Deze samenvatting is gebaseerd op het studiejaar 2013-2014.

Chapter A:  The Concept of Strategy

Strategy has the following seven concepts in common: the future, taking risk, complexity, irreversible decisions, need to create a strategic fit, implementations for change and significant scale and importance. Strategic problems are hard to solve because of many stakeholders within the organization, multiple objectives, importance of decisions, uncertainties in the surroundings, opportunity costs and complexity.

Intended strategy: strategy sets out a plan about how to get from here to there, while neglecting the concept of emerging strategy (Mintzberg).

Strategic intent (e.g. goal): strategy is being used to provide direction in the overall decision-making (Prahalad and Hamel).

Strategy can be used to ‘stretch and leverage’ à to use the core competences of the organisation to innovate new products. This is also known as the concept of innovation. According to Porter, competitive strategy is mainly about being different, while the strategic position is not sustainable unless there are trade-offs with other positions. This strategic coherence among many activities is fundamental for the sustainability of that advantage.

The five most important aspects of strategy are purpose, external reference point, advantage, decisions and capability.

Strategic planning is the process by which the firm organizes its resources and actions in relation to an external environment in order to achieve its goals or objectives. This is usually a formal and very hierarchical process.

Formal analysis would go through a number of stages in sequence: a mission statement, a review of the external and internal environment, formulating the strategy, making a business plan and specify the budgets. The intended strategy is changed by the environmental determinism and becomes a new realized strategy.

The external environment has three ranges of impact: market structure, industry structure and institutional and social context.

A PEST-analysis (figure 1.6) can be used to frame the political, economical, social, and technological forces that significantly influence the firm.

The internal assessment is often done with the help of a SWOT-analysis (Strengths, Weaknesses, Opportunities, Threats), in which the SW is internal and the OT is external (at business level). Strengths and Weaknesses can be categorised in: management and organisation, operations and finance. Opportunities and Threats can be categorised in: societal changes, governmental changes, economic changes, competitive changes, supplier changes and market changes.

Chapter B: The Analysis of Strategy

Strategy can be divided into three parts, namely, strategy context (where), strategy content (what), and strategy process (how). Combined together they are called the strategic map. There are a lot of different ways to look at strategy: the classic or rational view, the evolutionary view, the strategy processual or organizational process view, the strategy as systems view and the resource-based view.

The strategy systems framework gives you the individual elements of strategy that are all connected throughout time and causality. The elements of the systems framework are the environment, the direction, the strategic options, strategy: the strategic framework, the strategic decisions, operations: the business model and the outcomes.

To view the system the best, managers make use of a micro-perspective view and a systems-based view. The micro-perspective focuses on more deeply rooted individual activity, while the systems-based reveals more about the interactions between context, organisation and individual action, to see the pattern. The structural coupling is the interaction between the living system and its environment that triggers the living system in structures (see figure 2.3, p. 36).

Strategic planning is a mechanism that the company uses to organize its resources and actions to achieve objectives. The steps a company takes in this process are executive briefing, general management meeting, strategy assessment meeting, plan overview, strategy review meetings, plan resubmission and board presentation.

Business planning involves both the strategic and operational planning. It is complementary to strategic planning. Budgeting and control are derived from these plans and from the strategy. To asses whether the plan is performed correctly, organisation make use of performance measures, like matrices or the balanced scorecard. Data is gathered in the organisation to analyse the performance.

Strategic thinking: the intellectual, analytical activity that makes sense of the triad of forces to define the strategy at the heart of the company. Strategy making is how this thinking is put into practice. Intended strategies are deliberate and planned as intended beforehand. Emergent strategies come into existence throughout the process and are without or against what was intentionally planned. What eventually comes out is the realized strategy, a combination of both. Strategic decision-making occurs when everything is analysed and it is time for some action.

A distinction is being made between planning (i.e. coherence) vs. chaos (i.e. anarchy) with regard to strategic decision-making, where the former implies simplification and reducing risk, while the latter enhances creative, non-linear thinking. When placed against political process and problem solving, four types of decision process characteristics can be distinguished: uncoupled, uncontrolled, intended and incremental.

Implementing is the practical heartland of delivering strategies that work. This is the actual phase in which the decisions are put into practice. Interpreting occurs when the managers of a company look at the environment and their internal organisation. They can translate this in their strategy. A cognitive community is a group of like-minded individuals.

An organisation always learns from their experience or learn new things. This can be adaptive learning (single loop) or generative learning (double loop).

Managerial agency: assumption that managers determine strategy by interpreting the environment and taking action to align their organizational practices with the requirements of the environment, to make effective decisions.

The competitive landscape perspective states that strategy is deeply rooted in those processes where flexibility, knowledge creation and retention and collaboration are important.

Michaud and Thoenig (2003) characterize four organizational types according to the degree of autonomy of managers, and the extent to which they try to formulate strategies for long-term effectiveness or for short-term gain. They are as follows: fragmented organization, self-sufficient organization, mercenary organization and organic organization.

Chapter C: Industry and Competitors

Perfect competition implies price competition, easy entry and exit, and broad distribution of relevant knowledge. Firms, either individually or joint, attempt to create imperfections in the market to gain a competitive advantage over their competitors and in this way be able to charge a premium on their product. Competitive advantage is delivering superior value to customers and in doing so earning an above average return for the company and its stakeholders. Four key features of the market ‘context’ in which rivals sell their products are cost analysis, demand analysis, analysis of markets and competition and analysis of industry and competition.

Cost analysis is understanding the nature of costs that shapes the foundation for the microeconomics of strategy. Costs can be fixed or variable. Opportunity costs are the sacrifice of the alternatives forgone in producing a product or service.

Economies of scale imply that the fixed costs go down when you produce more. The strategic significance of economies of scale depends on the minimum efficient plant size (MEPS). Indivisibility means that an input cannot be scaled down from a certain minimum size and can only be scaled up in further minimum size units. The cube-square rule: production capacity is usually determined by the volume of the processing unit (the cube of its linear dimensions), whereas cost more often arises from the surface area (the cost of the materials involved). As capacity increases, the average cost decreases, because the ratio of surface area to cube diminishes. The learning curve is an empirical estimate of the proportion by which unit costs fall as experience of production increases.

Economies of scope occur when the prices of the range of products go down due to joint production. Economies of scope refer to increased variety in operations.

The demand analysis provides a framework for analysing price and other influences on the sales of the firms’ products and it provides a baseline for pricing products and marketing in general for forecasting and manipulating demand.

For the analysis of markets and competition you can have a lot of options. The markets are viewed as follow: perfect competition, monopoly, oligopoly and monopolistic competition.

Industry analysis: analysis of assets, resources and capabilities that create the economic foundation for firm operations (economic characteristics) and which determine individual capabilities that distinguish firms competing in the industry from one another (uniqueness). Porter’s five forces is the most well-known industry analysis. The five forces are rivalry, threat of entry, threat of substitutes, buyer power and supplier power.

Worldwide privatisation and deregulation has lead to an increase of competition and lower prices. Imperfections in the market create an opportunity to earn supernormal profits. Firm-specific imperfections are based on the creation of different assets (tangible or intangible) (i.e. resource-based view), and creation of distinctive, defensible positions (i.e. market-based view).

The essence of strategy implies creating space within which firms can improve their market position and performance by means of discrete and distinctive actions. This can be done on the basis of cost advantage or differentiation that are not easily imitated by other firms. Cost advantages are related to economies of scale (cost advantages due to expansion of a single product) and economies of scope (cost advantages due to joint production of different types of products). Economies of scope can be either broad or narrow.

Generic strategies (Porter, 1980) are typologies that offer type and range of strategic options based on pursuing either cost, differentiation, or scope advantages. They revolve around supply and demand in the market and strengths and weaknesses of the firm and its competitors. Stuck in the middle, according to Porter, implies that a firm pursues more than one strategy, which leaves the firm unsuccessful competitively speaking in the multiple strategies it is pursuing. This is due to all strategies being inconsistent in nature. However, many have already proven Porter wrong at this assumption regarding being stuck in the middle.

First-mover advantage includes having the first pick in resources and be the first to attract new customers. Intangible assets are the ones that are hard for a competitor to imitate, so the ones that makes your product unique (see table 3.4).

Sustainability of competitive advantage persists of power, catching-up, keeping ahead, changing game and virtuous circle.

Chapter D: Strategic Position

Describing strategy in four steps:

1. A clear set of long-term goals: ‘where are we going?’
2. The scope of the business: ‘what are we going to do?’
3. Competitive advantage: ‘how are we going to do it?’
4. The strategic logic: ‘how do we know it will work?’

Strategic position means the impact of strategy on the external environment and assumes an interaction between the internal world of the firm (i.e. assets and organization) with its external environment (i.e. industry, non-market). Furthermore, each firm contains a real economy and a financial economy. The former refers to the creation of resources and capabilities and the positioning within product markets, whereas the latter refers to the firm’s profits and cash flows that result from this real economy.

Resources are considered to be the tangible assets of a company (e.g. finance, skills of individual employees, purchased components and items of capital equipment), whereas capabilities are considered to be the intangible ones (e.g. knowledge, organization and management skills). Resources and capabilities combined determine the core competence of the firm that implies an underlying capability of the firm by which it creates a distinctive characteristic in comparison to other firms.

According to Porter, the supply chain is the spine of his five forces analysis. A subset of this supply chain is the value chain that consists out of primary activities (inbound logistics, operations, outbound logistics, marketing and sales, service) and support activities (firm infrastructure, HRM, technology development, procurement). Within these activities a distinction is being made between three types of activities, namely: direct, indirect and quality assurance.

Within this value chain the various activities are linked (i.e. ‘glued’ together) by means of tacit knowledge (i.e. something you know how to do but can’t explain it, such as riding a bike). This knowledge related to internal transactions is not visible and very specific to the organization. When costs of these internal transactions exceed the costs of buying outside, the organization should consider outsourcing these activities. 

Markets can be divided into strategic segments (demand side) based on product range and associated price differentials. Offer curves summarize the range of options open to customers in terms of price and product performance. The shape of this curve depends on customer price sensitivities and cost characteristics of the product. Furthermore, innovation can change the offer curve.

Consumer surplus means ‘profit’ that the consumer makes form a purchase and is calculated as follows: perceived gross benefit less user costs and transaction costs (=perceived net benefit) less price paid. Value maps show how these consumer surpluses work out competitively.

Economic value is created along the supply chain and into the value chain:

• Consumer surplus equals benefit less price paid (B - P)
• Firm profit (producer surplus) equals price paid by consumers less costs (P – C)
• Total value equals consumer surplus and firm profit (B – C)
• Value added equals firm profit less costs of raw materials (P – RM)

A strategic group is a firm within a group that makes strategic decisions that cannot readily be imitated by firms outside the group without substantial costs, significant elapsed time, or uncertainty about the outcome of those decisions. They are based on mobility barriers, which create limitations or replicability or imitation and can be considered as entry barriers for the strategic group (as opposed to for the entire industry).

Industry structure analysis aims to identify nature and range of profit-earning possibilities (i.e. benchmark). Oligopolistic market structures imply different (strategic) groups of firms that behave in systematically different ways that are protected by mobility barriers. Strategic group analysis provides a fundamental basis for the assessment of future strategic possibilities and emergence of new industry boundaries.

Strategic maps: two-dimensional replications of larger group structure within which important dimensions can be seen and through which key opportunities and threats can be depicted. These maps might be historical (i.e. backward-looking) or predictive (i.e. forward-looking).

To evaluate performance, a business applies the Balanced Scorecard. This broad-based performance measure revolves around the following main questions:

• How do customers perceive us? (Customer Perspective)
• What must we excel at? (Internal Perspective)
• How can we continue to improve and create value? (Innovation and learning perspective)
• How are we performing financially? (Financial perspective)

Business model intends to provide a link between intended strategies, its functional and operational requirements, and the performance (i.e. cash flows and profits) that can be expected.

The Du Pont accounting identities provides a starting point for identifying a business model as follows:

p = (p – c)Q – F

NA = WC + FA

Isolating mechanisms are economic forces that limit the extent to which a competitive advantage can be neutralized or copied. Competitor analysis implies analysing these isolating mechanisms and is used to give insight into ways in which incumbents’ core competences can be imitated or outflanked.

Chapter E: Strategic Capability

Resource-based view (RBV) and market-based view (MBV) complement each other and together they provide the basis for strategic theory.

Rents are surplus revenues over costs that are earned by resources and capabilities, otherwise called strategic assets or core competences. Internal economy of the firm implies sets of discrete activities (e.g. product line) that lead to market positions and are supported by resources and capabilities. A distinction is being made between similar activities (i.e. common strategic and generic assets that can lead to economies of scale, scope and experience effects) and complementary activities (i.e. dissimilar sets of strategic assets that require co-ordination/co-operation).

The distinctiveness of the firm’s specific set of resources and capabilities might lead to several issues, namely:

• Configuration issue: which resources to acquire and what capabilities to develop
• Firm-specificity issue: way in which resources and capabilities are developed
• Co-ordination issue: way in which resources and capabilities are internally managed to create positional advantage

There are some different visions on how to manage the CCs. There are five dimensions on which a company’s strategic resources and capabilities should aim to outperform competition, which are: speed, consistency, acuity, agility and innovativeness.

Assets = resources = capabilities. They can be divided into strategic assets (i.e. truly distinctive and unique to the firm that underpin positional advantage), complementary assets (i.e. jointly required with strategic assets for production/delivery of product/service), and make-or-buy assets (i.e. included based on financial calculations and will be excluded if the market can provide them at lower cost).

The definition of a core competence is: the set of firm-specific and cognitive processes directed towards the attainment of competitive advantage.

There are five ways in which management can leverage (i.e. focus attention and effort on a specific object in the attempt to exclude rival objects) resources to create conditions under which core competence can emerge. They are as follows: concentrating resources, accumulating resources, complementing resources, conserving resources and recovering resources.

Intangible resources and capabilities are those that are not visible, however, they do have a significant impact on business success.

Strategic industry factors are sources of market imperfections that can be used by firms to create competitive advantage.

Strategic intent implies setting psychological targets, which provide a focus that all organizational members seek to adopt. When there is a gap between ambition (intent) and resources (reality) one can speak of strategic stretch. However, when it does work out there is strategic fit.

Strategic investments are risky due to uncertainty and require technological progress and substantial investments in R&D and new products (i.e. strategic innovation). Strategic innovation implies rewriting the rules of the game and leads to new ways of competitive advantage, different conception of the required core competences and different business models.

Strategic planning view implies deciding on long-term objectives and strategic direction, eliminating or minimizing weaknesses, avoiding threats, building and defending strengths, and taking advantage of opportunities.

Key success factors (KFCs) are elements in the industry that are considered important for customers.

Competitive advantage consists of two components: the value for the customers and the value for the firm.

Value for customers consist of:

1. The firm’s ability to make a better product than competitors
2. The firm’s ability to make customers recognize, purchase and value the difference

Value to the firm is:

1. The ability to create and sustain CC’s
2. The ability to run the business efficiently and at best practices.

Chapter F: Digital Economy

Over the years the old world of scale and scope economies have made room for (note: have not been replaced by) a new world of network externalities (i.e. network effects) due to the development of new information and communication technologies (i.e. ICT). These changes have substantial effects on corporate strategies worldwide and have created a digital economy (i.e. multiple nodes, interconnectivity, cooperative) with increasing returns to scale characteristics, which is not moderated by the influence of diminishing returns.

A distinction is being made between three types of networks, namely:

• Virtual network (knowledge and information assets are intangible)
• Pure network (an essential characteristic of the product or service is organized through complementary nodes and links)
• Indirect or weak network (complementary nodes where links are created by the customer as opposed to for the customer)

Consumer externality implies that demand for a product or service is influenced by total demand for the product/service class or by total demand in a complementary one. A two-way network allows links to be operated in both directions; a one-way network has only one line of connection. If you have a star network, there are 56 products in the connection (formula: n*(n-1)). In a crystal network there are two main points, and these have some nodes of their own.

Network externalities are defined as the increasing utility that a user derives from consumption of a product as the number of other users who consume the same product increases. The focus of interest in network economics has shifted from the analysis of natural monopoly towards issues of interconnection, compatibility, interoperability and coordination of quality.

Pure network goods are goods that have no stand-alone value, such as a telephone (you need other means to be able to use it, without them, it is useless and therefore has no value on its own). Tipping point is where the installed base or size of the network tips expectations sharply towards one player or network and away from competition. Negative feedback systems, as used by traditional economics, implies that the strong get weaker at the margin and the weak get stronger, which eventually leads to a competitive equilibrium (i.e. diminishing marginal utility as consumption grows). Positive feedback systems, as used by the new (network) economies, imply that valuation of a product or service increases the more consumers consume due to interdependence of consumer decisions. Figure 7.4, page 223 of the book, shows the “winner takes all” phenomenon.

The optimal size of a network is found where demand and cost interact in such a way that the joining of valuable consumers decreases to the point where the costs of acquiring and servicing new consumers exceed the price that these consumers are willing to pay.

There are four settled levels of infrastructure within network industries (see figure 7.8), namely: technology and standards, supply chain, physical platforms and consumer network.

Moore's law implies that every year and a half processing power doubles while costs hold constant. Industry standard is achieved by three modes of selection process, namely: market-based selection, negotiated standardization and hybrid standard setting. 

Physical platforms are the tangible infrastructures that deliver service to a customer, such as computers, telephones and satellites, and are nowadays a complex structure of interconnected sub-platforms. Therefore, network architecture (i.e. standards that govern how a system and its modules interact) plays a crucial role. A distinction is being made between two kinds of dynamic processes with regard to network architecture, namely: modular innovation and architectural innovation.

Consumer network implies interdependencies between consumers. In the consumer market there are two types of values attached to a product, namely: autarky value and synchronization value. Furthermore, consumers can be locked in when they invest in multiple complementary and durable assets of a physical platform where costs of switching to an alternative prevent them from doing so.

Convergence of digital services means that different industries melt together to form one industry; they become linked by a powerful scope economy (i.e. a common technology).

Chapter G: Multi-business Firms

Corporate strategy implies value gained from mixing businesses and the way in which to manage those to achieve optimum value. It can be separated into portfolio management, growth idea (i.e. profitable growth), and relatedness (i.e. synergies). Over the years organizational structures have moved from the traditional U-form (i.e. centralized, functionally departmentalised operating firm, fig. 8.2) to the M-form (i.e. decentralised, multidivisional, semi-autonomous SBUs, fig. 8.3).

The economic logic behind the M-form is that here the whole had more value than the sum of its parts. In formula, this means:

Vc = As + Bs + Cs + Mc

Mc (which can also be negative) can have some different sources, organisational gain, benefits of scale and size, reorganisation, but the most potential one is the transaction cost Economics (TCE), where the transaction costs are shared within the whole corporation.

The M-form offers two major benefits according to the transaction cost theory, namely governance and scope.

The Corporate Business interface sets out in accountability and authority in the in which there are three styles, namely:

• Strategic planning (i.e. corporate executives define/monitor corporate and business strategies)
• Strategic control (i.e. corporate executives influence business-level strategies and monitor financial results)
• Financial control (i.e. control of business-level strategy is decentralized and relies solely on financial control at corporate level)

One way of pursuing corporate strategy implies adding value through buying and selling businesses. They can also invest in the bought company and sells it for more value. Lastly companies can buy conglomerates and sell the parts. Porter names this portfolio management and distinguishes between three organizational/process concepts, namely restructuring, sharing activities and transferring skills.

Parenting advantage (or corporate advantage, Goold (1994)) implies that parent companies can add value to its component businesses through orientation and management. Furthermore, Goold made a distinction between three classes of value-adding corporate strategy (see figure 8.7, p. 263), namely stand-alone influence, functional and services influence and linkage influence.

Style of the parent is determinant for the level of performance and can be divided into two dimensions (see figure 8.8, p. 265), namely dimensions of planning influence and dimensions of control influence. Three styles emerge: financial control, strategic planning and strategic control.

The role of the corporate layer is dependent on relatedness between SBUs and in order to achieve economies of scope cooperation between these SBUs is highly important. Furthermore, strategic orientations can be divided into cooperative (i.e. related diversification) and competitive (i.e. unrelated diversification) ones. In conclusion, competitive and cooperative organizations are dissimilar with regard to centralization, integration, control practices and incentive schemes, therefore, incompatible. By creating core business grouping or divisions this economic and organizational dilemma can be overcome.

The boxes of the BCG matrix are star, question mark, dog and cash cow.

Academic research supports the fact that combining related businesses can add value to a corporation. In this relationship there have to be strong findings on both sides, similarities in the characteristics and a dynamic creation an accumulation of trans-business competences.

Mergers and acquisitions are used to change the portfolio quickly, but are not very popular or good for the moral of the acquired business. So now corporations form strategic alliances with partial ownership to grow. When an acquisition has taken place, the corporation needs to integrate the new business, called post-acquisition integration. Strategic alliances overcome these limitations and are therefore more common. A strategic alliance can be between non-competitors (international expansion, vertical integration and diversification) and amongst competitors (pre-competitive or shared supply alliance, quasi-concentration alliance and complementary alliance).

Chapter H: Dangers

There are many definitions for risk and uncertainty. Translated into a business setting, risk and uncertainty are interrelated in such a way that taking risk provides that in order to make a profit one often needs to go. The main distinctions that can be made within organizations are organizational risk and managerial risk, which are somehow interrelated and are useful in risk analysis and assessment for the unique, uncertain opportunities. Managerial risk taking is where managers make choices associated with uncertain outcomes. Organizational risk is where organizations face volatile income streams, which are associated with turbulent and unpredictable environments. Additionally, risk can be divided into categories, such as strategy, operations, economic and hazards and are often a combination of endogenous and exogenous origin.

Prospect theory implies that decision makers choose between risky alternatives influenced by both magnitude and probability of possible outcomes, in which a decision maker is assumed to prefer sure gain to probable gain of expected double value and to prefer a probable loss of expected double value to a sure loss.

Uncertainty comes in many ways, shapes and sizes. In assessing risk and uncertainty, a PEST-analysis is a useful tool, which includes examining the following dimensions: political/legal, economic, socio-cultural and technological.

Risk analysis is used to assess the effects of uncertainty on decision-making, especially capital investment decisions, where one attempts to determine the 'worth' attached to the level(s) of risk. Worth can be measured in several ways, such as by calculating the net present value (NPV) or the internal rate of return (IRR).

Decision trees are designed to handle situations of sequential investment decision-making and assess risk across a series of related decisions (figure 11.2, page 371 of the book). Stochastic decision trees assume that:

1. All quantities and factors are empirical probability distributions
2. Information about results can be obtained in a probabilistic form
3. The probability distribution of possible results can be analysed using the concepts of utility and risk

Risk can also be determined by means of indices, such as Business Environment Risk Indicators (BERI) and the Economic Intelligence Unit (EIU), which select a range of variables covering political, economic, and financial or operational aspects of the country in question.

For the purpose of understanding and trying to reduce risk and uncertainty more qualitative techniques such as scenario analysis can be used. Scenario analysis is about attempting to describe what is possible (i.e. visualizing the future) and designing flexible strategic options to cope with the diversity of possibilities by means of 'telling a story'. There are two key characteristics to a 'good story', namely:

• It results from subjective assessments of a wide range of informed individuals/groups which are valid
• It recognizes that decision makers have some influence on future development

In conclusion, scenarios consider a longer time horizon, and offers a more broad set of options, as opposed to other techniques. In this way they help to assess risk over longer-term and identify strategic options for the organization.

The question remains how effectively scenarios can be made and if they are useful to the organisation. That is why scenario planning also has some other functions:

• Reflect the formulated strategy back against the organization
• Identify what changes need to be made with regard to 'gap analysis'
• Identify and select key indicators/signposts which will help monitor and assess implementation/performance of the chosen strategies

Gap analysis (table 11.5, p. 382) implies that core competences of the firm are assessed against future strategies.

Chapter I: Strategic decision making: process analyses

Strategic decisions are the decisions that drive or shape most of the organization's actions, are not easily modified once implemented and greatly impact organizational performance. The strategic decision making process consists of four aspects:

1. Decision action (individuals and groups)
2. Organisational action (choices and outcomes)
3. Interpretations and responses to the environment
4. Knowledge, interests, preferences and world views

Decision-making can be viewed by different perspectives, such as the five mentioned by Mintzberg, which are:

• Decision-making as a plan (i.e. intentional course of action)
• Decision-making as a ploy (i.e. designed to outsmart competition)
• Decision-making as a pattern (i.e. emergent behaviour)
• Decision-making as a position (i.e. achieving a match between organization and environment)
• Decision-making as a perspective (i.e. reflect strategist's view on the world/organization)

Strategic programming is based on planning and evaluation based on standardisation of procedures and activities around managerial decision-making. Game theory was designed to help make sense of and react to actions of competitors by examining what is likely to happen when two players make choices and figuring out the best outcomes/pay-offs of these choices.

Sensitivity analysis is used to investigate what happens if the underlying assumptions of a strategic decision are questioned and modified.

Options help management make key decisions about future activities when current strategies are letting them down (i.e. strategic decay).

Additionally, based on degrees of capabilities and knowledge of new markets, four strategic options can be distinguished (see fig. 12.3, p. 398), namely no options, bounded options, trading options and a full set of options.

Strategic decision-making can be classified in three distinct types:

1. Sporadic: it is a subject to delays and recycles.
2. Fluid: smooth flow and shorter duration.
3. Constricted: a small number of seniors makes the decision (in between)

More in depth there are three characteristics that influence the decision-making. The first are the decision-specific characteristics. Decision-specific characteristics can be divided into (1) interpretation of a problem(s) by decision makers and (2) characteristics of the decision or problem(s) to be solved. The second variable is the organizational context. Organizational context mainly covers systems, structure, ownership and control, and organization culture. The last determinant is the relationship between decision-making and performance. It is very difficult for managers to connect their decisions to outcomes of performance, especially when it goes the right way.

Decisions might fail where typical mistakes are as follows:

• Failure to address the real problem
• Decision made the problem worse as opposed to better
• Wrongly made decisions become irreversible and pull the organization even further into crisis

It remains very difficult to pinpoint where things have gone wrong. However, some key factors exist with regard to higher-achieving decisions, namely:

• Structure and receptiveness of organizational culture to the decision
• Features of what actions managers take during the process
• Features of the decision-process itself

Finally, achieving successful decisions relies on

1. Knowledge base of managers: how familiar managers are with the problem to be addressed.
2. Receptivity of organizational context to the strategic decision being implemented: how ready the organization is to adopt the changes required by the strategic decision.

Chapter J: Strategic Knowledge

A learning organization is one that is able to create, acquire, and transfer knowledge and to change its behaviour to reflect new knowledge. Systemic knowledge is the knowledge that is already inside the organisation. Knowledge management is the process of identifying, extracting and managing the information, intellectual property and accumulated knowledge that exists within a company and the minds of its employees. Dussage et al. point out clearly the distinction between ‘incremental’ innovations (refining and improving existing products or processes) and ‘radical’ innovations (introducing totally new concepts).

The learning process has to involve incremental learning that stimulates to follow up with the technology. Technologies can be sustaining and disruptive. To win over the competition with your innovation, the company has to have a value innovation.

Revolutionary innovators are the ones that do not come up with an imitation for a lower price, but really make something new. Being efficient is no longer enough to be called innovative. Knowledge can influence these decisions because of the economic concepts, the alternative definitions of innovation and the organizational approaches.

Learning is involved in developing the core competences of a company, mostly through objectified knowledge. This way they can create a framework (figure 14.2, p. 458) to view the competition. Part of this knowledge is ‘in the organization’, but not written down. These are the intangibles (intangible assets). Those can be divided in relational assets, knowledge assets and the competences.

In the Schumpeterian theory it is stated that because of the dynamic environment, innovation is a medium through which creative destruction of existing technologies and knowledge take place. Schumpeter suggested there were patterns of change and ferment (radical innovation) interspersed with stability (incremental innovation).

Companies survive in these markets because it is hard for new entrants to compete. Explanations are the sunk cost effect and the replacement effect. It might be that the monopolist is challenged and has to lower their prices to keep the market share: this is called the efficiency effect. The technology races to get to the dominant design: the design to which all of the competition has to adapt to stay in the market.

Knowledge-based view implies that knowledge can be viewed as an organizational asset that is created and enhanced by learning and is part of strategic management.

Knowledge can be divided into stocks (underpins outputs and inputs of the learning process) and flows (where knowledge passes from one to another). Knowledge can be transferred as follows, according to the model of knowledge, created by Nonaka: internalization, socialization, combination and externalization. This results in the learning spiral.

The value chain becomes tighter and with the corporate glue and collective knowledge corporations, it can create knowledge architecture in the form of a value web. This web has linkages between knowledge as assets, knowledge embedded in processes and the pathways to competitive advantage. Teece (1997) argues there are four knowledge processes in this web: entrepreneurial, coordinative and integrative, learning and reconfigurational.

In relation with strategy, there are three categories in knowledge important, also considered as the elements of the KBV. Specific knowledge is the knowledge production in functions and draws links between the elements of knowledge and knowledge renewal (fig. 14.7, p. 470). The aspects are: production, access, diffusion, connection and renewal. Organizational knowledge is the process in which the elements are taken into the organisation (fig. 14.8). Together, these create the knowledge web of the organisation.

Learning can be viewed from different levels of analysis, ranging from individual learning to organizational learning, and organizations appear rather less adaptive at learning than individuals. Learning can be separated into adaptive learning and generative learning. Learning can be divided into learning organization, group learning, one-to-one learning and individual learning.

Communities of practice, as opposed to dominant logic, occurs when members of a community learn through participation in tasks together, and transfers practices, ideas and concepts about the work processes.

Chapter K: Corporate governance

Due to exogenous forces, such as a global economy, government liberalization, and an increasing influence of foreign institutional investors, corporate governance has become more important. Furthermore, there are endogenous pressures related to purpose, responsibility, control, leadership, and power of boards.

Agency theory implies that effective boards will take the shareholders' (i.e. principals) interest into consideration, use their experience in decision making, and use their power to prohibit self-interest tendencies of corporate management (i.e. agents).

Multiple and double agency implies that the agent has more relationships than just with the shareholders. The second relationship is with the organisation itself. This one has to ensure the alignment between the objectives and successful implementation. Multiple agents occur if a company starts an alliance with another organisation, like a joint venture. Here the managers are agents for the owners of the joint venture.

The stakeholder theory is the opposite of the agency theory. The agents strive for profit maximization, while this one want to stress the importance of all the stakeholders.

O’Neal and Thomas outline the three basic functions of the board:

1. Advising and counselling top management
2. Monitoring and controlling top management
3. Developing corporate strategy

In their practice, boards should act as follows: ensure they focus on correct issues during meetings and avoid side-tracking and build in maintenance and learning functions into operations and processes. Boards must ensure that strategic decisions incorporate ethical, socially responsible and sustainable factors. An organization that fails to operate in a corporate social responsible way faces the risk of poor market ratings and adverse publicity.

The board has two major strategic purposes: to exercise control and to provide strategic leadership.

It is easier to measure board’s ineffectiveness (i.e. minimalist) as opposed to effectiveness (i.e. maximalist).

There are a lot of differences in countries regarding corporate governance, mostly concerned with the ownership structure, the state of the economy, the legal system, politics, culture and history. The world can be separated in two most commonly approaches: the outsider/market exit approach and the insider/voice approach.

Chapter L: Strategic Performance Measures

The domain of business performance can be used to measure organisational effectiveness and exists of three rings, from the inside out (see fig. 16.1, p. 521):

1. The financial performance: accounting principles are used.
2. Business performance (financial + operational performance): performance indicators are used to identify the operational success.
3. Organisational effectiveness: benchmarking the strategic goals to examine performance. This includes the shareholders and stakeholders of the company.

Accounting-based performance measurements are related to the efficiency of the company. Examples are: ROI, ROE, ROS, ROA, EPS en P/E. The Economic Value Added (EVA) is the net operating profit after tax (as a percentage) – weighted average cost of capital. The Shareholder Value Approach (SVA) is all about maximizing shareholder value. This means calculating the Net Present Value of the firm. If a business model is developed, the steps of the SVA are as follows:

1. Clear identification of the business model with the strategic, operational and financial drivers.
2. Derivation of the model of the set of viable strategic options.
3. Evaluation and estimation of the cash flow profiles with each option.
4. Estimation of the company’s cost of capital
5. Discounting the cash flow profile for each strategic option
6. Choosing the strategic option with the highest NPV

The Balanced Scorecard is a broader approach of evaluating performance with more perspectives. It identifies four groups with Key Performance Indicators. The four main groups are:

• Financial lens measures
• Consumer lens measures
• Internal lens measures
• Innovation and learning lens measures

To make the Balance Scorecard work, managers have to make the linkage between the short-term and long-term goals. This goes by four processes (see fig. 16.4, p. 532):

1. Translation of the vision and strategy statements
2. Communicating and linking
3. Business planning
4. Feedback and learning