The nature of strategy can be described in terms of a number of related elements that define and elaborate on what it involves – its purpose, the factors to be taken into account in developing and implementing it, and the concepts that guide our understanding of its function. They can be categorized as follows:
- The basic concept of competitive advantage, which describes what the strategy is there to achieve and how it will do this.
- A tool for analysing the factors affecting the attainment of the aims of the strategy – the value chain.
- The notion of core competencies or distinctive capabilities as the basis for attaining competitive advantage.
- An explanation of a key factor associated with gaining competitive advantage through distinctive capabilities – the resource-based view.
- Analyses of strategic notions and processes such as strategic management.
- The process of business model innovation.
The concept of competitive advantage was popularized by Porter (1985). Competitive advantage, Porter explained, arises out of a firm creating value for its customers. To achieve it, firms select markets in which they can excel and present a moving target to their competitors by continually improving their position.
Porter emphasized the importance of differentiation, which consists of offering a unique product or service, and focus – concentrating on particular buyers or product markets more effectively than competitors. He also developed his framework of three generic strategies that organizations can use to gain competitive advantage: innovation, quality and cost leadership. He posed (1996: 76) the following questions on competitive positioning:
- Which of our product or service varieties are the most distinctive?
- Which of our product or service varieties are the most profitable?
- Which of our customers are the most satisfied?
- Which customers, channels, or purchase occasions are the most profitable?
- Which of the activities in our value chain are the most different and effective?
Porter’s concept of the value chain is described below.
A distinction has been made by Barney (1991) between the competitive advantage that a firm presently enjoys but others will be able to copy, and sustained competitive advantage, which competitors cannot imitate.
The value chain
The concept of the value chain was also introduced by Porter (1985). As he described it, a value chain is a chain of activities for a firm operating in a specific industry. It identifies those activities in a firm that are strategically relevant and underlie its key capabilities. The ultimate aim of the exercise is to perform these activities better than competitors.
The value chain is ‘a breakdown of the production process into segments and functional activities’ (Kay (1993: 19)). Products pass through all activities of the chain in order, and at each activity the product gains some value. The chain of activities gives the products more added value than the sum of added values of all activities. A value system includes the value chains of a firm’s supplier (and their suppliers all the way back), the firm itself, the firm’s distribution channels, and the firm’s buyers (and presumably extends to the buyers of their products, and so on). Sparrow et al (2010) refer to the existence of a value web that recognizes the existence of multiple stakeholders and partners at each stage of the value chain. This web extends beyond the internal chain of activities to a broad range of external partnerships or other key relationships.
Value chain analysis identifies the activities of a firm and then studies the economic implications of those activities. It includes four steps: (1) defining the strategic business unit; (2) identifying critical activities; (3) defining products; and (4) determining the value of an activity. This leads to addressing two key questions: (1) what activities should a firm perform and how? and (2) what is the configuration of the firm’s activities that would enable it to add value to the product and to compete in its industry?
The significance of the concept is that it provides a useful analytical tool in strategic planning.
Core competencies and distinctive capabilities
Core competencies or distinctive capabilities – as Wright et al (2007: 86) comment, ‘the distinction between them seems blurred’ – describe what the organization is specially or uniquely capable of doing. A special competence was described by Quinn (1980: 179) as a feature that ‘makes the organization unique and better able to perform its functions than its competitors’. Distinctive capabilities can exist in such areas as technology, innovation, marketing, delivering quality, and making good use of human and financial resources. The concept of core competencies was originated by Pralahad and Hamel (1990: 82) who described them as a company’s critical resource that ‘represented the collective learning in the organization’.
Kay (1999) commented that the opportunity for companies to sustain competitive advantage is determined by their capabilities. He noted that there is a difference between distinctive capabilities and reproducible capabilities. Distinctive capabilities are those characteristics that cannot be replicated by competitors, or that can only be imitated with great difficulty. Reproducible capabilities are those that can be bought or created by any company with reasonable management skills, diligence and financial resources. Most technical capabilities are reproducible. As Kamoche (1996: 215) pointed out: ‘The capability-based view is concerned with actions, processes and related behavioural efforts to attain a competitive posture’. Teece et al (2002) emphasized that competitive advantage rests on dynamic capabilities.
Four criteria have been proposed by Barney (1991) for deciding whether a resource can be regarded as a distinctive capability or competency: value creation for the customer, rarity compared to the competition, non-imitability and non-substitutability. Eisenhardt and Martin (2000: 1106) noted that capabilities are a ‘set of specific and identifiable processes, such as product development, strategic decision making, and alliancing’. Ulrich (2007: 127) stated that: ‘Capabilities represent the skills, abilities and expertise of the organization. They describe what organizations are able to do and how they do it… Capabilities represent the ability of the organization to use resources,
get things done and behave to reach goals.’
Capability requirements can change as the organization changes. They need to be dynamic – to be developed over time in response to changing demands. Teece et al (2002) emphasize that competitive advantage rests on distinctive processes. And Teece (2007: 1319–20) commented that: ‘Dynamic capabilities enable business enterprises to create, deploy, and protect the intangible assets that support superior long-run business performance… These capabilities can be harnessed to continuously create, extend, upgrade, protect, and keep relevant the enterprise’s unique asset base.’
The concept of capabilities forms the foundation of the resource-based view of strategy as described below.
The resource-based view
The resource-based view of strategy is that the firm is a bundle of distinctive resources that are the keys to developing competitive advantage – the strategic capability of a firm depends on its resource capability. It is based on the ideas of Penrose (1959: 24–25), who wrote that the firm is ‘an administrative organization and a collection of productive resources’ and saw resources as ‘a bundle of potential services’. It was expanded by Wernerfelt (1984: 172), who explained that strategy ‘is a balance between the exploitation of existing resources and the development of new ones’. Resources were defined by Hunt (1991: 322) as ‘anything that has an enabling capacity’.
The concept was developed by Barney (1991: 102) who stated that ‘a firm is said to have a competitive advantage when it is implementing a value creating strategy not simultaneously being implemented by any current or potential competitors and when these other firms are unable to duplicate the benefits of this strategy’. This will happen if their resources are valuable, rare, inimitable and non-substitutable. He noted later (Barney 1995: 49) that an environmental (SWOT) analysis of strengths, weaknesses, opportunities and threats was only half the story: ‘A complete understanding of sources of a firm’s competitive advantage requires the analysis of a firm’s internal strengths and weaknesses as well’. He emphasized that: ‘Creating sustained competitive advantage depends on the unique resources and capabilities
that a firm brings to competition in its environment. To discover these resources and capabilities, managers must look inside their firm for valuable, rare and costly-to-imitate resources, and then exploit these resources through their organization’ (ibid: 60). The following rationale for resource-based strategy was produced by Grant:
Source review Rationale for resource-based strategy – Grant (1991: 133)
The resources and capabilities of a firm are the central considerations in formulating its strategy: they are the primary constants upon which a firm can establish its identity and frame its strategy, and they are the primary sources of the firm’s profitability. The key to a resource-based approach to strategy formulation is understanding the relationships between resources, capabilities, competitive advantage, and profitability – in particular, an understanding of the mechanisms through which competitive advantage can be sustained over time. This requires the design of strategies which exploit to maximum effect each firm’s unique characteristics.
Commentators on the sometimes elusive concept of strategy have tried to explain how it works through the notions and processes of strategic management, strategic intent, strategic goals, strategic plans and strategic decisions.
According to Boxall and Purcell (2003: 44): ‘Strategic management is best defined as a process. It is a process of strategy making, of forming and, if the firm survives, reforming its strategy over time.’ Strategic management was defined by Johnson et al (2005: 6) as the process of ‘understanding the strategic position of an organization, making strategic choices for the future, and turning strategy into action’. The purpose of strategic management has been expressed by Rosabeth Moss Kanter (1984: 288) as being to ‘elicit the present actions for the future’ and become ‘action vehicles – integrating and institutionalizing mechanisms for change’ (ibid: 301).
The key strategic management activity as identified by Thompson and Strickland (1996: 3) is ‘deciding what business the company will be in and forming a strategic vision of where the organization needs to be headed – in effect, infusing the organization with a sense of purpose, providing longterm direction, and establishing a clear mission to be accomplished’.
The focus is on identifying the organization’s mission and strategies, but attention is also given to the resource base required to make it succeed. Managers who think strategically will have a broad and long-term view of where they are going. But they will also be aware that they are responsible first for planning how to allocate resources to opportunities that contribute
to the implementation of strategy, and secondly for managing these opportunities in ways that will add value to the results achieved by the firm.
The process of strategic management is modelled in Figure 2.1. It involves analysing the internal and external environment, exercising strategic choice (there is always choice), formulating corporate and functional strategies and goals, implementing strategies, and monitoring and evaluating progress in achieving goals. But in practice, it is not as simple and linear as that.
In its simplest form, strategy could be described as an expression of the intentions of the organization – what it means to do and how the business means to ‘get from here to there’. As defined by Hamel and Pralahad (1989), strategic intent refers to the expression of the leadership position the organization wants to attain and establishes a clear criterion on how progress towards its achievement will be measured. They emphasized that ‘strategic intent is clear about ends, it is flexible as to means’ and that: ‘The goal of strategic intent is to fold the future back into the present. The important question is not “How will next year be different from this year?” but “What must we do
differently next year to get closer to our strategic intent?” ’ (ibid: 66).
According to Johnson et al (2005: 13) strategic intent is an expression of ‘the desired future state of an organization’. Strategic intent could be a very broad statement of vision or mission and/or it could more specifically spell out the goals and objectives to be attained over the longer term.
The strategic intent sequence has been defined by Miller and Dess (1996) as a broad vision of what the organization should be.
Strategic capability refers to the ability of an organization to develop and implement strategies that will achieve sustained competitive advantage. It is therefore about the capacity to select the most appropriate vision, to define realistic intentions, to match resources to opportunities and to prepare and implement strategic plans.
The strategic capability of an organization depends on the strategic capabilities of its managers. People who display high levels of strategic capability know where they are going and know how they are going to get there. They recognize that although they must be successful now to succeed in the future, it is always necessary to create and sustain a sense of purpose and direction.
Strategic goals define where the organization wants to be. They were described by Quinn (1980:7) as ‘those that affect the organization’s overall direction and viability’. They may be specified in terms of actions, quantified in terms of growth, or expressed in general terms as aspirations rather than specifics.
Strategic plans are formal expressions of how an organization intends to attain its strategic goals over a defined period of time. Boxall and Purcell (2003: 34) make the point that: ‘We should not make the mistake of equating the strategies of a firm with formal strategic plans… It is better if we understand the strategies of firms as sets of strategic choices, some of which may stem from planning exercises and set piece debates in senior management, and some of which emerge in a stream of action.’ Mintzberg (1987: 73) suggested that: ‘So-called strategic planning must be recognized for what it is: a means, not to create strategy, but to program a strategy already created – to work out its implications formally’.
As described by Johnson et al (2005: 10), strategic decisions are about:
- the long-term direction of an organization;
- the scope of an organization’s activities;
- gaining advantage over competitors;
- addressing changes in the business environment;
- building resources and competences (capability);
- the values and expectations of stakeholders.
They are therefore likely to be complex, be made in circumstances of uncertainty, affect operational decisions, require an integrated approach and involve considerable changes.
Business model innovation
Business model innovation is a recently formulated approach to strategy that focuses on how the firm creates value. The aim is to change the ways in which companies view their business operations and to provide guidance on mapping their future strategy. Business model innovation is concerned with the development or even re-creation of a business through a review of all the elements of its business model in order to identify opportunities to increase its competitiveness and prosperity. A business model can be defined simplistically as a description of how a company makes money, but as Johnson et al (2008) claim, it is more complicated than that.