Strategic Management Principles 31

Chapter II
Strategic Management
Principles

Introduction

Building on the understanding of the theories and models of firms, this chapter reviews the
basic principles of strategic management of business enterprises. First, the basic principles
of business strategy are explained. Only through in-depth understanding and diligent ap-
plication of these principles will business executives be able to make strategic choices and
craft an appropriate business strategy and the corresponding value configuration, business
model, or e-business model for the firm.
Second, the role of corporate strategy and its relationships with business unit strate-
gies are discussed. The discipline of strategic management is introduced together with the
principles of strategy maps—a model which is explained and illustrated by case example
of its application by a leading corporation in more detail in Chapter V as part of a strategic
alignment discussion.
Third, the principles of strategic planning and the measurement of competitive strategy
are described. These tasks ensure a corporate/business strategy is rigorously planned,
resourced, and diligently executed to deliver the requisite strategic goals.
Following on from the resource-based and activity-based theories of firms discussed
in Chapter I, this chapter describes the corresponding resource-based and activity-based
strategies. In addition, with the increasing importance of corporate governance comes the
need to ensure due consideration is given to ethics in information technology deployment.
Theories for ethics in IT and their incorporation in IT strategy are still emerging. The basic
issues for IT strategy developmental consideration are reviewed.

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32 Chew & Gottschalk

Fourth, to help managers develop sound business strategies for their firms, the chapter
describes nine basic methods for business strategy analysis. From this analysis, firms will
be able to analyze the needs for change from comparing the current state to the future target
state of the business envisioned by the resultant business strategy.
Finally, to ensure firms will be able to leverage the strategic advantage that Internet
technology may able to offer, this chapter continues from Chapter I’s discussion of e-busi-
ness models to explain the basic properties of e-strategies.

Basic Principles of Strategy

Strategy is not about finding the universally best way of competing, nor is it an effort to be
all things to every customer. Strategy is about defining a way of competing that delivers
unique value in a particular set of uses or for a particular set of customers (Porter, 1985).
Indeed, as Thompson and Strickland (2003, p. 3) postulate, “a company’s strategy is the
game plan management is using to stake out a market position, conduct its operation, at-
tract and please customers, compete successfully, and achieve organizational objectives.”
To establish and maintain a distinctive strategic positioning, Porter (2001) stipulates that
a company needs to follow six fundamental principles:

• It must start with the right goal: superior long-term return on investment. Only by
grounding strategy in sustained profitability will real economic value be generated.
Economic value is created when customers are willing to pay a price for a product
or service that exceeds the cost of producing it.
• A company’s strategy must enable it to deliver a value proposition, or set of benefits,
different from those that competitors offer.
• Strategy needs to be reflected in a distinctive value configuration. To establish a
sustainable competitive advantage, a company must perform different activities than
rivals or perform similar activities in different ways.
• Robust strategies involve trade-offs. A company must abandon or forego some product
features, services, or activities in order to be unique at others.
• Strategy defines how all the elements of what a company does fit together. A strategy
involves making choices throughout the value configuration that are independent; all
a company’s activities must be mutually reinforcing.
• Strategy involves continuity of direction. A company must define a distinctive value
proposition that it will stand for, even if that means foregoing certain opportuni-
ties.

Thus, the value configuration or e-business model (described in Chapter I) that the firm
will choose can only be determined after the firm has decided on its strategic goal and
the distinct value proposition that it intends to deliver to win the target markets it wishes
to serve and make profit from. The unique value configuration and strategic resources
required to deliver that distinct value proposition are designed as part of the strategy
creation process. Only then will it make sense to define the IT strategy, which specified
the IT applications and infrastructure required to implement the value configuration and
support and integrate the various strategic resources required to deliver the distinct value
proposition. This will ensure that the IT strategy is aligned with the business strategy—a

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 Strategic Management Principles 33

practice which is called strategic alignment and the central theme of this book. This practice
is described in Chapter V.
Strategy is both a plan for the future and a pattern from the past; it is the match an
organization makes between its internal resources and skills (sometimes collectively called
competencies) and the opportunities and risks created by its external environments. Strategy
is the long-term direction of an organization. Strategy is a course of action for achieving
an organization’s purpose. Strategy is the direction and scope of an organization over the
long term, which achieves advantage for the organization through its configuration of
resources within a changing environment and to fulfill stakeholder expectations (Johnson
& Scholes, 2002).
Strategy as a plan is a direction, a guide or course of action into the future, a path to get
from here to there. Strategy as a pattern is a consistency in behavior over time. Strategy
as a position is the determination of particular products in particular markets. Strategy as
perspective is an organization’s way of doing things (Mintzberg, 1994).
Necessary elements of a business strategy include mission, vision, objectives, market
strategy, knowledge strategy, and our general approach to the use of information, informa-
tion systems, and information technology.
Mission describes the reason for firm existence. For example, the reason for law firm
existence is client’s needs for legal advice. The mission addresses the organization’s basic
question of “What business are we in?”’ This single essential sentence should include no
quantification, but must unambiguously state the purpose of the organization and should
just as carefully define what the organization does not do. The mission is an unambiguous
statement of what the organization does and its long-term overall purpose. Its primary role
is to set a direction for everyone to follow. It may be short, succinct, and inspirational, or
contain broad philosophical statements that tie an organization to certain activities and to
economic, social, ethical, or political ends. Values are also frequently stated alongside the
mission. Three differing examples of missions are: To help people move from one place to
another; to provide medical treatment to sick people; and to enable electronic communica-
tion between people.
Vision describes what the firm wants to achieve. For example, the law firm wants to
become the leading law firm in Norway. The vision represents the view that senior managers
have for the future of the organization, so it is what they want it to become. This view gives
a way to judge the appropriateness of all potential activities that the organization might
engage in. The vision gives a picture, frequently covering many aspects that everyone can
identify with, of what the business will be in the future, and how it will operate. It exists to
bring objectives to life and to give the whole organization a destination that it can visualize
so that every stakeholder has a shared picture of the future aim.
Objectives describe where the business is heading. For example, the law firm can choose
to merge with another law firm to become the leading law firm in Norway. Objectives are
the set of major achievements that will accomplish the vision. These are usually small in
number but embody the most important aspects of the vision such as financial returns,
customer service, manufacturing excellence, staff morale, and social and environmental
obligations.
Market strategy describes market segments and products. For example, the law firm
can focus on corporate clients in the area of tax law.

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34 Chew & Gottschalk

Figure 2.1. Corporate strategy above other levels (Johnson & Scholes, 2002)

Corporaton
Corporate Parent
Dvsons

Busnesses

Corporate Strategy

Corporate strategy is concerned with the strategic decisions at the corporate level of orga-
nizations, decisions which may affect many business units. Managers at this level are acting
on behalf of shareholders, or other stakeholders, to provide services and, quite possibly,
strategic guidance to business units that seek to generate value by interacting with custom-
ers. In these circumstances, a key question is to what extent and how the corporate level
might add value to what the businesses do or in the least how they might avoid destroying
value (Johnson & Scholes, 2002).
A multibusiness company structure may consist of a number of business units grouped
within divisions and a corporate center or head office providing, perhaps, legal services,
financial services, and the staff of the chief executive. There are different views as to what
is meant by corporate strategy and what represents corporate as distinct from business-
level strategy. Johnson and Scholes (2002) argue that anything above the business unit
level represents corporate activity.
The levels of management above that of business units are often referred to as the cor-
porate parent (Figure 2.1). So, for example, the divisions within a corporation, which look
after several businesses act in a corporate parenting role. The corporate parenting role can
be as (Johnson & Scholes, 2002):

• The portfolio manager. A corporate parent acting as an agent on behalf of financial

markets and shareholders with a view to enhancing the value attained from the various
businesses in a more efficient or effective way than financial markets could. Their
role is to identify and acquire undervalued assets or businesses and improve them.
• The restructurer. A corporate parent identifying restructuring opportunities in
businesses and having the skills to intervene to transform performance in those
businesses. They may well hold a diverse range of businesses within their portfolio.
However, they do have a limited role at the business-unit level, which is to identify
ways in which businesses can be turned around or fitness improved and to manage
the restructuring period.
• The synergy manager. Synergy is often seen as the main reason for the existence
of the corporate parent. Potentially, synergy can occur in situations where two or
more activities or processes complement each other, to the extent that their combined
effect is greater than the sum of the parts. In terms of corporate strategy, the logic is
that value can be enhanced across business units. This can be done in a number of

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 Strategic Management Principles 35

ways: activities might be shared, and there may exist common skills or competences
across businesses.
• The parental developer. A corporate parent seeks to employ its own competences
as a parent to add value to its businesses. Here, the issue is not so much about how
it can help create or develop benefits across business units or transference between
business units, as in the case of managing synergy. Rather, parental developers have
to enhance the potential of business units.

From a strategic planning perspective, corporate strategy will depend on the main role
of the corporate parent. The portfolio manager is not directly intervening in the strategies
of business units. Rather, they are setting financial targets, making central evaluations
about the well-being and future prospects of such businesses, and investing or divesting
accordingly. The restructurer is directly intervening in business units, as it is likely that the
business restructuring opportunities that will be sought will be those that match the skills
of the corporate center. The synergy manager will initiate activities and develop resources
that are shared across business units. Managers in the businesses have to be prepared to
cooperate in such transference and sharing (Johnson & Scholes, 2002).
Finally, the parental developer has to enhance the potential of business units in various
ways. Suppose, for example, it has a great deal of experience in globalizing domestically
based businesses; a valuable brand that may enhance the performance or image of a busi-
ness; or perhaps specialist skills in financial management, brand marketing, or research
and development. If such parenting competences exist, corporate managers then need to
identify a parenting opportunity—a business or businesses not fulfilling their potential
but where improvement could be made by the application of the competences of the parent
(Johnson & Scholes, 2002).

Strategic Management

Strategy without actions has no value to the company. To realize the future that the strategy
aims to effect, the company must “manage” the strategy from formulation to implementation
and benefits realization. This discipline is called strategic management, which includes
understanding the strategic position of an organization, strategic choices for the future,
and turning strategy into action. Understanding the strategic position is concerned with
impact on strategy of the external environment, internal resources and competences, and
the expectations and influence of stakeholders. Strategic choices involve understanding
the underlying bases for future strategy at both the corporate and business unit levels
and the options for developing strategy in terms of both the directions in which strategy
might move and the methods of development. Translating strategy into action is concerned
with ensuring that strategies are working in practice. A strategy is not just a good idea, a
statement, or a plan. It is only meaningful when it is actually being carried out (Johnson
& Scholes, 2002). The discipline of developing the strategy into a series of action plans
is called strategic planning. Strategic planning is a subset of the strategic management
discipline. It focuses on prioritizing resources to the selected action plans, and coordinat-
ing and controlling the activities to ensure the envisioned future will be created. This is
described in detail in the next section.

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36 Chew & Gottschalk

Thompson and Strickland (2003, p. 6) stipulate that strategic management is a combined

process of strategy making and strategy implementation, which comprises five interrelated
managerial tasks:

1. Develop strategic vision and business mission—set the long-term direction and define
what the company is trying to become so as “to infuse the organization with a sense
of purposeful action.”
2. Set objectives—translate the strategic vision into a set of (measurable) business
outcomes that the company must accomplish.
3. Craft a strategy to achieve the objectives—the game plan to realize the business
outcomes.
4. Implement and execute the chosen strategy efficiently and effectively to realize the
desired business outcomes.
5. Evaluating performance, monitoring new developments (such as external market,
industry, regulatory, and technology developments), and initiating corrective adjust-
ments in vision, strategic objectives, strategy, or execution, as required, as a result
of the actual experience, changing conditions, new ideas, and new opportunities.

As these tasks are interrelated, they need not be done sequentially. Strategic management
is an ongoing process—not a start-stop event (Thompson & Strickland, 2003). Strategy
and its implementation will adapt with performance experience and internal and external
business environmental changes.
Generally, there are some characteristics of strategic decisions that are usually associ-
ated with the word strategy (Johnson & Scholes, 2002):

• Strategy is likely to be concerned with long-term direction of an organization.

• Strategic decisions are normally about trying to achieve some advantage for the
organization over competition.
• Strategic decisions are likely to be concerned with the scope of an organization’s
activities.
• Strategy can be seen as the matching of the resources and activities of an organiza-
tion to the environment in which it operates.
• Strategy can also be seen as building on or expanding an organization’s resources
and competences to create opportunities or to capitalize on them.
• Strategies may require major resource changes for an organization.
• Strategic decisions are likely to affect operational decisions.
• The strategy of an organization is affected not only by environmental forces and
resource availability but also by the values and expectations of those who have power
in and around the organization.

The notion of strategic fit is developing strategy by identifying opportunities in the

business environment and adapting resources and competences so as to take advantage of
these. The correct positioning of the organization is important, for example, in terms of
the extent to which it meets clearly identified market needs. Strategic position is concerned
with impact on strategy of the external environment, internal resources and competences,
and the expectations and influence of stakeholders (Johnson & Scholes, 2002).

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 Strategic Management Principles 37

Strategy development is linked to strategic planning procedures. They represent the

design approach to managing strategy, which views strategy development as the deliber-
ate positioning of the organization through a rational, analytic, structured, and directive
process. Strategy as design is an important strategy lens. Alternative and supplementing
lenses are strategy as experience and strategy as ideas. Strategy as experience suggests that
strategies develop in an adaptive fashion and change gradually. Strategy is here understood
in terms of continuity; once an organization has adopted a particular strategy, it tends
to develop from and within that strategy, rather than fundamentally changing direction.
Strategy as ideas sees strategy as the emergence of order and innovation from the variety
and diversity that exists in and around an organization. New ideas, and therefore innova-
tion, may come from anywhere in an organization or from stimuli in the world around it
(Johnson & Scholes, 2002).
Strategy development and strategy formation is also concerned with concepts such as
strategic leadership, organizational politics, strategic incrementalism, the learning organiza-
tion, imposed strategy, and multiple processes of strategy development. A strategic leader
is an individual upon whom strategy development and change are seen to be dependent.
Managers often suggest that the strategy being followed by the organization is really the
outcome of organizational politics in terms of the bargaining and power politics that go
on between important executives. Managers may have a view of where they want the
organization to be in years to come and try to move towards this position incrementally,
where strategic incrementalism can be thought of as the deliberate development of strategy
by learning through doing over time. The concept of the learning organization and strat-
egy as a learning process implies continual regeneration of strategy from the variety of
knowledge, experience, and skills of individuals with a culture, which encourages mutual
questioning and challenge around a shared purpose or vision. Forces or agencies external
to the organization may cause imposed strategy that the organization has to follow. Dif-
ferent lenses and different strategy development processes may cause multiple processes
of strategy development, since there is no right way in which strategies are developed
(Johnson & Scholes, 2002).
At the beginning of this chapter, strategy is defined as a course of action for achieving an
organization’s purpose. Where managers have a clear understanding of their organization’s
purpose, this can provide strong guidance during processes of strategic thinking, strategy
formation, and strategic change. The organizational purpose can function as a fundamental
principle, against which strategic options can be evaluated. Organizational purpose can
be defined as the reason for which an organization exists. The broader set of fundamental
principles giving direction to strategic decision making, of which organizational purpose
is the central element, is referred to as the corporate mission. The corporate mission may
have elements such as organizational beliefs, organizational values, and business definition
(Wit & Meyer, 2004).
Some authors distinguish between deliberate strategy and emergent strategy as two
alternative processes of strategy formulation. According to Christensen and Raynor (2003),
deliberate strategy—such as strategic planning—is the appropriate tool for organizing ac-
tion if three conditions are met. First, the strategy must encompass and address correctly
all of the important details required to succeed, and those responsible for implementation
must understand each important detail in management’s deliberate strategy. Second, if the
organization is to take collective action, the strategy needs to make as much sense to all
employees as they view the world from their own context as it does to top management, so

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38 Chew & Gottschalk

that they will all act appropriately and consistent. Finally, the collective intentions must
be realized with little unanticipated influence from outside political, technological, and
market forces.
Emergent strategy bubbles up from within the organization and is the cumulative effect
of day-to-day prioritization and investment decisions made by middle managers, engineers,
salespeople, and financial staff. These tend to be tactical, day-to-day operating decisions
that are made by people who are not in a visionary, futuristic, or strategic state of mind
(Christensen & Raynor, 2003). Emergent strategy is also often the result of the dynami-
cally readjusted strategy in response to external changing competitive market forces and
conditions (Marchand, Kettinger, & Rollins, 2001).
Some authors distinguish between intended strategy and realized strategy. Intended
strategy is an expression of desired strategic direction deliberately formulated and planned
by managers. Realized strategy is the strategy actually being followed by an organization
in practice. Strategic drift occurs when an organization’s strategy gradually moves away
from relevance to the forces at work in its environment (Johnson & Scholes, 2002).
As we will see throughout this book, strategic alignment is the key to successful stra-
tegic management. Strategic alignment calls for methods for analysis, choice, and imple-
mentation. A general method is available in terms of strategy maps as defined by Kaplan
and Norton (2004), which represent interesting perspectives on strategy development and
strategy formation. Strategy maps are used to describe how the organization creates value,
and they were developed for the balanced scorecard. The strategy map is based on several
principles:

• Strategy balances contradictory forces. Investing in intangible assets for long-

term revenue growth usually conflicts with cutting costs for short-term financial
performance.
• Strategy is based on a differentiated customer value proposition. Satisfying
customers is the source of sustainable value creation.
• Value is created through internal business processes. The financial and customer
perspectives in strategy maps and balanced scorecards describe the outcomes, that
is, what the organization hopes to achieve.
• Strategy consists of simultaneous, complementary themes. Operations manage-
ment, customer management, innovation, regulations, and societal expectations
deliver benefits at different points in time.
• Strategic alignment determines the value of intangible assets. Human capital,
information capital, and organization capital are intangible assets.

We will return to strategy maps in Chapter V. Understanding the strategic position of

an organization and considering the strategic choices open to it are of little value unless
the strategies managers wish to follow can be turned into organizational action. Strategies
cannot take effect until they take shape in action. Such action takes form in the day-to-
day processes and relationships that exist in organizations; and these need to be managed
desirably in line with the intended strategy (Johnson & Scholes, 2002). The critical first
step of turning strategy into action is called strategic planning.

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 Strategic Management Principles 39

Strategic Planning

Translating strategies into action is no simple task. First, it is important to organize for suc-
cess by introducing appropriate structure, processes, relationships, and boundaries. Second,
it is important to enable success by managing people, managing information, managing
finance, managing technology, and integrating resources. Finally, strategic change has to
be managed by diagnosing the change situation, applying relevant styles and roles, and
implementing levers for managing strategic change, such as organizational routines and
symbolic processes (Johnson & Scholes, 2002).
The design school of strategic planning is built on the belief that strategy formation
is a process of conception—the use of a few basic ideas to design strategy. Of these, the
most essential is that of congruence, or fit, between external and organizational factors. A
number of premises underlie the design school (Mintzberg, 1994):

1. Strategy formation should be a controlled, conscious process of thought.

2. Responsibility for the process must rest with the chief executive officer; that person
is the strategist.
3. The model of strategy formation must be kept simple and informal.
4. Strategies should be unique: the best ones result from a process of creative design.
5. Strategies must come out of the design process fully developed.
6. The strategies should be made explicit and, if possible, articulated, which means they
have to be kept simple.
7. Finally, once these unique, full-blown, explicit, and simple strategies are fully for-
mulated, they must then be implemented.

Numerous researchers and executives advocate strategic planning. They argue that an
explicit planning process rather than haphazard guesswork results in the collection and
interpretation of data critical to creating and maintaining organization–environment align-
ment. They argue that planning generally produces better alignment and financial results
than does trial-and-error learning (Miller & Cardinal, 1994).
Despite the intuitive appeal of these arguments, several researchers have countered that
explicit strategic planning is dysfunctional or, at best, irrelevant. One of the most widely
circulated criticisms is that planning yields too much rigidity. Proponents of the rigidity
hypothesis maintain that a plan channels attention and behavior to an unacceptable degree,
driving out important innovations that are not part of the plan. Given that the future param-
eters of even relatively stable industries are difficult to predict, these theoreticians consider
any reduction in creative thinking and action dysfunctional (Miller & Cardinal, 1994).
Miller and Cardinal (1994) developed a model that might explain the inconsistent
planning–performance findings reported in previous research. Results from the model
suggest that strategic planning positively influences firm performance. Researchers who
have concluded that planning does not generally benefit performance appear to have been
incorrect.
Strategic planning procedures represent the design approach to managing strategy.
Such procedures may take the form of highly systematized, step by step, chronological
procedures involving many different parts of the organization.
Some of the key concepts in strategic planning are future thinking, controlling the
future, decision making, integrated decision making, and a formalized procedure to

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40 Chew & Gottschalk

produce an articulated result in the form of an integrated process of decisions. Strategic

planning is the process of deciding on the projects that the organization will undertake
and the approximate amount of resources that will be allocated to each program over the
next several years.
Planning represents the extent to which decision makers look into the future and use
formal planning methodologies. Planning is something we do in advance of taking action;
it is anticipatory decision making. We make decisions before action is required. The focus
of planning revolves around objectives, which are the heart of a strategic plan (Mintzberg,
1994).
The whole purpose of strategizing is to give organizations direction, instead of letting
them drift. Organizations cannot act rationally without intentions; if you do not know
where you are going, any behavior is fine. By first setting a goal and then choosing a strat-
egy to get there, organizations can get organized. A structure can be chosen, tasks can be
assigned, responsibilities can be divided, budgets can be allotted, and targets can be set.
Not unimportantly, a control system can be created to measure results in comparison to
the plan so that corrective action can be taken (Wit & Meyer, 2004).
Another advantage of the planning approach to strategy formation is that it allows for
the formalization and differentiation of strategy tasks. Because of its highly structured
and sequential nature, strategic planning lends itself well to formalization. The steps of
the strategic planning approach can be captured in planning procedures to enhance and
organize the strategy formation process. In such planning procedures, not all elements of
strategy formation need to be carried out by one and the same person but can be divided
among a number of people. The most important division of labor is often between those
formulating the plans and those implementing them (Wit & Meyer, 2004).
We will return to strategic planning in Chapter IV to address its critical success fac-
tor.

Measurement of Competitive Strategy

The measurement of competitive strategy is an important issue in strategic management.

Porter (1985) first defined three generic competitive strategies: cost leadership, differen-
tiation, and focus. Attempts to measure these strategies seek to capture differences in the
extent to which firms emphasize various competitive dimensions. Competitive strategy
is traditionally measured at the business level. Yet businesses often consist of product
portfolios in which a different competitive strategy is used for each product. Thus, busi-
ness-level measures may not be good indicators of product-level competitive strategy.
Further, business-level analyses have found combined cost-leadership and differentiation
strategies. But if competitive strategies are formulated at the product level, it is unclear
whether combined strategies exist at that level.
Nayyar (1993) examined these issues. He found that business-level measures are not
good indicators of product-level competitive strategies. He also found no evidence sup-
porting the existence of combined competitive strategies at the product level. He found
that cost-leadership and differentiation are mutually exclusive at the product level. They do
not appear to be two dimensions of any strategy. Previously used business-level measures
tend to identify combined competitive strategies, a result that may reflect the existence of
product portfolios, rather than combined competitive strategies.

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 Strategic Management Principles 41

These findings suggest a need for a reexamination of the concept of competitive strate-
gies. It appears that firms use competitive strategies for products and then construct product
portfolios to obtain overall cost, differentiation, and preemption advantages. Within any
industry, different firms may construct different product portfolios.
In his measurement of competitive strategy, Nayyar (1993) used the following com-
petitive dimensions associated with a cost-leadership strategy: operating efficiency, cost
control, pricing below competitors, managing raw materials cost and availability, trade
sales promotion, manufacturing process improvements and innovation, and product cost
reduction. The following competitive dimensions were associated with a differentiation
strategy: new product development, extensive customer service, building and maintaining
brand equity, marketing innovation, influence over distribution channels, targeting high-
priced segment(s), advertising, building and maintaining the firm’s reputation, providing
product(s) with many features, and premium product quality. The following competitive
dimensions were associated with a focus strategy: serving special market segment(s) and
manufacturing and selling customized products.
Instead of measuring competitive strategy in terms of alternative strategies, Julien
and Ramangalahy (2003) measured competitive strategy in terms of intensity. The more
competitive a strategy is, the more intense is the competitive strategy. The intensity was
measured in terms of marketing differentiation, segmentation differentiation, innovation
differentiation, and products service. Marketing differentiation is based on competitive
pricing, brand development, control over distribution, advertising, and innovation in terms
of marketing techniques. Segmentation differentiation relies on the ability to offer special-
ized products to specific customer groups. Innovation differentiation is based on the ability
to offer new and technologically superior products. Product service is based on the quality
of the products and services provided by customers.
Competitive strategy must drive other strategies in the firm such as knowledge strategy.
Executives must be able to articulate why customers buy a company’s products or services
rather than those of its competitors. What value do customers expect from the company?
How does knowledge that resides in the company add value for customers? Assuming the
competitive strategy is clear, managers will want to consider three more questions that
can help them choose a primary knowledge management strategy (Hansen, Nohria, &
Tierny, 1999):

• Do you offer standardized or customized products? Companies that follow a stan-

dardized product strategy sell products that do not vary much, if at all. A knowledge
management strategy based on reuse fits companies that are creating standardized
products.
• Do you have a mature or innovative product? A business strategy based on mature
products typically benefits most from a reuse of existing knowledge.
• Do your people rely on explicit or tacit knowledge to solve problems? Explicit knowl-
edge is knowledge that can be codified, such as simple software code and market
data.

Strategic planning in a turbulent environment is challenging. The challenge of making
strategy when the future is unknowable encourages reconsideration of both the process
of strategy formulation and the nature of organizational strategy. Attempts to reconcile

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42 Chew & Gottschalk

systematic strategic planning with turbulent, unpredictable business environments included

the following (Grant, 2003):

• Scenario planning. Multiple scenario planning seeks not to predict the future but
to envisage alternative views of the future in the form of distinct configurations of
key environmental variables. Abandoning single-point forecasts in favor of alterna-
tive futures implies foresaking single-point plans in favor of strategy alternatives,
emphasizing strategic flexibility that creates option values.
• Strategic intent and the role of vision. If uncertainty precludes planning in any de-
tailed sense, then strategy is primarily concerned with establishing broad parameters
for the development of the enterprise with regard to domain selection and domain
navigation. Uncertainty requires that strategy is concerned less with specific actions
and the more with establishing clarity of direction within which short-term flexibility
can be reconciled with overall coordination of strategic decisions.
• Strategic innovation. If established companies are to prosper and survive, new ex-
ternal environments require new strategies. Strategic planning may be a source of
institutional inertia rather than innovation. Yet, systematic approaches to strategy
can be encouraging to managers to explore alternatives beyond the scope of their
prior experiences. Strategic inertia may be more to do with the planners than of
planning.
• Complexity and self-organization. Often faced with a constantly changing fitness
landscape, maximizing survival implies constant exploration, parallel exploration
efforts by different organizational members, and the combination of incremental
steps. A key feature of strategic processes is the presence of semistructures that create
plans, standards, and responsibilities for certain activities, while allowing freedom
elsewhere. One application of the semistructure concept to strategy formulation
concerns the use of simple rules that permit adaptation while establishing bounds
that can prevent companies from falling off the edge of chaos.

Hopkins and Hopkins (1997) investigated relationships among managerial, environ-

mental, and organizational factors, strategic planning intensity, and financial performance
in U.S. banks. The results suggested that the intensity with which banks engage in the
strategic planning process has a direct positive effect on banks’ financial performance
and mediates the effects of managerial and organizational factors on banks’ performance.
Results also indicated a reciprocal relationship between strategic planning intensity and
performance. That is, strategic planning intensity causes better performance, and, in turn,
better performance causes greater strategic planning intensity.
Strategic planning takes many different forms in different organizations. However,
Boyd and Reuning-Elliotts’ (1998) study of strategic planning provide strong support for
the measurement properties of the strategic planning construct. In particular, the study
results indicate that strategic planning is a construct that can be reliably measured through
seven indicators: mission statement, trend analysis, competitor analysis, long-term goals,
annual goals, short-term action plans, and ongoing evaluation. This evidence is important
because previous researchers rarely tested for dimensionality of the planning construct,
nor did most studies report tests of the reliability of their measures.
A small entrepreneurial startup may operate without any explicit strategy. The firm’s
strategy is likely to exist only in the head of the founder and, apart from being articulated

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 Strategic Management Principles 43

through verbal communication with employees, suppliers, and other interested parties,
may have been made explicit only when a business plan was required by outside investors.
Most corporations with an established management structure tend to have some form of
strategic planning process, though in small single-business companies, the strategy pro-
cess may be highly informal with no regular cycle and may result in little documentation.
Most larger companies, especially those with multiple businesses, have more systematic
strategic planning processes, the outcome of which is a documented plan that integrates
the business plans of the individual divisions (Grant, 2003).
Whether formal or informal, systematic or ad hoc, documented or not, the strategy
formulation process is an important vehicle for achieving coordination within a company.
The strategy process occupies multiple roles within the firm. It is in part a coordination
device encouraging consistency between the decisions being made at different levels and in
different parts of the organization. And it is in part a mechanism for driving performance by
establishing consensus around ambitious long-term targets and by inspiring organizational
members through creating vision and a sense of mission. In these roles, the strategy process
can be important in achieving both coordination and cooperation (Grant, 2003).
The system through which strategy is formulated varies considerably from company to
company. Even after the entrepreneurial startup has grown into a large company, strategy
making may remain the preserve of the chief executive. Medium-sized single-business
companies typically have simple strategic planning processes where functional managers
provide key inputs such as financial projections and market analysis, but the key elements
of strategy—goals, new business developments, capital investment, and key competitive
initiatives—are decided by the chief executive (Grant, 2003).
The more systematized strategic planning processes typical of large companies with
separate divisions or business units traditionally follow an annual cycle. Strategic plans tend
to be for three to five years and combine top-down initiatives (indications of performance
expectations and identification of key strategic initiatives) and bottom-up business plans
(proposed strategies and financial forecasts for individual divisions and business units).
After discussion between the corporate level and the individual businesses, the business
plans are amended and agreed and integrated into an overall corporate plan that is presented
to and agreed by the board of directors (Grant, 2003).
The resulting strategic plan typically comprises the following elements (Grant,
2003):

• A statement of the goals the company seeks to achieve over the planning period with
regard to both financial targets and strategic goals.
• A set of assumptions or forecasts about key developments in the external environment
to which the company must respond.
• A qualitative statement of how the shape of the business will be changing in relation
to geographical and segment emphasis, and the basis on which the company will be
establishing and extending its competitive advantage.
• Specific action steps with regard to decisions and projects, supported by a set of
mileposts stating what is to be achieved by specific dates.
• A set of financial projections, including a capital expenditure budget and outline
operating budgets.

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44 Chew & Gottschalk

Although directed toward making decisions that are documented in written strategic
plans, the important elements of strategic planning form the strategy process: the dialog
through which knowledge is shared and ideas communicated, the establishment of con-
sensus, and the commitment to action and results (Grant, 2003).

Resource-Based Strategy

Strategic management models traditionally have defined the firm’s strategy in terms of its
product/market positioning—the products it makes and the markets its serves. The resource-
based approach suggests, however, that firms should position themselves strategically based
on their unique, valuable, and inimitable resources and capabilities rather than the products
and services derived from those capabilities. Resources and capabilities can be thought of
as a platform from which the firm derives various products for various markets. Leveraging
resources and capabilities across many markets and products, rather than targeting specific
products for specific markets, becomes the strategic driver. While products and markets
may come and go, resources and capabilities are more enduring.
According to Hitt, Bierman, Shimizu, and Kochhar (2001), scholars argue that resources
form the basis of firm strategies and are critical in the implementation of those strate-
gies as well. Therefore, firm resources and strategy seem to interact to produce positive
returns. Firms employ both tangible resources (such as buildings and financial resources)
and intangible resources (like human capital and brand equity) in the development and
implementation of strategy. Outside of natural resource monopolies, intangible resources
are more likely to produce a competitive advantage because they are often rare and socially
complex, thereby making them difficult to imitate.
According to Barney (2001), resource-based theory includes a very simple view about
how resources are connected to the strategies a firm pursues. It is almost as though once a
firm becomes aware of the valuable, rare, costly to imitate, and nonsubstitutable resources
it controls, the actions the firm should take to exploit these resources will be self-evident.
That may be true some of the time. For example, if a firm possesses valuable, rare, costly
to imitate, and nonsubstitutable economies of scale, learning curve economies, access to
low-cost factors of production, and technological resources, it seems clear that the firm
should pursue a cost leadership strategy.
However, it will often be the case that the link between resources and the strategy of
a firm is not being so obvious. Resource-based strategy has to determine when, where,
and how resources may be useful. Such strategy is not obvious, since a firm’s resources
may be consistent with several different strategies, all with the ability to create the same
level of competitive advantage. In this situation, how should a firm decide which of these
several different strategies it should pursue? According to Barney (2001), this and other
questions presented by Priem and Butler (2001) concerning the resource-based theory of
the firm indicate that the theory is still a theory in many respects, and that more conceptual
and empirical research has to be conducted to make the theory more useful to business
executives who develop resource-based strategies for their firms.
Resource-based strategy is concerned with the mobilization of resources. Since perceived
resources merely represent potential sources of value-creation, they need to be mobilized
to create value. Conversely, for a specific resource to have value, it has to increase or oth-
erwise facilitate value-creation. The activity whereby tangible and intangible resources

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 Strategic Management Principles 45

are recognized, combined, and turned into activities with the aim of creating value is the
process here called resource mobilization. The term resource mobilization is appropriate, as
it incorporates the activity-creation based on both individual and organizational resources,
as well as tangibles and intangibles. According to Haanaes (1997), alternative terms such
as resource allocation, resource leveraging, or resource deployment are appropriate when
describing the value-creation based on tangible resources, but less so for intangibles. For
example, a competence cannot be allocated, as the person controlling it has full discretion
over it. Moreover, the competence can be used in different ways. An engineer can choose
to work for a different organization and to work with varying enthusiasm. Also, the same
engineer can choose not to utilize his or her competence at all. The term resource mobi-
lization is thus meant to cover the value-creation based on all types of resources, and it
recognizes that all activity creation has a human aspect.
In strategic management and organization theory, the importance for the firm of re-
ducing uncertainty and its dependence on key resources that it cannot fully control has
received much attention. If a large part of the resource accumulation takes place in terms
of increased competences that key professionals could easily use for the benefit of other
employers, the firm needs to set priorities in terms of linking these individually controlled
resources to the firm. Loewendahl (2000) suggests three alternative strategies. The simplest
strategy, which may be acceptable to some firms, involves minimizing the dependence on
individual professionals and their personal competence. In this sense, the firm chooses
to avoid the dependence on individual tangibles. A second strategy is that of linking the
professionals more tightly to the firm and reducing the probability of losing them. The
third alternative strategy involves increasing the organizationally controlled competence
resources without reducing the individually controlled resources. Such a strategy leads to
a reduction in the relative impact of individual professionals on total performance without
reducing the absolute value of their contributions. Firms that have been able to develop a
high degree of organizationally controlled resources, including relational resources that are
linked to the firm rather than to individual employees, are likely to be less concerned about
the exit and entry of individual professionals and more concerned about the development
and maintenance of their organizational resource base.
According to Maister (1993), there is a natural, but regrettable, tendency for professional
firms, in their strategy development process, to focus on new things: What new markets
does the firm want to enter? What new clients does the firm want to target? What new
services does the firm want to offer? This focus on new services and new markets is too
often a cop-out. A new specialty (or a new office location) may or may not make sense for
the firm, but it rarely does much (if anything) to affect the profitability or competitiveness
of the vast bulk of the firm’s existing practices.
On the other hand, an improvement in competitiveness in the firm’s core businesses will
have a much higher return on investment since the firm can capitalize on it by applying it
to a larger volume of business. Enhancing the competitiveness of the existing practice will
require changes in the behavior of employees. It implies new methods of operating, new
skill development, and new accountabilities. Possible strategies for being more valuable to
clients can be found in answers to the following questions (Maister, 1993):

• Can we develop an innovative approach to hiring so that we can be more valuable to

clients by achieving a higher caliber of staff than the competition?

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46 Chew & Gottschalk

• Can we train our people better than the competition in a variety of technical and
counseling skills so that they will be more valuable on the marketplace than their
counterparts at other firms?
• Can we develop innovative methodologies for handling our matters (or engagements,
transactions, or projects) so that our delivery of services becomes more thorough and
efficient?
• Can we develop systematic ways of helping, encouraging, and ensuring that our
people are skilled at client counseling in addition to being top suppliers?
• Can we become better than our competition at accumulating, disseminating, and
building our firmwide expertise and experience, so that each professional becomes
more valuable in the marketplace by being empowered with a greater breadth and
depth of experience?
• Can we organize and specialize our people in innovative ways so that they become
particularly skilled and valuable to the market because of their focus on a particular
market segment’s needs?
• Can we become more valuable to our clients by being more systematic and diligent
about listening to the market: collecting, analyzing, and absorbing the details of their
business than does our competition?
• Can we become more valuable to our clients by investing in research and develop-
ment on issues of particular interest to them?

In resource-based strategy, there has to be consistency between resources and busi-

ness. The logic behind this requirement is that the resources should create a competitive
advantage in the business in which the firm competes. To meet this requirement, corporate
resources can be evaluated against key success factors in each business. When doing so,
it is important to keep in mind that in order to justify retaining a business, or entering a
business, the resources should convey a substantial advantage. Merely having pedestrian
resources that could be applied in an industry is seldom sufficient to justify entry or main-
tain presence in an attractive industry (Collis & Montgomery, 1997).
Moreover, managers must remember that, regardless of the advantage of a particular
corporate resource appears to yield, the firm must also compete on all the other resources
that are required to produce and deliver the product or service in each business. One great
resource does not ensure a successful competitive position, particularly if a firm is disad-
vantaged on other resource dimensions (Collis & Montgomery, 1997).

Activity-Based Strategy

The goal of strategy formulation in the resource-based theory is to identify and increase
those resources that allow a firm to gain and sustain superior rents. Firms owning strategic
resources are predicted to earn superior rents, while firms possessing no or few strategic
resources are thought to earn industry average rents or below average rents. The goal of
strategy formulation in the activity-based theory is to identify and explore drivers that allow
a firm to gain and sustain superior rents. Drivers are a central concept in the activity-based
theory. To be considered drivers, firm level factors must meet three criteria: they are struc-
tural factors at the level of activities, they are more or less controllable by management, and
they impact the cost and/or differentiation position of the firm. The definition of drivers is

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 Strategic Management Principles 47

primarily based on what drivers do. Drivers are abstract, relative, and relational properties
of activities. For example, scale of an activity is a driver, as the size of the activity relative
to competitors may represent a competitive advantage.
The analytical focus of the resource-based theory is potentially narrower than that of
the activity-based theory. While the activity-based theory takes the firm’s entire activity
set as its unit of analysis, the resource-based theory focuses on individual resources or
bundles of resources. Having a narrower focus means that the resource-based theory may
not take into account the negative impact of resources, how a resource’s value may change
as the environment changes, or the role of noncore resources in achieving competitive
advantage.
The activity-based and resource-based theories are similar as they both attempt to ex-
plain how firms attain superior positions through factors that increase firm differentiation
or lower firm cost. While drivers and resources share a common goal of achieving and
sustaining superior positions, the manner by which they are seen to reach a profitable posi-
tion is different. With the resource-based theory, it is the possession or control of strategic
resources that allow a firm to gain a profitable position. On the other hand, drivers within
the activity-based theory are not unique to the firm. They are generic structural factors
available to all firms in the industry in the sense that they are conceptualized as proper-
ties of the firm’s activities. A firm gains a profitable position by configuring its activities
using drivers. It is this position that a firm may own but only if it is difficult for rivals to
copy the firm’s configuration.
The sustainability of superior positions created by configuring drivers or owning
resources is based on barriers to imitation. The sustainability of competitive advantage
as per the activity-based theory is through barriers to imitation at the activity level. If the
firm has a competitive advantage, as long as competitors are unable to copy the way activi-
ties are performed and configured through the drivers, the firm should be able to achieve
above-average earnings over an extended period. The sustainability of superior profitability
in the resource-based theory is through barriers to imitation of resources and immobility
of resources. If resources are easily copied or substituted, then the sustainability of the
position is suspect.
Sheehan (2002) concludes his discussion by finding similarities between the resource-
based theory and the activity-based theory. Resources in the resource-based theory are
similar to drivers in the activity-based theory, as both are based on earning efficiency
rents. Furthermore, capabilities in the resource-based theory are similar to activities in
the activity-based theory, as both imply action.

Ethics in IT

Schultz (2006, p. 2) argues: “Nowadays, ‘ethics’ seems to be an inclusive term for concerns
referred to by ‘morality’, ‘value’, and ‘justice’…and it is also concerned with the value or
goodness of things and situations and with the justness of institutions (both formal and
informal).”
Stakeholder theory is a theory of organizational management and ethics. Indeed all
theories of strategic management have some moral content, though it is often implicit.
Moral content in this case means that the subject matter of the theories are inherently
moral topics (i.e., they are not amoral). Stakeholder theory is distinct because it addresses

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48 Chew & Gottschalk

morals and values explicitly as a central feature of managing organizations. The ends of
cooperative activity and the means of achieving these ends are critically examined in
stakeholder theory in a way that they are not in many theories of strategic management
(Phillips, Freeman, & Wicks, 2003).
As far as we know, there is no comprehensive use of stakeholder theory in IT strategy
research. Although Lacity and Willcocks (2000) have used the term in identifying four
distinct customer stakeholders and three distinct supplier stakeholders, their research has
not gotten any further on this path. In an IT strategy context, a stakeholder theory ap-
proach will describe the relationship as a nexus of cooperative and competitive interests
possessing intrinsic value.
The term stakeholder is a powerful one. This is due, to a significant degree, to its
conceptual breadth. The term means many different things to many different people and
hence evokes praise and scorn from a wide variety of scholars and practitioners of myriad
academic disciplines and backgrounds. Such breadth of interpretation, though one of stake-
holder theory’s greatest strengths, is also one of its most prominent theoretical liabilities
as a topic of reasoned discourse. Much of the power of stakeholder theory is a direct result
of the fact that, when used unreflectively, its managerial prescriptions and implications
are merely limitless. When discussed in instrumental variation (i.e., that managers should
attend to stakeholders as a means to achieving other organizational goals such as profit or
shareholder wealth maximization), stakeholder theory stands virtually unopposed (Phil-
lips et al., 2003).
Ethics in information technology is an emerging research field. Schultz (2006, p. 5)
identifies four basic features of information technology that could create new ethical issues:
(1) speed of information technology; (2) unlimited size of information storage capacity;
(3) availability of information at any location (connectivity); and (4) easy reproduction of
digital information. Earlier research (Salehnia, 2002) has addressed ethical issues related
to these basic features such as Internet privacy, digital contract laws, copyright, piracy, and
other security issues. Schultz (2006) has analyzed, among other things, the ethical issues
of offshoring from both the perspectives of the source and destination countries. A recent
article (Intorna, 2007) addressing the question of morality of technology, published in the
specialist journal Ethics and Information Technology, exemplifies the kinds of ethical issues
that IT strategy must address. Intorna (2007) argues that it is important to make the ethics
(politics) of information technology visible via (a) disclosive ethical archaeology—to subject
technology sites to ongoing disclosive scrutiny, (b) transparent design—to open up design
and development (and implementation) activity to multiple stakeolders for ongoing scrutiny
and debate, (c) engaging and multistable1 design—to prevent the user of technology design
from becoming unwittingly enrolled into political programs not of their choosing, and (d)
materializing morality—technology is transparent and open to ongoing scrutiny.
Ethics of information technology is a corporate governance issue managed through
IT governance (Raghupathi, 2007). IT ethical issues within organizations arise from the
relation between IT professionals and non-IT personnel, known as users (Schultz, 2006, p.
34). Standards and policies are usually specified by organizations to ensure ethical conduct
is conformed by IT professionals and the user community as part of IT governance. The
contemporary ethics issues currently being addressed by IT governance include codes of
ethics, for example, ACM Code of Ethics (Schultz, 2006, p. 48); Web/e-mail policy; data
protection and privacy; integration of customer relationship, supplier management, and
compliance with privacy laws; and compliance with corporate governance (such as the

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 Strategic Management Principles 49

Sarbanes-Oxley Act) and USA Patriot Act (Raghupathi, 2007). IT governance as an IT

management practice is discussed in detail in Chapter IX.

Business Strategy Analysis

Before we can define the desired business situation and craft the appropriate business strategy,
we must analyze the current business situation. There are many business analysis techniques
for strategy development. Some are general, while others are more specific. General analysis
techniques include SWOT analysis and the X model. Specific analysis techniques include
business direction (mission, vision, objectives), market strategy, value system, competitive
forces, and product life cycle. We will review the following methods:

I. SWOT analysis. SWOT analysis is an analytical tool for assessing the present and
future situation focusing on strengths (S), weaknesses (W), opportunities (O), and
threats (T). The whole company may be the object of analysis, but also a department
in a company or a project in a company may be the study object.
II. X model. The X model is a tool for description and analysis of both the current and
a desired situation. It is a method for assessing the situation within a company, a
project, or a department. The situation consists of a time period in which work is
done. In the beginning of the time period, there are both factual and personal inputs,
and at the end of the period, there are both factual and personal outputs.
III. Business direction. Important business concepts are mission, vision, and objectives.
What are the business outcomes that the strategy must achieve?
IV. Market strategy. The market strategy shows our position and ambition in the mar-
ketplace. We can either have the same product as our competitors, or we can have a
different product. If we have the same product as everyone else, it has to be sold at
the same price as all the others (as in a vegetable market or through the Internet). It
is not possible for an Internet bookstore to sell at a higher price than others, when
there is perfect information, and information searching is associated with no costs.
This is called the law of indifference. In order to survive, the company must have a
cost advantage that will give higher profits and result in higher earnings for the own-
ers. If we are selling a product that our customers perceive to be different from our
competitors’ product, then we have differentiation. A service may in its basic form
be the same for all companies, like an airline travel, in the sense that all airlines are
supposed to bring you safely to your destination. The product is differentiated by
supplementary services.
V. Competitive forces. The basis of this method is that a company exists within an
industry, and to succeed, it must effectively deal with the competitive forces that
exist within the particular industry. For example, the forces in an emerging industry
such as mobile communication are considerably different from those of established
industries such as financial services. The company interacts with its customers, sup-
pliers, and competitors. In addition, there are potential new entrants into the particular
competitive marketplace and potential substitute products and services. To survive
and succeed in this environment, it is important to understand these interactions
and the implications in terms of what opportunities or competitive advantage can
occur.

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50 Chew & Gottschalk

VI. Product portfolio analysis. There are a number of approaches that aim to relate the
competitive position of an organization to the maturity of its product. The models
assume there is a basic S-shaped curve description to the growth phenomenon of
products. Four stages in the life cycle of any product can be identified as introduction,
growth, maturity, and decline. When we look at the life cycle of all products in the
firm, we can apply product portfolio analysis. This method shows the relationship
between a product’s current or future revenue potential and the appropriate manage-
ment stance. The two by two matrix names the products in order to chart symptoms
into a diagnosis so that effective management behavior can be adopted. The matrix
classifies products according to the present market share and the future growth of
that market. A successful product that lasts from emergent to mature market goes
around the matrix. This strategy is simply to milk the cows, divest the dogs, invest
in the stars, and examine the wild cats.
VII. Environmental analysis. Environmental analysis is concerned with the external cor-
porate environment. An analysis of the environment is important because it increases
the quality of the strategic decision making by considering a range of the relevant
features. The organization identifies threats and opportunities facing it, and those
factors that might assist in achieving objectives and those that might act as a barrier.
The strategy of the organization should be directed at exploiting the environmental
opportunities and blocking environmental threats in a way that is consistent with
internal capabilities. This is a matter of environmental fit that allows the organization
to maximize its competitive position. An external analysis can investigate politics, the
economy, the society, and the technology. This is sometimes called PEST analysis.
If we include the study of legal and environmental matters, we call it PESTLE. The
analytical work that has to be done in the company when doing environmental analysis
is concerned with questions such as: What are the implications of the trends (changes
in the environment)? What can the company do in order to meet the opportunities
and threats that follow?
VIII. Knowledge analysis. Distinctions can be made between core knowledge, advanced
knowledge, and innovative knowledge. While core knowledge is required to stay in
business, advanced knowledge makes the firm competitively visible, and innovative
knowledge allows the firm to lead its entire industry. The knowledge map can be
applied to identify firm position compared with competitors’ knowledge levels.

In the following sections, we describe each method in detail. All methods are gener-
ally used by enterprises with varying degree of details in crafting the appropriate business
strategy to achieve the enterprise vision and strategic objectives.

Method I: SWOT Analysis

SWOT analysis is an analytical tool for assessing the present and future situation focusing
on strengths, weaknesses, opportunities, and threats. The whole company may be the object
of analysis, but also a department in a company or a project in a company may be the study
object. As illustrated in Figure 2.2, strengths and weaknesses are concerned with the internal
situation, while opportunities and threats are concerned with the external situation.
The main advantage of this technique is its readiness for application. The main dis-
advantage is that it will represent subjective views. Furthermore, management has to be

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 Strategic Management Principles 51

Figure 2.2. Example of SWOT analysis

Strengths Opportunities

Dstrbuton Market growth

Knowledge Supplementary servces
Reputaton Globalzaton

weaknesses Threats

Management New compettors

Costs New technology
Infrastructure Low-cost producers

aware of employee expectations if employees are invited to contribute in a SWOT analysis,

as they will expect something to happen after the analysis is completed.
The SWOT model reveals the needs for changes in business. The company has to
change in order to take advantage of tomorrow’s opportunities and to avoid future threats.
The company does also need to change to utilize strengths and to avoid weaknesses. For
example, the company in Figure 2.2 could:

• Seek more benefits from distribution, knowledge, and reputation

• Improve management, reduce costs, and improve infrastructure
• Find ways of participating in the market growth
• Develop supplementary services
• Expand market activities worldwide
• Develop entry barriers for competitors
• Learn and introduce new technology
• Cut costs where there are low-cost producers

Method II: X Model

The X model is a tool for description and analysis of both the current and a desired situa-
tion. It is a method for assessing the situation within a company, a project, or a department.
The situation consists of a time period in which work is done. In the beginning of the time
period, there are both factual and personal inputs, and at the end of the period, there are
both factual and personal outputs, as illustrated in Figure 2.3.

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52 Chew & Gottschalk

Figure 2.3. The X model in a time perspective

Begnnng End

Personal nputs Personal outputs

Factual nputs Factual outputs

Figure 2.4. Inputs and outputs of the X model

Personal Factual
nputs nputs

Working procedures in the firm

Personal Factual
outputs outputs

This technique is called the X model because of the visual image we see illustrated
in Figure 2.4. It uses the same description technique as the Y model, where a rectangle
represents an information set and a dot represents an information process.
The personal inputs consist of people with knowledge, experience, attitudes, needs, and
ambitions. The factual inputs consist of tasks, objectives, plans, procedures, and resources.
The working manners and procedures consist of working styles, cooperation, and com-
munication. Personal outputs consist of people with new knowledge, new experience, new
attitudes, new needs, and new ambitions. Similarly, factual outputs consist of executed
tasks, objectives achieved or not, plans implemented or not, new procedures installed,
and used resources.
The main advantage of the X model is its very compressed description; a description of
a comprehensive situation is condensed onto a page. Thereby, it gives a very good overview
of what has happened or will happen. Another advantage is that the model focuses both on
factual and personal inputs, thereby providing a good starting point for business analysis. An
example of a knowledge management project will illustrate the X model in Figure 2.5.
We see in this example that the expected outcome is reduced motivation. Reasons for
this may be too much work close to milestones as well as medium quality communication.
Probably, we may be able to achieve improved motivation if these two factors are changed
as illustrated in Figure 2.6. The working manner is determined by the factual and personal
inputs. The reason for too much work close to milestones might be that there is too short
a time allocated to the work. We would also like to change the inputs, but that might not
always be possible as they are given or determined by others.

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 Strategic Management Principles 53

Figure 2.5. The X model applied to a project in the company

Medum work motvaton Clear objectves

Good work competence Short tme
Good techncal background Clear lnes of authorty

Poor communication in the project Effective division of work

Lack of management support Too much work close to deadlines

Improved techncal competence Delvery on tme

Reduced work motvaton Good qualty work
People want to leave company Used more resources

Figure 2.6. Example of causal analysis in the X model

Medum work motvaton Clear objectves

Good work competence Short tme
Good techncal background Clear lnes of authorty

Poor communication in the project Effective division of work

Lack of management support Too much work close to deadlines

Improved techncal competence Delvery on tme

Reduced work motvaton Good qualty work
People want to leave company Used more resources

.............................

When we have described the current situation and working manners, we can explain
why personal and factual outputs become what they do. The next step is to describe the
desired situation. It is easy to say what we would like the desired situation to be. Then we
can go backwards in the X model to revise personal and factual inputs as well as working
procedures.

Method III: Business Direction

Important business concepts are mission, vision, and objectives. A mission is an unambigu-
ous statement of what the company does and its long-term, overall purpose. It indicates
what kind of business the company is in and which markets it serves. For example a telecom
corporation such as Telenor in Norway is in the business of providing connections, while
a power corporation such as Statnett is in the business of providing energy. The mission
of a law firm is to provide legal advice. The mission describes a justification for firm ex-

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54 Chew & Gottschalk

istence; it states the purpose of the organization. The mission answers the question: What
business are we in?
A vision is a statement of what the business will be in the future (three to five years)
and how the company will operate. It indicates how good the company wants to be. Given
the mission that describes the justification for existence, the vision is to describe what
ambitions the firm has for the future. For example, the vision of Telenor may be to develop
from a local operator in Norway to a global player in the telecommunications market. For
Statnett, the vision might be to expand into other energy sources besides hydroelectric
power. For a law firm, the vision might be to become the leader in business law. The vi-
sion represents the view that senior management has for the future of the organization; it
is what they want it to become or achieve. The vision answers the question: What do we
want to achieve in this business?
Objectives are short-term (such as annual) and interim (such as 2–3 years) targets that
management is setting to take the company toward its vision. Objectives are quantified
targets, such as financial returns, customer service, manufacturing performance, staff
morale, and social and environmental contributions. For example, the objective of Telenor
may be to double its income from foreign business by a certain date. For Statnett, it may
be to have a fraction of its business in nonhydropower. For a law firm, an objective might
be to recruit all the best business lawyers. Objectives define the desired future positions
of the organization; they are specific and tangible measures of future targets. Objectives
answer the question: What should be our future positions in this business?
The Norwegian School of Management BI (NSM) will serve as an example. The mis-
sion of NSM is teaching business administration and management and doing research. Its
vision is to be one of the leading research-based business schools in Europe and an attrac-
tive workplace for leading faculty members within important management areas such as
marketing, finance, and technology. Objectives include the number of doctoral students
and the amount of research funding in the next one, two, and three years.

Method IV: Market Strategy

The market strategy shows our position and ambition in the marketplace. Figure 2.7 provides
an illustration of generic market strategies. We can either have the same product as our
competitors, or we can have a different product. If we have the same product as everyone
else, it has to be sold at the same price as all the others (as in a vegetable market or through
the Internet). It is not possible for an Internet bookstore to sell at a higher price than others
when there is perfect information and information searching is associated with no costs.
This is called the law of indifference. In order to survive, the company must have a cost
advantage that will give higher profits and result in higher earnings for the owners.
If we are selling a product that our customers perceive to be different from our competi-
tors’ product, then we have differentiation. A service may in its basic form be the same
for all companies, like an airline travel, in the sense that all airlines are supposed to bring
you safely to your destination. The product is differentiated by supplementary services.
For example, some airlines give you the option of booking certain seats in advance; some
airlines have frequent flyer programs, while others have better meals.
The two generic market strategies are concerned with cost leadership or differentia-
tion. In Figure 2.8, required skills and resources as well as organizational requirements
are listed for the two strategies.

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 Strategic Management Principles 55

Figure 2.7. Generic market strategies

Same product Dfferent product

Broad market scope Overall cost Dfferentaton

(all markets) leadershp

Narrow market scope

(selected markets) Cost based Dfferentaton
focus based focus
...................................................

Figure 2.8. Characteristics of generic market strategies

Generic strategy Required skills and resources Organizational requirements

Cost leadership • Frequent investments and easy • Tight cost control; frequent,
access to capital detailed control reports
• Process skills • Structured organization and
responsibilities
• Intensive supervision of labor
• Incentives based on meeting
quantitative targets
Differentiation • Strong on marketing and creativity • Strong coordination in
research and development
• Product skills (R&D), product
• Strong capability in basic research development, and marketing

• Corporate reputation for quality or • Market based incentives

technological leadership • Ability to attract highly skilled
• Strong cooperation with labor and creative people
distribution channels • Looser, more trusting
organizational relationships

Cost leadership means the organization aims to be the lowest-cost producer in the
marketplace. The organization enjoys above-average performance by minimizing costs.
The product or service offered must be comparable in quality to those offered by others
in the industry in order that customers perceive its relative value. Typically, there is only
one cost leader. If more than one organization seek advantage with this strategy, a price
war ensues, which eventually may drive the organization with the higher cost structure
out of the marketplace.
Differentiation means the organization qualifies its products or service in a way that
allows it to appear unique in the marketplace. The organization has identified which quali-
tative dimensions are most important to its customers, and it has found ways to add value
along one or more of those dimensions. In order for this strategy to work, the price charged

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56 Chew & Gottschalk

customers by the differentiator must seem fair relative to the price charged by competitors.
Typically, multiple firms in any given market will employ this strategy (Pearlson, 2001).

Method V: Competitive Forces

The basis of this method is that a company exists within an industry, and to succeed, it must
effectively deal with the competitive forces that exist within the particular industry. For
example, the forces in an emerging industry such as mobile communication are consider-
ably different from those of established industries such as financial services.
The company interacts with its customers, suppliers, and competitors. In addition,
there are potential new entrants into the particular competitive marketplace and potential
substitute products and services. To survive and succeed in this environment, it is impor-
tant to understand these interactions and the implications in terms of what opportunities
or competitive advantage can occur. Figure 2.9 illustrates the competitive forces model
(Porter, 1985).
At any one time, one or more of the forces may be exerting particular pressure on the
competing company. The competitive forces method models the competitive world in which
any organization exists and the forces that play upon it. The current competitive position
of any organization will be the net force of these five aggregated. In order to understand
the strength of any one of these forces, an understanding must be built up of the contribu-
tory factors to its power. Theoretically, there are a large number of these, but for any given
organization, many of them will not be relevant (Robson, 1997):

• Rivalry among existing competitors. This rivalry can range from intense in a
cut-throat industry to mild in an affluent one. When rivalry is high, profits tend to
be low. Industries that are static or in decline will have more intense rivalry than
those that are rapidly growing. When there are high fixed costs or high storage costs,
then the volume of sales must be maintained, so rivalry heightens. Rivalry is more
intense when there is overcapacity caused by demand fluctuations or production
constraints. Where there is no brand loyalty, that is, no differentiation, then demand
depends on price, and when switching costs are small, this is very elastic, so rivalry
will be heated. If there are lots of organizations of a similar size in the same pool,

Figure 2.9. Porter’s (2001) competitive forces model

Threat of New
Entrants

Bargaining Power of Rivalry among Bargaining Power of

Suppliers Existing Competitors Buyers

Threat of Substitute
Products or Services

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 Strategic Management Principles 57

then rivalry will be intense. If leaving the industry will cost a lot either physically
or emotionally, then the rivalry will tend to be intense.
• Threat of new entrants. The height of the barriers against this threat and the de-
termination to get over them defines the industry’s profitability. Government policy
can represent such a barrier when a license to operate is required or strict safety
rules have to be applied. The threat of reactions to a new entrant acts as a barrier,
since dealing with aggressive countermoves needs strong capabilities and significant
advantages. For example, Color Air was a new entrant that was met by aggressive
countermoves by existing airlines in Norway. After having lost five hundred million
Norwegian kroner, Color Air gave up. If existing firms have lower costs than new
entrants can have, then this absolute cost advantage is a very high barrier. A new
entrant must establish access to distribution channels so the difficulties of access act
as a barrier to entry. If buyers would have to face extra costs to change suppliers, or
have a reluctance to do so, this acts as an entry barrier. If economies of scale are an
important pricing factor, then new entrants either need large markets straightaway
or must face higher costs. The degree of product differentiation and brand loyalty
is directly related to the height of the entry barrier. Some industries involve major
startup costs, and obviously in them, the barriers to entry are very high.
• Threat of substitute products or services. When this threat is high, then the profit
margin is low, as customers more readily change when prices are high. If a similar
product or service is available at the same, or lower, price, then the threat is high. If
potential substitutes are more expensive, or inferior, then the threats are low. Switching
costs for customers determine the threat of substitutes as well as determine the height
of the entry barrier. If no extra costs are incurred, then change is likely. Apathetic or
satisfied buyers are not likely to change; militant or dissatisfied ones are. Generally,
the more significant the purchase is to the customer, the higher is their propensity to
switch.
• Bargaining power of buyers. This primarily depends on their price sensitivity and
their bargaining leverage. The bargaining power of buyers depends on the purchaser’s
relative cost importance. A number of things can reduce price sensitivity: brand
loyalty and differentiation, impacts of the product on their product, and customer’s
own profitability. The bargaining power of buyers depends on buyer concentration
and volume, buyer switching costs, buyer information, threat of backward vertical
integration by buyers, and existence of substitutes.
• Bargaining power of suppliers. This is the differentiation of the inputs and matters
when the organization’s process needs a rare commodity. When switching costs of
changing to an alternative supplier are high, then suppliers are relatively powerful
since the organization would face significant costs if it were to leave them. When
substitute suppliers are available, the power of the supplier is reduced. The higher
supplier concentration, the higher supplier power is. If the supplier has to achieve
high volume sales, then they hold less bargaining power. Supplier power is low when
the costs of goods provided are high relative to the purchasing industry’s total costs.
Supplier power is higher when their product is significant to the buyer organization’s
chances of product differentiation. When suppliers will find it easy to forward inte-
grate into the purchaser’s industry, then they have high bargaining power.

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58 Chew & Gottschalk

To produce a model of the competitive forces playing upon an organization requires

detailed research into its industry, but it then allows the net power of the five forces as
well as extreme single powers to be judged in order to concentrate attention on those most
significant.

Method VI: Product Portfolio Analysis

There are a number of approaches that aim to relate the competitive position of an organi-
zation to the maturity of its product. The models assume there is a basic S-shaped curve
description to the growth phenomenon of products. Four stages in the life cycle of any
product can be identified as illustrated in Figure 2.10:

• Introduction. The product is new, and there is an initial stage of experimentation

and gradual acceptance. IS/IT can support product specification, customer require-
ments, process design, market research and forecasting, logistics planning, and cost
estimation.
• Growth. There is a rapid increase in sales. IS/IT can support product enhancement,
customer service, capacity development and utilization, new distribution channels,
monitoring price margins, service from suppliers, promotion to expand customer
base, and identifying competitors’ position.
• Maturity. Sales remain high, but there is no further increase. IS/IT can support prod-
uct variations, customer segmentation, product cost reduction, costing and sourcing
of components, inventory control, pricing flexibility, analysis of contribution, and
targeting specific competitors.
• Decline. Competition, product displacement, or other factors cause a decline in sales.
IS/IT can support reduced inventory levels, sales forecasting, subcontracting, release
of capacity for other uses, rationalization of distribution channels, and reduction in
administrative costs.

When we look at the life cycle of all products in the firm, we can apply product portfolio
analysis. This method shows the relationship between a product’s current or future revenue

Figure 2.10. Product life cycle

Sales

Year
Introducton Growth Maturty Declne

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 Strategic Management Principles 59

Figure 2.11. Product portfolio analysis (Robson, 1997)

Hgh

.........Wild.Cats.............................Stars.
Market
Growth

Low
........Dead.Dogs.................Cash.Cows.

Low Hgh
Market share

potential and the appropriate management stance as illustrated in Figure 2.11. The two by
two matrix names the products in order to chart symptoms into a diagnosis so that effec-
tive management behavior can be adopted. The matrix classifies products according to the
present market share and the future growth of that market. A successful product that lasts
from emergent to mature market goes clockwise around the matrix.
The matrix segments summarize the expected profit and cash flow and also recom-
mends an outline strategy to follow. This strategy is simply to milk the cows, divest the
dogs, invest in the stars, and examine the wild cats (Robson, 1997):

• Cash cows. Products in this segment are those that are the current high-income
earners for the organization. They are expected to provide the major part of current
profits and form the major source of funding for future developments. Cash cows are
relatively short-term, so they are not expected to provide significant future revenues.
Management will try to increase profitability by milking more intensively and by
extending the lifetime. IS/IT will tend to focus on control of the business environ-
ment rather than innovation—to defend the current position.
• Stars. Products in this segment are the ones that provide significant revenue now and
are expected to continue to do so in the future. In this segment, the organization will
wish to seek opportunities to increase profits and extend the life of the product. IS/IT
will tend to focus on the customer—identifying customers and their requirements to
achieve a better understanding of demand than actual and potential competitors.
• Dead dogs. Products in this segment provide little or no contribution to profits today,
and it is not expected that this situation will change. Such products should be removed.
IS/IT will tend to focus on reducing costs and securing customers.
• Wild cats. Products in this segment are those that the organization is currently pre-
pared to continue, although they make little or no contribution to revenue now, they
are expected to in the future. These are usually young products and are probably
still being developed. Investments should be made cautiously in this segment since
the risks associated with it are higher than with others. Wild cats are potential rising

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60 Chew & Gottschalk

stars. The organization will seek ways to ensure that products quickly mature into
highly profitable stars. IS/IT will tend to focus on innovative product and process
improvements.

Product portfolio analysis is an important tool for innovation management. Companies

will strive to invent new products before the existing ones decline. Innovations will be
either incremental improvements on existing products to increase their customer values
and extend their commercial lifespan, or disruptive or radical new products which are
markedly different from the existing products and have great potential to become star
products. New products tend to start their life as a promising wild cat, which through
marketing excellence and/or further product improvement, could potentially transition into
a star. Agile enterprises are responsive to competitive market changes and able to quickly
introduce new products to capitalize on the market opportunities. Agile enterprises are
therefore more able to rapidly increase their new product revenues over old products over
a 2–3 year time frame. Agile enterprises sustain their competitive advantage through con-
stant product innovation in synchrony with market changes. We will return to the topic of
product innovation in Chapter X.

Method VII: Environmental Analysis

Environmental analysis is concerned with the external corporate environment. An analysis

of the environment is important because it increases the quality of the strategic decision
making by considering a range of the relevant features. The organization identifies threats
and opportunities facing it, and those factors that might assist in achieving objectives and

Figure 2.12. External factors for environmental analysis

External Factor Implications for Company

Examples of Trends

Politics Less trade barriers Global competition

Economy Deregulation Global competition
Larger, freer markets Alliances and partnerships
Society Increasing number of older people New services and products
Growing unemployment Market decrease
More knowledge Changing customer needs
Technology IT can support knowledge work Technology to achieve benefits
New communications networks Technology to become global
Legal issues Privacy legislation Data security
Electronic signature Paperless trading
Ecology Green movements Reusable resources
Terrorism Contingent plans

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 Strategic Management Principles 61

those that might act as barriers. The strategy of the organization should be directed at
exploiting the environmental opportunities and blocking environmental threats in a way
that is consistent with internal capabilities. This is a matter of environmental fit that allows
the organization to maximize its competitive position.
An external analysis can investigate politics, the economy, the society, and the technology.
This is sometimes called PEST analysis. If we include the study of legal and environmental
matters, we call it PESTLE. In Figure 2.12, some examples of external factors are listed
with their implications for the company. The analytical work that has to be done in the
company when doing environmental analysis is concerned with questions such as: What
are the implications of the trends (changes in the environment)? What can the company do
in order to meet the opportunities and threats that follow?
The success of an environmental analysis is largely dependent on the characteristics of
the environment: its complexity—that is, how many variables are in the environment, the
rate of change, and the amount (and cost) of available information about it. Environmental
analysis considers the external situation within which the organization exists. It is impor-
tant to audit the environmental influences, assess the nature of the environment to judge
whether it is simple or complex, identify the key environmental forces, and identify the
key opportunities and threats to be handled by the company (Robson, 1997).
Environmental analysis is an important competence for innovation. Environmental
changes are often the source of inspiration for generating new ideas for innovation. Enterprises
must be very well in-tune with the environment to sustain their competitive advantages.
Otherwise, they may rapidly become industry laggards, rendering the products and services
less appealing or less effective in the emergent environment. Chapter X will address the
issues of business innovation and environmental analysis in more detail.

Method VIII: Knowledge Analysis

Distinctions can be made between core knowledge, advanced knowledge, and innovative
knowledge. While core knowledge is required to stay in business, advanced knowledge makes
the firm competitively visible, and innovative knowledge allows the firm to lead its entire

Figure 2.13. Knowledge map for external analysis (Tiwana, 2000)

Innovative knowledge
Innovator

KNOWLEDGE
EXCELLENCE Market leader
OF OUR FIRM

Advanced knowledge
Compettor

Core knowledge

Imtator knowledge
Core knowledge Advanced knowledge Innovative

KNOWLEDGE EXCELLENCE OF COMPETING FIRMS

Player
..........................
.
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62 Chew & Gottschalk

Figure 2.14. Identifying knowledge gap in internal analysis (Tiwana, 2000)

Strategy-knowledge-link
What the frm What the frm
has to know wll do

Knowledge gap Strategy gap

Knowledge-strategy-link
What the frm What the frm
................... knows does

industry. The knowledge map in Figure 2.13 can be applied to identify firm position. The
map illustrates firm knowledge levels compared with competitors’ knowledge levels.
While the knowledge map represents an external analysis of the firm’s current knowl-
edge situation, the knowledge gap in Figure 2.14 represents an internal analysis of the
firm’s current knowledge situation. The knowledge gap is dependent on business strategy.
What the company does is different from what the company will do, creating a strategy
gap. What the company knows is different from what the company has to know, creat-
ing a knowledge gap. Two important links emerge: the strategy-knowledge link and the
knowledge-strategy link (Tiwana, 2000).

Analyzing Needs for Change: The Strategy

After descriptions of the current situation and the desired situation, the needs for change
can be identified. The gap between desired and current situation is called needs for change.
In Figure 2.15, all business analysis methods presented earlier are listed, and examples of
desired and current situation are presented. Needed changes are exemplified, and potential
IS/IT are suggested. We see many changes needed, and IS/IT solutions include executive
information system (EIS), project management system (PMS), research library system
(RLS), customer relationship management (CRM), enterprise resources planning (ERP),
electronic marketplaces (EMS), and knowledge management system (KMS). Many of these
systems will rely on Internet technology. For example, EIS, PMS, and KMS will use both
intranet and extranet as well as the Internet.
The same kind of analysis should be done for the current and desired IS/IT situation
as illustrated in Figure 2.14. Again, we see IS/IT solutions include customer relationship
management (CRM), knowledge management system (KMS), and executive informa-
tion system (EIS). The column “change needed” in both Figures 2.15 and 2.16 represent
answers to the what question, while the column “IS/IT potential” suggests answers to the
how question.
One of the elements of the IS/IT strategy is identification of future applications. In order
to discuss this subject, we have to familiarize ourselves with what kinds of application
software a company might have and how applications are developed or acquired.
A company seldom starts from scratch. There are already computers, terminals, print-
ers, operating systems, application software, databases, and communication networks

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 Strategic Management Principles 63

in the firm. This implies that potential IS/IT as listed in Figures 2.15 and 2.16 have to be
considered in view of existing infrastructure, architecture, and applications.
Furthermore, at this stage, needs for change have to be prioritized. This implies that
not all needs can get attention and not all potential IS/IT can be implemented.
Analyzing needs for change, identifying potential IS/IT, comparing with current IS/IT
in the company, and then prioritizing needs for change should result in proposals for new
IS/IT in the organization. For example, our company may prioritize extending product
lives, sharing and developing advanced and innovative knowledge, improving internal
and external communication, improving support for knowledge workers, improving hu-
man resources management, improving problem solving, and coding information from
knowledge sources. If such needs for change have priority, then a knowledge management
system (KMS) should be implemented in the organization.

Figure 2.15. Identification of potential IS/IT based on needs for business change

Business Analysis Desired Current Change IS/IT

Situation Situation Needed Potential
SWOT analysis Strong Weak Strengthen Executive
management management management Information
System (EIS)
X model Even distribution Too much Improve work Project
of work work close to scheduling Management
milestones System (PMS)
Business direction Research-based Education- Strengthen Research Library
business school based business research System (RLS)
school
Market strategy Strong Weak Add services to Customer
differentiation differentiation base product Relationship
Management
(CRM)
Competitive forces High entry Low entry Achieve Enterprise
barriers for new barriers for new economies of Resources
entrants entrants scale Planning (ERP)
Product portfolio Many stars Many cash Extend life of Knowledge
analysis cows products Management
System (KMS)
Environmental Reach young Customers are Apply new Electronic Market
analysis people old people technology- Places (EMP)
based market
channels
Knowledge Market leader Imitator Share and Knowledge
analysis develop Management
advanced and System
innovative (KMS)
knowledge

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64 Chew & Gottschalk

Figure 2.16. Identification of potential IS/IT based on needs for technology change

IS/IT Desired Current Change IS/IT

Analysis Situation Situation Needed Potential

Benefits of Market benefits Rationalization Achieve competitive Customer

IS/IT benefits advantage Relationship
Management
(CRM)
Stages of IS/IT Growth stage Architecture stage Improve internal Knowledge
growth and external Management
communication System (KMS)
IS/IT in Knowledge Administrative and Improve support for Knowledge
management management support functions knowledge workers Management
activities System (KMS)
IS/IT in Excellent Poor human Improve human Knowledge
business human resources resources Management
processes resources management management System (KMS)
management
IS/IT support Excellent Poor problem Improve problem Knowledge
for value problem solving in value solving Management
configuration solving in value shop System (KMS)
shop
Strategic Reciprocal Administrative Top management Executive
integration integration integration participation Information
System (EIS)
IS/IT support What they End user tools Coding information Knowledge
for knowledge know stage stage from knowledge Management
management sources System (KMS)
IS/IT in e- E-business Internal Business process New IS/IT
business stage communication reengineering and infrastructure
stage design

E-Strategy

The Internet is an extremely important new technology, and it is no surprise that it has re-
ceived so much attention from entrepreneurs, executives, investors, and business observers.
Caught up in the general fervor, many have assumed that the Internet changes everything,
rendering all the old rules about companies and competition obsolete. According to Porter
(2001), that may be a natural reaction, but it is a dangerous one. It has led many companies,
dot-coms, and incumbent alike to make bad decisions—decisions that have eroded the
attractiveness of their industries and undermined their own competitive advantage. The
time has come to make a clearer view of the Internet.
The Internet provides a global infrastructure that enables compression of time and
space, integrated supply chains, mass customization, and navigational ability. The impact
of the Internet can be described as breaking down traditional trade-offs between richness of
interaction possible with a customer and the number of customers a business can access or

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 Strategic Management Principles 65

products it can offer. Internet-based businesses can compete on huge selections of products
as they are not constrained by physical stores. Also, richer interaction (e.g., check order
status, seek online advice) and customized relationships with large numbers of customers
at incremental costs are increasingly feasible with the economics of information (Grover
& Saeed, 2004).
Internet technology provides better opportunities for companies to establish distinctive
strategic positioning than did previous generations of information technology. The Internet’s
greatest impact has been to enable the reconfiguration of existing industries that had been
constrained by high costs for communicating, gathering information, or accomplishing
transactions. For example, the Internet tends to dampen the bargaining power of channels
to providing companies with new, more direct avenues to customers (Porter, 2001).
Kim, Nam, and Stimpert (2004) find that Porter’s generic strategies of differentiation
and cost leadership will still be applicable to e-business firms in a broad sense. However,
they argue that a strategy of focus will be less viable in e-business than traditional business
contexts. They argue that differentiation is more sustainable than cost leadership strategy
for e-business firms. In particular, Kim et al. (2004) argue that an e-strategy will be able
to achieve superior, sustainable performance through an “integrated strategy”2 discipline
(when compared with either differentiation or cost leadership), which strives to achieve
both cost leadership and differentiation strategic positioning. Kim et al. (2004) also sug-
gest that “clicks-and-bricks firms will enjoy superior performance relative to their pure
play counter-parts only when their online and offline operations are aligned and tightly
integrated.”
The Internet has many properties, but 10 of them stand out (Afuah & Tucci, 2003):

• Mediating technology. The Internet is a mediating technology that interconnects

parties that are independent or want to be. The interconnection can be business-
to-business (B2B), business-to-consumer (B2C), consumer-to-consumer (C2C), or
consumer-to-business (C2B). It can also be within a firm or any other organization,
in which case it is called an intranet.
• Universality. Universality of the Internet refers to the Internet’s ability to both
enlarge and shrink the world. It enlarges the world because anyone anywhere in the
world can potentially make his or her products available to anyone anywhere else in
the world. It shrinks the world in that distance is reduced on electronic highways.
• Network externalities. A technology or product exhibits network externalities when
it becomes more valuable to users as more people take advantage of it. A classic ex-
ample is the telephone, where the value for each subscriber increases with number
of subscribers. The more people that are connected to a network within the Internet,
the more valuable the network is.
• Distribution channel. The Internet acts as a distribution channel for products that
are largely information bits, such as software, music, video, news, and tickets. There
is a replacement effect if the Internet is used to serve the same customers serviced by
the old distribution channel without bringing in new customers. There is an extension
effect if the Internet is used by more people and for new services.
• Time moderator. The fifth property of the Internet is time moderation or its ability
to shrink and enlarge time. It shrinks time for customers who want information on
products when regular stores are closed. It enlarges time when related work can be
done at different points in time.

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66 Chew & Gottschalk

• Information asymmetry shrinker. An information asymmetry exists when one

party to a transaction has information that another party does not—information that
is important to the transaction. The Web reduces such information asymmetries, as
the other party can find the same information on the Web.
• Infinite virtual capacity. Access to the Internet is perceived as unlimited; you do
not have to wait on hold or in a long line. For example, virtual communities like chat
houses have infinite capacity for members who can talk anytime of the day for as
long as they want.
• Low cost standard. Firms could not exploit the properties of the Internet if they did
not adopt it. For two reasons, adoption has been easy. First and most important, the
Internet and the Web are standards open to everyone everywhere and are very easy
to use. Second, the cost of the Internet is a lot lower than that of earlier means of
electronic communications.
• Creative destroyer. These properties of the Internet have enabled it to usher in a
wave of creative destruction in many industries. Newspapers, for example, offer
their readers material on their Web sites. The Internet is a low cost standard printing
press of sorts and a distribution network with unlimited capacity that reaches more
people than any newspaper could ever hope to reach. This tears down a large part of
the barriers to entry that exist in the newspaper business.
• Transaction cost reducer. The Internet also reduces transaction costs for many in-
dustries—thanks in part to the universality, distribution channel, low cost standard,
and information asymmetry reduction properties. Transaction costs are the costs of
searching for sellers and buyers; collecting information on products; negotiating,
writing, monitoring, and enforcing contracts; and the costs of transportation associ-
ated with buying and selling.

However, as supply chains are becoming more dispersed and global in their orienta-
tion, and thereby have given rise to the problem of coordinating flow of information and
materials across organizations that are linked together, transaction costs will rise (Grover
& Malhotra, 2003).
The Internet provides a global infrastructure that enables compression of time and
space, integrated supply chains, mass customization, and navigational ability. The impact
of the Internet can be described as breaking down traditional trade-offs between richness
of interaction possible with a customer and the number of customers a business can ac-
cess or products it can offer. Internet-based businesses can compete on huge selections
of products, as they are not constrained by physical stores. Also, richer interaction (e.g.,
check order status, seek online advice) and customized relationships with large numbers of
customers at incremental costs are increasingly feasible with the economics of information
(Grover & Saeed, 2004).
The digital transformation of traditional businesses is occurring (Andal, Cartwright,
& Yip, 2003). New information technologies, such as broadband networks, mobile com-
munications, and the Internet, have well-known but often unrealized potential to transform
businesses and industries. The key to success is knowing how and when to apply technolo-
gies. Companies should look at 10 specific drivers to help determine their best strategy.
From a study of large corporations in North America and Europe, Andal et al. (2003)
identified the different drivers that determine the competitive advantage of deploying new
information technology. Each of the drivers is very specific to how new IT can be applied

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 Strategic Management Principles 67

in a particular industry. They are not general factors, such as the overall cost of a technol-
ogy. And they are different from the critical success factors that affect the implementation
of information technology and that are mostly specific to a company, as opposed to being
characteristic of an industry. There are a total of 10 drivers to help determine an appropri-
ate enterprise e-strategy:

1. Electronic deliverability. Some products have a large component that can be delivered
electronically. Airline companies, for instance, enable customers to book reservations
online, after which the confirmations and tickets can be delivered efficiently through
e-mail.
2. Information intensity. Nearly all products and services have some information
content, but the amount varies dramatically. Cars come with volumes of operating
instructions, for instance.
3. Customizability. New information technology allows many companies to tailor an
overall offering to the specific needs and preferences of individual customers. In
the past, newspapers were a one-size-fits-all product. Today, online editions can be
customized to include just the news and information that a particular subscriber is
likely to want.
4. Aggregation effects. Products and services differ in the way they can be aggregated
or combined. Thanks to new information technology, institutions can offer customers
bundled services.
5. Search costs. Before the advent of Internet companies such as Amazon.com, find-
ing an out-of-print book could require considerable time and effort. Now, the Web
provides people with vast amounts of information, regardless of their location or
time zone, lowering the search costs for finding exactly the product or service they
want.
6. Real-time interface. A real-time interface is necessary for companies and custom-
ers dealing with important information that changes suddenly and unpredictably. A
good example is online trading, in which rapid fluctuations in the stock market can
be devastating for those who lack instantaneous access to that information.
7. Contracting risk. Buying new books online has little contracting risk for customers.
Prices are relatively low, and specifying the exact titles is straightforward. Buying
cars online is a completely different matter. Prices are substantially higher.
8. Network effects. In many industries, the utility of a good or service increases with
the number of people who are using it (or one that is compatible). A key benefit of
using Microsoft Office, for instance, is that the suite of programs is ubiquitous in the
business world, enabling people to share Word, PowerPoint, and Excel documents
easily.
9. Standardization benefits. New information technology enabled companies to
synchronize and standardize certain processes, resulting in greater efficiency in
business-to-business transactions as well as increased convenience for customers.
10. Missing competencies. New information technology can facilitate company alliances
in which partners use each other to fill in missing competencies.

These 10 drivers can be classified into three types of drivers. The first four drivers are
inherent characteristics of product or service, drivers 5–7 are concerned with interactions

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68 Chew & Gottschalk

between company and its customers, while the last three are concerned with interactions
between company and its partners and competitors.
The 10 drivers determine what type of mediation approach is most likely to succeed
in particular industries. For each of three defined strategies, a couple of drivers are domi-
nant, several are ancillary, and others have little consequence. The three strategies, classic
disintermediation, remediation, and network-based mediation, are explained in terms of
drivers by Andal et al. (2003) as follows:

A. Classic disintermediation is cutting away layers of middlemen, such as distributors,

that separate the company from its customers. Disintermediation is the elimination of tra-
ditional intermediaries, be they retail stores, direct mail operations, or 800-number-style
telephone support operations. With market-facing systems, the selling of products directly
to consumers and businesses has become a powerful force in many industries. This strategy
is affected mainly by the drivers that pertain to the inherent characteristics of a product or
service. Specifically, electronic deliverability is a major factor. That is, why use a distribu-
tor when a product or service can be delivered electronically to the customer? Information
intensity is another dominant driver. Before new information technology, products or
services with high information intensity often needed intermediaries, such as an insur-
ance agent, to explain a complex policy. Now, a sophisticated Web site can perform much
of that functionality. Less powerful drivers of disintermediation include customizability,
search costs, real-time interface, and low contracting risk. An industry that benefits from
technology that provides a real-time interface, for instance, will favor disintermediation
in order to eliminate the time lag caused by middlemen.

B. Remediation is introducing and embracing middlemen. Historically, whenever

transportation and communications infrastructures have markedly improved, industry
value chains have tended to lengthen, with products and services becoming increasingly
specialized. This has led many to suggest that the Web will also create whole new classes
of intermediaries: market-facing enterprises whose primary presence is on the Web and
who will provide portals that allow online users to access producers of goods and services.
Remediation is affected mainly by two drivers: aggregation effects and high contract-
ing risk. When there are benefits to combining products or services, companies can use
technology to work more closely with their middlemen partners, building strong, ongoing
relationships. Some insurance companies, for example, now provide potential customers
with online estimates of different policies through the Web site of the Automobile Asso-
ciation of America (www.aaa.com). High contracting risks also encourage companies to
use technology to establish closer—and more secure—relationships. Ford, for instance,
relies on the Web-based applications of middleman Vastera Inc., a Viriginia-based firm, to
handle import and export processes, customs clearance, trade regulation compliance, and
cost calculations for shipments to Mexico and Canada. Other drivers of remediation are
customizability (if the middleman can contribute to the customization process rather than
get in its way), real-time interface (if the interface is between the middleman and either the
producer or customer—and not between the producer and customer, which would instead
encourage disintermediation), and missing competencies. High search costs tend to favor
disintermediation instead of remediation.

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 Strategic Management Principles 69

C. Network-based mediation is building strategic alliances and partnerships with new

and existing players in a tangle of complex relationships. This mediation is affected mainly
by drivers that pertain to a company’s interactions with its partners and competitors.
Specifically, network effects and standardization benefits are clearly important reasons
for industry players to work more closely together. Other drivers include high search costs
(which favor the use of a network for locating products and information), the need for a
real-time interface (which encourages partners to build a system that enables them to deal
with each other in real time), and missing competencies (which encourage companies, even
competitors, to partner with one another to fill those gaps).
These Internet-enabled business transformative drivers can be selected using Porter’s
strategy principles to create an appropriate e-strategy that fits the purpose of the firm.

Summary

Business-aligned IT strategy is developed in accordance with Porter’s (1985) business

strategy principles. Business strategy with a clear goal and a “continuity of direction” must
first be defined. The strategy must have a unique value proposition supported by a distinc-
tive value configuration. The strategy must also define how all the elements (resources
and activities) of what the firm does fit together and reinforce each other. This usually
involves making trade-offs. Corporate strategy shapes business and IT strategies, so dif-
ferent corporate roles must be understood. The firm uses strategic management discipline
to formulate its strategic position, make strategic choices for the future, turn the strategy
into action, and realize the benefits (Johnson & Scholes, 2002). Translating strategy into
actions requires strategic planning skills. Strategic planning is the process of deciding on
the projects/programs that the organization will undertake and the appropriate amount
of resources that will be allocated to each program over the next several years. Strategic
planning practice performance can be measured from the perspectives of cost leadership,
differentiation, focus, and intensity (Nayyar 1993). Formal systematic strategic planning
process has been found to be beneficial, and the key elements of strategic plan are described
(Grant, 2003).
Resource-based strategy leverages the firm’s unique resources and capabilities as a
platform across many markets and products (Barney, 2001). Activity-based strategy allows
the firm to gain a profitable position by configuring its activities using activity-based drivers
such as scale—a unique configuration which is difficult for rivals to copy. In comparing
the two strategies, resources are similar to drivers and capabilities to activities (Sheehan,
2002).
Business ethics can be studied via stakeholder theory, which is a theory of organizational
management and ethics. Indeed all theories of strategic management have some moral
content, though it is often implicit. Moral content in this case means that the subject matter
of the theories are inherently moral topics (i.e., they are not amoral). Stakeholder theory is
distinct because it addresses morals and values explicitly as a central feature of managing
organizations. The ends of cooperative activity and the means of achieving these ends are
critically examined in stakeholder theory in a way that they are not in many theories of
strategic management (Phillips et al., 2003). Use of stakeholder theory in IT strategy research
is a still subject for further study. In an IT strategy context, a stakeholder theory approach
will describe the relationship as a nexus of cooperative and competitive interests possessing

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70 Chew & Gottschalk

intrinsic value. IT strategy should ensure the design and use of information technology to
be transparent and open to ongoing scrutiny by stakeholders such that the values of ethics
are upheld, always. This is assured through diligent application of IT governance (which
is described in Chapter IX) by business enterprises.
Competitive business strategy formulation requires competitive strategic analysis. Eight
popular methods of strategy analysis are available: SWOT analysis, X-model, business
direction, market strategy, competitive forces, product portfolio analysis, environmental
analysis, and knowledge analysis. From analysis of each method, a strategic change can
be determined and the corresponding IT system can be identified.
Internet technology will enable the reconfiguration of existing industries that had been
constrained by high costs for communicating, gathering information, or accomplishing
transactions. Internet-driven business strategy, known as e-strategy, has created successful
new-generation companies such as e-Bay, Google, Amazon, and Yahoo. Differentiation
is more sustainable than cost leadership strategy for e-business firms. In particular, an e-
strategy will be able to achieve superior, sustainable performance through an “integrated
strategy” discipline (when compared with either differentiation or cost leadership), which
strives to achieve both cost leadership and differentiation strategic positioning (Kim et al.,
2004). E-strategy is also being adopted by traditional companies such as GE and News
Limited. E-strategy is developed through gaining insights on 10 fundamental properties
of the Internet, which include (Afuah & Tucci, 2003): mediating technology, universal-
ity, network externalities, distribution channel, time moderator, information asymmetry
shrinker, infinite virtual capacity, low cost standard, creative destroyer, and transaction
cost reducer. In-depth understanding of Internet capabilities in reshaping business models
will give IT managers the ability to influence business strategy to take advantage of, and
incorporate, Internet into the business and IT strategies to keep firms competitive, adap-
tive, and responsive to changing market and external environments.

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ENDNOTES

1
Introna (2007, p. 23) refers to multistability as “technologies which afford multiple interpreta-
tions—and ways of doing—to the users. This means that the users can interpret and use these
artifacts in multiple ways that encourage active engagement with the artifact, as in the case of
a manual camera.” He argues that “the higher the level of engagement the less likely it will be
for the user to become unwittingly enrolled into political programs not of their choosing.”

2
Kim et al (2004) argue that this is in contrast to Porter’s stuck in the middle conundrum, without
clear strategic focus, in traditional business contexts.

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is prohibited.