title: The Portable MBA in Strategy Portable MBA Series author: Fahey, Liam publisher: John Wiley & Sons, Inc. (US) isbn10 | asin: 0471584983 print isbn13: 9780471584988 ebook isbn13: 9780585251196 language: English subject Strategic planning, Business planning. publication date: 1994 lcc: HD30.28.P674 1994eb ddc: 658.4/012 subject: Strategic planning, Business planning. cover Page i The Portable MBA in Strategy page_i Page ii The Portable MBA Series The Portable MBA Series provides managers, executives, professionals, and students with a "hands-on," easy-to-access overview of the ideas and information covered in a typical Masters of Business Administration program. The published and forthcoming books in the program are: Published The Portable MBA (0-471-61997-3, cloth; 0-471-54895-2, paper) Eliza G. C. Collins and Mary Anne Devanna The Portable MBA Desk Reference (0-471-57681-6) Paul A. Argenti The Portable MBA in Finance and Accounting (0-471-53226-6) John Leslie Livingstone The Portable MBA in Management (0-471-57379-5) Allan R. Cohen The Portable MBA in Marketing (0-471-54728-X) Alexander Hiam and Charles Schewe New Product Development: Managing and Forecasting for Strategic Success (0-471-57226-8) Robert J. Thomas Real-Time Strategy: Improving Team-Based Planning for a Fast-Changing World (0-471-58564-5) Lee Tom Perry, Randall G. Stott, and W. Norman Smallwood The Portable MBA in Economics (0-471-59526-8) Philip K. Y. Young and John McCauley The Portable MBA in Entrepreneurship (0-471-57780-4) William Bygrave The Portable MBA in Strategy (0-471-58498-3) Liam Fahey and Robert M. Randall The New Marketing Concept (0-471-59576-4) Frederick E. Webster Total Quality Management: Strategies and Techniques Proven at Today's Most Successful Companies (0-471-54538-1) Arnold Weimerskirch and Stephen George Market-Driven Management: Using the New Market Concept to Create a Customer-Oriented Company (0-471-5976-4) Frederick E. Webster Forthcoming The Portable MBA in Global Business Leadership (0-471-30410-7) Noel Tichy, Michael Brimm, and Hiro Takeuchi Analyzing the Balance Sheet (0-471-59191-2) John Leslie Livingstone Information Technology and Business Strategy (0-471-59659-0) N. Venkatraman and James E. Short Negotiating Strategically (0-471-1321-8) Roy Lewicki and Alexander Hiam Psychology for Leaders (0-471-59538-1) Dean Tjosvold and Mary Tjosvold page_ii Page iii The Portable MBA in Strategy Liam Fahey Robert M. Randall page_iii Page iv This text is printed on acid-free paper. Copyright © 1994 by John Wiley & Sons, Inc. All rights reserved. Published simultaneously in Canada. Reproduction or translation of any part of this work beyond that permitted by Section 107 or 108 of the 1976 United States Copyright Act without the permission of the copyright owner is unlawful. Requests for permission or further information should be addressed to the Permissions Department, John Wiley & Sons, Inc., 605 Third Avenue, New York, NY 10158-0012. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Library of Congress Cataloging-in Publication Data: The Portable MBA in strategy / [edited by] Liam Fahey, Robert Randall. p. cm. Includes index. ISBN 0-471-58498-3 (alk. paper) 1. Strategic planning. 2. Corporate planning. I. Fahey, Liam, 1951 . II. Randall, Robert, 1940 HD30.28.P674 1994 658.4'012dc20 94-4475 Printed in the United States of America 10 9 8 7 6 5 4 page_iv Page v PREFACE The design and development of The Portable MBA in Strategy was guided by one overarching goal: to bring the best in thought and practice in the field of strategic management (or business strategy) to a number of audiences: 1. Managers and others who possess an MBA degree and are interested in staying abreast of the field of strategic management. 2. Any person working in an organizational setting who is interested in learning about the scope, substance, and processes of strategic management. 3. Students, at both the graduate and undergraduate levels, who need a compendium of material from the leading thinkers in the field. This book could serve as a primary or supplementary text in any mainstream course related to strategic management. To bring together the best in thought and practice in the strategic management field, we invited a select list of outstanding thought leaders to contribute to the book. Sixteen contributors are leading professors at the most prestigious business schools. Five contributors are innovative consultants. Each contributor is an expert in his or her domain; each has extensive experience in "live" organizations, putting into practice the principles, precepts, and methodologies expounded in each chapter. The work of many of the contributors is internationally known. The Portable MBA in Strategy addresses the following questions: 1. What is strategic management? What is it that managers do when they engage in strategic management? How and why is strategic management different from other types of management, such as financial management or manufacturing management or human resource management? 2. What is a strategy? How does one identify an organization's strategy? How do strategies differ from one organization to another? page_v Page vi 3. What should an organization do when it sets about formulating or changing its strategy? What kinds of analysis should it do? What kinds of analytical methodologies are available? 4. What is involved in implementing strategy? How are strategies translated into action? How can the organization be better managed, with a view to more efficient and effective strategy execution? How can strategy development and execution be more tightly linked? The book is divided into five parts. Part One An Introduction to Strategic Management Chapter 1, Strategic Management: Today's Most Important Business Challenge, by Liam Fahey, provides an overview of strategic management. It argues that strategic management's central challenge is the need to lay the foundation for success in tomorrow's marketplace while competing to win in today's marketplace. This challenge lies at the heart of strategic management because the environment confronting every organization is in a constant state of change. Chapter l segments strategic management into three components: (1) managing marketplace strategy, (2) managing the organization, and (3) managing the interface between strategy and the organization. Marketplace strategy incorporates three elements: (1) scope, (2) posture, and (3) goals. Managing the organization incorporates five elements: (1) analytics, (2) mindset, (3) operating processes, (4) infrastructure, and (5) leadership. Managing the linkages between marketplace strategy and organization is the focus of much of the activity that must be accomplished by strategic management. Part Two Strategy: Winning in the Marketplace Strategy, above all else, is about winning in the marketplaceattracting, winning, and retaining customers, and outperforming competitors. To do so requires that the organization create or leverage change in the environment by continually adapting its product offerings and by modifying and enhancing how it competes. It must anticipate changes in competitive conditionsthe entry of new types of competitors, the introduction of new products, technology developments, and changes in customers' tastes. Chapters 2 through 5 address strategy from four distinct vantage points: (1) corporate strategy, (2) business-unit strategy, (3) global strategy, and (4) political strategy. Chapter 2, Corporate Strategy: Managing a Set of Businesses, by H. Kurt Christensen, begins by considering the rationale or logic for corporate diversification, a central thrust in many firms' corporate strategy. It then details the principal elements in corporate strategy and examines the most frequently page_vi Page vii used means by which a corporation can change its scope (internal development, strategic alliances, and divestment). Chapter 3, Business-Unit Strategy: Managing the Single Business, by Anil K. Gupta, examines strategy at the level of a stand-alone organization, that is, a business unit in a multibusiness corporation or single business organization. The author addresses five issues central to strategy development and execution in any single business entity: (1) defining the scope of the business unit, (2) setting business-unit goals, (3) defining the intended bases for competitive advantage, (4) designing the value constellation (what the business unit will do versus what it will rely on its partners to do), and (5) managing the business unit's internal value chain. Chapter 4, Global Strategy: Winning in the World-Wide Marketplace, by Michael E. Porter, considers corporate and business-unit strategy from a global perspective. Porter provides a framework for understanding the nature of competition between rivals in an international arena and the development of a new conception of global strategy. Chapter 5, Political Strategy: Managing the Social and Political Environment, by John F. Mahon, Barbara Bigelow, and Liam Fahey, extends the notion of strategy to incorporate an organization's efforts to deal with the social and political environment. Political strategy is defined as the set of activities undertaken by an organization in the political, regulatory, judicial, or social domain to secure a position of advantage and influence over other actors in the process. Although political strategy is frequently accorded little prominence in strategic management textbooks, this chapter demonstrates how political strategy is sometimes critical to the success of strategy in the marketplace, that is, the corporate, business-unit, and global strategies discussed in the three prior chapters. Part Three Strategy Inputs: Analyzing the External and Internal Environments Strategy, as an intentional organizational choice, is always driven by some understanding of the organization's external and internal environment. Unfortunately, in too many organizations, this understanding is, at best, only partially explicated, challenged, and refined. The four chapters in Part Three are intended to show readers what is involved in analyzing organizations' external and internal environments (and many of the connections between these environments). In Chapter 6, Industry Analysis: Understanding Industry and Dynamics, David Collis and Pankaj Ghemawat show how to analyze an industry using two distinct but related frameworks. Industry analysis constitutes the core of the environmental analysis conducted by most firms. In Chapter 7, Macroenvironmental Analysis: Understanding the Environment Outside the Industry, V. K. Narayanan and Liam Fahey show how to analyze the macroenvironmentthe political, economic, social, and technological page_vii Page viii environment external to an industry. In particular, they show how to scan, monitor, and forecast change in each of the four domains within the macroenvironment. Yet, it is not enough to understand what macroenvironmental change is occurring or may occur: the implications of such change for the development and execution of corporate and business-unit strategy are detailed and discussed in the final section of the chapter. Chapter 8, Building the Intelligent Enterprise: Leveraging Resources, Services, and Technology, by James Brian Quinn, focuses on the organization itself as a source of distinctive competitive advantage. In particular, this chapter demonstrates how (and why) intellectual resources rather than physical resources contain the seeds of marketplace success. The core challenge for organizations is to develop knowledge-based service activitieswhich are, increasingly, the source of value and benefits that are important to customers. Recognition of the need to continually upgrade and enhance intellectual resources is leading many firms to create new organizational configurations involving multiple linkages to suppliers, distributors, end customers, and technology sources. Chapter 9, A Strategy for Growth: The Role of Core Competencies in the Corporation, by C. K. Prahalad, with Liam Fahey and Robert M. Randall also addresses how the organization itself can be a source of marketplace success, with particular reference to multibusiness corporations. The chapter argues that corporations need to develop a strategic intent and strategic architecture as a prelude to the determination of which core competencies need to be developed and refined. Core competencies assume strategic importance because they underlie products provided by a number of business units. As an example, Honda's engine competence is reflected in a range of products. Part Four Strategy Making: Identifying and Evaluating Strategic Alternatives An understanding of strategy and of an organization's external and internal environment in and of itself does not generate strategy. Managers need to transform knowledge about their industry, about the environment outside the industry, and about their own organization's resources and competencies into opportunities. Thus, they must develop a range of strategy alternativessome of which may take the organization in a direction that is radically different from its current strategyand choose their preferred options among those alternatives. Chapter 10, Identifying and Developing Strategic Alternatives, by Marjorie A. Lyles, illustrates why it is so important for any organization to invest considerable time and effort in generating obvious, creative, and unthinkable alternatives. Unless opportunities are detected and developed, they cannot be considered or exploited. This chapter offers various analytical methodologies and organizational processes to capture and develop alternatives in the hope page_viii Page ix that, by so doing, the organization will never become complacent because of its marketplace success, nor succumb to being a victim of its own historic mindset and way of doing business. Chapter 11, Evaluating Strategic Alternatives, by George S. Day, discusses how to evaluate the strategic alternatives an organization may generate. Poor choices of strategic direction cost organizations dearly. This chapter provides a framework of analysisa set of tests in the form of questionsthat is intended to provide organizations with a comprehensive means of evaluating and testing strategic alternatives before managers commit to a specific strategic direction. Part Five Managing Strategic Change: Linking Strategy and Action However elegant and grand their design, strategies that do not get executed cannot enhance organizational performance. By the same token, how the organization is managed affects significantly the quality of the strategies developed and the commitment and willingness of the organization's members to execute them. In other words, managing strategyhow the organization seeks to win in the marketplaceand managing the organization are intimately interrelated. In Chapter 12, Strategic Change: Realigning the Organization to Implement Strategy, Russell A. Eisenstat and Michael Beer tackle a challenge that has bedeviled so many organizations' efforts to achieve strategic changerealigning the organization with the intended change in strategic direction. Part of the problem is that it appears so deceptively easy; yet, any manager who has tried to instill new attitudes, new skills, and new behaviors in his or her organization knows how difficult the task is. This chapter lays out a systematic approach to achieving such alignment. Chapter 13, Strategic Change: Reconfiguring Operational Processes to Implement Strategy, by Ellen R. Hart, emphasizes the crucial need to reconfigure organizational processesto redefine the work organizations do and how they do it. Redesigning core business processeshow products are designed and developed, how products are manufactured, and how products or services are delivered to customersis central to delivering value to targeted customers. Strategic change increasingly involves reconfiguring multiple core processes. This chapter provides a detailed methodology on how to do so. In Chapter 14, Strategic Change: Managing Strategy Making through Planning and Administrative Systems, John H. Grant argues that strategy making must be coordinated throughout the organization. If left to their own devices, individual unitsbusiness units, product groups, and functional departments, among otherswill push and pull the organization in conflicting directions. Thus, the role of planning and of related administrative systems is to provide mechanisms for coordinating strategy development and execution. This chapter details a variety of organizational processes to achieve integrated and coordinated strategy making. page_ix Page x Chapter 15, Strategic Change: Managing Cultural Processes, by Gerry Johnson, explicates the linkages between organizational culture and strategy. Although these connections often receive minimal attention from managers, strategic change is always either inhibited or fostered by the organization's culture. After delineating the elements that constitute an organization's cultural web, this chapter shows how strategic change can be achieved through managing cultural processes and the closely related political processes. Chapter 16, Re-Inventing Strategy and the Organization: Managing the Present from the Future, by Tracy Goss, Richard Pascale, and Anthony Athos, makes the case that many organizations need to reinvent both their strategy and their entire organizationperhaps many times in the course of a manager's careerif their intent is to get ahead of and stay ahead of competitors. The organizationespecially its key executivesmust make a complete break with the past and embrace a future that, by definition, will remain murky. Using many different corporate examples, this chapter documents what is involved in reinvention and the steps that an organization must undertake in order to achieve strategic change of this magnitude. LIAM FAHEY ROBERT M. RANDALL BABSON PARK, MASSACHUSETTS NEW YORK, NEW YORK FEBRUARY 1994 page_x Page xi CONTENTS Part One An Introduction to Strategic Management 1. Strategic Management: Today's Most Important Business Challenge 3 Part Two Strategy: Winning in the Marketplace 2. Corporate Strategy: Managing a Set of Businesses 53 3. Business-Unit Strategy: Managing the Single Business 84 4. Global Strategy: Winning in the World-Wide Market Place 108 5. Political Strategy: Managing the Social and Political Environment 142 Part Three Strategy Inputs: Analyzing the External and Internal Environments 6. Industry Analysis: Understanding Industry Structure and Dynamics 171 page_xi Page xii 7. Macroenvironmental Analysis: Understanding the Environment Outside the Industry 195 8. Building the Intelligent Enterprise: Leveraging Resources, Services, and Technology 224 9. A Strategy for Growth: The Role of Core Competencies in the Corporation 249 Part Four Strategy Making: Identifying and Evaluating Strategic Alternatives 10. Identifying and Developing Strategic Alternatives 273 11. Evaluating Strategic Alternatives 297 Part Five Managing Strategic Change: Linking Strategy and Action 12. Strategic Change: Realigning the Organization to Implement Strategy 321 13. Strategic Change: Reconfiguring Operational Processes to Implement Strategy 358 14. Strategic Change: Managing Strategy Making through Planning and Administrative Systems 389 15. Strategic Change: Managing Cultural Processes 410 16. Re-Inventing Strategy and the Organization: Managing the Present from the Future 439 About the Authors 470 Index 475 page_xii Page 1 PART ONE AN INTRODUCTION TO STRATEGIC MANAGEMENT page_1 Page 3 1 Strategic Management: Today's Most Important Business Challenge* Liam Fahey Babson College and Cranfield School of Management Strategic management is the name given to the most important, difficult, and encompassing challenge that confronts any private or public organization: how to lay the foundation for tomorrow's success while competing to win in today's marketplace. Winning today is never enough; unless the seeds of tomorrow's success are planted and cultivated, the organization will not have a future. This challenge is difficult because, as we shall see throughout this book, the choices involved in exploiting the present and building for the future confront managers with complex trade-offs. Managers must resolve conflicting demands from stakeholders; perennial tensions among different groups and levels within the organization must be fairly addressed. It is encompassing because it embraces all the decisions that any organization makes. The conflict between the demands of the present and the requirements of the future lies at the heart of strategic management for at least three reasons: 1. The environment in which tomorrow's success will be earned is likely to be quite different from the environment that confronts the organization today. Products change as competitors introduce new variations, sometimes radically shifting the nature of the offering made to customers. New models of laptop computers that are smaller, lighter, and more powerful have changed many customers' perceptions of what constitutes a * The author would like to especially thank Robert M. Randall for his many comments on this chapter, and H. Kurt Christensen, Jeffrey Ellis, Samuel Felton, V. K. Narayanan, G. Richard Patten, and Daniel Simpson for their comments on an earlier draft of this chapter. page_3 Page 4 personal computer. New competitors enter long-established markets with new concepts of how to serve and satisfy customers. For example, Saturn, at the low end of the automobile market, and Lexus, at the high end, have dramatically altered the dynamics of competition within their product categories. 1 Increasingly, the emergence of substitute products causes highly disruptive industry change. Customers' tastes sometimes change in unexpected ways. Technological developments often alter not only the function of products but every facet of how business is conducted: procurement, logistics, manufacturing, marketing, sales, and service. Political, regulatory, social, and economic change often give rise, directly or indirectly, to shifts in industry or competitive conditions.2 2. To succeed in the new environment of tomorrow, the organization itself must undergo significant and sometimes radical change. Organizations as large, as diverse, and as historically successful as IBM, General Motors, Sears, Honda, Sony, Philips, and Rolls Royce have learned this painful lesson in the late 1980s and early 1990s. Old ways of thinking have had to be challenged and reconceived: long-held assumptions and beliefs ultimately have become incongruent with the changed environment. New operating processes or ways of doing things must be learned. Organizational structures, systems, and decision processes inherited from outmoded eras need to be redesigned. 3. Adapting to (and, in many cases, driving) change in and around the marketplace during a time of significant internal change places an extremely heavy burden on the leaders of any organization. Yet, that is precisely the dual task that confronts strategic managers. They must: · Exploit the present while sowing the seeds for a new and very different future and, simultaneously, · Build bridges between change in the environment and change within their organizations.3 Change is the central concern and focus of strategic management: change in the environment, change inside the organization, and change in how the organization links strategy and the organization. Change means that organizations can never become satisfied with their accomplishments. Unless an organization changes its products over time, it falls behind competitors. Unless the organization changes its own understanding of the environment, it cannot keep abreast of, much less get ahead of, changes in customers, the industry, technology, and governmental policies. The importance and pervasiveness of change is evident in the strategic management principles noted in Table 1-1. From environmental change springs opportunities. Without change or the potential to affect change, organizations would neither confront nor be able to create opportunities.4 Without a managed flow of new opportunities, organizations cannot grow and prosper; they are destined to decline and die. Unfortunately, change is also the source of threats to the organization's current and page_4 Page 5 Table 1-1 Some strategic management (SM) principles. Strategic Management · Involves the management of marketplace strategy, of the organization, and of the relationship between them. · Has as a core assignment; management of the interface between the organization and its environment. · Involves anticipating, adapting to, and creating change both in the environment and within the organization. · Is driven by the relentless pursuit of opportunities. · Recognizes that opportunities may arise in the external environment or they may be generated within the organization; in either case, they are realized in the marketplace. · Necessitates risk taking; the organization commits to pursuing opportunities before they have fully materialized (in the environment). · Is as much about inventing or creating the organization's competitive future as it is about adapting to some understanding of that future. · Sees the marketplace purpose of an organization as residing outside its (legal) boundaries; it must find, serve, and satisfy customers as a prelude to other returns such as profits. · Is the task of the whole organization; it cannot be delegated to any group within the organization. · Necessitates the integration of the long-distance and short-distance horizons; the future influences current decisions; current decisions are intended to lead toward some future state or goal. potential strategies. Thus, organizations must commit themselves to grappling with changeunderstanding it and transforming it into opportunity. Leveraging and/or shaping change in the environment is, as we shall see in the next section, central to designing and executing strategy. Although organizations cannot control their environment, 5 they are not helpless in the face of persistent and sometimes unpredictable environmental change. By practicing strategic management, managers can lead more effectively. They can effect change in their strategies: they can introduce new products, enhance their existing products, withdraw from particular markets, compete more smartly against their competitors, and offer better value to customers. Managers can also reconfigure their organization: They can get more output out of existing resources, hone existing capabilities or competencies and develop new ones, and energize the organization through their leadership. As we shall see throughout this chapter, managing more effectively and reconfiguring organizations go hand-in-hand. To cope with change successfully, strategic management must address three interrelated tasks (see Figure 1-1): 1. Managing strategy in the marketplace: designing, executing, and refining strategies that ''win" in a changing marketplace. Strategy is the means by page_5 Page 6 Figure 1-1 An integrated model of strategic management. page_6 Page 7 which the organization creates and leverages change in and around the marketplace. 2. Managing the organization: continually reconfiguring the organizationhow it thinks, how it operates. Without such internal change, the organization cannot hope to hone its capacity to identify, adapt to, and leverage environmental change. 3. Practicing strategic management: continually enhancing the linkages or "interface" between strategy (what the organization does in the marketplace) and organization (what takes place within the organization). Throughout this book, we shall see that how these linkages are managed determines whether the organization wins today and positions itself for tomorrow. Each of these three core strategic management tasks will now be discussed in detail. Managing Strategy in the Marketplace Few words are as abused in the lexicon of organizations, as ill-defined in the management literature, and as open to multiple meanings as strategy. 6 Throughout this book, strategy is a synonym for choices. The sum of the choices determines whether the organization has a chance to win in the marketplacewhether it can get and keep customers and outperform competitors. Success in getting and keeping customers allows organizations to achieve their financial, technological, and other stakeholder-related goals. A number of core strategy principles are indicated in Table 1-2. If a strategy is to successfully create or leverage change, it must manifest an "entrepreneurial content"7 in the marketplace. Strategies that do not anticipate changes in competitive conditions, such as technological developments, new entrants with distinctly different product offerings, or changes in customers' tastes, will lag behind what is happening in the marketplace and will eventually fail. Strategies that do not create or leverage change to the organization's advantage cannot drive the marketplace; that is, they cannot provide, faster and better than competitors, the offerings that customers want. How do organizations create or leverage change in the marketplace? What levers can they manipulate to effect changes that are to their advantage? How is change exploited for superior performance? In brief, strategy creates or leverages change in three related ways: 1. Through the choice of products the firm offers and the customers it seeks to servecommonly referred to as the "scope" issue. For example, should Apple Computer Inc. add more powerful computers to its product line? Should General Motors eliminate its Oldsmobile product line or significantly overhaul it by introducing a new set of models? page_7 Page 8 Table 1-2 Some strategy principles. Strategy addresses the interface between the organization and its marketplace environment. Strategy involves three elements: (1) scope, (2) posture, and (3) goals. Strategy is the means by which the organization creates and/or leverages environmental change. Strategy is always conditional; the choice of strategy depends on the conditions in the environment and within the organization. Strategy is in part an intellectual activity; strategies exist in managers' minds. Strategy is about outwitting and outmaneuvering competitors by anticipating change faster and better and taking actions accordingly. Strategy's marketplace intent is to be better than competitors at attracting, winning, and retaining customers. Strategy is not likely to win unless it possesses some degree of entrepreneurial content: its approach is different from competitors'. Strategy must be continually renovated; scope, posture, and goals are adjusted to enhance the chances of winning in the marketplace. Strategy often needs to be (re)invented if it is to achieve "breakthrough" success. A strategy that is new to the marketplace and significantly outdistances rivals needs to be created. 2. Through how the firm competes in its chosen businesses or product customer segments to attract, win, and retain customers. We shall refer to this as the "posture" issue. For example, should Apple add functionalitymore speed and more featuresto its Macintosh line? Should the price on some Cadillac models be lowered to make them more attractive to new customer segments? 3. Through the choice of goals the firm wishes to pursue. Should Apple try to be a major participant in every segment of the personal computer business or aim to be the leader in certain software segments? Should General Motors set out to penetrate the Japanese market? Scope, posture, and goals will be recurring themes throughout this book. Because of their importance to any understanding of strategy, each will now be briefly discussed. Business Scope Central to any consideration of strategy are questions concerning business scope. Scope compels choices because it cannot be unlimited. No organization can market an unlimited array of products, and frequently (even with the assistance of partners) it will not be able to reach all potential customers. Indeed, few firms are able to compete or "be a player" in all product-customer segments of their industry. page_8 Page 9 Scope determination revolves around three general questions: 1. What products (or product groups) does the organization want to provide to the marketplace? 2. What customersor, more specifically, what customer needsdoes it want to serve? 3. What resources, competencies, and technologies does it possess or can it develop to serve its product-customer segments? These three questions compel an organization to systematically and carefully assess what business it is in, where opportunities exist in the marketplace, and what capacity it has or can create to avail of these opportunities. 8 Product-Market Scope The breadth and complexity of the relevant product-market scope questions are distinctly different at the corporate and business-unit levels, as shown in Table 1-3. At the corporate level, a principal challenge is to identify the businesses in which the corporation can generate value-adding opportunities. What businesses can be developed and enhanced over time? The difficulties inherent in this strategic task are well exemplified in the myriad of household-name corporations in the United States (such as, Westinghouse, Kodak, DuPont), in Europe (such as Mercedes-Benz, Siemens, Philips, Rolls Royce), and in Japan (Matsushita, Mitsubishi, Nissan) that, in the past few years, have reported significantly lower performance results than anticipated. Many of these firms have had to sell off what once were described as promising or "can't miss" businesses. The case of General Electric (GE), a multibusiness conglomerate, illustrates differences in the context and setting of corporate and business-unit scope issues and questions. Viewed from the perspective of the CEO or the board of directors, GE's corporate scope is assessed by continually posing the following types of questions with regard to each of its business areas (see Figure 1-2): · Which business areas confront the greatest opportunities in the form of potential new businesses (that is, new products that would give rise to a new business for GE)? · What emerging or potential opportunities might not be exploited, given the present configuration of business areas? How might the business areas be realigned to pursue these opportunities? · Which areas should be encouraged to develop new opportunities through the internal development of new products, based on their current knowledge, capabilities, and competencies? · Which business areas can take existing products to new types of customers or to customers in new geographic regions? · Which areas should receive minimal, if any, new funds for business development? page_9 Page 10 Table 1-3 Scope: Some key questions and issues. Corporate Level Business Scope What businesses is the firm in? What business does the firm want to be in? Stakeholder Scope What stakeholders can the organization leverage to aid in attaining its goals? Scope Relatedness How should the businesses in the corporation be related to each other, if at all? Means of Changing Scope Internal development, acquisitions, alliances, divestment; aligning with/opposing stakeholders. Strategic Issues In which business sectors should the firm invest? Retain the current level of investment? Reduce investment or divest itself entirely? Strategic Challenges How can the corporation add value to its individual businesses? What might be the basis of synergy between two or more businesses within the corporation? Business- Unit Level Product Scope What range of products does the firm want to offer to the marketplace? Customer Scope What categories of customers does the organization want to serve? What customer needs does the firm want to satisfy? Geographic Scope Within what geographic terrain does the organization want to offer its products to its chosen customers? Vertical Scope What linkages does the organization have (and want to have) with suppliers and customers? Stakeholder Scope What stakeholders can the organization leverage to aid in attaining its goals? Means of Changing Scope Adding/deleting products or customers, moving into/out of geographic regions, aligning with/opposing stakeholders. Strategic Issues In what products should the organization invest? Retain at current levels? Divest itself? What relationships does the organization wish to develop with stakeholders? Strategic Challenges How can opportunities be identified and exploited? What is the best strategy to do so? page_10 Page 11 Figure 1-2 The GE Corporation's business sectors. page_11 Page 12 · Which areas should be deemphasized, that is, managed with the intent of generating cash that will be invested elsewhere, perhaps in other areas or in the development of new business areas? · What new opportunities might be created by linking products, skills, and competencies from two or more business areas? · What opportunities might be created by aligning with one or more other corporations? Only a few of the major scope changes noted by GE in its 1992 annual report are indicated in Box 1-1. Yet, even this sampling suggests the extensive changes that most large multibusiness firms make in their corporate scope, sometimes within a single year, but certainly over a five-year period. Some of the same questions can be directed, with considerably more focus and specificity, to each of GE's business areas. Each area must consider which specialized businesses or business units it wants to grow, hold, or divest. The Financial Services area is an example: · Which of its 22 specialized businesses or business units should be extended through the introduction of new products or services, the pursuit of international markets, and/or the acquisition of businesses? · Which business-units ought to be "pruned" or scaled back? · Are there business-units that should be divested? · What opportunities can be pursued by combining the products, technologies, and competencies of two or more business units? Box 1-1 Sample GE Scope Changes* Aerospace 1. The product-market scope was extended with several major contracts. These included: a Korean Telecom contract for two commercial communications satellites; a U.S. Navy contract for an antisubmarine warfare system; others from the governments of Italy, Canada, and Turkey, for GE-built solid-state radars. 2. To enhance its position in the engine control and flight control markets, it formed a coventure with GE Aircraft Engines to pursue new opportunities. Aircraft Engines 1. An ambitious development program is under way to certify the GE90 engine in 1994 and introduce it into active service in 1995. *As noted in GEs 1992 annual report. (Box continued on next page) page_12 Page 13 (Box continued from previous page)