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Strategic Management Dynamics

Chapter outline

Strategic Management Dynamics is primarily designed as a textbook for introductory courses in strategic management. However, it can be used – in whole or in part – in other types of course, as well as for independent study.

The basic appreciation of how firms and organizations function covered in the early chapters can support foundation courses in business and management, designed to give students a clear context for understanding how functional courses relate to each other. Elsewhere in MBA and similar programs, the book provides powerful, rigorous frameworks applicable to classes in functional or topic-oriented classes, such as marketing and sales, human resource management, product development, operations management, entrepreneurship and innovation.

Its rigorous, integrated perspective on how the major functions and departments of an organization work together over time also provide a useful basis for a business management and strategy course within specialist Masters’ and professional courses in such subjects as Finance, Marketing, Accounting, Information Systems, and Technology Management.

The early chapters of this book offer simple frameworks for the development of isolated organizational resources – customers, staff, and so on – before developing progressively more detailed models for how these different resources are developed and sustained. Instructors in marketing and sales, human resources, product development, and operations management will therefore find a collection of frameworks that add important concepts to their courses. These can be identified by reviewing the book in its entirety, noting examples and frameworks that relate specifically to the functional course in question. It is then possible to select from the book’s on-line resources and exercises just those elements required.

The book makes a particularly strong contribution to courses in entrepreneurship, focusing as it does on the development, integration and sustaining of basic resources. Experience with students using its frameworks for this context suggests that these add considerable confidence to the resulting business plans for new ventures. Indeed, the launches of many such ventures have been substantially revised and enhanced as a result of this scrutiny, whilst others that do not promise a viable future have been abandoned. Chapters 1-4 provide the essential elements for this purpose, whilst a review of the likely rivalry in which a new venture will be involved can be examined with the tools in chapter 7.

The chapters are ordered as follows

Chapter 1 – Performance through time
Chapter 2 – Resources drive performance
Chapter 3 – Resource accumulation
Chapter 4 – Interdependence and the strategic architecture

Chapter 5 – Resource attributes
Chapter 6 – Resource development
Chapter 7 – Rivalry

Chapter 8 – Goals and controls
Chapter 9 – Intangible resources
Chapter 10 – Capabilities

This Chapter explains why the over-riding imperative for strategy is to help management improve performance over time, an issue just as vital to organizations in the voluntary and public service sectors as to commercial businesses. This exposes three fundamental questions – why performance has followed the path that it has up to today, where that performance will likely go into the future, and how management can act to improve that trajectory sustainably. The Chapter explains the problems with ratio-based objectives and establishes the importance of focusing instead on time-chart pictures of absolute performance measures. Two widespread risks in setting performance objectives are discussed – choosing aims that are either unrealistically ambitious or under-shoot the potential opportunity. Also discussed is the value of applying the same principles to functional performance. Connections are made to established concepts of economic profit and shareholder value.

This Chapter includes connections to the following Strategy concepts: Value-Curve, Value Chain, Generic Strategies, Industry Forces and Vision & Mission.

Key issues addressed

  • Business value reflects future earnings
  • The management imperative: Building performance into the future
  • Non-financial performance measures, especially in public-service and voluntary organisations
  • Appropriate objectives: Achievable, but developing the full opportunity
  • Inappropriate performance measures: ratios, market share, percentage growth rates
  • Multiple and conflicting objectives
  • Choosing appropriate timescales, depending on the issue of concern
  • Functional challenges and choice of objectives
  • Implications for information needs

This Chapter starts by establishing the importance of rigorous casual analysis pushing back from top-level performance outcomes through the logical chain of causality that accounts for those outcomes. This process ultimately exposes the fundamental relationship between resources and demand, revenues, costs and profits. The Chapter shows how equivalent principles operate in public services and voluntary organisations. This resource-driven perspective is compared with other approaches to understanding and forecasting performance. Links are made to the industry-forces view of performance, cost-leadership and differentiation, the value-curve approach and the resource-based view of strategy (RBV).

This Chapter includes connections to the following Strategy concepts: Value-Curve, Value Chain, Generic Strategies, Industry Forces and Vision & Mission.

Key issues addressed

  • The need for rigorous causal explanations of performance
  • From performance outcomes to the resources that drive demand and supply, revenue and costs
  • Measures of performance for a whole time-period vs. quantities of resources at an instant in time
  • Critical importance of tracking numbers over time, including non-business cases and functional challenges
  • From understanding history to estimating future performance - market-based and resource-based explanations and forecasts
  • Strategy dynamics and the resource-based view of strategy
  • Identifying, specifying and measuring resources – and definitions for resources and capabilities

This Chapter explains the principle that resources accumulate and deplete (fill and drain, over time) and the deeply fundamental role of this principle as core theory underlying organizations’ performance over time. It describes the 'stock-and-flow' structure that captures, numerically, the behaviour of accumulating resources, explains in detail the implications for numerical analysis of performance. The Chapter shows how this phenomenon relates to the problem of 'causal ambiguity', severely limiting the insights that can be obtained either by correlation analysis or by managerial judgment. It demonstrates how the mechanism operates in marketing (e.g. new-product adoption), human resources (staff hiring and retention) and product development. Connections are made to segmentation, value-chain and asset-stock accumulation concepts in Strategy, and to the criteria normally used to assess the strategic contribution of firm resources.

This chapter includes connections to the following strategy concepts: Value-Curve, Value Chain, asset-stock accumulation and causal ambiguity.

Key issues addressed

  • The inescapable and critical behaviour of resources - building up and draining away over time
  • Understanding the math of how resource flow-rates determine resource levels
  • Seeking explanations for what causes the rate at which resources are won and lost
  • 'Causal ambiguity' – understanding causes – and how accumulating resources devalue correlation analysis
  • Resource accumulation and constantly changing value-chain structures
  • Dealing with important details, including segmentation, and one-time changes in resource levels

This Chapter adds to the ideas that performance depends on resources and that these accumulate and deplete the further observation that resource-building depends on existing resources – a rigorous, quantified perspective on the principle of 'complementary resources'. It shows how combining these three basic causal principles enables the laying out of an integrated core business system for any kind of organisation. The basic math behind these principles is explained, and how this relates to a simple spreadsheet-perspective on modelling business performance. The Chapter shows how to use the resulting 'strategic architecture' to both understand and anticipate organizations' performance. It explains how interdependence creates feedback mechanisms that give rise to common phenomena of performance dynamics - escalation, collapse and limits-to-growth. Investigation of how strategic architectures behave shows that minimum resource levels are required for an enterprise to function at all, and that there is a maximum performance limit that can be extracted from a finite set of resources.

Includes connections to the following frameworks and concepts: The Bass Diffusion model, Tipping Points, Issue Tree Analysis, Value Drivers, Balanced Scorecard, Strategy Maps.

Key issues addressed

  • Complementary resources: why growth depends on existing and potential resources
  • How interdependence causes feedback that can both drive growth and constrain it
  • Mapping the interactions amongst resources to complete the ’strategic architecture’ that drives organisations’ performance over time
  • How different organisations in related industries exhibit common core architectures
  • The causes of discontinuities and tipping points
  • Using strategic architectures with issue-tree analysis and value-drivers
  • Using strategic architectures to support balanced scorecards and strategy maps

more vs less appealing products etc – affects how an organization performs over time. Any such quality operates as an 'attribute' for the resource that carries it, and rises or falls along with changes to the resource itself, in just the same way as adding hot or cold water changes the temperature of a tank or bathtub. The chapter shows how to work out the scale and speed with which changes occur to an attribute, and how these changes work through to drive overall changes to performance over time. It also explains how a resource can exhibit a quality-distribution, for example when customers vary in size or staff vary in experience. Examples covered include customer-quality, staff skill levels, equipment reliability, and the fund-raising for a voluntary organization. The chapter explains important attributes for a low-fare airline, and shows how the principles can be used for turning round performance of a troubled business or to undermine a competitor’s strategy.

This Chapter includes link to concepts of human capital, skills and competency audits, marketing channels, industry consolidation, corporate turn-round and rejuvenation.

Key issues addressed

  • The attributes possessed by resources that describe their quality and determine their contribution to performance
  • Understanding how those attributes improve and deteriorate as resources are added or lost
  • Implications for developing human resources, product range, and other functional issues
  • Using the quality-distribution of resources to decide where to compete and where to focus efforts at improving performance
  • Situations when resources bring with them the potential to access others
  • The importance of competitive structure in an industry, and using attributes to undermine competitors

This chapter explains how resources often develop through stages, at each of which they contribute differently to performance – disloyal customers vs. loyal, junior staff vs. experienced, and so on. Organizations are often able to manage resources before they become an active part of the business system, and may need to do so, for example to make potential customers aware or interested in their products. Resources sometimes continue to have an influence after leaving an organization’s system, e.g. former employees recommending others to join its staff. Especially widespread and powerful cases concern the efforts of firms to win awareness and choice of customers, to hire, develop and retain staff, and to develop and promote new products. The chapter provides frameworks for laying out and quantifying where in their development process customers, staff, products, equipment and other resources lie. It also shows how to quantify the impact of the various factors affecting resource-development, including how managerial choices affect their movement, so that changes over time in performance can be assessed.

This chapter includes connections to the following frameworks and concepts: staff hierarchies, R&D pipelines, the 'AIDA' framework and other models of customer development, sales pipeline, 'PEST' analysis of political, economic, social and technological factors, the experience-curve of cost reduction and dynamics of industry innovation.

Key issues addressed

  • Recognising that resources contribute differently to an organisation as they move through different stages
  • The importance of knowing and controlling the rates at which resources develop – customers, staff, products and assets
  • Resources that deteriorate rather than improve as they develop, such as items of equipment
  • Attracting and reaching potential customers and staff before they become active
  • The exceedingly long-term consequences of strategic decisions on developing resources
  • Assessing the impact of external factors as they drive resource development in innovation and industry development
  • The continuing contribution of staff and customers after they leave the business
  • Resource development in non-commercial cases
  • How resource development connects with the organisation’s core strategic architecture

Just three rivalry mechanisms cover all competitive interactions between firms. In the case of customers these are:

  • winning new customers
  • stealing customers from rivals
  • obtaining a larger share of business from shared customers

Organizations may also compete for other resources, such as employees or providers of funds, making the mechanisms equally relevant to public services and voluntary groups. The chapter provides frameworks for laying out and quantifying how customers or other resources are flowing between competitors, and the implications of these processes for how performance develops over time. It also shows how to assess the consequence for the way in which industries develop, including important considerations, such as the risk of building a market for competitors to exploit. Most importantly, the chapter shows how to assess the impact of decisions and policies on the winning and losing of competitive situations. Many situations involve several competing organizations, or many, so the chapter also offers ways to understand and simplify these complex interactions. It ends with a description of the rivalry mechanisms as they apply to competitors in the low-fare airline sector, for which a learning-simulation is available.

The chapter includes connections to the following concepts: elasticity of demand, first-mover advantage, switching costs, competitor analysis, blue ocean strategy, game theory, strategic groups.

Key issues addressed

  • Type-1 rivalry – capturing new customers, especially in growing markets
  • Type-2 rivalry – stealing customers from competitors, especially in mature markets
  • Type-3 rivalry – fighting for share of sales to non-exclusive customers
  • How the three types of rivalry may operate together
  • How rivalry accelerates development of emerging markets, and how product generations renew the competitive process
  • Rivalry for other resources, such as projects, staff, intermediaries and suppliers
  • How limited rationality and delays make competitive outcomes dependent on the sequence and timing of events
  • Dealing with multiple customer segments
  • Relevance of competition in non-commercial cases
  • Dealing with multiple competitors
  • Grouping competitors according to similarities to simplify complicated cases
  • Rivalry for routes and passengers in the low-fare airline sector

Strategic decision-making covers a wide range of issues confronting management that need organizing, to see where they arise and how they are connected. A more or less chronological sequence for an enterprise is:

  1. Whether to take part.
  2. Choosing a strategy for taking part.
  3. Designing a likely path to success.
  4. Steering strategy through time.
  5. Whether to extend or revise the strategy.

The issues apply with little modification to strategic challenges in public services and voluntary organizations.

Key issues addressed

  • The many different categories of decision that arise in different stages of strategy
  • The interrelated issues of evaluating strategic opportunities, choosing between them, and designing a path that might deliver success
  • The critical importance of good policy to steer strategy as time passes
  • Understanding “policy” as a rule or guideline for making a decision, often by changing a previous value of that decision
  • Recognizing that most decisions of strategic significance affect resource growth and retention
  • Including the consequences of competitors’ decisions in our own policy
  • Designing policy that allows decisions to balance conflicting aims
  • When decisions interfere with each other

It is widely accepted that intangible or soft factors have a substantial impact on organizational performance – a damaged reputation can destroy a business, strong staff motivation can drive powerful growth, proprietary knowledge can give rise to market-leading products, and so on. But there is a challenge in making practical use of this general understanding to steer strategy, because of terminology that is overly wide-ranging, ambiguous and inconsistent. This chapter offers definitions of tangible and intangible resources that is clear and usable, and identifies three major categories into which intangible factors mostly divide:

  1. Psychological factors concerning the state of mind of key groups, especially customers and staff, but also investors and other stakeholders
  2. Information-based resources, such as data, technology, knowledge
  3. Certain quality factors that must be built up and sustained over time

The chapter then gives frameworks for working with these types of intangible, and examples of how they feature in real-world situations.

Key issues addressed

  • Classifying resources and capabilities to give a clear specification of intangible resources
  • Three main classes of intangibles affecting the tangible heart of the strategic architecture: psychological factors, information-based resources, and quality-related items
  • The distinction between current quality driving behavior for current customers vs. reputation influencing potential customers
  • Perceptions that build up to threshold levels where they trigger big changes in behavior
  • Problems with intangibles that bring the system back into balance, though not for good reasons
  • The decay of information-related intangibles, causing a need to rebuild, and the key role of information systems strategy
  • Knowledge as a higher-level concept than data or information, requiring effort to develop and maintain, but with important effects for many firms
  • How quality factors, not all of which are strictly "resources" contribute to strategic performance

Organizations with few resources are not necessarily doomed to weak, low growth competitive positions in their industries. If they do not possess or have access to important resources, they can develop those they need. For this purpose, they need the capability to build and sustain resources. Whilst this much is clear in principle, making use of capabilities to design and deliver strong strategic performance faces the same difficulties as those encountered with intangible resources in Chapter 9; namely a terminology that is wide-ranging, inconsistent and abstract.

Key issues addressed

  • Capabilities as activities groups are good at doing, that can be and often are deliberately identified and developed
  • The importance of clear terminology and specification for capabilities
  • Most important capabilities concern acquiring, developing or retaining resources, so can be found at each resource flow in the strategic architecture
  • … and three detailed capabilities are often required; to get things done quickly, with good quality and at low cost
  • Small differences in capability explain large differences in performance, with no need to invoke complex, abstract concepts
  • The dividing out of capabilities amongst teams with particular responsibilities
  • Contrasting the stock-and-flow view of how capabilities develop resources vs. the activity flow of business process mapping
  • The self-reinforcing link between resource flows and building capability as the basis for learning
  • Capabilities as composite asset-stocks, combining people, skills, processes and information systems
  • Certain capabilities that are not linked to resource flows
  • Capabilities in non-commercial settings
  • Learning mechanisms incorporate limits to growth and the forgetting of capabilities
  • The powerful consequences arising from capabilities working together
  • Learning from games