The decline in beer consumption in developed markets was partly a result of growing impartiality to branded beverages and an increasing affection for wine, craft-brewed, and healthier non-alcoholic beverages. AB InBev’s share of the US market had shrunk from 50 to 45% in the 5 years leading up to the acquisition. Particularly millennials and younger drinkers were shifting from high volume consumption to high value consumption, favouring pricier and tastier craft brews over what they increasingly perceived to be the bland alternatives on offer by multinational brewers. Secondly, and more critical from AB InBev’s perspective, the fastest growing region for beer sales was Africa, a continent to which the brewer had almost no exposure. Africa, on the other hand, was SABMiller’s traditional heartland. The brewer, originally named South African Breweries, earned 29% of its profits in Africa. Moreover, in contrast to the increasing big-brand weariness in economically developed regions, the African continent’s unquenched penchant for highly branded beverages was on the rise. Thus, Africa alone made SABMiller a particularly lucrative acquisition target. The deal, however, was to be one of the most complex in M&A history to date. A more detailed examination of the ‘Megabrew’ strategy, when broken down into its three constituent unique competing space boundary elements, helps explain why. ‘Megabrew’ Boundary ‘1’ Element The key issues raised at boundary ‘1’ of the ‘Megabrew’ strategy component revolved around the extent to which the strategy would elicit or entail: . Reactions on the part of AB InBev’s competitors . Potential movement of the boundary . Competition-related liabilities and consequences (continued)

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Praxis Case 6.2 (continued) Reactions of Competitors: The reactions of competitors to a strategy, particularly in the case of an expansionary move, are always an important consideration. For AB InBev’s ‘Megabrew’ strategy, however, the competition did not present a primary concern. For one, the strategy involved the removal of AB InBev’s closest rival. Its enhanced global clout, if anything, widened the gap with rivals Heineken and Carlsberg. Small craft brewers, despite numbering in the thousands and representing the fastest growing segment of the industry in Europe and the USA, posed a moderate risk. Competitors in this highly fragmented segment were essentially playing in a different league than the handful of big-name brand operators. Potential Movement of the Boundary: Given that the ‘Megabrew’ strategy implied the removal of AB InBev’s closest rival, the strategy represented a foray into AB In Bev’s competitor space at boundary ‘1’. The extent of the expansion at boundary ‘1’ from position 1 to 1′ (in Fig. 6.18) was quantifiable in terms of the market share gain the acquisition was to be anticipated to yield. SABMiller’s 9.7% share of the global beer market (in 2014 and by volume) would, in effect, be removed from the competitor space and added to AB InBev’s pre-acquisition 20.7%. Competition-Related Liabilities and Consequences: Competition issues raised by geographical overlaps of AB InBev’s activities with SABMiller’s business interests were to present much more of a challenge. Although anticipated in 2016 that geographical overlaps stemming from SABMiller’s stake in partnerships in the USA, Europe, and China would make the sell-off of certain businesses all but inevitable, the extent of the mandatory sell-offs ended up being much more substantial than initially expected. In part, the sell-offs were requirements set by the regulatory authorities for approval of the deal, but they were also to offset the debt incurred by the deal. The massive mandatory restructuring imposed on the newly formed brewing giant, that alone added $2bn in advisory fees and taxes to the cost of the transaction, was not only an indication of its complexity, but it also highlighted the consequences of the intrinsic coupling effects between the strategy’s three boundary components. In effect, the obligatory restructuring of AB InBev forced by conditions imposed by the company’s regulatory stakeholders emphasise the interplay of the strategy’s boundary ‘1’ and ‘2’ elements. The sheer scale of the sell-offs prompted at boundary ‘2’ by AB InBev’s stakeholder regulators in effect resulted in a substantial reconfiguration of the global brewing industry, and thus AB InBev’s competitive playing field at boundary ‘1’. Similarly, the selloffs that forced AB InBev to shed nearly a third of SABMiller’s pre-acquisition value resulted in a substantial reduction of the assets it had hoped to gain and exploit as a result of its enhanced competitive basis at boundary ‘3’. (continued)

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Praxis Case 6.2 (continued) ‘Megabrew’ Boundary ‘2’ Element In essence, AB InBev’s ‘Megabrew’ strategy revolved around the opportunities for growth presented at its unique competing space boundary ‘2’. These were to provide both the rationale and motivation for the strategy. In retrospect, however, issues that emerged at this boundary also presented some of the greatest challenges to the deal. These, in turn, would have pronounced effects on the strategy’s other two boundary components. Issues prompted by the boundary ‘2’ component of the ‘Megabrew’ strategy hinged on the potential for expansion into new global market space that the strategy presented and any liabilities such an expansion would entail. The strategy was to enable the capture of a greater share of the global brewing market. Visually, this implied a potential movement of AB InBev’s unique competing space boundary ‘2’ from position 2 to 2′ (in Fig. 6.18). Such a movement, however, was contingent on the extent to which the strategy would succeed in harmonising the interests of its multiple stakeholders that included AB InBev’s . . . .

Consumers (in a broader sense, markets) Regulatory (antitrust) authorities Investors and financial partners Supply chain and distribution partners

Consumers and Markets: The primary thrust of the AB InBev’s ‘Megabrew’ strategy was directed at gaining a greater market share of the global brewing market. At stake was a continuation of its aggressive and ambitious drive to become the world’s leading brewer. Increasing competitive pressure, shifting consumer tastes, and diminishing growth in developed economy markets meant that to achieve this aspiration, AB InBev would need to expand into regions that offered the requisite high growth potential. The obvious choice was the African continent, in which the brewer had almost no presence. Hence, a critical element of the strategy’s boundary ‘2’ component revolved around establishing a market footprint in Africa. The acquisition of a player already well established in Africa presented a viable option. The acquisition of SABMiller, which derived 29% of its profits in Africa, offered a quick way to realise this aim. The acquisition also promised access to SABMiller’s other global markets, particularly its South American markets in Colombia, Ecuador, and Peru, to which AB InBev had virtually no exposure. The shaded difference between positions 2 and 2′ in Fig. 6.18 provides a visual representation of the anticipated gain in market presence the strategy was to achieve at AB InBev’s unique competing space boundary ‘2’. Regulatory Authorities: The stake of antitrust authorities in an M&A transaction inevitably raises the prospect of conflicts of interest. Regulatory interests in a deal, of course, diverge from those of a firm’s other key (continued)

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Praxis Case 6.2 (continued) stakeholders. Antitrust authorities, however, have the final say in the completion and execution of an M&A transaction. Hence, their reaction to a proposed deal is always a critical element of an M&A strategy’s boundary ‘2’ component. Although antitrust issues were anticipated from the start, the full extent and consequences of the conditions imposed by antitrust authorities became apparent only during the subsequent period of the strategy’s rollout. In effect, measures imposed by the antitrust authorities resulted in changes to the particulars of the deal to an extent not anticipated. Not least of these were a substantial restructuring of the competitive brewing industry landscape and a considerable diminution of the competitive clout AB InBev had hoped to gain. Investors and Financial Partners: Winning the buy-in of key investor stakeholders is a crucial antecedent to any strategy. But subsequently maintaining their confidence as the transaction unfolds is a different and more critical matter. Two years into the execution of the ‘Megabrew’ strategy, AB InBev’s shares sat at 26 percent below their October 2016 level and the brewing giant was still carrying a $105bn debt it had taken on to finance the deal. Key investors were getting concerned. Indeed, some industry executives and financiers were quietly beginning to question the very rationale of the deal. Growing concerns regarding the strategy’s viability prompted AB InBev to impose course corrections in 2018 in a bid to win back the confidence of its key stakeholders. The company halved its dividend pay-out, replaced its chairman, and promised to sell assets. The actions aimed to appease major shareholders, foremost of which were the US tobacco group Altria, Colombia’s Santo Domingo family, the three Brazilian founders of 3G Capital, and a group of Belgian families. Collectively, these investors held more than half of the brewing company’s shares. Supply Chain and Distribution Partners: The intricate web of partnerships SAB had built over the years was indicative of the complexity of the deal. SABMiller’s stakes in MillerCoors in the US and CR Snow, China’s largest brewer, were primary concerns of the antitrust authorities in those markets. A disposal of SABMiller’s stake in MillerCoors was a condition the US Department of Justice would be certain to insist on. The company’s tie-up with CocaCola in Africa posed another problem. The soda giant, for whom SABMiller was an important bottler, was unlikely to agree to a continuation with a partner controlled by AB InBev, a bottler for PepsiCo in Latin America. The soft drinks business comprised about a fifth of SABMiller’s volumes. AB InBev’s acquisition of SABMiller would make it impossible to sustain relations with both soft drinks producers. In the African market, a major issue revolved around SABMiller’s joint-venture with privately held Castel of France, through which SABMiller operated much of its African beer business. A withdrawal on the part of Castel would make the African market a (continued)

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Praxis Case 6.2 (continued) significantly less attractive part of the business. AB InBev ultimately acquired a 20% in Castel’s Africa business. ‘Megabrew’ Boundary ‘3’ Element In essence, the boundary ‘3’ component of an M&A strategy revolves around the post-merger integration ability of the acquiring company. M&A strategies, when they fail, most often do so in this stage of an acquisition process. Post-merger integration is a complex process by which acquired assets are reconfigured, assimilated, and ultimately combined in a way that enables the acquiring firm to ultimately extract and exploit the acquired assets for competitive advantage. Post-merger integration thus involves the . Reconfiguration and assimilation of newly acquired assets . Mobilisation of the reconfigured and assimilated assets across a firm’s unique competing space boundary ‘3’ and the realisation of synergies Reconfiguration and Assimilation of Newly Acquired Assets: Before an acquired asset can be mobilised and exploited for competitive advantage, it must be appropriately configured, that is to say, ‘made fit for purpose’. Complex entanglements of elements that comprise an acquired asset’s cognitive, socio-cultural, and technical systems and infrastructure inevitably present a formidable challenge to the acquiring firm that frequently results in failure. SABMiller’s multiple tie-ups in joint-ventures around the world raised not only competition issues, but they also presented integration hurdles. These required a substantial reconfiguring of its asset base. In the case of Castel, this required further investment on the part of AB InBev; in the case of SABMiller’s stake in MillerCoors, divestment. Mobilisation and Synergy Extraction: From a boundary ‘3’ perspective, the integration involves orchestrating the mobilisation of the newly acquired assets across the acquiring firm’s third boundary into its unique competing space (as indicated in Fig. 6.18). An acquired asset, unless mobilised for competitive purpose, simply ‘sits’ in the lower sphere representing the firm’s basis of competitive advantage. If not exploited, an asset incurs cost and therefore constitutes a liability. AB InBev’s undisputed track record of profitable growth through serial acquisition and ruthless cost-cutting gave reasons to believe that it was in a good position to successfully pull off what would be its biggest deal to date. In 2000, the company, which was to become AB InBev after its acquisition of Anheuser-Busch in 2008, posted an operating margin of 10%. In the space of 15 years and several acquisitions later, it had upped that to over 32 percent thanks to a well-developed integration strategy. The acquisition of SABMiller provided a good opportunity to put the template to further profitable use. Although already lean across its scattered operations, AB InBev still managed to extract synergies worth some $2.2bn annually at SABMiller. (continued)

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Praxis Case 6.2 (continued) Early concerns dividing opinion amongst analysts, bankers, and industry observers regarding the rationale of the acquisition strategy have been assuaged some 7 years later. On balance, the view is that AB InBev has come out ahead, despite the high price it ended up paying. Strong market positions, particularly in emerging markets, have left the brewing giant with promising long-term growth prospects. Indeed, in the view of industry experts, AB In Bev’s continuing performance in these markets will largely determine whether ‘Megabrew’ lives up to its name. Competitors • • • •

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Fig. 6.18 Potential UCS boundary implications of the AB InBev–SABMiller transaction

Sources: Daneshkhu, S. (2015, September 17). AB InBev still ‘dreams big’ with move on closest rival, Financial Times. Beer, coffee, and vodka: the scale of the challenge. Financial Times, October 9, 2015; The beerhemoth, The Economist, October 17, 2015. Massoudi, A., & Abboud, L. (2019, July 24). How deal for SABMiller left AB InBev with lasting hangover. Financial Times.

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Chapter Summary Strategising and strategic problem-solving are ultimately decision processes that lead to the formation of a response to a strategic challenge. Option formulation involves the critical step in the strategy process wherein the focus shifts from sensemaking to decision-making. Academic thinking as yet provides little guidance for the practice field on this crucial transition step. While the strategic management literature features an elaborate array of frameworks and tools for the analysis of problems, it offers very little on how to take the outputs of these forward into the decision-making stage of strategic problem-solving. This has immense implications for the practice field. The lack of academic enlightenment on the critical link between strategic analysis and strategy formulation remains a major source of disparity between theory and practice in the strategic management field. In this chapter, we introduce and develop a first principles-based, insight-driven approach to bridging the analysis—formulation stages in strategic problem-solving. We draw on the concepts and principles introduced in earlier chapters of this book and show how the first principles, insight-driven strategic thinking and analysis approaches can be applied to the formulation of strategic options. Strategy formulation always begins with an assessment of a firm’s current reality. First principles-based thinking and analysis allow us to establish this starting point. However, a strategic response to a problem inevitably occurs in a future context and reality which we can at best imagine but not predict. This introduces elements of risk to any strategic option. The scenario technique discussed in this chapter offers a means of thinking about and imagining conceivable future realities that allows us to position a strategy. It also allows us to factor contingencies into the formulation of a strategic option. An alignment of a firm’s current reality with a postulated future reality via a strategic gap analysis enables a preliminary scoping of strategic options. For a more rigorous and precise derivation of a viable strategic option space pertinent to a strategic challenge, we apply the first principles-based, insight-driven strategic thinking and analysis approaches introduced in the earlier chapters of this book. Insight-driven strategic analysis enables us to delineate the boundaries of a viable option space within which we identify and scope suitable strategic options. Strategic options thus derived comprise a narrowed set of potentially viable strategic responses to a challenge at hand. Typically, these number no more than a handful of discrete options. Given, however, that a firm cannot pursue multiple strategic directions simultaneously, we need to narrow the field of options to a single ‘most suitable’ choice of option. To do this, we apply evaluation criteria derived from the ‘five strategy building blocks’ (5-SBBs) analysis framework. A ‘most suitable’ strategic option, once identified and selected, is subjected to final verification and validation, for which use a ‘3-boundaries’ analysis. There is never a ‘perfect’ solution to a problem. Strategic solutions to a problem invariably feature potential liabilities; these invariably demand trade-offs. Circumstances unique to a strategic challenge at hand, of course, factor into decisions regarding suitable trade-offs. Ultimately, residual uncertainties associated with a

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future context within which a strategic solution is to be positioned impose constraints on the degree of confidence with which any strategic option is chosen. Strategic thinking is thus crucial for making a ‘final call’ when choosing between potentially suitable options. Criteria appropriately derived from the 5-SBBs analysis framework provide and enable a meaningful basis for making such a ‘final call’. However, once a strategic option has been decided upon, the competitive context needs to be continually monitored for changes in circumstances that might have an impact on the suitability of a selected response. As competitive environments evolve, criteria applied in a selection process are often affected. Assumptions that went into the formulation of a strategic option may no longer hold; new, unanticipated issues may manifest themselves. This then calls for an appropriate recalibration of a selected strategic option. In extreme cases, changing circumstances might necessitate abandonment of an option altogether and a renewed search for a response that more suitably reflects the changed circumstances.

References 1. Rumelt, R. P. (2011). Good strategy/bad strategy. Profile Books. 2. Grant, R. M. (2016). Contemporary strategic analysis (9th ed., p. 24). Wiley. 3. Van der Heijden, K., Bradfield, R., Burt, G., Cairns, G., & Wright, G. (2002). The sixth sense. Wiley. 4. Schwartz, P. (1991). The art of the long view. Currency Doubleday. 5. https://www.worldometers.info/oil/# 6. Shotter, J. (2012, August 16). Nestlé loses bid to stop rival coffee capsules. Financial Times. 7. Van den Steen, E. (2021, March 15). Strategy and strategic thinking. Harvard Business School Publishing, Note 9-721-431.

Chapter 7

Strategy Praxis: Perspectives and Reflections

There are those who make things happen; there are those who watch things happen; and then there are those who wonder what happened. (Anonymous)

In This Concluding Chapter, We. . . Reflect on ancillary aspects of strategy and strategic problem-solving relevant to the core themes dealt with in the earlier chapters of this book. We examine the following: . . . . . .

Organisational engagement and its impact on firm resilience Competitive ‘sustainability’ and sources of firm failure Organisational knowledge, learning, and ‘intelligent failure’ The role of narratives in strategy and strategising Rationality and irrationality and their implications for strategy The current state and relevance of academic research for the strategy practice field . What constitutes ‘good’ strategy and strategy execution Strategy and strategic problem-solving are complex, multi-facetted processes that are contingent on multiple peripheral aspects. In this final chapter, we elaborate on some further ancillary themes that are relevant to strategy practice. These themes provide additional practice context to the core themes dealt with in the previous chapters of this book. The focus of the foregoing chapters has been on insightdriven, first principles thinking and the role it plays in strategic analysis and problem-solving. Ultimately, however, the effectiveness of first principles-based strategic thinking is contingent on a number of factors that are peripheral to the core themes examined in earlier chapters. Some peculiarities of strategy have already been broached in Chap. 1. What we have not explicitly dealt with so far is where and how strategising and problem-solving actually take place within an organisation. © The Author(s), under exclusive license to Springer Nature Switzerland AG 2023 G. Tovstiga, Strategy Praxis, Management for Professionals, https://doi.org/10.1007/978-3-031-40692-8_7

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Granted, in the formal sense, strategies are conceived and designed at the top echelons of an organisation and rolled out in a top-down manner. Seldom, however, as pointed out in Chap. 6, is this how strategy manifests in the practice field. Deliberate, intended strategies are often idealisations removed from the realities of the competitive playing field.

Strategy Praxis: Strategic Dissonance and Resilience Strategies, regardless of their intent, come to life and either succeed or fail on account of what happens at the competitive front-line. This is where organisations face an almost infinite number of problems waiting to be discovered and resolved: some greater, some smaller. Only a fraction of these, however, are visible, or indeed, even imaginable at the top levels of the organisation. Consequently, strategies planned at the top of an organisation tend to take on a life of their own during their execution and veer from their intended course. This leads to strategic dissonance within organisations. Intended strategies thus morph into reconfigured emergent versions that more closely reflect the realities of the competitive playing field. Given the prevalence of emergent strategies in the practice field, it would be remiss not to examine more closely the organisational means and mechanisms by which intended strategies evolve into emergent strategies. We find very little on the real ‘nuts and bolts’ of emergent strategy formation in the management literature. Firms are often not entirely aware themselves of how emergent strategies take on shape and form. To the extent that they are, they quite understandably are loath to divulge such details of their inner workings. We know, however, that the decisions and actions taken by employees on the front-line every day ultimately determine the outcome of a strategy. We also know that the effectiveness of employees’ involvement is highly correlated with the quality and level of their engagement. A recent study by Gallup [1] suggests a global employee engagement level of merely 21%. A 2020 study by Eurofound (European Foundation for the Improvement of Living and Working Conditions) [2] suggests that only 20% of European companies fall into the category of ‘high investment, high involvement’ workplaces. If these and similar studies are any indication, then organisations worldwide are relinquishing a huge source of competitive advantage by failing to tap into the full potential of their workforces. They also point to a disconnect between many firms’ top management where strategic decisions are made, and the lower levels of the organisations where these are expected to be executed but, in reality, may not even be understood or bought into by large parts of the workforce. A firm’s engagement of its workforce in the execution of its strategies is a critical determinant of its competitive resilience in the rough-and-tumble realities that competitive environments impose. Resilience is a measure of the extent and pace of strategic renewal in the face of unanticipated events that drive the need for a strategic response. Hamel [3] ties the notion of resilience to a number of factors that reflect a firm’s workforce involvement in shaping emergent strategies by proposing

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the following equation that captures the effects of employee involvement and engagement in the workplace: Resilience =

p n×q × ×c t s

where n is the number of workforce inputs q is the quality of the inputs t is the time to test and put the inputs into action p is the breadth of propagation and rollout with an organisation s is the speed of propagation and rollout c is the coherence and congruence of the inputs with an organisation’s strategic intent Notably, all of the variables are intrinsically contingent on the workplace culture and practices that effectively serve to value, seek, and engage the participation of employees in the workforce. Practices that encourage and value inputs from the shop floor promote the number and quality of inputs and enhance their propagation within an organisation. Practices aimed at nurturing a deep and wide sharing of a firm’s strategic aims and objectives within the organisation help to ensure strategic coherence and congruence of a workforce’s engagement. The fact that that 80% of companies fail to extract more value from their workforce (according to Eurofound) presents huge competitive opportunities to companies intent on and prepped to enhance the engagement of their workforce. Praxis Case 7.1: Dissonance and Strategic Inflection Points at Intel Former Intel chair and CEO Andy Grove’s account of Intel’s transition from memory to chip producers provides rare insight into the mechanisms by which intended strategies mutate into emergent strategies. In reflecting on Intel’s exodus from the memory chip business in the mid-1980s, a market in which it had at one point held practically a 100% share of the market, to the microprocessor business, Grove refers to the strategic dissonance and strategic inflection points Intel experienced in the critical years in which it abandoned the memory chip business and established itself as market leader in the microprocessor business. What had happened? Intel was the first mover in the microchip business. The company had pioneered, developed, and introduced memory chips (or ‘memories’) to the nascent computer industry soon after its start-up in 1968. Numerous competitors, mostly American and small in size, emerged in the early 1970s. Throughout the 1970s, competition for the next generation of memory chips was mainly between American companies. During this period, (continued)

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Praxis Case 7.1 (continued) Intel was able to sustain its leadership position in the market. Then, in the early 1980s, a number of Japanese companies made their way into the memory chip market. Not only did they rapidly build an impressive memory chip manufacturing capability, but the quality of the Japanese memory chips was better than those produced by most American companies. In fact, Japanese quality levels were superior to what was thought possible even by Intel. What exacerbated the situation for Intel was not only that the Japanese offered superior quality, but that they could sell these at market-dumping price levels. All the while Intel continued to spend heavily on research and development. Intel’s R&D focus in those days was primarily on improving its memory chips, but some R&D effort was also invested in developing technology for another device that had been invented in the early 1970s: the microprocessor. Both microprocessors and memories are based on similar silicon chip technology, but their design is different. Memory chips merely store information; microprocessors calculate, they are the brains of the computer. However, because they represented a slower-growing and smaller-volume market than memory chips, Intel did not consider microprocessor technology development a priority. That changed after 1984 when memory chip sales virtually collapsed in the face of stiff Japanese competition. Intel lost its bearings and began to flounder. Its priorities and identity were clearly still focused on memories. In fact, the importance of memories to Intel was firmly embedded in its very beliefs and corporate dogma. Yet memory chips had by then become a worldwide commodity. Intel was at a loss as to what to do. In Grove’s words, Intel entered into a period of strategic dissonance—a period marked by divergence between an organization’s actions and its statements. This was a critical 3-year period in which Intel’s middle management was already in the process of positioning the company in the emerging microprocessor market, while its senior management was still engaging in heated strategy debates on how to recapture its former leading position in the memory chip market. Grove recalls asking Intel’s chair and CEO, Gordon Moore, in a meeting sometime in mid-1985, ‘If we got kicked out and the board brought in a new CEO, what do you think he would do?’ To which Moore responded without hesitation, ‘He would get out of memories.’ Whereupon Grove countered, ‘Why shouldn’t you and I walk out the door, come back, and do it ourselves?’ The rest is Intel history. Fortuitously, the adjustment of Intel’s strategic posture from manufacturer of memories to manufacturer of microprocessors had already begun sometime before Intel’s senior management caught on. While its senior management was still looking for clever memory strategies, people at the front-line were already initiating and driving the change in direction. Increasingly, production resources were being directed to the (continued)

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Praxis Case 7.1 (continued) emerging microprocessor business—not as a result of senior management direction, but rather as a result of daily decisions by middle managers close to the business front. In the face of a declining demand for memories and increasing opportunities for business profitability, memory chip production was being retooled for microchip manufacturing. By the time that Intel’s senior management made the formal decision to exit the memory business, only one out of eight silicon fabrication plants were still producing memories. The change in strategic direction—in Grove’s terminology, Intel’s strategic inflection point—took a total of 3 years. It turned out that the exit decision had a significantly less drastic market impact than anticipated and feared by Intel’s senior management. A typical reaction of Intel’s customers on being informed about Intel’s decision to exit memories was ‘it sure took you a long time’. Source: Grove, A. S. (1996). Only the paranoid survive. Currency Doubleday

Praxis Reflection 7.1: Workforce Engagement In your organisation. . . . What practices are in place to maximise workforce engagement and involvement? . What are the common obstacles to workforce engagement? . How are these dealt with?

Strategy Perspective: Competitive Advantage, Failure, and Sustainability Business success and failure are often mistaken to be diametrically opposed outcomes. This, however, is not necessarily so. The seeds of failure are not seldom sown during periods of business success. Conversely, business failure is frequently a precursor to business success, as numerous business case histories attest. The notion of sustainability, when used in the context of competitive advantage, is likewise frequently misconstrued. As we argue in this section, a presumption of the sustainability of competitive advantage is illusory and in need of rethinking. The themes of business failure and sustainability, although contentious, have immense implications for the strategy practice field. Hence, we examine and reflect on the two themes more closely in this section. We first examine firm failure and its causes; we then examine the notion of sustainability in the context of competitive

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advantage. Further on in this chapter, we revisit the notion of failure and derive its strategic implications from an organisational knowledge and learning perspective.

Why Do Once Great Companies Flounder? The notion of business failure tends to be an orphaned subject in the management field. We prefer to focus on and celebrate business success; failure tends to be swept under the carpet. Yet, lessons learnt from business failure are often far more valuable than those derived from a study of business success. Many firms are successful at some point in time, some even achieve remarkable success. However, few firms can hang on to their success for long. Today’s average tenure of a company on the S&P 500 list is only half of what it was 50 years ago. The near-record number of CEO departures seen recently reflects the internal turmoil many companies face in the wake of business failure. The character in the Hemingway novel The Sun Also Rises, when asked ‘how did you go bankrupt’ replies, ‘two ways—gradually, then suddenly’. Indeed, a firm’s decline often begins with creeping stagnation. Numerous factors contribute to a firm’s stumbling. Establishing definitive causes of failure is always difficult. But we can identify some recurrent patterns: for example, patterns of decisions taken (or not taken, as the case may be) or patterns of evolving competitive stagnation. The origins of business failure inevitably lie deep within a firm. The culprits are often organisational dysfunctionalities, the seeds of which are often sown during periods of success. These manifest themselves in a number of ways. We examine three dysfunctionalities in particular: overly complex internal structures, management complacency, and functional myopia. Overly Complex, Obsolete Internal Structures Large sprawling industrial conglomerates were once seen to be the winning formula. Today, those remaining are viewed as gentrified behemoths from another era while earning themselves no more than recognition as ‘last man standing’. While American activist hedge funds have led the way, European investors are increasingly pushing for the dismantling of ungainly corporate structures. The rationale is simple: in increasingly global competition, stream-lined businesses focused on doing one thing and one thing only have a distinct advantage. ABB was celebrated in the early 1990s as the ‘prototypical post-industrial organisation’, the ‘new model of competitive enterprise’ managed by ‘a new breed of super-humans’. Under CEO Percy Barnevik, ABB’s matrix organisation, said to have been modelled on the Swiss army, comprised 1300 separate companies that were divided into 5000 profit centres [4]. While other conglomerates were consolidating and shedding units, ABB continued embarking on heady global acquisition sprees. By the late 1990s, the company had evolved into a dysfunctional and fragmented multinational with no less than 576 ERP systems, 60 payroll systems, and over 700 software platforms—a ‘tired manufacturing firm mired in nineteenth-

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century assets’ (FORBES [5]) and on the brink of bankruptcy. Thyssenkrupp and GE also belong in this besieged league. Both are seeking to rid themselves of their legacy past that has locked them into being complex, convoluted corporate behemoths. Over the years, Thyssenkrupp, the 200-year old German steelmaking conglomerate, had strayed into businesses as diverse as submarines and building elevators. Alone its powerful head office in Essen consumed an astonishing 30% of its profits. All the while, the company’s share price lagged seriously behind its German compatriot multinationals which have long since streamlined their portfolios into much simpler structures. Management Hubris and Complacency Besieged firms’ management often recognises a threat early. However, past success tends to breed a sense of infallibility and adversity to taking prudent and timely decisions in response to changing competitive environments. Overly confident that what has worked in the past will continue to do so, firms get locked into their legacy trajectory. Inertia keeps the firm from breaking out of established patterns. The strategic thinking that led to the company’s success in the past is often replaced by a rigid devotion to the status quo. Tough questions are discouraged. GE was once the greatest US industrial corporation: a constituent member of the DOW index when it was created in 1896 and a member continuously since 1907. In 2018, it was ejected from the index. GE had lost more than 80% of its market capitalization since 2000. GE’s penchant for botched acquisitions and its inability to respond effectively to a global economy shifting from industrials to consumer, finance, and technology were viewed as immediate flaws. Arguably, though, the fault-lines contributing to GE’s problems had their origins in GE’s hugely successful Jack Welch era (1981–2001) during which its acquisitive culture was considered its winning formula. Functional Myopia Functional myopia sets in when companies lose sight of their overall strategic purpose and direction. The focus reverts to sub-optimizing overall performance all the while becoming increasingly singular, complacent, and bureaucratic. This happens when the company’s leaders become obsessed with results, turn their focus inward, and become short-term oriented. When numbers become more important than a clear sense of purpose, strategies then serve only to advance nearterm results. The demise of Nokia (dealt with in Chap. 3) was largely the result of functional myopia. Companies lose their competitive edge for numerous reasons. The seeds of corporate demise are often sown during periods of remarkable success. Internal contradictions and dysfunctionalities take root long before they surface. They are exposed by shifting competitive environments. Internal ineptness nurtured by management complacency and exacerbated by functional myopia then only serve to accelerate the decline.

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Competitive Advantage and Sustainability The notion of sustainability, considered here in the context of competitive advantage, addresses the flip side of strategic failure—at least in a nominal sense. Sustainability of competitive advantage has long been a dominant idea deeply embedded in the purpose of strategy; its pursuit is somewhat like a search for the elusive holy grail. Increasingly, though, the very notion of sustainability of competitive advantage is being viewed to be more of a quixotic quest rather than a realisable strategic objective. In principle, the notion of sustainable competitive advantage is quite simple: to gain competitive advantage, a firm must outperform its competitors; to sustain that position, it must continue to do so. The hitch is that a firm’s competitors have the exact same intent in mind. Hence, deadlocks ensue while competitive positions erode. The notion of erosion in the context of competitive advantage finds an apt corollary in the physical sciences in the expression of the second law of thermodynamics and its intrinsic principle of entropy. The principle of entropy states that a system featuring a higher-energy level inevitably degrades unless energy in some form is continually applied to reverse the process. In a business context, the entropy principle implies that any position of competitive advantage achieved by a firm has by default a limited ‘shelf-life’. Such a view is consistent with the real nature of competition in the practice field. We know that product and process innovation, often viewed to be the primary drivers of competitive advantage, offer only limited periods of competitive exclusivity. Ghemawat [6] suggests that as much as 70% of the advantages gained by new products are lost to competitors within a year of their development. Intellectual property protection of products offers limited buffers to imitation. On average, imitation costs a third less than innovation and is quicker by a third. Advantages gained by innovative processes are even more difficult to protect. By the estimation of some pundits, anywhere from 60 to 90% of ‘learning’ acquired from process innovation ultimately diffuses to competitors. Competitive advantage, once gained, is inevitably subject to degradation. To sustain a position of competitive advantage, a firm must exert deliberate and purposeful effort. This sobering reality underscores the fallacy of sustainability when tied to competitive advantage. Evidence from the practice field suggests that no position of competitive advantage is indefinitely sustainable. Missing in conventional thinking on sustainability is a consideration of its temporal dimension. To account for the temporality of competitive advantage, McGrath suggests viewing any position of competitive advantage achieved more aptly as a transient rather than a sustainable state, given that in business practice, success and profitable growth correlate more closely with punctuated periods of advantage than with a single position attained and held [7]. To view a state of competitive advantage achieved as transient rather than ‘sustainable’ is therefore much more consistent with our understanding of how competition plays out in the real world. The notion of

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transiency factors in a time dimension and implies a different approach to competition. Transient competitive advantage entails capturing opportunities quickly, exploiting them decisively, and moving on before these are exhausted. Mauboussin and Johnson qualify the duration of a state of any transient advantage achieved as ‘the time during which a company is expected to generate returns on incremental investment that exceed its cost of capital’ [8]. A more meaningful approach to the notion of competitive advantage is to think of it in terms of the contestability of its constituent elements. All positions of competitive advantage are to some extent vulnerable and therefore contestable; consequently, all positions of competitive advantage feature a ‘shelf-life’. Thinking about competitive advantage in terms of its contestability redirects our focus from a quixotic pursuit of sustainability to a much more meaningful consideration of its transient character. The notion of contestability of competitive advantage touches on two points addressed in earlier chapters worthy of recall: First, the value equation introduced and discussed in Chap. 1 alludes to the fact that the constituent components of a value bundle feature varying degrees of competitive differentiation potential. Some components are more contestable than others. Critically important are the elements of a value bundle that contribute disproportionately to its value premium. Some elements are easily imitated by competitors, others less so. Consequently, not all determinants of competitive advantage tied to a value bundle are equally critical or, indeed, at risk at a given point in time. The granular perspective that the de-bundling of a value offering adds to our understanding prompts careful consideration of its features that contribute competitive advantage, and actions a firm might take to enhance these. Appropriate actions might include strengthening the differentiating features through further innovative development and enhanced intellectual property protection. The second point relates to the VRIO framework introduced in Chap. 4; in particular, the ability of an organisation to exploit an asset for competitive advantage. As pointed out in Chap. 4, no competitive advantage is ever indefinitely sustainable. Hence, any advantage achieved is ultimately contestable and therefore transient at best. The transient nature of competitive advantage demands agility and astuteness on the part of a firm, and a prioritisation of means and courses of action that most effectively exploit the firm’s critical determinants of advantage. Praxis Reflection 7.2: Competitive Advantage When thinking about competitive advantage. . . . What is the anticipated window of opportunity for exploiting a position of competitive advantage? . What practices and mechanisms are in place for capturing opportunities quickly? (continued)

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Praxis Reflection 7.2 (continued) . Which elements of competitive advantage held are most vulnerable and contestable? . How is the most appropriate time to ‘move on’ from a currently held position determined?

Strategy Praxis: A Knowledge and Learning Perspective Organisational knowledge features multiple dimensions that are critical to strategy. Organisational knowledge encompasses both content and process components. Strategic knowledge content is a competitively differentiating resource. The process part of knowledge comprises the procedure by which strategically relevant knowledge is created, acquired, configured, and deployed. Organisational learning plays a central role in this process. Learning, in essence, is a knowledge process. In this section, we focus on the process part of organisational knowledge, and specifically on the role of organisational learning in strategic problem-solving. In the second part of this section, we revisit the notion of failure broached in the earlier section of this chapter and examine it more closely from an organisational knowledge and learning perspective.

Organisational Knowledge and Learning Trajectory Strategic problem-solving can be thought of in terms of a knowledge trajectory that evolves through learning over the course of a problem-solving endeavour. Key concepts and approaches presented in previous chapters have implicitly alluded to the mechanisms by which knowledge is created through learning in the strategic problem-solving process. In this section, we examine strategic problem-solving from a more formal knowledge and learning perspective [9]. The classic ‘conscious competence’ matrix [10, 11]1 from learning theory provides an apt framework for mapping the knowledge and learning trajectory of the problem-solving process (Fig. 7.1): Quadrant 1: Uncertainty and the spectre of the unknown: The state of unconscious incognizance characterised by quadrant 1 typically manifests itself in the initial stage of the problem-solving process. At this stage, the true nature and potential impact of a problem have yet to reveal themselves. The spectre of ‘not knowing

1

This framework is also mentioned in [10]; the framework is said to have been used extensively by N. Burch (Gordon International Training) in the 1970s

Strategy Praxis: A Knowledge and Learning Perspective

Quadrant 1: Uncertainty

Unconscious

“We don’t know what we don’t know” (uncertainty and spectre of the unknown) Quadrant 2: Learning zone

Conscious

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Quadrant 4: Dormant knowledge zone

“We don’t know (or are aware of) what we already know” (deep, existing expertise, untapped) Quadrant 3: Enabled knowledge zone

“We know what we don’t know”

“We know what we know”

(learning basis established)

(purposeful actioning of knowledge)

incognizance

Competence

Fig. 7.1 Phases of the knowledge and learning trajectory

what we don’t (yet) know’ about a problem at hand triggers a sense of powerlessness and vulnerability. These conditions and lack of knowledge about the problem obstruct meaningful action to be taken towards a resolution of the problem at this stage. We need only think back to the early days of the COVID-19 crisis. In extreme circumstances, the situation depicted by quadrant 1 presents a fertile breeding ground for misinformation, scaremongering and conspiracy theories that serve to propagate further fear of the unknown and uncertainty. Quadrant 2: Learning zone: As the problem-solving process evolves and insightdriven, first-principles thinking and analysis increasingly reveal the true contours of a problem, unconscious incognizance gradually cedes to a state of conscious incognizance represented by quadrant 2. Key knowledge deficits in dealing with the problem are recognised, although many aspects of the problem at hand may yet be unknown at this stage. And, although knowledge production in this stage occurs primarily in an ad hoc, uncoordinated Mode 1 manner [12], a better understanding of ‘what we know we don’t know’ about the problem allows the initiation of preliminary activities aimed at the resolution of the problem. More importantly, this stage lays the basis for systematic, insight-driven sense-making of the problem. Emergent knowledge, though yet lacking in coherence and cohesiveness, begins to suggest broad patterns. Questions play a critical role in this stage of the learning process. When approached appropriately, questions not only address ‘what we know we don’t know’, they are also an indicator of learning progression along the trajectory. As learning progresses, questions become sharper and more focused. These prompt new insights related to as yet missing knowledge. Snippets of insight, when assimilated and integrated, sharpen the contours of the problem at hand. This, in turn, guides further purpose-driven learning.

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Quadrant 3: Actionable knowledge zone: Quadrant 3 represents the stage in which relevant knowledge becomes actionable. Knowledge acquired from learning in this stage manifests itself in the form of capability and capacity to act purposefully in dealing with the problem at hand. Though actions taken initially may lack proficiency, continued learning progressively contributes to the development of further expertise and capability. Reflective learning is a significant feature of the learning process [13]. New insights generated, when integrated with accumulated knowledge, enable the production of new knowledge that empowers the execution of deliberate and purposeful action. This production of knowledge, sometimes referred to as ‘Mode 2’, occurs in a coherent, transdisciplinary, reflexive, and collaborative manner and in a context of application [12]. Quadrant 4: Dormant knowledge zone: Quadrant 4 represents deeply embedded but dormant capability and expertise. Knowledge and learning residing in this quadrant represents ‘what we don’t know that we already know’. Typically, this knowledge is in the form of deep experiential knowledge and learning from the past that a firm is no longer aware of. Deeply embedded expertise residing in this realm consists of knowledge that has simply been forgotten [14, 15], often in the form of mastery based on accumulated experiential knowledge embedded in intuition and heuristics. Knowledge residing in this realm comprises a potential reservoir that, if successfully recovered, can be exploited and re-harnessed for purposeful action. In order for this knowledge and learning to contribute to the problem-solving process, it must be reactivated and adapted to the problem at hand. There are, however, caveats: not all dormant knowledge may be relevant; in fact, some of the knowledge embedded in deeply entrenched routines may prove to be detrimental to the task at hand as illustrated in Praxis Perspective 7.1. Hence, the challenge associated with quadrant 4 centres on accessing, rejuvenating, and transferring knowledge and learning that is relevant to the problem to be solved. Praxis Perspective 7.1: Holding the Horses Dormant knowledge residing in quadrant 4 of the knowledge and learning trajectory schematic depicted in Fig. 7.1 may have significant potential for strategic problem-solving. But not all dormant knowledge is relevant or conducive to solving a problem. Deeply embedded knowledge and skills may prove to be counterproductive, as an anecdote from the early days of World War II illustrates. The story recounts the experience of a small British crew of World War I veterans that were brushing up on their artillery skills. Their training exercise was part of a greater territorial defence effort to bolster Britain’s coastal security. In the days following the fall of France, armaments were in short supply. Ancient, originally horse-drawn field artillery units dating back as far back as the Boer War were being dusted off and brought back into service. Now hitched to lorries, these units were being re-deployed (continued)

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Praxis Perspective 7.1 (continued) as mobile field units. A five-man veteran gun crew, training on one such aging piece of field military, was trying to increase the rapidity of the firing cycle but hit a plateau. A time-motion expert, brought in to advise the crew on how to improve their performance, watched carefully as the veterans went through their routine of loading, aiming, and firing. Puzzled by what he observed, the expert took slow-motion pictures of the crew in action. Something appeared odd. A moment before firing, two members of the gun crew came to a complete standstill and stood at attention for the three-second interval during which the gun discharged. The time-motion expert, at loss for an explanation, sent for an old veteran colonel of the artillery and pointed out the puzzling behaviour of the two motionless crew members. The colonel, too, was baffled at first. Then, on re-examining one of the pictures, he exclaimed, ‘Ah, I have it! They are holding the horses!’ Source: Morison, E. (1997). Gunfire at sea: A case study of innovation, Chapter 9. In M. L. Tushman & P. Anderson Managing strategic innovation and change—A collection of readings. Oxford University Press.

Learning and (Intelligent) Failure Not even the best companies are exempt from failure—and the stakes are high. In this section, we revisit the earlier discussion on why firms fail and examine the notion of failure from an organisational knowledge and learning perspective. Failure Has Many Faces Failure is viewed differently depending on cultural context. While a bankruptcy in Europe can be the end to a business career, it can be a badge of honour and a steppingstone to success in the Silicon Valley. This suggests that ‘failure is not always failure’, and that there might be something inherently redeemable about ‘failure’. Indeed, success and failure are not polar opposites. Although stigmatised, failure has the potential to be a precedent for success. Some examples come to mind: . Champagne was invented by mistake when wine bottled by a French monk named Dom Perignon inadvertently underwent a secondary fermentation. . 3M invented an adhesive that failed. It didn’t stick well enough for its originally conceived purpose. But it was ‘good enough’ to create 3M’s billion-dollar Post-It note business. . Scientists at Pfizer were initially disappointed when their new drug Viagra failed to relieve high blood pressure.

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Admittedly, these are notable exceptions. Far more often, failure arises from errors due to negligence and incompetence. These translate to wasted time, money, and effort with no recoverable benefit. But failure in this category is often preventable. Intelligent Failure In strategy, we define failure as an outcome that does not contribute to the creation of competitive advantage. This definition presents several important points: it links success and failure to a firm’s ability to extract competitive advantage from its endeavours. Just as importantly, it does not rule out the possibility of failure as an intermediary to success. For this to be the case, however, failure must necessarily be of the intelligent type. From the perspective of intelligent failure, success isn’t the pursuit of not making mistakes. Mistakes are not avoidable, since they are part of any learning process. Intelligent failure focuses on the extraction of learning from mistakes that can be effectively applied in the future. We want to avoid ‘preventable’ failure while encouraging failure that allows an extraction of valuable learning. Failure Is (Still) Poorly Managed in Firms Intelligent failure gives rise to a number of managerial challenges. For one, a precise ‘measurement’ of success and failure is difficult. Many firms lack adequate metrics. Only 7% of respondents queried in a recent polling of senior innovation officers2 at the Copenhagen Innovation Summit reported that they had the means to unambiguously measure innovation failure in their firms. A lack of clarity in distinguishing between preventable and intelligent failure is another challenge. Although failure per se is still widely stigmatised (59% of respondents confirmed this), only a third (34%) reported a clear distinction between preventable and intelligent failure in their firm. The Copenhagen survey findings also confirm that firms are not very good at learning from failure; 58% of the respondents admitted that their firms do not perform well in this area. Framing the Challenge of Failure Failure is inevitable, especially when entering new competitive territory. Some efforts will end up in the waste bin. The challenge of managing failure intelligently thus prompts the following critical questions: . If failure is inevitable, what can firms do to minimise their preventable failure rate; if and when they do fail, how can firms ‘learn to fail intelligently’? . Moreover, how can firms maximise the learning they extract from intelligent failure? Changing the Mindset Around Failure Fear of failing encourages ‘playing not to lose’ rather than ‘playing to win’. Organisational cultures that accept ‘trying and failing’ align with the latter. However, simply ‘embracing’ failure is not enough.

2

EDHEC research: Polling of 138 senior innovation officers representing a cross-section of European predominantly European companies across all sectors at the Innovation Summit 2016 / Copenhagen (DK) in November 2016.

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Companies must learn to purposefully manage it. This must be a part of the organisational culture’s mindset—and there is no single ‘right’ way to do this. Nonetheless, a few simple steps can help firms recapture positive returns from failure: 1. Distinguishing between preventable and intelligent failure. Failure isn’t necessarily always ‘failure’. A good understanding of the cause and context of failure can help firms minimise failure of the wasteful type. Insightful analysis of failure requires discipline and demands both emotional and cognitive honesty. Interdisciplinary teams that bring multiple perspectives to the table can be effective to that end. 2. Destigmatising ‘intelligent failure’. An organisational context that encourages intelligent risk taking and doesn’t punish intelligent failure supports intelligent failure. This calls for a commensurate mindset and requires unequivocal leadership commitment. This, however, is only a start. Intelligent failure encompasses systematic and purposeful capture, transfer, and sharing of learning from each and every opportunity. Successful firms view intelligent ‘trying and failing’ as integral to their ‘strategy of small losses’. 3. Assessing failure objectively and comprehensively. Many firms shy away from any systematic effort to assess failure. Failure becomes undiscussable, because career prospects are often at stake. Moreover, deep-seated biases often throw up barriers to an objective assessment of outcomes. Performance metrics always present challenges, especially so when a potentially conflicting interpretation of failed outcomes is at stake. A clear delineation of what success and failure would look like before engaging in an initiative can help to circumvent such needless impasses. In many ways, the ubiquity and inevitability of strategic failure tend to make it a playing-field leveller in today’s competitive business environment. No firm is immune to failure. Although seemingly paradoxical, failure offers opportunities for strategic advantage. Relatively few firms are really good at dealing intelligently with failure. Those that do, stand to achieve a significant competitive edge. Praxis Reflection 7.3: Knowledge, Learning, and Attitudes Towards Failure In your organisation. . . . What are the key barriers to progress along the knowledge and learning trajectory, and why? . How is failure viewed and dealt with? . How is learning extracted from failed initiatives?

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Strategy Praxis: A Narrative Perspective In this final perspective, we examine the role of narratives in strategy. Narratives play a critical role—they are an important means for building a shared understanding of strategy within an organisation. Due to their circumstantial nature, narratives allow for strategic ambiguity. This ambiguity of narratives is not a defect but rather a feature that, if effectively utilised, encourages and promotes diversity of thought in organisational discourse [16]. In this way, strategy narratives serve as a critical method of discourse for sense-making during the formation and execution stages of an organisation’s strategy. Narratives make people central to strategy. They facilitate constructive engagement and debate that socialise an organisation’s strategic argument. Narratives integrate and unify people within the organisational collective by consolidating common purpose, thinking, and behaviour. They make a company’s strategy people-first by bringing emotion and lived experience to the strategy and to the organisation’s raison d’être [17]. An organisation’s strategic narrative conveys how its past, present, and future are coherent in a broader strategy context. And, while this narrative may involve a rhetorical and discursive reconstruction of the organisation’s strategy in the past and a rationalisation of existing circumstances, its primary function is to lay the foundations for difficult decisions yet to be made [18]. To be effective, a strategic narrative needs to be grounded in action. It is not so much about what an organisation aspires to be—though this often is the extent of an organisations’ narrative. Rather, effective narratives are about what the organisation is doing; why and how those activities are meaningful in the context of its strategy. In strategy practice, strategic narrative is more than simply a communication channel; it encompasses a core element of an organisation’s strategic orientation and strategy process. Effective narratives do not happen without deliberate effort. Organisational cultural environments that tolerate unfocussed discussions, dismissal of contrarian opinions, domineering personalities in the room, and people around the table who choose to bite their tongue rather than contribute their thinking are dysfunctional. To be effective, narratives need to be nurtured and thoughtfully orchestrated. Praxis Perspective 7.2: Sorting the Wheat from the Chaff No doubt, we’ve all been there. We are sitting in a meeting listening to someone confidently and enthusiastically hold forth on a matter in which they are clearly out of their depth. The attention in the audience shifts from the speaker to inconspicuously appearing mobiles. We tune out, hope, and pray for a mercifully quick ending. The enigmatic nature of strategy makes it particularly susceptible to nonsensical narratives—renditions of lofty strategic objectives steeped in fantasy (not seldom accompanied by energetic handwaving); seriously flawed assessments of the current reality; projections based on shaky analyses. So, how do (continued)

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Praxis Perspective 7.2 (continued) we distinguish the ‘real McCoy’ from the rest of the noise? Thora Tenbrink, a professor of linguistics, has been studying how people convey their thoughts through language for over 20 years. Tenbrink offers four guiding questions for separating ‘the wheat from the chaff’ [1]: 1. How likely is it that this person is a true expert? A person’s background, skills, and personal competence profile are telling indicators of their expertise. Tenbrink points out that true experts differ from novices in their perception of individuals, ability to listen, and ability to explain complex situations. All too often, though, the true experts are the quiet voices in the room. 2. Is the person able to dig deep? True experts know more details and can elaborate deeply and convincingly on a topic when prompted. Non-experts tend to stick to sweeping statements and repetitious messages on a superficial level. 3. Does the person acknowledge (their own) limits to certainty? Many circumstances and situations arising in strategy bear a certain amount of uncertainty. Think of the uncertainty brought on by COVID. An expert knows whatever can be known about the matter at hand—and will not hesitate to admit limitations of their own knowledge. 4. Is the person able to provide succinct responses to questions? We have no doubt experienced this in Q&A sessions following a talk or presentation when the floor is opened to questions from the audience. Inevitably, Q&As tend to reveal the speaker’s true expertise. Non-experts are prone to embark on lengthy and evasive verbal trajectories to even simple questions. The more rambling and elusive the response, the clearer it is that they don’t have an answer. Experts have no difficulty in providing clear, brief, and ‘on point’ responses to questions—and in circumstances in which there simply is no answer to a question, to admit as much. Source: Tenbrink, T. (2022, September 7). 5 ways to tell if someone is a real expert (or just really good at BS). FastCompany.

Praxis Reflection 7.4: Narratives In your organisation. . . . What role do narratives play in your organisation? . What practices are in place to enhance their effectiveness?

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Strategy Praxis: Rationality and Irrationality in Strategy In strategic problem-solving, a complex interplay of human emotions, perceptions, and idiosyncrasies is set against the stark and brutal reality of circumstances prompting a strategic response. It endows the concept of strategy with an esoteric quality and raises questions regarding the boundaries between rationality and irrationality. Indeed, in the practice field, these borders are often not that clear. And although disquieting from a conceptually rigorous perspective, this mysterious borderland is nevertheless highly pertinent to strategy praxis. Must strategy be ‘rational’ in order to be effective? This question prompts a definition of ‘rationality’ and its intended function. What might at first glance appear to be a highly irrational approach to strategising may, in fact, conceal deep-seated rationality. To illustrate, consider the indigenous Naskapi peoples of Labrador. As huntergathers, their survival relies on the success of their hunting endeavours. As such, reaching consensus on where to hunt is a crucial element of their daily routine. The Naskapi deploy an unusual approach to deciding where to hunt on a given day: the shoulder bone of a caribou is held over a fire until it begins to fracture. Fracture patterns on the charred shoulder bone are then examined for guidance on which direction to set off in for the day’s hunt. Although seemingly peculiar, this approach has served the Naskapi well over millennia; they almost always succeed in finding game. The apparent irrationality of the approach obscures a deeper rationality that has less to do with the rationality of the technique per se than its intended purpose and outcome. On account of the direction gleaned from the fractures in the charred caribou bone, the Naskapi hunters end up spending most of each day actually hunting. They don’t sit around the fire all day debating on where to hunt. On those rare days on which they do fail to find game, there is no individual to blame. Any failed effort is attributed to the gods testing their faith. The fractured caribou bone entices the hunters to be out in the field and to keep moving. The reality of their being out there greatly enhances the probability of scoring a successful hunt. Another example that illustrates the metaphysical character of strategy recounts an incident that allegedly took place during World War I. A small Hungarian military unit on reconnaissance in the Swiss Alps lost their way in a fierce blizzard that lasted for 2 days. The young lieutenant who had sent the unit out on their mission was devastated after the unit failed to return by the second day and feared that he had dispatched his men to their certain death. On the third day, however, the unit trooped back into the base camp unscathed and in good spirits. What had transpired? How had they survived and found their way back to the camp? Members of the unit recounted how they had indeed considered themselves doomed until one of the soldiers discovered a map in his pocket. The mere realisation of having a map restored confidence and prompted the unit to do the most sensible thing when caught in a blizzard—to pitch camp and sit out the storm in the relative safety of their tents. After the storm had broken, the unit found its bearings and set out back to the base camp. Overjoyed and flabbergasted, the lieutenant asked to have a look at the map.

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To his astonishment, he discovered that it was not a map of the Alps at all, but of the Pyrenees! Did it matter to the lost reconnaissance unit? Not at all, as it turned out. Conceivably, of course, it might well have mattered had the unit realised the map’s true identity. As it happened, the confidence instilled by the erroneous belief of having a map strengthened the unit’s resolve to survive, mobilised clarity of thinking, and prompted appropriate action. Once on the move, iterative observation, and recalibration in relation to where they wanted to go, kept the unit going. Meaning was derived from circumstances as they evolved. This ultimately led the unit back to their base camp. Irrational as it might seem in hindsight, an entirely irrelevant map saved the unit from near certain death in the alpine wilderness. Both examples underscore Weick’s [19] argument that mechanisms stimulating purposeful action are often more important than an a priori deliberation of strategy. This line of reasoning builds on the premise that purposeful action creates meaning and provides the requisite stability and structure for an organisation to ‘get on with it’ in the absence of a strategic rationale. Moreover, this argument is congruent with a point made earlier in this chapter—that it is always better to be approximately correct than precisely wrong. Even a vague plan, map, or explanation can serve a purpose. More important than the coherence and accuracy of a plan is the response and attention it receives from the organisation. Meaning and validation of the strategic direction then often take shape only ex tempore. Strategy as a pretext on which people act and generate meaning in response to changing circumstances ‘on the go’ is intrinsically Darwinian in character. Adaptation, even in the absence of a rigorous rationale, is a much more viable approach to strategy than a pretence of deliberate planning—provided, of course, that the strategic action taken is congruent with the realities of the evolving environment. In today’s complex and fast-changing competitive environments, this is as true as ever. Praxis Reflection 7.5: Rationality and Irrationality In your organisation. . . . How is the probability of irrationality factored into analysis and sensemaking? . How is irrationality factored into decision-making?

Strategy Praxis: Reflections on the Relevance of Academic Research for the Strategy Practice Field At its conception, strategic management was a quintessentially practice-oriented discipline. Its primary purpose was to solve real-world problems in the practice field. This early problem-solving focus led to the development of many seminal concepts and theoretical contributions to the field. Scholars in the field, however, raise concerns that the academic agenda in the field has strayed from its original

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purpose [20]. Without doubt, academic research has produced remarkable advances in the field. But as it has become ever more sophisticated, academic research output has become ever less useful to the practitioner in the field [21, 22]. As a result, the disconnect between the direction that strategic management research is taking and its relevance for managerial practice is ever widening. The threat of irrelevant management research for the practice field is reflected in the current membership numbers of leading academic societies. Merely 5% of Academy of Management members identify as business executives or consultants. The Strategic Management Society, which aspires to ‘bring together the worlds of reflective practice and thoughtful scholarship’, counts less than 6% practitioners amongst its members [23]. Academic research has, for the most part, evolved into an intellectual exercise of producing new knowledge for its own sake rather than tackling a growing list of problems facing practitioners in the field. The bulk of academic research does not focus on problems relevant to business practice, or if it does, then the recommendations derived from the research are often far removed from the complex realities of actual challenges facing organisations. A recent analysis of academic papers published between 2015 and 2020 indicates that little of the research originating from business schools in this period predicted or explored managerial and economic effects of a pandemic, even months into the COVID-19 crisis. The surge in publications on these themes that we did see stemmed largely from online and social media sources that had their origins in communities outside the leading academic institutions [24]. Management academia’s current obsession with ‘pure’ research suggests an inherent contradiction in a field whose origins lie in real world problem-solving and decision-making [25]. The substantial body of evidence suggesting that practitioners in the field typically find little use for academic research therefore hardly comes as a surprise [22]. Owing to the lack of guidance from academia, practitioners are relying on intuition and heuristics for strategic sense-making and decisionmaking. Regarding the latter, academic research quite tellingly has offered little more than a critique of heuristics deployed in the practice field [26]. The causes for the research-practice gap have been widely debated and point to fundamental differences in how academics and practitioners approach strategic management. These include 1. Differences in the incentives and motivations: Academic research is mainly incentivised by the pressures exerted by institutions to publish in top-tier journals. Research agendas are constrained by topics deemed to be of interest to editors and reviewers of those journals. Proxy measures such as a journal’s impact factor and citation frequency supersede practice relevance and impact [27]. Such incentives drive the production of theoretical work that has limited applicability, and consequently finds scant readership in the practice field. 2. Core differences in frames of reference and assumptions adopted by academics and practitioners: These have a bearing on the sort of information considered important and relevant. Practitioners think differently than academics. Problems

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in the real world encompass elements that cannot be thought through based on rational analysis alone. Hence, the way in which information is interpreted and used to construe meaningful insights differs distinctly in practice and formal academic research [28]. 3. Differences in takes on reality: Little of the academic research output is grounded in the reality of business practice. Research questions in academia are often driven by availability of data or methodological concerns [27]. Consequently, academic research tends to address issues of marginal relevance to the practice field. Failure to focus on problems of primary concern to practitioners has resulted in a mismatch that often leaves academic research producing exact answers to the wrong questions, rather than approximate answers to the right questions. Scholarly thinking has, of course, not lost its intrinsic appeal to the strategy practitioner in the field. If anything, the variability and dynamics of competitive environments have created an ever-greater need for the pragmatic and problemfocused scholarly work that established the foundational thinking in the strategic management field. Indeed, the need for clear guidance on matters relating to strategy in the practice field and the absence of this from the academic community have given rise to a flourishing consulting industry, in which strategy consulting is filling the gap.3 While the professional consulting industry fulfils many needs in the practice field, a lack of mandatory professional qualification and certification in the consulting field has, regrettably, also given rise to dubious consultancy services on offer. Current tendencies in academic research that favour scientific and methodological rigour over practical relevance are contributing to a further widening of the strategy academia–practice gap in the strategy field. Indeed, a continued failure on the part of the academic community to effectively address the theory–practice gap threatens the very legitimacy of the strategic management field. Praxis Reflection 7.6: Relevance of Academic Research for Practice In your organisation. . . . Which areas of practice are most affected by the prevailing academia– practice gap; in other words, in which areas of practice would academic research potentially have the greatest impact? . How are deficits in theoretical and conceptual understanding relevant to every-day practice currently dealt with and compensated for?

3 For an excellent account of the rise of the strategy consulting see: Kiechel III, W. (2010). The Lords of Strategy. Boston, MA: Harvard Business Press

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Strategy Praxis: Concluding Reflections Good Strategy Strategies, when they succeed, do so for distinct reasons. The happenstance of serendipity notwithstanding, of course, they normally don’t just happen by chance. The success of a strategy is inevitably tied to factors within a firm’s organisational reality that reflect the way in which a firm approaches strategising and the appropriateness of checks and balances in place for ensuring their effectiveness. The failure of strategy to deliver desired outcomes is typically blamed on a host of factors. We have examined some reasons for business failure earlier in this chapter. Very often, external contextual factors are identified as culprits. The external context always matters in strategy, if only because it establishes the exogenous parameters of a problem to be resolved. However, as previously argued, external contextual factors are not the sole determinants of the success or failure of a strategy. The real causes of a failed strategy are most often much closer to home. A firm’s response to a challenge lies entirely within its discretionary powers. Whether to respond to a challenge, and if so, how lie entirely at a firm’s discretion. Contexts may indeed introduce complicating factors to a problem’s solution, but internal dysfunctionalities are the more likely cause of failure. Moreover, as Johnson [28] suggests and backs up with research findings, firm-internal sources of failure do not always lie within the organisation per se as often assumed, but rather with failures at the very top: such as executive’s failure to be clear about their intentions, not being realistic about the cost and effort required, and inconsistent signalling about what is really important. The success or failure of a firm’s strategy hinges on the choices made by a firm and its ability to follow through with their execution. Effective strategies fulfil key requisite criteria, because they: . Focus on the challenge to be resolved by concentrating on the root causes inherent to the challenge. . Are coherent and plausible. . Define cohesive and purposeful action towards achieving their intended outcome. . Appropriately address the means required for their enactment Rumelt [29] argues that few organisations can lay claim to strategies that meet these criteria. What many have instead are multiple aspirations and initiatives which, although symbolising progress, in fact amount to little more than a strategic illusion of ‘spending more and trying harder’. Consequently, good strategy in business practice is an exception, not the rule. Flawed strategising does not necessarily imply the failure or absence of a strategy. Rather, poor strategy exemplifies a failed way of thinking about strategy that is endemic to many firms. This is the case when a strategy centres on goals and aspirations that are incoherent and unrealistic. Strategies focused solely on lofty objectives are the hallmarks of failed strategies.

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Factors underpinning the success or failure of strategising and the extraction of a suitable response to a strategic challenge thus lie entirely within the realm of a firm’s discretionary power. Firms are held accountable for the strategic decisions they make. The insight-driven, first principles-base approaches to strategic problem-solving outlined in this book comprise and provide the requisite conceptual and practicerelevant means for thinking about strategy and deriving solutions to competitive challenges in a purposeful way. In view of this, we recount: . The primary role and purpose of insight-driven, first principles thinking process introduced in Chap. 2 in setting, guiding, and corroborating the course of a strategic problem-solving process as it unfolds . The high-level strategic analysis frameworks and their purpose in positioning a firm’s strategic challenge in a comprehensive and congruent greater context discussed in Chap. 3 . The insight-driven micro-analyses introduced in Chap. 4 and their application in making sense of the greater external and internal contexts within which a strategic problem presents itself and their application towards establishing the problem’s root causes . The tandem application of strategy thinking and strategic analysis in Chap. 5 that ensures not losing ‘sight of the wood for the trees’ when engaging in strategic problem-solving . The application of the 5-SBBs framework, discussed in Chap. 6, for scrutinising and evaluating strategic options for their suitability for identifying potential sources of a strategy’s failure

Strategy Execution The focus of this book is on the formation of strategic options, not their execution. As such the insight-driven strategic thinking, analysis, and decision-making approaches introduced and developed in this book focus on the strategic problemsolving process that leads to the formation of suitable options in response to a strategic challenge. The execution and realisation of strategic options, once these have been derived, of course, is another matter. Strategy execution—the enactment of decisions into purposeful action—is about the operationalisation of strategic decisions once these have been taken. The operationalisation of decisions taken entails complex processes that aim at organisational transformation and change; these delve into questions of organisational design, restructuring, and behavioural themes that are beyond scope of this book. That being the case, however, the distinction between a strategy’s formation and its execution is seldom clear in strategy practice. In fact, the lines are often blurred. Even as a strategy is being executed, elements of its formation continue to evolve. In

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Strategy form fformation ation

continual monitoring adj d ustment & adjustment

Strategy ex eexecution ecution Strategy process Fig. 7.2 Stage progression: strategy formation and execution

the extreme case, strategy execution takes an entirely emergent path by which formation and execution occur simultaneously, and in which case few elements of an originally conceived deliberate strategy end up being executed. More typical is a situation in which elements of a strategy are progressively adjusted over the course of its execution, as shown in Fig. 7.2. Adjustments might be required as a result of new insights; these might relate to previously missing ‘pieces of the puzzle’ that emerge only after a strategy’s execution has been initiated. However, adjustments might also be necessary to account for unanticipated changes in the competitive environment. Indeed, this premise encompasses the crux of this book—that numerous factors that set the stage for the successful execution of a strategy are affected and influenced by the thinking that goes into the formation of a strategic option. As such, factors that ultimately determine a strategy’s successful execution are those that are addressed by principles and concepts comprehensively dealt with in the earlier chapters of this book. The very purpose of insight-driven, first principles-based thinking and analysis approaches to strategic problem-solving dealt with in this book is to narrow the choice of options to those that a firm is most capable of executing. Effort invested in strategic problem-solving that produces a strategy that cannot be executed, no matter how grand and aspirational it might be, is essentially futile. The objective of purposeful strategising is to factor the execution of a strategy into its design from the start. Corrective mechanisms intrinsic to insight-driven, first principles thinking and analysis approaches to strategising and decision-making ultimately ensure the highest probability of a strategy’s success.

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Praxis Reflection 7.7: Concluding Reflections In your organisation. . . . When reflecting on past failed strategies, what were the common contributing factors? . To what extent are the formulation and the execution of a strategy synchronised? . What issues typically arise in the execution phase of a strategy?

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