Strategic Management: Confront-Sense-Choose-Transform PDF

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Strategic Management ereader.perlego.com/1/book/4533798/0 Strategic Management Cover Strategic Management ereader.perlego.com/1/book/4533798/3 1 Oliver’s Yard 55 City Road London EC1Y 1SP 2455 Teller Road Thousand Oaks California 91320 Unit No 323-333, Third Floor, F-Block International Trade Tower Nehru Place, New Delhi – 110 019 8 Marina View Suite 43-053 Asia Square Tower 1 Singapore 018960 © Henk W. Volberda, Rick M.A. Hollen, Joana R. Pereira, Jatinder S. Sidhu, Kevin Heij 2024 Apart from any fair dealing for the purposes of research, private study, or criticism or review, as permitted under the Copyright, Designs and Patents Act, 1988, this publication may not be reproduced, stored or transmitted in any form, or by any means, without the prior permission in writing of the publisher, or in the case of reprographic reproduction, in accordance with the terms of licences issued by the Copyright Licensing Agency. Enquiries concerning reproduction outside those terms should be sent to the publisher. Library of Congress Control Number: 2023933271 British Library Cataloguing in Publication data A catalogue record for this book is available from the British Library ISBN 978-1-5297-7058-2 ISBN 978-1-5297-7057-5 (pbk) Editor: Kirsty Smy 1/2 Development editors: Jessica Moran, Martha Cuneen and Sarah Turpie Editorial assistant: Charlotte Hegley Production editor: Nicola Marshall Copyeditor: Catja Pafort Proofreader: Tom Bedford Indexer: C&M Digitals (P) Ltd, Chennai, India Marketing manager: Lucia Sweet Cover design: Francis Kenney Typeset by: C&M Digitals (P) Ltd, Chennai, India Printed in the UK At Sage we take sustainability seriously. Most of our products are printed in the UK using responsibly sourced papers and boards. When we print overseas we ensure sustainable papers are used as measured by the Paper Chain Project grading system. We undertake an annual audit to monitor our sustainability. 2/2 Strategic Management ereader.perlego.com/1/book/4533798/5 Brief Contents 1. List of Tables and Figures 2. List of Cases, Strategic Foci and Key Debates 3. Preface 4. About the Authors 5. Online Resources for Instructors 6. Guided Tour 7. Acknowledgements 8. 1Introduction to Strategic Management 9. PART I Confront 1. 2Direction, Purpose and Sustainability 2. 3Stakeholders and Corporate Governance 3. 4Competitive Rivalry and Nonmarket Forces 4. 5Emerging Technologies 5. Diagnostic Part I: Confrontrix 10. Part II Sense 1. 6 Industry and Product-Market Analysis 2. 7 Customer Analysis 3. 8 Resources, Routines, Capabilities and Competencies 4. 9 Ecosystems and Platforms 5. Diagnostic Part II: iSense 11. PART III Choose 1. 10 Business-level Strategy 2. 11 Diversification and Internationalization 3. 12 Corporate-level Strategy 4. 13 Network-level Strategy 5. Diagnostic Part III: ChooseWell 12. Part IV Transform 1. 14 Reconfiguration and Restructuring 2. 15 Strategic Entrepreneurship 3. 16 Business Model Innovation 4. 17 Strategic Renewal 5. Diagnostic Part IV: Transformax 13. Index 1/1 Strategic Management ereader.perlego.com/1/book/4533798/9 Preface Business leaders, managers and strategists are constantly confronted with disruptive changes and new realities. They are challenged to provide directions and lead their organizations, ensuring future success. This essential book on strategic management presents the original process to Confront-Sense-Choose-Transform– the CSCT protocol, which helps students of strategy to successfully address challenges of competition in the global marketplace. This book adopts a managerial perspective and presents the most widely used and trusted methods, tools and theories that enable the reader to confrontblind spots and disruptive change, senseand interpret, choosegeneric strategies and make judgment calls, and to direct transformation. This novel perspective on the strategic management process focuses on the stages, concepts and strategic capabilities that help students of strategy to learn and practice how to confront new challenges, sense what matters, choose wisely, and transform structures, systems and operations. The process of Confront-Sense-Choose-Transformallows the strategy novice to find everything one needs to know about strategic management concepts and tools, and the knowledgeable reader to immediately find where to catch up on the cutting-edge knowledge presented in this book. What makes this book unique? We live in a highly complex and dynamic world, with uncertainty and ambiguity being the norm. The rules that served strategists in growing economies of the past decades when the world was relatively simple, stable, clear and certain were fundamentally different to what is needed today. Part I of this book, Confront, acknowledges this great shift, and explores how new challenges question business leaders and strategists’ ability to formulate and implement strategies. Making these strategy tensions explicit, this part helps to focus on the key strategic capabilities. Part II, Sense, enables readers to learn how to apply the analytical techniques and tools that provide an in-depth understanding of focal industries, competitors, complementors, customer segments, and, internally, an appreciation of capabilities. Part III, Choose, provides clarity of the numerous choices like the generic business-level strategies (e.g., cost leadership, differentiation, focus), diversification, internationalization, and alliance choices that need to be considered in terms of trade-offs. Part IV, Transform, presents how to carry the chosen strategy through to execution. Concepts and tools answering the critical questions on reorganization, strategic entrepreneurship, new business models, and strategic renewal are found here. Throughout the process stages, the action-oriented ‘why-how’-structure helps students of strategy to understand what they need to know to cope with the new ‘now’. Complementing the main text, in-text illustrations, and cases are ‘pages of action’, which will nudge readers to exercise their growing strategy muscles to apply what they found useful. Each chapter offers up-to-date theories of strategic management and best 1/11 practices from businesses around the world, illustrations and material to trigger all five senses for active learning to allow readers’ experience developing and implementing strategy in the real world. Strategic Management: From Confrontation to Transformation differs from standard strategy textbook in several ways: Topics of growing importance include corporate purpose, disruptions, emerging (digital) technologies, business models, ecosystems, platforms, strategic change, organizational learning, digital transformation, and innovation. The comprehensive selection of concepts and methods in this book is biased; biased towards relevance. Phenomena of interest that businesses need to confront are centre stage in this book. Management education has increasingly seen diverse student bodies with growing numbers of international students. This book is designed and written to be taught for a global audience. This is manifest in the plenitude of iconic and original case studies from different continents: Europe, North America, Asia, and Oceania. The majority of courses, at all levels, take an approach that focuses on (and contrasts) the industrial organization and emergent models while highlighting, to varying degrees, critiques of this orthodoxy. This book focuses on the Confront- Sense-Choose-Transform process of strategic management, presenting theoretical perspectives when they are useful, not because they exist. Shorter case studies are popular for in-class discussion and illustrative purposes at undergraduate level and longer cases are used at postgraduate level (and, on occasion, for formative and summative assessment purposes at undergraduate level). This book, in print and on screen, offers brief vignettes and short case studies that help students to pick up the essence of concepts and methods. Additional case studies, offered online at https://study.sagepub.com/volberda, invite students to dig into in-depth cases to explore the reality of complex organization and learn about the intricacies of theories and tools’ application. Particularly at MBA level, there is a shift away from ‘theory followed by example’- delivery towards more active forms of learning, focusing on group work, skills and experiential exercises. Our book enables the new ways of learning – team-based, online, interactive and flipped – by providing in print and online experiential assignments, exercises and experiments, which we developed over the last decades. The challenge of what comes after defining the strategy remains an underexploited opportunity that we seek to seize in this book with much emphasis on strategy implementation/execution issues. Key characteristics In contrast to traditional textbooks that follow the script of ‘ODMAA’ (one damned model after another), this book is not simply a string of models. We provide all the useful tools our readers expect and map them in an integrated process stage model to help understanding strategic management systematically and assist students in learning the 2/11 foundations and cutting-edge concepts to move to the practice of confronting reality and creating solutions. We proceed from confront to sense, choose and transform. The process stages (Confront-Sense-Choose-Transform) allow for stepwise progression from strategy formulation to strategy development. Links between the interconnected areas of practical strategy development and execution are acknowledged in order to allow for fast and repeated learning cycles. Our strategic management process model helps students along on their own journey of discovering and learning how to develop and implement strategy while ensuring growing dexterity of essential skills to sense, choose and transform. Several characteristics of this book will enhance the student’s learning opportunities: This book presents you with the most comprehensive and thorough coverage of strategic management that is available in the market. Various aspects of the strategy process are discussed in this book clustered around the four stages of confronting strategic issues, sensing new opportunities and threats, choosing proper strategies, and transforming the organization in the right strategic direction. Confront focuses on the changed reality that business faces. Sense details traditional as well as advanced analytical tools and techniques to gain insight. Choose explains how strategic decisions are made. Transform focuses on leadership and execution that brings strategy to life. Our strategic management process model provides a broad coverage of strategy formulation as well as strategy implementation. Moreover, this textbook not only addresses the most relevant theories and concepts in the strategy field, but, in contrast with most traditional textbooks, we also developed diagnostic chapters that describe various concrete tools for each stage of the strategy process: Part I: Confrontrix, Part II: iSense, Part III: ChooseWell, and Part IV: Transformax. The practical tools covered in each of these diagnostic chapters help students in strategic management to address and solve strategic problems, and provide important building blocks for strategy consulting. Our book presents you with many examples of how firms use the strategic management tools, techniques and concepts developed by leading researchers. Indeed this book is strongly application oriented and presents you, our readers, with a vast number of examples and applications of strategic management concepts, techniques and tools. Collectively, no other strategic management book offers the combination of useful and insightful theory and applications in a wide variety of organizations as does this text. Company examples cover a wide international range of large firms such as Adidas, Amazon, Apple, BMW, Coca-Cola, DSM, EY, Facebook, Google, Henkel, Hilton, IKEA, ING, McDonald’s, Nestlé, Nintendo, Nokia, PepsiCo, Philips, Qualcomm, Shell, Tesla, and Volkswagen. We also include examples of successful younger firms such as Airbnb, Ben & Jerry’s, Beyond Meat, Epic Games Store, Mindflow, Northvolt, PayPay, Protix, RealFevr and Stripe Inc. 3/11 This new strategy textbook also covers several new strategic themes that have been mostly ignored in traditional textbooks. For example, in Chapter 2 we describe how strategy should be based on an authentic Purpose. Different from the taken-for- granted that a company basically has to create economic value, the notion of a purpose is based on the assumption that a company should also provide social value besides striving for financial gains. Chapter 3, which is devoted to Stakeholders and Corporate Governance, shows how firms’ ability to simultaneously satisfy their stakeholders’ different interests is critical to firms’ success and has become an essential part of the strategic management process. Moreover, Chapter 5 discusses how various Emerging Technologies of the Industry 4.0 and Web 3.0 might affect future strategy-making and the emergence of new business models. Chapter 9 focuses on Ecosystems and Platforms and shows how strategy analysis of this higher level of analysis is fundamentally different from firm strategy. Chapter 13 covers a wide array of relevant interorganizational arrangements, and pays attention to strategic choices regarding both the alliance formation and post-formation stage. Chapter 16 covers Business Models as a reflection of the firm’s chosen strategy and discusses several ways how to change the business model. Most firms fail to innovate their business model because they continue to do the same things that have made them successful in the past. Chapter 17 discusses how implementation of strategic actions may help firms to realize Strategic Renewal by transforming their core businesses, and seeking new avenues for growth. The research that underpins this book is drawn from the ‘classics’ as well as the most recent contributions to the strategic management literature, knowledge and practice. The historically significant ‘classic’ research provides the foundation for much of what is known about strategic management; the most recent contributions reveal insights about how to effectively use strategic management in the complex, global business environment in which most firms operate while trying to outperform their competitors. Focusing only on formulations of strategy is misguided. Strategy formulation is important, yet it is nothing without strategy implementation. This is especially important in the current global economic climate. With the dramatic changes that are unfolding, careful attention to the cyclical process of Confront-Sense-Choose- Transform enables companies to better adjust to the shifting context, making the implementation and renewal of strategy paramount for long-term success. Unlike many other textbooks, we devote four chapters to the implementation of strategy. No other book offers the formulation-implementation link in such clarity as presented here. We, the authors of this book, are also active scholars. We conduct research on a range of contemporary and challenging strategic management topics. Our passion for doing so is to contribute to the strategic management literature and to better understand how to effectively apply strategic management tools, techniques and concepts to create payoffs in organizational performance. Thus, our own research is integrated in the appropriate chapters along with the research of numerous other scholars and thought leaders. 4/11 Structure of the book This strategy textbook addresses the need of strategists to confront a fundamentally changed business landscape and a large variety of current and imminent strategic challenges that may arise over time, to sense – based on thorough analyses – what matters in relation to these confrontations, to make judgment calls and choose from a wide array of strategic options how to (re)act, and to ultimately transform the organization in pursuit of a sustainable or (at least) a transient competitive advantage and other desired outcomes of organizational activity. The book offers a novel managerial perspective on strategic management detailing these Confront-Sense-Choose-Transform process stages, which capture the essence of how to carry out strategic management in today’s dynamic, ambiguous, complex and uncertain business landscape. The book is reader-friendly and does not assume prior strategy knowledge. It presents a variety of different tools, methods, concepts and theories that allow for stepwise progression from confrontation to transformation. Following the general introductory chapter on strategy, the textbook is split up into four parts (I, II, III and IV), each of which consists of four regular chapters and one diagnostic chapter. These different parts and chapters are structured around the Confront-Sense- Choose-Transform logic, as visualized in our strategic management process framework, with Chapter 1 residing in the centre. Figure 0.1 The strategic management process model: Confront-Sense-Choose-Transform Framing the discipline and practice of strategic management, the introductory Chapter 1 allows the rookie student to understand the traditional linear narrative underlying strategy teaching. The bird’s eye view in this chapter will be composed of a mix of traditional and emergent approaches in strategic management and end with an overall framework with different stages of the strategy process, which we examine in the remainder of the book. The reader will appreciate the challenges facing the strategists as tensions that typically arise in the strategy process. From Chapter 2 onwards, we move clockwise through this framework. The regular chapters focus on the concepts and capabilities that help you learn and practice how to enable firms – and other types of organizations – to go through this iterative and dynamic process, allowing them to improve their strategic fit and progress towards prolonged above-average performance. The diagnostic chapters offer mainly practical and action- oriented tools and methods in relation to topics covered in preceding regular chapters. Although we cover the process of Confront-Sense-Choose-Transform in a sequential order, starting with confrontation, we see this process as dynamic and iterative, rather than as static and linear. Also, the chapters are highly interrelated – after all, as strategy is supposed to be a unifying and integrative approach, strategic choices, actions and commitments should be coherent and aligned with each other in pursuit of a firm’s strategic goals and objectives. Next, we provide a bird’s eye view of the different chapters of the book. 5/11 Confrontation Following the general introductory chapter on strategic management (Chapter 1), in which we delineate the field of strategy, along with presenting different perspectives on strategy formation, we arrive at Part I of the book, Confront. This part is structured around relevant changes and tensions that firms may face in relation to their mission, vision, purpose and their internal organization, market environment and broader environment. These changes and tensions and their consequences challenge strategists and demand that they confront their new realities. Letting go of deeply held, outdated, erroneous assumptions can unsettle managers because they understand how irrevocably altered the competitive arenas and surroundings have become. We present different concepts and tools that help to develop a better understanding of these changes and (sometimes unprecedented) challenges, which often give rise to tensions in the strategy process, and set the stage for the subsequent parts of the book. One of the central tenets in Chapter 2 is the developing viewpoint that firms are there not only for economic value creation but also for contributing to the mitigation and fixing of social and ecological problems. Different from the taken-for-granted view that a firm basically serves an economic purpose, the notion of purpose is beginning to include the choices firms make regarding social ends besides striving for profit maximalization. The chapter also discusses how effective strategic management depends on a firm’s mission, vision, core values and purpose cohering tightly with each other and with other strategic choices. The reality may be that this coherence is suboptimal, requiring firms to rethink their choices, commitments and actions. A firm may also be confronted with the situation that its overarching goals can no longer be met within its current industry or market scope, which could be a reason to change this scope. Chapter 3 is where we look into a firm’s stakeholders and then corporate governance, which revolves around balancing the interests of these stakeholders. Entities with which a firm engages are far-ranging, from investors to employees, regulators, local communities and activist groups, and they may bring conflicting expectations and demands to the table, which gives rise to tensions a firm must deal with. Also, these stakeholders may decide to exert pressure on the firm to change. Regarding corporate governance, the chapter indicates that ownership and control have been separated in many firms, which can lead to problems with misalignments that may arise over time. Besides that, firms may be confronted with inadequate corporate governance mechanisms with adverse effects on organizational functioning. Furthermore, the chapter points out potential dilemmas such as long-term versus short-term performance, shareholder versus stakeholder orientation, and the distribution of power between managerial and supervisory directors. Chapter 4 discusses market dynamics and nonmarket forces and their impact on firms. Market dynamics refer to changes in a firm’s competitive and operating environment, which is made up of competitors, customers, suppliers and complementors. These dynamics include, for instance, the entry of new rivals, changes in the degree and nature of competitive rivalry, disruption, the blurring of traditional industry boundaries, volatile customer demand, changing customer habits and preferences, supply chain dynamics, and the launch of complementary products by other firms. Nonmarket forces, in the form 6/11 of political, economic, social, technological, ecological and legal factors shape the broader context in which firms compete and operate. Changes in this context as a result of nonmarket dynamics can have a significant impact on firms’ strategic goals, activities and returns. This chapter stresses that we live in a highly dynamic and complex world, with uncertainty and ambiguity often being the norm. The rules that served strategists for a long time when the world was rather simple, clear and stable were fundamentally different to what is needed today. Increasingly, achieving transient or temporary competitive advantages is more feasible than sustaining a competitive advantage, especially when competing in fast-cycle markets, as we discuss. Chapter 5 zooms in on a nonmarket force that deserves particular attention because it is so pervasive: emerging technologies, and technological progress in general. Think about internet technologies, artificial intelligence, machine learning, advanced sensor technologies, blockchain technology, cloud computing, nanotechnology, augmented reality, drones, robotics, and 3D-printing. These and other technological advancements push the increasing digitalization of the economy and play a significant role in the accelerated pace that most firms nowadays experience. Emergent technologies and the ambiguity of technology change bring unprecedent challenges, confronting firms’ existing business models and the way they compete, collaborate and organize. In Confrontrix, the diagnostic chapter of Part I, several tools and frameworks are introduced that can be used to recognize and anticipate environmental dynamics and changes and act on them. Sensing When confronted with changing circumstances, firms have to analyze the short- and long- term need to take action and adjust to the new realities. Hence, a crucial part of the strategic management process is how you, as a strategist, are able to ‘sense’ the external and internal environment. Part II of the book, Sense, focuses on the concepts and analytical tools and techniques that help strategists conduct analyses to gain a broad and deep understanding of the key parameters, including both external and internal factors that influence strategic decisions. The analyses that are presented in this part include industry and product-market analysis, strategic group analysis, competitor analysis, customer analysis, internal analysis, and ecosystem analysis. Chapter 6 focuses on the analysis of industries and product markets. As we elaborate further in this chapter, an industry is comprised of firms that produce similar products and compete for the same resources and consumers. An industry may consist of multiple product markets. A product market consists of products (good or services) with similar characteristics in terms of features, performance, intended use and price. Firms from different industries may compete in the same product market. This chapter enables you to conduct a three-dimensional analysis of firms’ industries and product markets. The first dimension is the industry or product market as a whole, with attention to its boundaries, structure, life cycle and other characteristics. The second dimension concerns strategic groups, which are formed by firms that display similarities across a set of relevant dimensions. The third dimension is about rivals: their competitive behaviour and what drives this behaviour. 7/11 While most of the strategic management process emphasizes competition and rivals, one should not lose sight that customers are the ultimate source of income. Chapter 7 revolves around the analysis of the customer side of the market. As a business is run on revenue, and revenue comes from customers, it is critical to understand who a firm’s current and potential customers are, what they need and want, when they buy, and how they choose among products. Market segmentation is a vital exercise to increase this understanding. Besides a focus on distinguishing different customer segments, this chapter draws on value disciplines and Blue Ocean strategy to analyze how firms can drive customer value in specific segments. Chapter 8 switches attention from a firm’s external environment to its internal organization. This internal environment encompasses tangible and intangible resources, routines, capabilities, and competencies that firms employ to create value. Firms that strive to accomplish sustained value creation need resources and capabilities that are valuable, rare, inimitable and non-substitutable. Moreover, firms should be able to adequately exploit them. The people who interact with and enact resources, routines and capabilities need to possess properties that allow them to help the organization excel. If resources, routines or capabilities turn inert, one needs to be able to change them. The chapter also points attention to the importance of understanding how the different activities of a firm are linked together and how they relate to its resources, capabilities and competencies. An exclusive focus on analyzing industries, product markets, competitors, customers and internal factors would leave an analytical blind spot, as these analyses leave out complements and complementors from the overall picture. Catalyzed by advances in communication technology and digitalization, regulatory changes (which have opened up various product markets to more firms) and the blurring of industry boundaries, the last decade has witnessed a proliferation of business ecosystems. As covered in Chapter 9, these ecosystems comprise multiple organizations whose dynamic interactions, which are based on nongeneric complementarities instead of arm’s-length relationships or hierarchical control, contribute to joint value creation. Many ecosystems are organized around a central platform (often a digital one) that serves as the principal foundation for firms to offer complements. Chapter 9 provides you with the basic insights to conduct an analysis of platform-centred ecosystems and other types of ecosystems. In iSense, the diagnostic chapter of Part II, several practical tools and frameworks are introduced that support you in your endeavours to sense (internal) strengths and weaknesses and (external) opportunities and threats. Also, we show how the outcomes of different types of analyses can be put together in a SWOT overview that provides a basis for additional analysis. Strategic choices Confronted with relevant changes and challenges in their environment, and fuelled with insights derived from external and internal analysis, strategists are challenged to give direction and lead their organizations towards future success. Part III of the book, Choose, is structured around sets of strategic choices that managers have to make. Making wise choices among promising options, which is at the heart of strategy, is difficult 8/11 as this often involves trade-offs which we have to navigate. Also, potential synergies between choices need to be explored. This part of the book helps you to craft your own strategies on both a business unit and corporate level and, in addition to that, to formulate strategies regarding how to cooperate with other firms. Chapter 10 covers business-level strategy (competitive strategy), which revolves around making choices on how to compete in a particular industry or market. One of these choices is which generic strategy to employ in pursuit of competitive advantage. Here, firms can choose between cost leadership, differentiation, focus (differentiation focus or cost focus), and a hybrid position. These generic strategies, which are explained in this chapter, represent strategic positions at the broadest and simplest level, and can be further specified by choosing the basis of these positions: customers’ needs, the variety of a firm’s product, or customers’ accessibility. The recent proliferation of digital platforms has resulted in another ‘generic’ strategy: the leveraging of network effects. In addition to this, the chapter focuses on strategic decision-making in the context of competitive dynamics. A firm can decide to attack rivals in an effort to strengthen its competitive position, it may choose to fend off attacks of others in order to defend its current position, or it could decide to move away. Furthermore, firms may decide to be a first mover, a second mover or a later mover. Before deciding on how to compete in a particular industry or market, you first need to decide on where to have a competitive presence: in what industries or markets? This ‘where to compete’ question is a fundamental decision that concerns the scope of a firm as a whole (including all component businesses). Chapter 11 zooms in on how this scope is shaped by choices concerning diversification and internationalization. We examine diversification and internationalization from both a growth perspective (i.e., the expansion of the firm’s corporate scope to include new business areas and geographical areas) and a portfolio perspective (i.e., the firm’s current levels of diversification and internationalization). In relation to the first perspective, we discuss different types and modes of diversification and internationalization, the reasons for these corporate expansions, and the associated challenges. In relation to the second perspective, we distinguish between different levels (or categories) of diversification and internationalization and examine how these relate to corporate performance. Also, we discuss trade-offs between a multidomestic, global, and transnational strategy. Corporate-level strategy is not only concerned with what the corporate scope should be, but also with overseeing this scope. Chapter 12 deals with strategic choices regarding how to enhance the performance of a group of multiple divisions (or business units) that operate in different industries or markets. These divisions are overseen by a corporate parent whose choices regarding how to create value make up the corporate strategy. The chapter zooms in on the characteristics and functions of corporate parents and the roles they can play that allow them to achieve and sustain a corporate parenting advantage, which implies that more value is created than competitors would with the same businesses. The importance of some parenting roles over others depends largely on the intended degree of relatedness between divisions. In relation to that, the chapter zooms in on different type of interdivisional links that allow firms to achieve synergies. Synergy management is a corporate logic that stands in stark contrast to a capital orchestration logic, which goes hand-in-hand with unrelatedness among divisions. The chapter 9/11 discusses both these logics. Furthermore, we pay attention to which factors corporate parents need to take into account when deciding how much to intervene, and what types of control mechanisms they can use. Firms should not be seen as fully independently operating entities that strive to enhance their competitive and parenting advantage entirely on their own strength. After all, firms are typically embedded in networks of cooperative relationships with other organizations in their market environment. Accordingly, Chapter 13 focuses on making choices at the network level, where firms engage in cooperative arrangements to further their business- level and corporate-level goals and objectives. We zoom in on a variety of different forms of alliances from which firms can choose, including equity alliances, contractual alliances, and associational alliances, before moving on to discuss the choice of entering an alliance, the choice of alliance partner, and choices with respect to how to manage alliances in the post-formation stage. In ChooseWell, the diagnostic chapter of Part III, several portfolio matrices are presented that can be used to support choices regarding how to prioritize the allocation of resources, where to cross-subsidize, which business to keep, divest or reposition, and how to achieve a balanced portfolio that benefits the corporation as a whole in the long term. In addition to this, the chapter points out how conducting the better-off test and ownership test, as well as viewing the corporation as a bundle of core competencies, can further improve business portfolio decisions. Transformation The final part of this book, Transform, focuses on the concepts and tools that help achieve transformation and ultimately enhanced performance with the chosen strategy. Here, the reader will find chapters on reconfiguration and restructuring as well as strategic entrepreneurship that are mainly focused on evolutionary transformations. In contrast, the chapters on business model innovation and strategic renewal are focused mainly on more radical transformations involving the exploration of fundamental new business models and capabilities and competencies. In Chapter 14, we discuss how the chosen strategies in Part III can be realized by various modes of reorganizing the company. Reorganization involves changing a firm’s existing activities, resources or intraorganizational linkages or its underlying organizational and financial structure. Two main types of reorganization are discussed here, namely reconfiguration and restructuring, which are often related to each other. Reconfiguration is a change process that involves the adding, combining, transferring, splitting, or dissolving of business entities. We discuss both acquisition-based and divestiture-based reconfigurations, paying attention not only to the nature of these transactions but also the implementation process. Restructuring is a distinct change process, which involves alterations in a firm’s underlying organizational or financial structure. Both organizational and financial restructuring are discussed in this chapter. While Chapter 14 describes how to transform a firm by reconfiguration or restructuring, another way to transform a firm might be to start up de novo or starting something up in an existing context. Chapter 15 on strategic entrepreneurship is about transforming a firm 10/11 by identifying and taking advantage of opportunities presented by the business environment to generate and capture value. Much of this chapter is on corporate entrepreneurship, an organization-wide nurturing of entrepreneurial initiatives through the introduction of new innovation-driven business. We describe how to boost entrepreneurship through internal and external corporate venturing, intrapreneurship and crowdsourcing. Moreover, we discuss several ways in which firms can boost business innovativeness through startup engagements that tap into new ideas such as corporate hackathons, corporate accelerators, or even corporate venture capital programs to systematically invest in new startups. Sometimes reorganizing or exploiting entrepreneurial opportunities might not be sufficient, and a change of business model is required. Chapter 16 makes clear how firms can transform their business model and when they should do this (early warning signs). Most firms fail to innovate their business model because they continue to do the same things that have made them successful in the past. They listen carefully to customers, invest in existing business, and build distinctive capabilities, but tend to overlook disruptions in markets and technologies. In this chapter we identify several early warning signs of such a business model trap. Moreover, two modes of business model innovation are described, namely replication of the existing model and generation of a fundamentally new business model. Furthermore, the chapter presents the Business Model Innovation Matrix that helps to derive various transformation trajectories of how to change the business model. For large, complex, and mature organizations, transformation requires often more than just reorganizing, strategic entrepreneurship or even changing the business model as discussed in the earlier chapters. A more integrated approach may be needed in those instances. Chapter 17 on Strategic Renewal describes how well-established firms can renew themselves by breaking out of path dependencies and adapting to their environment. For those firms to renew successfully and ensure long-term survival, two generic types of learning are required: exploratory and exploitative learning. We show different ways in which firms can achieve high levels of exploration and exploitation: contextual, structural, cyclical and reciprocal ambidexterity. Also, on the basis of different roles of top-, middle- and front-line management, several basic journeys of renewal are discussed: emergent (‘follow the market’), directed (‘top-management should be in control’), facilitated (‘increase variety of renewal initiatives’), and transformational (‘mobilize a company-wide renewal process’). In Transformax, the diagnostic chapter of Part IV, we provide you with several diagnostic tools and frameworks that can be employed in pursuit of transforming a firm. More specifically, these tools and frameworks may help you to plan for and conduct entrepreneurial activities, conceive of new business models (business model ideation), facilitate business model transformation, and achieve strategic renewal through the revitalization of the organization. 11/11 Strategic Management ereader.perlego.com/1/book/4533798/12 Guided Tour Each chapter in this book comes with a range of useful learning features to support you in your studies: Learning Objectivesa series of short bullet points outlining what you will gain from reading each chapter. Opening Casea scene-setting case study showcasing a real-world business scenario at the start of each chapter. Introductiona short overview of the topics covered in each chapter and their relevance. Strategic Focus short boxes that shed light on contemporary phenomena or examples from multiple perspectives. Crack-the-Case short case studies that can be analyzed using the models, frameworks and tools discussed. Key Debate short boxes that outline opposing perspectives on key debates in the strategy field. Closing Case an end-of-chapter case study that encourages you to apply what you have learned in each chapter to practice. Summary a short recap of the key topics, themes and issues explored in each chapter. Review Questions short answer questions to help you to reflect on and check your understanding of the content. Discussion Questions long answer questions that can be used for discussion, library assignments and online projects. Experiential Exercises scenarios that encourage you to engage actively with specific aspects of strategic management. 1/5 Further Reading relevant journal articles and/or book chapters to help you build your bibliography and expand your learning. Key Terms short definitions of key terminology in reader-friendly language. 2/5 3/5 4/5 5/5 Strategic Management ereader.perlego.com/1/book/4533798/13 Acknowledgements This textbook is the outcome of a great team effort. The original idea of writing this fundamentally new textbook was developed by the first author Henk Volberda together with Robert Morgan and Patrick Reinmoeller. Unfortunately, Rob and Patrick had to step out because of new challenges at new business schools and competing time claims. Rick Hollen, Joana Pereira, Jatinder Sidhu, and Emre Karali stepped in. Unfortunately, Emre’s new consulting position did not allow him to finish the job and we were lucky that Kevin Heij joined us in a later stage. With these members of this dream team we had many discussions on new developments in the strategy field, heavy debates on which topics to include, struggles on what cases to choose, and lively sessions how to better challenge and engage with our readers, students of strategy. We have tested with students parts of this textbook over several years. Furthermore, this book has benefited greatly from the hands-on help of our colleagues and our students who have committed to many of these chapters. For this we thank especially: Omid Aliasghar, University of Auckland (Icebreaker case in Chapter 2) Sebastian Carter (Marks & Spencer case in Chapter 1) Hugo Elworthy (Northvolt case in Chapter 15) Liam Goodman (parts of Chapters 3, 4, 9 and Diagnostic Part I, the cases on Google and Stripe in Chapter 15, and the cases on Volkswagen, Qualcomm, and Shell in Chapter 17) Bram Huis in ‘t Veld (Axel Springer case in Chapter 1) Fiona Hurd, Auckland University of Technology (Icebreaker case in Chapter 2) Naadiya Ismail (EY case in Chapter 14) Emre Karali, Deloitte and Erasmus University Rotterdam (parts of Chapters 4, 8, and 10) Silvia Mateo Combarros (Tapestry/Capri Holdings case in Chapter 1) Raymond Meijnen (part of the first Strategic Focus in Chapter 6) José Miranda (RealFevr case in Chapter 5) Hakan Özalp, Amsterdam Business School, University of Amsterdam (parts of Chapters 9 and 10) Taghi Ramezan Zadeh, Amsterdam Business School, University of Amsterdam (Chapter 15 and part of Diagnostic Part IV) Max Rossmann (PayPay case in Chapter 9) Dennis Steur (part of Chapter 14) Jeroen Thorenaar (KPN case in Chapter 12) Pushpika Vishwanathan, Amsterdam Business School, University of Amsterdam (part of Chapter 2) Wieke Wagemans (Grocery retail and courier services case in Chapter 4) 1/3  Luuk op de Weegh (KPN case in Chapter 12) Niels van der Weerdt, Amsterdam Business School, University of Amsterdam (part of Diagnostic Part IV) Joeri van der Wees (Hilton case in Chapter 12) Chrissy Welsh (Philips case in Chapter 12) Nick Ziats (Victoria’s Secret case in Chapter 4) The content of this book is enriched by the countless stimulating, challenging, though- provoking and always fun discussions we have had with current and former students in the bachelor, master, and MBA programs of the Amsterdam Business School and Leeds Business School. These class discussions, as well as the case presentations, have helped us to fine-tune our line of reasoning and forced us to convey our strategy frameworks in meaningful and manageable packets of learning. In addition, the many interactions with managers in the Fulltime and Executive MBA course Competitive & Corporate Strategy proved to be very useful in developing this book and further improving the strategy process framework. Towers of strength in orchestrating our writing efforts to deliver this textbook were the secretarial offices, particularly Elsemieke Meijer from the Amsterdam Business School and our student-assistants, Liam Goodman, Roos Exterkate, Milo de Jong and Siem van de Kraats. We also express our appreciation for the excellent support received from our editorial and production team at Sage Publications. We especially wish to thank our publisher Kirsty Smy and development editors Jessica Moran and Martha Cunneen. We are grateful for their patience, dedication, commitment and outstanding contributions to the development and publication of this book and its package of support materials. The scientific debates we had with peers in the field, as well as comments from reviewers on previous work, served as the engine for progress. In particular, we are highly indebted to the reviewers of this strategy textbook: Torben Juul Andersen, Copenhagen Business School Maya Cara, University of Sussex Hemakshi Chokshi, London Metropolitan University Keith Halcro, Glasgow Caledonian University James Johnston, University of the West of Scotland Yiannis Kyratsis, VU University Amsterdam Joseph Lane, University of Reading John McCarthy, University of Limerick Deirdre McQuillan, University of Bradford Sorin Piperca, Birkbeck, University of London Misagh Tasavori, University of Essex Bilgehan Uzunca, ESADE Business School Karl Warner, University of Glasgow 2/3 Finally, we are grateful to our closest partners in this endeavour. Many days and evenings were spent on this book and too many weekends were sacrificed. This work would not have been accomplished without their unconditional support. We dedicate this joint work to them. 3/3 Strategic Management ereader.perlego.com/1/book/4533798/14 1Introduction to Strategic Management Learning Objectives After reading this chapter, you should be able to: indicate what strategy is (not) about; specify what is meant by added value, above-average returns and competitive advantage; explain how firms can achieve above-average performance from both an industrial organization perspective and a resource-based perspective; indicate the difference between deliberate, emergent and unrealized strategy; distinguish between different prescriptive and descriptive schools of strategy formation. Opening Case Navigating the new frontier of the luxury fashion industry 1/26  Source: © T. Schneider (2021) / Shutterstock. In August 2023, Tapestry, Inc., a luxury fashion holding company recognized for its exclusive portfolio featuring Coach, Kate Spade, and Stuart Weitzman, made a significant announcement – the acquisition of its rival, Capri Holdings, renowned for its famous brands such as Michael Kors, Jimmy Choo (acquired in 2017 for $1.35 billion) and Versace (acquired in 2018 for $2.12 billion). The product mix of Capri Holdings, which relied heavily on brand loyalty, innovation and creativity, included accessories (representing just over half of group net sales), footwear, apparel, and licensed products. Horizontal diversification had allowed them to tap into the needs of different market segments and to offer different product categories in each of the brands, following the example of leading luxury firms like LVMH. In 2023, luxury goods was a $355 billion industry worldwide, of which luxury fashion represented 31% of the global revenue.1 The biggest markets are the US, followed by Japan, China, Germany, and Italy. Overall, it is a profitable industry with a composite net profit margin (for the 78 Top 100 firms that reported net profits) of 12.2% year-on-year in 2021. The top three players in the industry are the French firms LVMH (which includes Louis Vuitton, Tiffany and Christian Dior) and Kering (Gucci, Balenciaga), along with the US-based Estée Lauder Companies. There is a substantial degree of industry concentration, with the top ten firms – which did not include Capri Holdings (17th position) – representing over half of the total luxury goods industry revenue in 2022.2 In 2016, older generations accounted for 73% of luxury purchases, however this is shifting. A 2020 study estimated that millennials will represent 40% of the global personal luxury goods market by 2025.3 Hence, luxury fashion firms will need to transform to cater to the shopping habits and needs of newer generations born and raised in a more digital world. In 2020, various trends affecting the luxury market came to light4: Conscious consumption and ethics: consumers pay more attention to affordability and value for money, and they are increasingly more conscious about environmental and social issues, especially younger generations, asking for more responsible and purposeful brands. Comfort and wellness: self-care has become a key driver in purchase decisions, which favours sportswear and comfortable items. Customization and local consumption: consumers are looking for more personalized luxury goods and experiences and give higher relevance to domestic purchase. Digital acceleration: the huge growth of e-commerce, especially since the COVID-19 pandemic, has made firms invest in omnichannel strategies, revolutionizing the shopping experience by leveraging technological developments across all touchpoints. One challenge faced by Capri Holdings was the relatively weak performance of its biggest brand, Michael Kors, which reported a 3.9% decrease in revenue in FY21 versus the year before, whereas both Versace and Jimmy Choo grew their revenues by 12.3% and 15.9% respectively. The group management explained this drop in 2/26 performance as a brand positioning issue and identified the need to increase customer engagement.5 This relates partly to the trend of digital acceleration, which presented another strategic challenge for the group. Consumers touch and feel offline but increasingly buy online for convenience. Firms are pressured to build an omnichannel approach that provides consumers a seamless shopping journey across key touchpoints. Such an approach implies leveraging technology to make the best of both the offline and online worlds. The thriving of online channels as the key touchpoint between brands and their customers is partly due to the preferences of newer generations but has been accelerated by the lockdowns during the COVID-19 pandemic and subsequent closure of physical stores. In 2018, online sales of luxury goods represented 10% globally, while they are expected to represent 25% by 2025.6 Kering was even able to double its online sales in 2020 compared to pre- pandemic figures.7 In parallel, physical stores suffered greatly because of pandemic-related restrictions: Offline sales inevitably declined as retail chains were forced to close stores. As customers got more used to online shopping, online sales remained on a high level also once most restrictions had been lifted. In the period between the acquisition of Jimmy Choo and Versace and the first phase of the COVID-19 pandemic, Capri Holdings had focused on opening physical stores – at a remarkable rate of 22–30% YoY – as a strategy to boost revenues. 2021 was the first year to decrease the total number of stores versus the previous year (1,271 in 2020 vs 1,257 in 2021).8 Although the opening of physical stores may have been a great strategy before the disruption of the industry, the acquisition of Capri Holdings by Tapestry raises questions about the company’s readiness for success in the face of the changing luxury fashion market landscape. Questions 1. How could Tapestry strategically bolster the competitive standing of its Capri Holdings portfolio in the dynamic landscape of luxury fashion? 2. To what extent do you expect that (some of) the trends as listed in the case will also provide a challenge for firms in industries other than the luxury fashion industry? Introduction As illustrated in the opening case, firms are confronted with new realities that challenge them to rethink their strategies. You may think about the emergence of digital platforms, disruptive new industry entrants, intensifying competition, changing expectations of dominant shareholders, more environmentally conscious consumption, new customer demands, shifts in demand across sales channels, regulatory changes, the emergence of artificial intelligence, geopolitical conflicts, and many other changes and dynamics that firms (and other types of organizational entities) may encounter. Their managers have to make adaptive choices to maintain a strategic fit in this new environment, and their firms may also actively shape this environment. As further detailed in the preface, this book addresses the fact that over time firms are confronted with – and contribute themselves to – a multitude of changes and challenges, requiring them to continuously sense and analyze what is going on, choose strategies to enable sustained value creation, and, when necessary, transform their organization in order to increase the odds of surviving and thriving in the face of new confrontations. This process of Confront-Sense- Choose-Transform, which is dynamic and iterative in nature, is at the core of contemporary strategic management. Chapters 2 to 17 zoom in on the different stages and elements of this process and their interlinkages. This chapter presents a general introduction to strategic management, which also services to anchor these follow-up chapters. We discuss what strategy and strategic management is (not) about, along with different perspectives on strategy formulation and formation. What is strategy? Strategic management, strategic goals, strategic plan(ning), strategic investment, strategic initiatives, strategy consultant, strategist… Just a selection of the many different ways in which the term ‘strategy’ is used in today’s business world. The term has been derived from the ancient Greek noun strategos, meaning ‘(military) general’. Alfred Dupont Chandler Jr., a former business historian at Harvard Business School, provided one of the first definitions of strategy in a modern business context: Strategy can be defined as the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals.9 3/26 Throughout this book we use the words firm, company, enterprise, and corporation interchangeably to refer to a commercial organizational entity – that is, a for-profit business organization. Chandler’s definition remains valid today and can also be used in the context of other types of organizations, such as public schools, research institutes, trade associations, trade unions, public clinics and hospitals, legal aid societies, charitable organizations, the armed forces and (semi-)governmental bodies. Although strategy is highly relevant for these ‘other’ organizations (see also this chapter’s Key Debate), you will read in this book mostly about firms. In many instances, however, what you read is (largely) applicable to organizations other than for-profit business organizations as well. Table 1.1 A selection of prior definitions of strategy 1. ‘[…] the determination of the basic long-term goals and objectives of an enterprise and the adoption of courses of action and the allocation of resources necessary for carrying out these goals’10 2. ‘[…] decision rules and guidelines [that] guide the process of development of an organization’11 3. ‘[…] the creation of a unique and valuable position, involving a different set of activities’, and the creation of ‘fit among [these] activities’12 4. ‘[…] an integrated, overarching concept of how the business will achieve its objectives.’13 5. […] the process by which a firm deploys its resources and capabilities within its business environment in order to achieve its goals’14 6. ‘[…] an integrated and coordinated set of commitments and actions designed to develop and exploit core competencies and gain a competitive advantage’15 7. ‘[…] a set of goal-directed actions a firm takes to gain and sustain superior performance relative to competitors’16 8. ‘[…] the means by which individuals or organizations achieve their objectives’17 9. ‘[…] an integrative set of choices that positions you on a playing field of your choice in a way that you win’18 Table 1.1 provides some additional useful definitions of strategy, some of which include the word ‘goals’ or ‘objectives’ or both. A goal or objective in itself is not a strategy, but most strategies have one or more overall goals and more specific, actionable targets (objectives). The ultimate goal of any organizational strategy, regardless of the context in which it is carried out, is to sustain added value – that is, to sustain value creation.19 What is considered ‘value’ typically depends on the type of organization and, partly related to that, on what type of stakeholder (such as customers, shareholders or society) the organization prioritizes over others (see Chapters 2 and 3). For instance, value can lie in profit maximization, the maximization of share- or stockholder equity, the maximization of societal benefits or a balanced satisfaction of multiple types of stakeholders. The verb ‘sustain’ signals the ability to continuously create value for an extended period of time. Strategists need to provide a coherent vision and high-level orchestration to achieve that. Key Debate 4/26 Strategy at nonprofit, not-for-profit and government organizations Every organization needs a strategy for achieving its long-term goals, but not every organization has a primary focus on competing with and outperforming rivals. Think, for instance, about trade associations, trade unions, hospitals, and (semi-)governmental bodies, which usually do not have rivals because of the nature of their activities. Since the appearance of Porter’s seminal work Competitive Advantage in 1985, however, strategy has often become synonymous with the pursuit of a sustained competitive advantage over rivals. The earning of above-average returns is frequently mentioned as a primary intended outcome of strategic endeavours. These returns are often expressed in terms of profitability ratios such as Return on Investment (ROI) and Return on Equity (ROE). There are multiple types of organizations, however, that are not driven by profits. These include nonprofit, not-for-profit, and governmental organizations. Nonprofit organizations have been formed to benefit the public good – for instance, by promoting a social cause or by advocating for the needs of certain social groups or communities. Most non-governmental organizations (NGOs), which typically focus on social welfare goals on a large (and usually international) scale, are nonprofit organizations. They are not commercially motivated but do often compete with other nonprofit organizations for members and external funding. Similar to nonprofit organizations, not-for-profit organizations do not earn profits for their owners, but, in contrast to the former, are not required to benefit the public good – instead, they can simply serve the collective goals of their members. Examples are trade associations and recreational sports clubs. Finally, government organizations are sovereign entities with authoritative power over other organizations in a certain state or area. The term ‘performance’ does not necessary imply profitability – for example, think about a social return on investment (SROI) that reflects social or environmental factors. With that in mind, to what extent do the definitions of strategy in this chapter hold for non-commercial organizations? In a for-profit context, added value equals competitive advantage.20 Having a competitive advantage means that a firm is able to outperform its competitors, which commonly translates into above-average returns. Simply put, the term return usually denotes the money that is made (a positive return, which marks a profit, or financial gain) or lost (a negative return, which marks a financial loss) on capital, assets, equity, or another form of investment over a certain time period. Returns can be expressed either as a change in current monetary value (also known as nominal value), indicated in euros or another currency, or as a percentage return, commonly indicated in financial metrics such as Return on Investment (ROI), Return on Invested Capital (ROIC), Return on Assets (ROA) and Return on Equity (ROE). A firm is said to earn above-average returns, or superior returns, when it generates returns over a certain period of time in excess of what investors would expect to gain from alternative investments with a similar risk profile. The earning of above-average returns implies an above- average performance. One of the most rudimentary questions in strategy is why some firms outperform others. Firms that are outperformed by their rivals or whose returns are below the industry average have a competitive disadvantage. In between competitive advantage and competitive disadvantages lies competitive parity. We can distinguish different levels and types of strategies, including functional-level strategies (for example marketing strategy and purchasing strategy), business-level strategy (also referred to as competitive strategy; see Chapter 10), corporate-level strategy (Chapter 12), and network-level strategy (also referred to as cooperative strategy; see Chapter 13). Although we discuss most of these strategies separately in individual chapters, they should not be viewed in isolation from one another. After all, the different strategic choices, commitments, and actions of a firm need to be aligned with one another in pursuit of its overarching strategic goals, including its purpose (see Chapter 2), which requires a certain level of orchestration. Also, strategists should adopt a unifying and integrated approach that combines sets of choices and actions and directs them towards this purposive endeavour. Hence, strategy can be defined as an orchestrated, unified, integrated, and purposeful set of choices, commitments, and activities directed at achieving and sustaining above-average performance. This set of choices can be divided into different domains, which can be seen as the principal elements of strategy:21 arenas, differentiators, staging and pacing, vehicles, and the value creation logic (see Figure 1.1). 5/26  Description Figure 1.1 Elements of strategy Source: adapted from Hambrick, D.C. and Fredrickson, J.W. (2001) ‘Are you sure you have a strategy?’ Academy of Management Executive, 15(4): 48–59. In line with these five elements, a general strategy needs to provide compelling answers to the following interrelated questions: In what industries or markets do we have a (competitive) presence? How do we successfully differentiate ourselves from relevant others in these industries or markets? How do we get to where we want to be? How do we sustainably create value for which stakeholder(s)? The last question lies at the heart of strategy – after all, without sustained added value, which, as previously discussed, translates into above-average returns, firms usually will not survive or thrive in the long term. It can be particularly challenging to sustain above-average returns for long periods of time when there is a high degree of market-related and technology-related turbulence; when firms are confronted with volatile markets, hypercompetition (see Chapter 4), or technological disruption (see Chapter 5), they might be able to achieve temporary competitive advantages at best.22 As becomes clear from the above questions, strategy is about making choices about what to do and what not to do, which usually come with (sometimes very difficult) trade- offs.23 Making clear trade-offs, and communicating these trade-offs to stakeholders, should constitute a key part of any strategic agenda. Strategic Focus The history of the strategy field in brief Strategy outside of a military context is a relatively young academic field. Its foundation can be traced largely to Alfred Chandler’s 1962 publication Strategy and Structure,24 as well as the seminal works of Edith Penrose and Igor Ansoff in the late 1950s and the 1960s.25 These works had been inspired by the emergence of mass production in the 1920s and 1930s and the concomitant increase in average size of firms, introducing new type of challenges. In the 1960s, the Harvard Business School newly introduced a Business Policy capstone course with a focus on ‘strategic’ frameworks including the still widely used SWOT framework (see the iSense diagnostic chapter). The 1970s witnessed a proliferation of tools and frameworks in the area of business policy and strategy, partly driven by consultant firms, including the Boston Consulting Group and McKinsey & Company. These firms introduced various portfolio management matrices (see the ChooseWell diagnostic chapter) along with other tools to support strategizing in a world where this had become increasingly more complex partly due to increasing diversification (see Chapter 11), as studied by, among others, Igor Ansoff26 and Richard Rumelt.27 Also the agency theory of corporate governance (see Chapter 3) emerged in the 1970s.28 Michael Porter’s books on strategy, including Competitive Strategy 29 and Competitive Advantage, 30 resulted in 6/26 an increasing focus on competitive advantage as the main cornerstone of strategic endeavours. The Five Forces Framework (see Chapter 6) and the notions of strategic positions and generic strategies (see Chapter 10) became widespread since Porter’s work. In the 1980s and 1990s, the strategy field was further shaped by influential publications on the resource-based view of firms,31 core competencies,32 dynamic capabilities33 (see Chapter 8), disruption,34 and business models35 (see Chapter 16). More recently, there has been an increasing focus within the strategy field on (digital) platforms36 and ecosystems37 (see Chapter 9). This overview is clearly far from complete (we would need another book), but it does provide a sense of how the field of strategy has developed over time. To further clarify the concept of strategy, which has been described as ‘an elusive and somewhat abstract concept’38 by one of the founding fathers of the modern strategy field, Harry Igor Ansoff, it may be helpful to briefly discuss what strategy is not about. Michael Porter, another founding father, has stressed that ‘operational effectiveness is not strategy’.39 Operational effectiveness, including efficiency, revolves around realizing operational improvements. These improvements might result from employing management methods such as lean six sigma, total quality management (TQM), scrum, business process reengineering and benchmarking, and can be essential to above-average performance, as can strategy. However, although they typically are a necessary condition, operational improvements alone are not sufficient for firms to outperform other firms for an extended period of time. As Porter points out, these improvements imply performing similar activities better than competitors perform them, and hence are not based on any difference a firm is able to preserve during that time. Operational improvements are usually imitated relatively quickly and commonly culminate in a greater degree of homogeneity within industries. Strategy, in contrast, is concerned with achieving and sustaining above-average returns for an extended time period by performing similar activities in different ways (as compared to competitors) or performing different activities, and ensuring fit among these activities, which is generally more difficult for other firms to replicate successfully.40 A plan is not the same as a strategy either. Although managers can take a planned approach to strategy, as we will discuss further below, there are important differences between the two. Most notably, unlike a strategy, the set of activities that constitute a plan (‘what are we going to do?’) does not necessarily have to be coherent with other activities a firm decides to engage in and, moreover, revolves around how to spend certain resources, which by definition are under a firm’s control. In contrast, a strategy specifies a desirable outcome – in terms of sustained above-average performance – for which it depends on other entities, most notably competitors and customers, which decide for themselves and are thus not under the firm’s control.41 Perspectives on strategy formation The formulation (or articulation) and implementation (or execution) of strategy is jointly referred to as strategic management. Defined as such, just about everyone in an organization could somehow be involved in strategy. The classical perspective on strategy is that the strategic course of action of a firm is the main responsibility of the organization’s CEO, executive board or owner, but strategy-making can instead involve a collective of different people, including those working at lower levels in the organization. For instance, middle-line managers may possibly be in a better position to make strategic choices about how to compete in a certain product market than senior managers. Hence, although strategy formulation can be a predominantly top-down process, it can also be more of a bottom-up process. Some firms are under the pressure of shareholders – or other types of powerful stakeholders – who are very dominant in enforcing certain strategies. Strategy formulation can be a largely analytical and rational exercise, based on facts, but instead it could also be based mainly on intuition of new market opportunities. A strategy could be formulated in a formal document or instead be more implicit, residing in people’s minds. As these examples and the next few sections demonstrate, there exists a variety of perspectives on who should formulate a firm’s strategy and how this is done, regardless of firm size and industry. How to earn above-average returns: I/O model versus resource-based model How do firms select strategies that should enable them to achieve above-average performance? Let’s compare two models that provide an alternative view of this: the industrial organization (I/O) model and the resource- based model (see Figure 1.2). 7/26  Description Figure 1.2 Comparing the I/O model and resource-based model of above-average returns Source: authors, based on Barney (1991), Porter (1980a, 1985), Rumelt (1974), Wernerfelt (1984) The underlying assumption of the I/O model of above-average returns is that the set of characteristics of the industries or industry segments in which firms choose to maintain a presence (see Chapter 6), and the degree to which their strategies consider or shape these characteristics, which change over time, is the main determinant of their performance. Therefore, according to this model, firms should take an outside-in approach to strategy formulation, meaning that the first thing they should look at is the external environment in which they are embedded, which includes both their market and nonmarket environment (see Chapter 4). Based on this external sensing, they should then locate those industries or industry segments whose structural characteristics seem to have the strongest potential for earning above-average returns. A firm then must select the type of strategy that is most adequate for exploiting this potential and focus on using those resources and capabilities (see Chapter 8) that are needed most to effectively implement this strategy. These resources and capabilities are already present in the organization or otherwise can be either accessed by engaging in an alliance (see Chapter 13), or acquisition (see Chapter 14) or developed internally (see Chapter 15). At a time when NXP, a Dutch semiconductor designer and manufacturer that had spun off from Philips in 2006, was not doing very well, its then-CEO Rick Clemmer decided that NXP should only invest in industries where the firm’s market share was at least twice as large as its largest rival in those industries. The firm left many markets and strengthened its position in those markets where it was the market leader, which eventually resulted in above-average performance. This pacing rule for selecting attractive industries illustrates the logic of the I/O model. The resource-based model of above-average returns alternatively assumes that it is in fact the set of resources and capabilities of a firm, in particular their uniqueness, and the degree to which the firm can successfully exploit these in one or more industries or industry segments, that determines its performance. Thus, instead of identifying general industry potential, this model is mainly about identifying the potential of organizational resources and capabilities for outperforming others. Firms should therefore – according to this model – take an inside-out approach to strategy formulation, meaning that the first thing they should look at are their relative strengths in terms of tangible and intangible resources (which are means of producing goods or providing services) and capabilities (which denote the capacity of an integrated bundle of resources to integratively perform certain activities) (see Chapter 8). Based on this internal sensing, firms should then determine their ability to use these strengths – while bearing in mind also their weaknesses – in a way that allows them to outperform others. This ability will be stronger in some industries or industry segments than in others. Once an industry or segment has been selected based on this consideration, a firm should select the strategy that puts itself in the best position to exploit its strengths in taking advantage of the opportunities in this 8/26 industry or segment. Illustrative of this resource-based view is the fact that McKinsey & Company invests heavily in the unique skills and competencies of its consultants in particular knowledge areas and markets it wants to dominate. Prior studies indicate that profitability is determined partly by the characteristics of the industry in which firms choose to compete but also by differences in their resource base and skill sets.42 Firms would therefore be wise to not focus exclusively on a resource or I/O-based line of thinking – instead, a combination of these approaches is advised. A focus on one of these approaches at the expense of the other comes with significant risks. For instance, firms that demonstrate a very dominant resource-based approach run the risk of overdeveloping certain resources that they cannot sufficiently exploit in any market, while an exclusive focus on the I/O logic can result in an inability to sustain added value in certain industries because of a lack of resource distinctiveness. CRACK-THE-CASE Beyond Meat and Impossible Foods Source: © Rblfmr (2019) / Shutterstock. The alternative meat industry is moving full steam ahead and two firms stand out in terms of rivalry: Beyond Meat, founded in 2009, and Impossible Foods, founded in 2011. These US-based producers of meat substitutes are particularly known for respectively their Beyond Burger and Impossible Burger. The odds had been in favour of Beyond Meat – it has been around for longer so had wider recognition and market penetration. As Bloomberg Businessweek puts it, Beyond Meat is ‘in more U.S. retailers (28,000 compared to Impossible’s 20,000), more restaurants (42,000 in the U.S. vs. 30,000-plus), and more international markets (more than 80 vs. 5).’43 But will things stay like that? Beyond Meat’s large dependence on providing to sit-down locations has backfired due to the COVID-19 pandemic. Meanwhile, Impossible Foods’ alternative meat got a boost, as they focused on pandemic-resilient takeout, drive-thru, and delivery options. Impossible Foods has also launched a price war, undercutting Beyond Meat in its prices for restaurants and grocery stores. During the pandemic, Impossible Foods increased its market share from 5% to 55% in plant-based patties that were sold in supermarkets. Despite these attempts by Impossible Foods, Beyond Meat still dominates the market and tries to keep things going through innovation design and sales,44 as it seeks to enhance the taste of its alternative meat and its availability in stores and restaurants. The question is for how long the firm can maintain its position. Questions 1. To what extent do Beyond Meat and Impossible Foods compete not only with each other but also with firms outside the alternative meat industry? 2. What would be your main strategic advice to Beyond Meat or Impossible Foods? 9/26 Strategy formation: Deliberate and emergent strategy The I/O model and resource-based model of above-average returns entail that firms carefully select an appropriate strategy that – given certain industry characteristics and resource heterogeneity, respectively – should enable them to achieve above-average performance. Both models thus presume the presence of an intended strategy: a clear strategy that a firm intends to implement (see Figure 1.3). When this strategy is articulated explicitly, it is alternatively called a formulated strategy. Some parts of an intended (or formulated) strategy will possibly be abandoned along the way. These parts are collectively referred to as the unrealized strategy. The remaining parts of an intended strategy, which eventually are put into action, are collectively referred to as the deliberate strategy. In addition to – or even instead of – a deliberate strategy, there can be an emergent strategy, which is an internally consistent pattern of actions and reactions that arise spontaneously as a firm navigates within its operating environment (see again Figure 1.3).45 Deliberate strategies (formed intentionally) and emergent strategies (formed spontaneously) can be seen as two ends of a continuum along which the firm’s actual strategy formation lies.46 This actual, real-world strategy formation (that is, what firms actually do) is also known as the realized strategy.47 Description Figure 1.3 From intended to realized strategy By emphasizing the role of strategic choices in strategy formation over unplanned actions and reactions, deliberate strategy has received considerably more attention in the strategy literature than emergent strategy.48 We provide a somewhat more balanced view. First, although Part III of this textbook (‘Choose’) revolves around strategic choices, we emphasize that these choices should be revisited regularly in the light of emergent strategy formation and, moreover, that they should go hand-in-hand with experimentation, learning, adjustment, a clear vision that provides guidance, and overcoming mental biases. Second, we explicitly zoom in on emergent strategy-formation processes in Chapter 15 (corporate entrepreneurial processes), Chapter 16 (emergent business model transformation) and Chapter 17 (emergent strategic renewal). Schools of strategy formation The existing literature on the strategy formation process can be categorized by how this process is conceived. These categories have been labelled the schools of strategy formation, or strategy schools of thought. As discussed next, we can distinguish multiple schools of strategy formation,49 which are either prescriptive or descriptive in nature (see Table 1.2). Typically, none of these schools capture all of the strategy formation process at a certain firm over a specified period in time – often it is a combination of schools that comes closest to reality. Also, the applicability and dominance of some schools over others can change over time as, for instance, a firm or the industry in which it competes goes through different stages.50 The following overview of nine schools serves to present a more balanced view of how the strategy formation process may come about. Prescriptive schools of strategy formation The design school, planning school and positioning school are prescriptive schools of strategy formation, in the sense that they prescribe how a strategy should be formed. They assume that strategies are formulated and not formed spontaneously, and that once they have been formulated they will eventually be realized. Prescriptive schools thus idealize the strategy formation process. This formation is associated with a top-down, analytical and fully rational decision-making approach. Although there is less variety in prescriptive schools than in descriptive schools, they are more pervasive in strategy textbooks as, in contrast to the latter, they come with 10/26 different frameworks and analytical tools and techniques – many of which have been introduced by consulting firms – that enable analysis and measurement, which provides a more concrete and proactive basis for strategy formation than describing emergent processes as they occur. Table 1.2 Stylized comparison between nine schools of strategy formation View of School of the Essence strategy Influential Base strategy of Central Central formation source(s) discipline(s) process strategy message actor Prescriptive Design school Selznick none process of grand fit CEO/top (1957), conception strategy managers Andrews (1971) Planning Ansoff cybernetics, formal explicit formalize corporate school (1965, systems process planning staff 1988) theory Positioning Porter industrial analytical generic position analysts school (1980, organization process strategy based on 1985) (I/O) analysis Descriptive Cognitive Simon psychology, mental superior refine CEO/top school (1947), informatics process foresight mental managers, March and maps brain Simon (1958) Entrepreneurial Schumpeter none visionary superior creatively (corporate) school (1934) process vision destruct entrepreneur Learning Lindblom psychology learning learning learn multiple (all school (1959), process capacity from trial levels) Weick and error (1969), Quinn (1980) 11/26  View of School of the Essence strategy Influential Base strategy of Central Central formation source(s) discipline(s) process strategy message actor Cultural school Johnson anthropology collective collective socialize multiple (all (1987, (incl. process perception levels) 1992), ethnography) Pettigrew (1979, 1985) Power school MacMillan political process of power negotiate multiple (all (1978), science negotiation play and levels) Salancik persuade and Pfeffer (1974, 1977) Environmental Hannan contingency reactive passive adapt none school and theory process (external Freeman environment (1977), is key) Meyer and Rowan (1977) Source: authors, based on Mintzberg and Lampel (1999) and Mintzberg et al. (1998) The design school perceives strategy formation as a process of achieving an optimal fit between a firm’s strengths and weaknesses (compared to close competitors) at the one side, and opportunities and threats in its external environment at the other. The school’s main idea is that a firm’s strategy should be designed based on this fit, which can be identified by performing an adequate SWOT-analysis (see the iSense diagnostic chapter). The design school states that the CEO, board or founder is the central actor in the strategy formulation process, expecting everyone else in the organization to work on implementing the ‘grand strategy’. One implication of this approach is that it creates a separation of thinking (by the central actor) and action (by staff), which may result in a ‘not-invented-here syndrome’ and ensuing inertia or unwillingness to implement. Also, the articulation of a grand strategy entails commitments, which reduce flexibility. Moreover, this school assumes that structure follows strategy, which is not always the case. An additional critical note to this school is that the belief in an optimal strategy can be risky and may result in questionable strategies. In 1943, for instance, Thomas Watson Sr. is alleged to have said: ‘I think there’s a world market for maybe five computers’. A comparable statement was made in 1977 by Ken Olson, then chairman and founder of Digital Equipment Corp, at the World Future Society when he stated that ‘There is no reason anyone would want a computer in their home’. The planning school, which compared to the design school is a more nuanced school, perceives strategy formation as a formal process with a dominant emphasis on planning. It can be seen as a sort of cookbook for developing a great strategy: strategy according to this school is a detailed plan that is decomposed into steps, facilitated by checklists, awaiting implementation. For example, the planning may start with the setting of a firm’s goals, followed by a review of the current situation (for which a SWOT-analysis or another analysis can be used), which might then be followed by several steps to formulate the strategy, decide on resource allocation (including, for instance, budget specification) and decide on how to monitor implementation. The CEO or the board is responsible for strategic thinking and for approving the overall plan, but most of the work is done by corporate planners who serve as strategic engineers and others that implement the formulated actions. When this school gained prominence, following the publication in 1965 of Ansoff’s work on strategy, many firms created strategic planning departments. Strategic planning can work very well in changing but predictable environments, where it makes sense to develop a long-term, detailed plan. In environments that are not very predictable, however, the planning school may not work well. Other critiques of this approach are that it may lead to paralysis 12/26 by analysis and that it can be very time-consuming to develop a sophisticated, detailed plan. Once the plan has been implemented, it may already have become outdated. Also, the separation between planning and execution may lead to issues comparable to that of the design school. The positioning school, which is based largely on the work of Michael Porter,51 perceives strategy formation as an analytical process. According to this school, which is most in line with the I/O model of above-average returns, a firm needs to identify and develop viable strategic positions. At the broadest level, these positions, which can be based on customers’ accessibility, customers’ needs or the variety of a firm’s goods or services,52 can be differentiation, cost leadership and focus (either a cost focus or a differentiation focus) (see Chapter 10). These positions are known as the generic strategies (see Chapter 10). A central premise of the positioning school is that the strategy formation process is mainly a matter of selecting an appropriate generic position in the industry, based on an adequate analysis of industry characteristics. One of the best-known frameworks that can be used for carrying out such an analysis is the Five Forces Framework (see Chapter 6). The central actors according to the positioning school are analysts that provide information, based on which the CEO or board makes decisions as to how to position the firm. Well-positioned firms are deemed able to exploit economies of scale, which results in diminishing costs, and to achieve a sustainable competitive advantage. However, this may not be feasible in circumstances where any competitive advantages are gradually eroded over time.53 Another critique regarding the positioning school is that it is somewhat biased towards well-established firms and therefore less adequate for new industry entrants – for example, Virgin would possibly never have entered the airline industry, where it achieved success with Virgin Atlantic, if this decision would have depended on the outcome of a Five-Forces analysis. CRACK-THE-CASE Axel Springer: From near death to leading digital publisher Source: © Mo Fotography Berlin (2022) / Shutterstock. Axel Springer, founded in 1946, is a renowned German media conglomerate that holds the position of European market leader within the publishing industry. After the turn of the millennium, the firm found itself in a tough situation. Prior to this, it had always generated significant levels of sales volumes and profitability. However, an industry decline of advertising revenue in traditional print had a substantial effect on its earnings of 2001, suddenly turning the conglomerate into an industry midget.54 Andreas Wiele, an executive at Axel Springer, even called it a ‘near dead experience’ for the firm.55 At that point in time, digital technology and advertising started to take flight and for Axel Springer to survive it had to radically change its business model to meet the change in client needs. As a response, CEO Mathias Döpfner repositioned Axel Springer and envisioned the firm to become Europe’s leading digital publisher, which meant that he went on to execute a bold move to cannibalize the firm’s traditional newspaper operations by populating its online media portfolio, prioritizing its 13/26 digital media over its print media. This transformation towards a digital strategy in 2002 turned out to be fruitful. In 2018, digital media already accounted for 87% of the firm’s complete advertising revenue.56 Currently active in over 40 countries, with 16.000 employees and a total revenue of €3.1 billion,57 Axel Springer has shown significant growth in the past decade. After its strategic transformation, the firm split its portfolio in three divisions. The News Media division is probably the most well-known and recognizable of the three. With numerous digital and print titles such as Bild, die Welt, Politico, and Business Insider, this division is also the largest in terms of revenue. The second division is Classified Media, whose portfolio predominantly revolves around online ad portals characterized by job, real estate, and auto advertising websites. Marketing Media, the third division, generates revenue from advertising clients by focusing on performance- and reach-based marketing. Axel Springer tries to differentiate itself from competitors by providing quality content, which has been its prime profit driver since the start. However, capturing value by providing new digital news products proved to be challenging as in the perception of many people digital news should be free. Its News Media division implemented a ‘freemium’ pay-for-service model, believing that consumers are willing to pay for journalistic content in the digital world. Offering subscription-based services in News Media, monetizing content through advertiser revenue from selling Classified Ads, and its performance- and reach-based selling of advertiser space at Marketing has largely changed its revenue model from one end of the spectrum (print) to the other (digital). Axel Springer operates with a larger share of digital revenue than its ‘traditional’ competitors, such as Bertelsmann, Hubert Burda Media, and Ströer, and increasingly faces competition from technology giants such as Amazon, Google, and Meta on all fronts. Whe