Strategic Business Analysis COMPLETE MODULE
Strategic Business Analysis COMPLETE MODULE
Strategic Business Analysis COMPLETE MODULE
Objectives:
A strategic business unit (SBU) can be defined as a unit that produces products or
services for which there is an identifiable group of customers. Organization divisions or
units are frequently defined on this basis, with an adhesive company.
It is logical to answer the question where the organization is at two distinct organizational
levels:
Figure 1.1
Corporate and business strategy
Figure 1.2
Understanding strategy in
organizations
Figure 1.1 outlines the basic corporate model. Individual businesses are seen as part of
a corporate whole, with corporate strategy being concerned with decisions about the
management and composition of that whole.
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• Wove backwards and forwards within the procedure until the assess ment of the
data leads to a natural conclusion (see Figure l.3).
• Recognize that the data you are analyzing may be limited.
• Arrive at your conclusions with care in light of the inherent limitations of the
analysis.
• Be prepared to argue for your conclusions from the available evidence,
remembering that managers have to operate in situations of incomplete
knowledge
Some organizations operate in more than one business area and they do not have
neatly structured and easily identifiable product groups or SBUs. It is also possible for
companies to have structures that reflect the views of their senior managers and owners
on how they should operate, or that these structures are an outcome of history and
previous conveniences. This means that we should look beyond organization structure
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analyzed, the corporate analysis can be resumed and issues such as shared
competences and resources, and the nature of the fit between businesses.
It is a good idea to identify the people and/or organizations that purchase the business
unit's products and wherever possible to classify them into groups or segments. By doing
this we can produce data to estimate the proportion of the available market that the
organization serves. The data can also be used to compare the performance of the
company to that of its competitors, which can be an ongoing comparison if the data is
collected regularly.
A market segment has been defined as a group of consumers who can be classified on
specific dimensions. consumers may be individuals, in which case classification is along
dimensions such as age, income, life style, and socio-economic group. consumers can
also be organizations, in which case classification is along dimensions such as volume
usage, manufacturing or service process and inventory control process.
A description of an organization's products and the market segments that use them is a
description of the organization's product market mission. In consumer markets the
person who uses the product is often the person who pays for the product. In industrial
markets purchases are made by organizations and the people in manufacturing and
purchasing departments are key decision-makers. In public sector organizations the
purchaser and the user can be different; for example, school pupils and their parents as
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distinct from local and national government. In any strategic analysis it is important to
identify purchasers as well as users.
Customers buy a product because they perceive that its purchase will improve their
ability to achieve desired objectives (meet needs). An issue for a purchaser is that this
requirement is met at an acceptable cost. Different customers will also have different
perceptions of their needs and these needs will be conceptualized within their utility
potential. Put simply, some purchasers will be prepared to pay for a basic product and
no more, whilst others will be prepared to pay a premium for a differentiated product; that
is, they will be prepared to pay for benefits that derive from additional features. Models
that are useful in discussing these topics are those concerned with identifying product
and service competitive advantage. They are also useful when we try to develop
explanations for organizational performance.
In order to supply services and products an organization requires resources. These can
include skills and knowledge that are held tacitly within the organization. Strategic
analysis should therefore seek to understand the relationship between market success
(the sale of products and services) and the resources that are utilized to produce and
deliver those products and services.
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appropriate relationship when the portfolio is made up of related businesses and center
managers have a ‘feel' for the businesses in the portfolio.
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CHAPTER 2 – WHAT OPTIONS ARE OPEN TO THE ORGANIZATION?
Objectives:
Business closure
Business disposal
Business acquisition
Business re-organization
Business start up
The impact of doing nothing different
Even in the case of a single business organization, a corporate level perspective might
be important because an option may involve a diversification that can be best managed
by creating a divisional form of organization.
A useful starting point is to compare the financial performance of these various options
to the financial performance of the current business (i.e. the do-nothing-different option).
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Portfolio balance. Portfolio models, such as the Boston Consulting Group (BCG)
matrix and the General Electric (GE) matrix, are useful devices for examining multi-
business organizations. Understanding how the businesses ‘fit’ together is important
because it may be necessary, for example, to use money from a cash-rich company to
fund a growing and cash-hungry company. Shareholders must be happy that this is an
effective use of their money, which is why the business being funded must benefit
‘strategically’ from being in the portfolio.
Strategic fit and parenting. If organizations develop incrementally over time, then
situations can arise where inter-business synergies are lost and the scope for corporate
parenting is eroded. In these circumstances it may be necessary to divest non-core
businesses if the assessment is that there are no synergies or opportunities for
parenting.
Senior management teams must understand and appreciate the role of ‘parents’ in
assessing strategic fit and in the leveraging out of competitive advantage. It is clearly
important that the portfolio of businesses should be constructed in such a way that the
organization can fund its ambitions.
SPACE analysis (Strategic Position and Action Evaluation - after Rowe et al., l994) can
also be used to identify options at the business units and product level.
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Figure 2.1
Product-market Matrix
1. Market Geography
2. New
3. Present 2
4. Market Need 1
2
5. Product-services
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3
3
Technologies source: (Ansoff
1988) The New Corporate 3 2
Strategies.
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PRODUCT / MARKET
Maintenance Development
Box E Box F
Maintaining present Moving into new
Maintenance
resources to serve products and
present market markets with
segments present resources
RESOURCE
PORTFOLIO
Box G Box H
Delivering present Delivering new
Development products with new products and/or
resources entering new
markets with new
resources
The matrices in Figures 2.l and 2.2 can be used to generate a number of possible
options for a business unit.
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This could be the position in a highly competitive environment and may require a
constant improvement of product and service features because customers’ perceptions
of quality (as fitness for purpose) are changed by rapidly advancing technology and the
offerings of competitors. The main concern of firms is to maintain or enhance their
sources of market advantage - be it cost or differentiation based - the personal
computer market exemplifies this well.
The analysis of the business may indicate that the organization is in a situation where
some adjustments in strategy content and/or implementation are required as an antidote
to decline. The decline may be in the early stages or may be so advanced as to require
urgent action.
C
Customer perceived product benefits
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Figure 2.3. illustrates how organizations lose touch with their market and how their
product is ‘de-positioned’ by the market changing faster than the firm’s strategy. An
organization can lose its brand image and reputation and slip from position ‘C’ to
position ‘D’. This is the case when a product market position is not maintained and
customer expectations of the standard product increase.
A business may find that it is losing market share; it may have operating inefficiencies
and have products or services that are not competitive. In this situation the competence
portfolio is likely to need updating. It is also likely that the organization culture is no
longer responding in an effective way to its environment. Slatter (l984) indicates the
following factors cause a firm to decline:
➢ Poor management.
➢ Inadequate financial control.
➢ High cost structure.
➢ Lack of marketing effort.
➢ Competitive weakness.
➢ Big project acquisitions.
➢ Financial policy.
This can occur when a company seeks opportunities in a different geographic area or
wishes to reposition a product to appeal to a wider or different market segment. The
concept of repositioning is illustrated in Figure 2.4.
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In Figure 2.4, the company launches or acquires a product in position ‘A’, which has
basic tangible features. The company then improves the tangible and intangible features
(intangible features include reputation and brand image) of the product. At the same time
the product price increased incrementally (perhaps via point ‘B’) so that ultimately
position ‘C’ is achieved. Although there may be no advantage in leaving a high volume/
low price market to move into a low volume/higher price market, it can be an
appropriate strategy where the lower price segment is smaller than a higher priced
segment. So, even though the product is not new (although it might be modified) the
organization makes strenuous efforts to change the customers’ perception of its benefits.
This is an appropriate option when the strategic analysis suggests that there are
opportunities for the business to develop new products for customers. These products
may meet a present need that is served by other suppliers or may be a new need. In
this situation there may be a requirement to develop new competencies as well as
exploiting current one. (Boxes F and H).
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From a market-based perspective a relaced diversification will involve moving into new
products and markets that has similar dimensions to the ones currently being served. In
this scenario products and markets are chosen that have similar features to the ones
currently being served. For example, a perfume retailer whose historic market consist of
females may move into the manufacture and sales of men’s undergarments. In this case
selling, branding and distribution would have similar features for both product market
missions. A car producer who moves into manufacturing light vans may find some
marketing commonalties e.g. brand name and distribution, as well as relatedness in
production, etc.
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The procedure that has been outlined for option generation and evaluation has three
stages:
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CHAPTER 3 – WHAT IS THE BEST WAY FORWARD FOR THE ORGANIZATION?
Objectives:
Asses the options generated for each business in the context of the
corporate whole.
Identify the features of the change option that is proposed and to
what extent can the change be Managed.
Determine the outlined criteria for the FIRM evaluation.
The I in FIRM:
Will the strategic option have an impact on the organization’s performance within
agreed time frames?
There is no point in pursuing strategies that make little difference to the
performance of the organization in a time scale that is not acceptable to stakeholders.
Because of this the returns from the proposed strategy must be estimated using
appropriate techniques. In ‘for-profit’ organizations the impact of a strategy is usually
measured in financial terms.
The R in FIRM:
Can the resources required to implement the option be obtained?
Since there is little point in developing strategies for which resources cannot be
obtained, it is important that realistic judgements be made on the ability of the organization
to acquire such resources. Resources can include capital to fund acquisition of buildings
and equipment, raw materials, labor, skills, management expertise and sales outlets etc.,
and frameworks for assessing resources.
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The M in FIRM:
What are the features of the change option that is proposed and to what extent can
change be managed?
Writers and researchers on strategy focused their attention on the cognitive
nature of management. Organizations were said to have perspectives, cultural webs
and paradigms, and dominant logics. Consequently, if an organization is in a situation
where the world-view of key managers and staff is at odds with its environment, the
likelihood is that the organization will become dysfunctional. Examples of situations
where there is the potential for a misalignment of world-view and environment are:
❖ When an organization diversifies into a new market and the common perspective
of the organization is unable to understand the ‘rules’ of this market.
❖ When an organization’s members lose touch with the needs of their customers
because of complacency.
❖ When an organization is faced with a significant environmental change because
of privatization or regulatory changes.
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running the business. This means that corporate managers in multi-business and multi-
national environments may have to operate with multi-dominant logics if they are to
attend to the affairs of their different business.
Box 1 and Box 3 situations are those where organization members in key strategic
and/or operational positions have world-views/cultural webs that are not sympathetic to
the proposed change. Such situations may involve the development of new
competencies for expansion or may be situations where turnaround strategies are
necessary for survival. These circumstances are encountered by organizations entering
changed environments either through the incremental growth of competitive action.
Inconsistent Consistent
Doing things differently Doing things better
Box 1 Box 2
Incremental
(Slow)
Step
(Fast)
Figure 3.l Organization paradigm and rate of change required matrix Source: (after Balogun and
Hailey (l999) 1xploring Strategic Change, Prentice Hall, Europe, reprinted with
permission from Pearson Education Limited).
The sooner an organization is able to ‘sense’ the need for change the sooner it can
avoid situations of ‘strategic drift’ and the need for remedial actions, which are often
painful, if it is to remain competitive. Yet this may be difficult because the dominant
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paradigm of the organization is likely to resist this ‘sensing’ of the need for change
unless the situation becomes dramatically grave or a sense of urgency is deliberately
precipitated. Although difficult, there is evidence that dominant logics can be influenced
and changed through ‘selective’ recruitment, training and retirement programs for a
classic discussion of turn around and recovery strategies.
Boxes 2 and 4 illustrate positions where the change to be undertaken does not require a
change in dominant logic. Typically, initiatives like the implementation of total quality
management and business process re-engineering would fit into Box 4. In Box 3,
changes are more adaptive and are allowed and encouraged to take place over time,
and are exemplified by slowly improving the skills within the workforce, the
development of computer- based inventory control systems, and the development of
modified products to maintain markets. Changes in Boxes 3 and 4 are necessary to
improve the organization’s performance and are less likely to meet resistance com-
pared co the changes in Boxes 1 and 3. Estimations of power in organizations are an
important step for change managers, that power stems from:
Low High
POWER
Figure 3.2 Power–interest matrix Source: (after Mendelow, l99l, p. 2l6, Reproduced
with permission from Pearson Education Limited).
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Examples include trade unions who have power over labor resources, experts who
have control over information and knowledge, and shareholders who have the power to
vote out managers.
The power–interest matrix shown in Figure 3.2 is a useful way of representing the
interplay between different levels of interests and power.
Options
Outside
Present Corporate options
portfolio
Implementation plan
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The FIRM framework for evaluating options has been outlined, and the options
generated for each business that you look at should be critically evaluated using this
framework. On the basis of this analysis, the optimal way forward for each business
should be weighed against the long-term welfare of the corporate whole. In some
circumstance this may mean that a business should be disposed of to create a more
beneficial corporate environment, or sold to fund the aspirations of others.
The short and long-term implications for shareholder value and funding should be considered
and this is likely to necessitate the production of short, medium and long-term financial
predictions under different possible scenarios. The analysis should include estimates of future
company worth and how the new strategies will impact on other stakeholders such as
employees and customers.
Strategic Management and Business Analysis / David Williamson, Wyn Jenkins, Peter
Cooke and Keith Moreton
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CHAPTER 4 - THE 4th BIG QUESTION: HOW CAN THIS BE ACHIEVED?
Objectives:
The role of the center is to ensure that each unit in a corporate portfolio gains the maximum
benefit from being parc of the portfolio. Managers should also be aware of the way that units
can be clustered within an overall framework co maximize the opportunities for synergy and
parenting. this is particularly important in post-merger or post-acquisition periods when
corporate centers endeavor to reconfigure their organizations. Is may being appropriate to
bring units together or separate chem. Changes ac the business level may have an impact on
the whole organization, with some businesses possibly funding ocher businesses, while other
businesses could be given preference for investment over others.
Prompt a discussion of the implications with respect to the disposal of companies, the
acquisition of companies, company mergers and new business start-ups. Careful
consideration will have to be given to the financing of corporate level change. For some
businesses may be sold co fund expansion or improvements in other businesses. If
additional investment is required, it is important to identify sources of funds and the
impact that chis will have on the financial structure of the organization. The long-term
consequences of key financial ratios and the trends in these ratios need to be
understood.
The strategic options chosen may require that the overall governance of the organization
is changed and that the role of the center and its relationship to individual business is
modified. It may be appropriate for individual business to cooperate. A key issue is to
identify the parenting relationship between the center and the individual businesses and
the opportunities for synergy across businesses.
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Strategic change at the business level is the level where people become involved. The impact
of corporate restructuring has to be managed within the individual businesses, and the
ways that change is managed will be context-dependent. Expanding from a success is
quite different from turning round an organization in crisis. The challenge is different
when the proposed change requires a change in the way the organization’s members
understand their world.
It is important to estimate the impact that change has on customers because the nature
of that impact should be anticipated. Some impacts are desired and are expected to have
a positive impact on consumers, while ocher impacts may be trade-offs, which some
consumers may not like (it is important to realize that there may be some unanticipated
customer reactions).
A strategy that is counter to the culture of the unit will be difficult to implement. If a
change in strategic direction is necessary for long or short-term organization survival this
may be an appropriate route. Indeed, the very nature of the situation may be a driver for
change and may be used by organization leaders as a catalyst for change. The effective
communication of a crisis can be the lever, which facilitates change by challenging
peoples’ confidence in the existing certainties.
If we revisit the product/market resource portfolio matrix in Figure 4.l and the
organization paradigm and race of change required matrix we can consider the
implications of managing change under the conditions suggested by the nature of the
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change in the organization’s resource mix. Changes that are likely to be consistent with
the development of the present organizational paradigm are more likely to occur when
the organization is changing incrementally from a successful position.
PRODUCT/MARKET PORTFOLIO
Maintenance Development
Box E Box F
Maintenance Maintaining present Moving into new
resources to serve products and/or
present market markets with
Resource segments present resources
Portfolio
Box G Box H
Development Delivering present Delivering new
products products and/or
with new resources entering new markets
with new resources
1. Managing change when the change is consistent with the present culture.
2. Managing change co accommodate different organization contexts.
3. Managing change when the change requires a culture change co maintain a
successful position.
4. Managing change in turnaround situations.
In healthy organizations changes will be grounded in present resources, but over time
the organization will learn and grow. It will acquire new assets and skills as current
products are produced in more effective ways and new products and markets are
developed (Box G and H type changes).
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In continuous improvement projects the main players are usually first line managers,
maintained by middle managers acting as a key link to cop managers. In a healthy culture
there would be open communication throughout the organization. Indeed, the
empowerment of individuals and teams within organizations is one of the cornerstones
of a continuous. Organizations can also build teams with customers and suppliers. Let
the practice of cross-organization teams only works if team members believe that
customers and suppliers benefic through teamwork, and there is a shared belief in win–
win outcomes.
It is clearly essential that the team should be appropriate for the task and that the task being
undertaken has the support of top management. In addition to having clear objectives, the
objectives should be agreed at the start of the project and should be regularly restated. The
team should have a leader who is concerned with the three key areas of teamwork.
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1. Ensure that all members understand the task and the plan.
2. Be responsible for leading the team in developing the project or cask plan that
accurately reflects the task.
3. Allocate tasks within the team.
4. Agree milestones and performance measures.
5. Ensure that the team maintains an effective work race and its task focus.
6. Encourage and discipline the team and individuals.
7. Encourage the building of team spirit.
8. Minimize tension and reconcile disagreements.
9. Receive information from the wider organization and its environment and
disseminate to the team.
10. Disseminate information from the team to the wider organization.
11. Check project outcomes with initial objectives.
12. Help the team evaluate its own performance against objectives.
There are situations when organizations have to come to terms with operating
one way in one environment and another way in another environment. When healthy
organizations expand their market areas to different countries the structure set-up for
this must accommodate the impact that this will have on the organization.
Healthy organizations may also have to accommodate a step change when they
introduce new products to new markets when this requires the acquisition of new
resources.
PRINCIPLES:
Planning: The organization is clear about its aims and objectives and what people need
to do to achieve them
Action: The organization develops its people effectively in order to improve its
performance.
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INDICATORS:
Eight-Step Framework:
2. Forming a powerful guiding coalition: One of the first tasks within many
change processes is the formation of a guiding coalition or project team. This
team will initially review and re-examine the implications of the change proposals
so that they become committed to the proposal and take it forward. Deciding on
the composition of the project team is clearly an important task for senior
management.
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5. Empowering others to act on the vision: The system and culture of the
organization must be aligned to the vision outlined. The activities of the
organization must be compatible with the vision of the future aspired to.
Modelling value chains and culture webs before and after the change initiative
can allow people to focus on the requirements of the change process.
6. Planning for and creating short-term wins: Progress must be measured. This
is why the organization needs to set objectives and performance indicators.
Burns (2OOO) has identified two schools of change management theorists:
The work of a number of writers, however, suggests that change can be managed in
ways that involve both planned and emergent dimensions. Quinn (l978) captured the
essence of this idea when he developed the concept of logical incrementalism. The
balanced scorecard provides a framework for translating a company’s strategic
objectives into a set of performance measures. This system seeks to align short-term
performance indicators within a long-term perspective. This avoids organizations having
incompatible long- and short-term objectives.
Kaplan and Horton (l992, l993, l996) developed the balanced scorecard and it revolves
around four separate but inter-linked management processes:
Customer: To succeed financially a company needs to create value for its customers (i.e.
what do our customers value and what would they like to see improved – can we measure
our progress on these issues?).
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Learning and Growth: Support for value-creating strategies requires ongoing support
(i.e. improving customer service through superior. Its integration is an ongoing process
that requires the company to monitor how effective it is at innovation, learning and
growth).
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In summary, the benefits of integrating the balanced scorecard into the implementation
process enable a company to:
Slatter (l984) suggested that antidotes for decline should be mapped to specific causes
of decline. His research has indicated that firms in crisis can only be converted into
firms that make above average profits if strong product market positions can be
achieved.
Cause of decline
Antidote
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✓ Managing change when the change is consistent with the present culture.
✓ Managing change to accommodate different organization contexts.
✓ Managing change when the change requires a culture change to maintain a
successful position.
✓ Managing change in turnaround situations.
To know more information about Kotters (8) Eight steps Leading Change
Please click the link: https://www.youtube.com/watch?v=1QWiMkXyTP4
Strategic Management and Business Analysis / David Williamson, Wyn Jenkins, Peter
Cooke and Keith Moreton
11
CHAPTER 5 – ORGANIZATION STRUCTURE and STRATEGY
Objectives:
An organization is a collection of resources that are linked together to transform inputs into
outputs, and an organization structure is the framework that evolves (or is designed) to
facilitate communication and coordination between organization members so that this
transformation can take place. The way an organization arranges its resources, including
its people, and the mechanisms that link these resources and make them cohesive, are
dimensions of an organization’s structure.
1. Steady-state activities: These are routines that account for most of the work of
the organization, and are typical in manufacturing, sales and accounting.
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2. Innovation activities: Concerned with changing the things that the organization
does or the ways it does them. Exemplified in such activities as marketing,
product research and development, process development and innovative training.
3. Crisis activities: Associated with dealing with the unexpected and are likely to
be encountered by those departments and people who interface with the
organization’s environment.
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These types of issues and the critical dimensions of organization structure that underpin them
are explored through the work of the following key authors:
Alfred Chandler.
Larry Greiner.
Henry Mintzberg.
Michael Goold and Andrew Campbell.
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departments are responsible for the administration of the field offices. Chandler
distinguished between administrative and functional work.
Administrative work: The domain of the company executives and is concerned with two
kinds of tasks:
1. Those tasks that are concerned with the overall co-ordination and efficient
operation of the enterprise.
2. Those tasks that are concerned with ensuring the long-term health of the
organization.
Greiner’s (l972) ideas were developed in the early 1970 before information technology
increased the possibilities for cross-and inter-organizational communication. Nonetheless,
the propositions that are implicit in his work are an important contribution to the
frameworks for understanding organization structures:
A period of evolution is when the organization a long period of growth where no major
upheavals in organization practice. The model says that organizations require different
structures as they grow, and that organizations that survive are those that change their
structures.
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In the beginning the organization is staffed by its founders, who subsequently recruit
employees as the company grows. It has a simple structure, with power resting with the
founders, and where control and decision-making is achieved through informal
communication. Handy (l993) has described the culture in embryonic organizations as a
power culture in which the leader sees the organization as an extension of him or
herself. As the organization grows the ability of the owners to maintain control is
reduced until there is a crisis of leadership. The informal manner in which the
organization is managed is no longer adequate because it cannot:
The organization can survive this crisis by developing an organization structure that
facilitates control and communication and allows specialist managers to run the
company.
Phase 2: Direction
As a result of its growth the organization develops a functional structure (see Figure
5.2) that can support increased turnover in established and new product areas. The
senior management team now becomes responsible for the direction of the company
while those below it assumes responsibility for the control of the functional tasks of
production, distribution and marketing. As the organization continues to increase in
complexity through the growth in the number of inputs, processes and outputs, there
comes a stage when senior managers cannot cope with all the demands being made on
them, and as a consequence junior manager are torn between following procedures or
taking their own initiatives. The emerging crisis requires greater autonomy for junior
managers, with failure occurring when senior managers remain reluctant to delegate,
and when junior managers are unable to adjust to making non-routine decisions.
Phase 3: Delegation
At this stage the organization can survive by developing an organization structure that
pushes some elements of strategic decision-making down the organization. The
decentralization of responsibility and power also encourages the development of
relationships between middle managers, which can make senior executives
uncomfortable if they feel that the growing influence of functional and line managers
reduces their overall level of control within the diversified organizational structure. If
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managers do become parochial and run their own individual units as quasi-independent
businesses, then co-ordination and integration with the rest of the organization can be
inhibited.
Phase 4: Coordination
Phase 5: Collaboration
In this phase the emphasis is on collaboration between divisional groups and between
the center and these groups, which can be made possible through a move to a more
matrix style structure like the one shown in Figure 5.5. Greiner was optimistic that the
use of matrix structures and the development of managers with appropriate behavioral
skills would overcome ‘red tape crises’ in larger organizations even though it was not
specified how these ideas would be put into practice.
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Mintzberg (2002) recognized that an organization’s structure is not only dependent upon
its age or size but is affected by other situational features, such as:
All organizations have units whose task is to provide the service or produce the goods
that define the organization’s purpose. This is the operating core. The overall control of
the organization is in the hands of the strategic apex. However, as the operation grows
a hierarchical middle line is created between the strategic apex and the operating core.
As the organization becomes more complex two additional groups of people may be
required:
Mintzberg also suggests that every ‘active’ organization has an ideology (analogous to
Johnson’s cultural web. Each of these six components (i.e. the operating core, the
strategic apex, the middle line, the technostructure, the support services and the
ideology) plays a role in the production of an organization’s outputs. For outputs to be
produced organizations also have to have mechanisms of coordination. Organizational
coordination, according to Mintzberg, is facilitated through six basic mechanisms:
1. Mutual adjustment.
2. Direct supervision.
3. Standardization of work processes.
4. Standardization of outputs.
5. Standardization of skills.
6. Standardization of norms.
By using Mintzberg’s model it is possible to discuss the ways that communication and
coordination can occur in different organization structures.
8
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
The biggest part of the organization is likely to be the operating core. The prime
coordinating mechanism in the operating core is work standardization, which means
that the technostructure is important (although other mechanisms are also likely to be
present).
9
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Coordination in functions that are professionally staffed and involve the production of
variable and complex outputs, such as research laboratories or design offices, will differ
from coordination in functions that conduct routine repetitive tasks.
Mintzberg (l995) observed that the role of the center in divisional structures is:
10
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Campbell and Goold (l988) looked at how corporate centers add value to business units,
and their findings suggest that corporate success depends on the style, the corporate
center adopts, how well it implements that style and the fit of that style with the
organizational situation. They suggest that there are three styles that can be successful:
❖ The center is able to challenge ideas and attitudes more competently than
outside bankers and investors.
❖ By the process of interaction and leadership an effective central
management can lead the business unit into developing more creative and
ambitious strategies than would come out of single businesses.
❖ The center can buffer the business unit from short-term financial
pressures that stock markets and other investors may place on single
businesses.
11
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
❖ The business unit can therefore adjust strategies in order to gain long-
term benefits rather than be forced to concentrate on short- term financial
targets.
Strategic control companies try to position themselves between financial control companies
and strategic planning companies. Businesses are grouped into divisions but the
center maintains a closer interest on strategy than financial control companies. The
intention of the intermediate position is to gain advantages that accrue to both financial
control and strategic planning companies.
• Try to ensure that subsidiaries do not get crapped into inappropriate mind-
sets by allowing overlap of center and subsidiary management functions,
13
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
14
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
The underpinning economic logic is that organizations only grow to significant sizes
when inputs are turned into outputs more efficiently by large organizations than small
organizations (chough other factors, such as monopolistic practices and innovation,
are clearly important). Organizations that grow have to therefore ‘find’ structures that
allow this growth.
15
CHAPTER 6 – STRATEGY-MAKING PROCESS
Objectives:
In addition to recognizing the crucial role that managers play in shaping the destinies of
organizations, it is important to acknowledge and to make into account other influences
on strategy formation. Looking at strategy-making processes more generally, Mintzberg
and Waters (l985) identified two dominant strategic patterns, which they subsequently
termed ‘deliberate strategy’ and ‘emergent strategy.
Emergent strategy - incorporates the view that some organizations do not articulate
and formulate strategy through formal processes, even though they have coherent
business strategies.
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
STRATEGY-MAKING DECISIONS:
➢ A rational dimension
➢ An environmentally determined dimension
➢ A political and cultural dimension
Strategy, in rational models, develops out of logical processes. The emphasis in early
rational models was on strategy conception prior to strategy implementation, while later
models (such as the logical incremental models of Quinn and the process and umbrella
strategies of Mintzberg and Waters) recognized the limitations that managers have in
realizing and understanding the totality of their environment. This would imply that
managers formulate strategic directions in rational but imperfect way.
Quinn Model
UMBRELLA STRATEGY
This type of strategy can be described as deliberately emergent. In which the leader
doesn’t have tight control over the members of the organization and the environment.
The management therefore provides general guidelines that rule the behavior of the
actors: emergent strategies are accepted within these boundaries.
2
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Experience and research have shown, however, that these expectations were
frequently not realized.
Lenz and Lyles (l985), for example, have criticized ‘excessively rational’ planning
processes on the basis of studies carried out in financial and commercial organizations.
They found that some strategic planning models created the world of business and
commerce as if it was easily reducible to predictable outcomes, disregarding managerial
experience and ignored all data that could not be quantified.
3
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Wilson (l994) also describes the GL experience, one in which the planning process
became an end in itself, and the planning staff, not the managers, took control of
strategic planning. He describes how strategic planning became more effective when
the planning process was driven into the organization. In these circumstances strategic
planning promoted strategic thinking.
Grant (l995) reinforces this view when he outlines the feelings of Jack Welch, the Chief
Executive of GL, who forcibly describes the strategic planning system of the l97O’s as
slow, inefficient of management time, and stifling of innovation and opportunism.
Ansoff (l987) ascribes the failure of many strategic planning initiatives to the inability of
organizations to sustain them once the initial enthusiasm had worn off.
There are three main reasons, Ansoff argues, why strategic planning fails.
Overcoming these potential hurdles was felt to be important, as Ansoff believed that
formal strategic planning provided a framework for strategic thinking that was essential
for improved organizational performance. It involved the integration of three
management disciplines if strategic planning was to be effective:
4
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Quinn (l978) - observed that managers attempted to be rational, but because they were
aware of the unpredictable nature of their environment, they relaxed some of the constraints
usually associated with the design school. The strategic management process that he
observed moved forward in what was described as a logically incremental manner. It involves
senior managers developing an overall direction whilst simultaneously allowing lower level
managers the room to develop and negotiate how that direction should be followed.
▪ In the initial phases of strategy development, the top executives forecast the events
that are likely tohave the most impact on the company.
▪ They then try to develop a resource base and a corporate posture that can
withstand all but the most devastating events.
▪ They select resources and market positions that they can competitively dominate,
whilst simultaneously trying to maintain an ability to change.
▪ They then proceed incrementally, responding to unforeseen events as they occur,
building on successes and cutting out losses from failed activities.
▪ They constantly reassess the future, finding new relationships and seeking to
align the organization’s resources to the environment, never quite achieving the
perfect fit as events always keep changing.
Mintzberg and his co-workers investigated strategy formation over an extended time
period using case studies and they concluded that strategy had deliberate and
emergent characteristics. They were seen to range from completely planned strategies,
with managers in total control, through umbrella and process strategies where
managers have some control, to imposed strategies with managers having no control.
Their analysis also suggested that strategy development had the following eight
features and development characteristics.
1. Planned strategies assume that deliberate strategies can emerge from plans
developed by the central leadership.
2. Entrepreneurial strategies occur when strategy is formed and led by an organization
leader and can exhibit deliberate and emergent qualities.
3. Ideological strategies occur when all organizational members are dedicated to a
common cause (strategies are largely deliberate).
4. Umbrella strategies occur when senior managers define strategic boundaries but
allow lower levels to define specific market positions (control is through
performance targets, exhibiting deliberate and emergent characteristics in what
could be termed a deliberately emergent style).
5. Process strategies occur when organization leaders design the processes and
systems upon which the organization’s strategy creation and implementation is
founded, leaving the details of strategy to emerge from these systems (again
exhibiting deliberate and emergent characteristics in a deliberately emergent
fashion).
5
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
6. Unconnected strategies occur when actors within organization follow their own
desires. Coherent strategies emerge through the deliberate intentions of
individuals and from the fact that these individuals have followed similar training
schemes and have cognitively and organizationally equivalent standards.
7. Consensus strategies occur when actors mutually adjust through consistent trade-
offs, with the strategies emerging from the consensus.
8. Imposed strategies originate outside the organization through the explicit
imposition of the wishes of outside bodies, or implicitly by constraints on
managerial choices.
When we define strategic management as the management task that includes the activity of
fitting an organization’s resources to its environment, we are recognizing that an
organization’s strategy is constrained by its environment. As organizations commit more
and more resources to particular market positions they become increasingly committed to
those positions. Organization’s choices are constrained not only by an explicit cultural
dimension in the sense of ‘What we believe around here’ but also by what skills and
resources are available, and in what context those skills and resources become valuable
- the ‘What we can do around here’ question. In this sense strategies are constrained by
path dependency. If the environment changes substantially organizations that have been
unable to adapt will fail.
Many organizations have to respond to the constraints imposed upon them by outside
stakeholders. The actions of organizations, for example, can be constrained by the
expected responses of competitors, suppliers or customers. Indeed, many public sector
organizations, including those in the health and education sectors, are constrained by
government regulation and funding.
6
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Allison (l971) noted that a decision that seems irrational from an organizational
perspective may be rational from an individual or group perspective – suggesting that
the political context of decisions is integral to any concept of organizational rationality.
In line with the view that strategic decision-making is framed within a political and
cultural context, Prahalad and Bettis (l986) argue that organizations have dominant
logics, and that these logics are based on the mental maps developed in the
organization’s core business. For successful organizations the dominant logic underpins
their success, although there is always danger that management chinking can get stuck in
a belief structure that is inappropriate because it fails to keep pace with changing
situations. An explanation for such misalignments points to managers’ perceptions
changing more slowly than their environments.
The work of Johnson, who developed the idea of the ‘cultural web’ shown in Figure 6.l,
is particularly useful because it captures and distinguishes the factors that could
constrain managers’ world-views.
Figure 6.l
Cultural web
Source: (Johnson,
G. and Scholes, K.,
l999, Reproduced
with permission
from Pearson
Education Limited).
7
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
The central ‘paradigm’ represents the underlying beliefs that managers have about their
organization. Johnson and Scholes describe the paradigm as ‘the set of assumptions
held relatively in common and taken for granted in an organization’. They distinguish
between those assumptions that are implicit and unconsciously held and beliefs and
values that are explicit, openly published, and discussed. Both sets of assumptions are
said to be shaped and influenced by the ocher components of the cultural web:
Rituals and routines.
These activities establish relationships between organization members so that they know
their places and roles in the organization. It also has an important external effect, such as in
the service sectors where they can be designed to inform and control customers. For
example: A degree ceremonies in universities, clocking in and out in factories, and stock
taking in warehouses.
Stories
The stories of the organization reflect those things that are important to the organization,
such as tales of achievement and the doings of heroes and villains. They are signposts to
what the organization considers important. For example, the stories of health service
providers reflect an overriding passion for curing rather than for prevention and caring.
Symbols
These are representations of power in terms of visible images of status and examples
include the allocation and specification of company cars, the size and decoration of
offices, the wearing of uniforms, and in some organizations, the badges of rank.
Symbolism can also be manifested in language and the way people are described, as
when customers are called clients and when passengers are referred to as customers.
Power structure
Power can be vested in ownership, by being a member of the elite professional group
and by having control over valuable resources. For example, structures include
consultants in hospitals, pension funds with large shareholdings, majority shareholders,
trade unions, professional associations, professors in universities and technical experts in
research led companies.
Control systems
Organizations control their members through different types of reward and punishment
systems. The principle is simple, organizational action can be driven by organizational
rewards, and members respond to rewards more than they do to rhetoric. In periods of
stability the rewards can be finely tuned so that they reinforce desired outcomes. Such
tuning can be more difficult when strategic change is required because the reward system
is likely to be embedded in the existing and established organizational paradigm. When
strategic change is instigated it is therefore important to design the control system so that it can
operate within the existing organizational paradigm, or that the organizational paradigm is
changed, which can be very difficult, so that the control system can be made to work.
8
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Organizations structures
9
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
The work of Mintzberg and his colleagues initiated the concept that strategy are both
deliberate and emergent and formed by more than one mechanism. Explanations that
developed out of the planning school tried to be overtly rational and were subsequently
superseded and complemented by theories which recognized that ‘realized strategy’
arose out of situations where there is incomplete information and environmental
unpredictability.
Linear processes are typified by the strategic planning model of Andrews (l971), while
adaptive and interpretative processes progressively encompass the beliefs that are
individually and collectively held about the nature of the organization and its
environment. These three types of strategy-making processes are progressive because
organizations use increasingly more complex strategy forming processes as they evolve
from linear to adaptive to interpretative, there is organizational learning. Work
undertaken by Bailey and Johnson (l993, l995, l996), Hart (l993) and Banbury (l994)
provided operationalized and integrative frameworks for describing strategic processes.
Hart focuses on the roles that organization actors play in strategy-making and how
senior managers use/ manage/tolerate different strategy-making modes. Bailey and
Johnson take a different perspective and portray strategy as having different
dimensions that help explain strategy-making within the context of those dimensions. In
the Hart typology the emphasis is on managing process because he sees a link
10
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
between strategy making modes and performance, which is subtly different than the
Bailey and Johnson approach that recognizes that process can constrain managerial
action and that strategic configurations can be a product of organizational context. The
Hart typology proposed five strategy-making modes.
2. Symbolic. Where strategy is driven a mission and vision for the future.
The chief executive sets this vision and mission about where the
organization will be in 3Oyears.
Bailey and Johnson (l996) propose six dimensions of strategy development. these are
Planning, Political, Incrementalism, Command, Cultural and Enforced Choice. It is
argued that one or more of these describes the strategy-making process of any given
organization. The number of possible combinations on six dimensions is forty-nine,
although it is argued that only a limited number of configurations exist. Their research
indicated that there were six dominant configurations:
1. Planning. Organizations which are predominantly planners have clear objectives,
a commonly held concept of vision and mission and use precise plans to articulate
intended strategy and its implementation.
One dominant dimension: planning.
11
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
6. Embattled command. As the name suggests, this typifies situations where a leader is
charged with turning an organization in crisis around. It is frequently found in
smaller organizations in turbulent environments, as well as in failing subsidiaries
where a new leader is parachuted into address the situation. Embattled command
has also become more prevalent in the public sector, with failing schools and
hospitals attracting wide spread media attention.
Two dominant dimensions: command enforced choice
12
CHAPTER 7 – ORGANIZATION ENVIRONMENT
Objectives:
Industry Definition
Levitt (l960) attributes the decline of the US Railway industry to the inability of its
management to define their industry environment in such a way that the opportunities
and threats could be recognized, understood and managed. Grant (l995) suggests that
businesses can be usefully analyzed by looking at the markets they serve and/or by the
technology they employ. So, from a technological/supply side perspective, an industry
can be defined as a group of companies that would find it easy to switch their
production facilities to manufacture each other’s products.
have needs that are met by products and associated services (delivery method, after
sales care, etc.) that have very similar features, then strategic groups will emerge on
internal dimensions.
The first stage is to identify dimensions or characteristics that distinguish firms from
each other. Examples of such dimensions are product line breadth, brand image,
number and type of distribution channels, product features, service features, cost
position, price policy, geographic reach, degree of vertical integration and market
segments served.
The second stage is to plot the firms on a graph with the axis represented by two
minimally correlated dimensions. Repeat this procedure using a variety of axes until a
pattern emerges that consistently groups companies together. Porter (l996) argues that
if organizations follow similar market strategies, they will inevitably end up with similar
resource configurations because they all benefit from the dissemination of knowledge.
Benchmarking, re-engineering and total quality management are cited as examples of
technique diffusion.
A key concept in Porter’s five forces model is the view that some industries are
attractive and others as less attractive. The ability to identify industry attractiveness is
therefore important, and Porter argues that industries can be characterized and
evaluated by looking at, and analyzing, the following five forces:
If the product of an industry can be substituted by that of another, the purchaser of that
product has choices that extend beyond rival products. When analyzing a specific
segment, it is advisable to identify the products that are direct competitors and chose
that are not considered direct competitors, especially when these alternatives could be
first choice purchases if circumstances were to change slightly.
2
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
When new entrants enter an industry, they bring extra capacity to the industry. If
demand is increasing the new entrants can use this capacity to meet the increased
demand. This is frequently the case during the growth stages of an industry, but as the
industry matures demand growth slows and new entrants will have to start competing
with existing companies for a share of existing demand.
In this situation the new entrants will have to gain market share by offering similar
products at competitive prices or by redefining the market to increase product demand.
When this type of imitation produces a similar competitive position and a similarity of
resources, the entrants will face the following entry barriers:
✓ economies of scale.
✓ access to secret technology (patented and not patented).
✓ brand recognition.
✓ capital costs of entry.
✓ access to distribution channels.
3
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
4
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
➢ there are few alternative sources of supply and there are many buyers.
➢ a particular buyer is not an important customer to the supplier.
➢ the product or service supplied is an important input for the buyer.
➢ the buyer cannot make the product cheaper than the supplier can.
➢ there are no substitutes for the supplied product.
➢ the supplied product has a good brand reputation, especially when chis
branding is important to the final product.
Two extreme possibilities form reference points for this part of the analysis:
5
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
The impact that the wider environment has on firms and industries can be significant,
which is why it is important that we understand and recognize the forces that impact on the
organization and the industry it operates in.
Two of the most important environmental forces impacting on organizations are the
globalization of markets and organizations and the development of the Internet. Although
difficult, a cause and effect approach have to be adopted when assessing the drivers of
such environmental change.
Economic Factors: The economic factors that influence organizations fall into two
main categories; chose that impact on their costs and chose that affect their ability to sell.
Examples of chose that impact on cost are:
Interest rates.
The cost of inputs – some inputs impact across a range of industries (e.g.
energy and fuel costs).
Inflation rates.
Exchange rates.
6
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Technological Factors: Technological changes cover the whole range of inventions and
technological innovations that impact along the length of firms’ value chains and on the
lifestyles of producers and consumers. Significant technological developments over the
last 5O years include:
Having conducted an environmental audit the next task is to identify the forces that are
driving industry change and what impact these are having on firms and industries. It is
especially useful to identify the race at which change is taking place and whether the impact
of a particular factor is the same across industries or varies for different groups of firms or
specific organizations.
7
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
8
CHAPTER 8 – COMPETITIVE ADVANTAGE
Objectives:
Firms compete for sales revenue with other suppliers of goods and services. If a firm
has a competitive advantage its products are both profitable and attractive to significant
numbers of buyers. A theory that can explain how sustainable competitive advantage is
achieved would be the philosopher’s scone of strategic management. The theories of
Michael Porter (l980, l985) were thought to offer the answer, though subsequent
research has exposed their limitations.
• The firm sets out to be the lowest cost producer (of the industry standard
product)
• The firm has a broad scope and serves many segments.
• Above average profitability is achieved by the cost leader commanding prices at
or near the industry average.
• Proximity in differentiation
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Porter also argues that in commodity industries it is not only the cost leader who gains
above average returns but also chose firms who are in the lower quartile of costs. If
firms are price takers, any firm that can produce below average costs will make above
average profits.
This strategy requires the firm to focus on a narrow segment. It is appropriate when
chose firms following broad strategies do not cater for the needs of significant segments
either on the basis of cost or differentiation.
Whilst Porter’s framework has been widely adopted in the teaching of strategic
management and inspired many research frameworks it is the subject of critical debate
2
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
(e.g. Miller, l986; Hill, l988; Miller and Dess, l993; Bowman, l997; Walters and
Lancaster, l999; Campbell-Hunt, 2000). In a study of competitive strategy research
Campbell-Hunt (2000) concluded that:
• ‘Stuck in the middle’ designs, chose strategies that seek to produce lower than
average product costs with differentiation, are possible in some circumstances.
Some resources facilitate the production of both differentiation and reduced
costs.
Campbell-Hunt also suggests that differentiation can cake on a number of forms and
can be based on marketing variables, sales variables, quality reputation variables and
product innovation variables.
In order to discuss the relationship between cost, price and differentiation, the following
framework is proposed – that we describe products or services by three variables:
• Degree of differentiation.
• Relative cost to the producer.
• Relative price to the customer.
3
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
For the sake of simplicity, a number of assumptions are made. The degree of
differentiation is measured by the number of attributes of the product that give perceived
customer benefits; the more perceived benefits the product has, the greater is its
perceived value to the customer.
A number of authors have indicated that cost leadership strategies are usually
associated with price-based competition (Bowman, l997). Firms which charge average
prices for an average product can only make above average profits if its costs are lower
than average. Bowman (l997) argues that if average prices are charged then it is
4
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
unlikely that more than average market share will be achieved. If a firm wishes to
achieve a relatively high market share using a price-based strategy it will have to charge
lower than average price.
If a firm can reduce costs via innovative product and/ or process designs that cannot be
copied then lower costs for products can be achieved without relying on scale effects.
In order to be above average performers, firms following low price market strategies for
proximate standard products need to have lower than average costs.
Porter argues that in order to achieve differentiation, differentiators will incur costs and
thus their costs will be higher than average. Thus, both focused and broad
differentiators will approximate to position A. The danger for differentiators is that they
may get left behind if cost-based competitors increase product features as consumer
expectations rise (consumer expectations are not static-cars now have radios and
central locking as standard features, and computer chip speed and memory are
constantly changing as suppliers both respond co and shape consumer demand) and
differentiated parcs of the market risk becoming subsumed into larger segments that are
more price competitive.
Market differentiation with relative low costs and a relative high price. Market
differentiation with relative low costs and a relative low price. These appear to be very
attractive positions if they can be achieved profitably. Porter suggests that this is unlikely
because of the additional costs of differentiation. An alternative perspective is also
possible if a product with a high level of benefits is produced at a low cost because the firm
has developed some skill and resource that has hitherto been unavailable, then two
possibilities exist:
• The case where the skills and resources are imitable and transferable in
some finite time. In this case the innovator of the particular resource or skill
could elect to cry to achieve market share by using cost advantages to reduce
prices and seek to change customer perceptions of the standard product. In
this way they attempt to establish a broad position based on the redefinition of
both the standard product and the nature of the market.
• The case when the skills and resources are not imitable. In this situation the
firm with this position can sustain profits unless demand for its product
subsides.
5
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
People and organizations with finite amounts of money to spend have to make choices
between alternatives. Those with relatively high levels of disposable capital can elect to
purchase high price products with lower opportunity costs than chose with lower levels
(Frank, 2000).
A market may be a commodity market like agricultural markets where few segments
have appeared or like the car market where a number of segments have appeared. In
markets where segments exist, market positioning by segments is possible. In many
markets there are a number of products each having features that are designed to
appeal to particular segments. These features are perceived by users to give them
benefits.
We can hypothesize that customers in segments at the top right of Figure 8.5 are likely
to be more benefits sensitive and customers in segments at the bottom left more price
sensitive. Products that are in the middle of these positions are likely to sell on some
balance between benefits and price. However, all pricing decisions are best made with
a knowledge of price elasticity. Middle positioned products may, however, differ in the
nature of benefits they are offering so a number of viable positions may be available as
long as there are segments which have needs that match these benefits.
A key point in Porter’s (l996) argument is that a position is only valuable if the activities
required to deliver the customer needs of that position are also different. Porter’s thesis
is that in order to have a competitive advantage two criteria must be met:
• A market position must identify customers with specific needs. The customers
can belong to a particular segment (focus strategy) or can straddle a number
of segments (broad strategy) meeting the common needs of a variety of
customers leaving specific needs co ocher suppliers.
• The market position chosen can be best delivered by a specific sec of
activities and chose activities are unique to that position. If an organization
attempts to straddle positions it finds itself unable to maximize its efforts in
any position.
7
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Peteraf (l993) argues that the resource-based perspective requires that four criteria be
met if competitive advantage is to occur. These are that:
Resources have to be acquired at a price below their discounted net present value in
order to yield profits, otherwise future profits will be fully absorbed in the price paid for
the resource. Economics call this ex ante (before) limits to competition.
The third concept of ex post (after) limits to competition says that some resources
such as loyalty, tacit knowledge and relationships are developed over time and are built
progressively. Trying to compress these activities into shorter periods under different
conditions can prove to be unfruitful. Dierickx and Cool (l989) have suggested that there
are five mechanisms ac work that make it difficult for competitors to copy sources of
competitive advantage. These are:
2. Asset mass efficiencies (the marginal cost of an asset falls as its level
increases): these are the basis of ‘virtuous circles’, as when learning is easier
in firms where the stock of knowledge is already high.
8
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
• They must have competences and resources that allow them to meet the needs
of their customers.
• They must be able to identify and occupy an attractive market position –
9
[STRATEGIC MANAGEMENT AND BUSINESS ANALYSIS]
Campbell et al. (l995) emphasize that different markets have different critical (key)
success factors and that a potential problem for corporate managers is that an
understanding of critical success factors in one industry may lead chem co wrongly
believe that the same success factors apply elsewhere.
A competence in consumer marketing is therefore important for food suppliers who sell
under their own brand, but a competence in business to business marketing is important
for manufacturers who make own label brands for supermarkets.
We have outlined the work of Michael Porter on competitive advantage. This has led us
to discuss how market position and the internal ability to sustain it, is important in
gaining competitive advantage. Firms that have distinctive competences to provide
product/service features, through either lower costs or unique benefits, which
competitors cannot match, are more likely to be superior performers. Factors that lead
to differences in firms and how chose differences can lead to competitive advantage
have been outlined.
10
CHAPTER 9 – AUDITING RESOURCES
Objectives:
In our view of strategic management, the resources of an organization are its assets
and competence. This avoids confusion as different authors have defined resources,
assets and competences in different ways (e.g. Wernerfelt, 1984; Prahalad and Hamel,
l990; Barney, 1991; Kogut and Zander, 1992; Amit Schoemaker, 1993; Grant, 1995).
For the purposes of our approach the key terms can be defined as follows:
Assets are the resource endowments the business has accumulated over time
and include investments in plant, location and brand equity (Day, 1994).
A unique asset is one that a firm has that has not been imitated by other firms
and allows the firm to carry out some activity or activities better than other
firms.
A competence encompasses the skill, ability and knowledge that organization
members have individually or collectively which allows them to undertake an
activity or activities to contribute to the transformation of inputs into outputs
directly or indirectly.
A threshold competence is one that all producers must have in order to make
and deliver a particular product.
A distinctive competence is one that allows a firm to carry out an activity or
activities better than competitors.
An organization exhibits capability in carrying out a range of activities. Thus, a
capability in marketing will include a range of competences in selling,
promotion, etc.
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The value chain is the main analytical cool for analyzing resources at the business level.
It is described and discussed in the following algorithmic procedure:
The analyst has to initially decide on their unit of analysis, conduct the analysis, and
make links between not only support and primary activities but also between value
chains. In the university example, human resources management will support the
different teaching departments and the difference research groups. In many
organizations functional units match specific parcs of the value chain but this may not
always be the case. Cost and value are added to the product as it passes along the value
chain, and the final margin is the difference between the cumulative added costs and the
cumulative added values.
The use of the value chain model to identify the activities carried out by the
unit under consideration.
The identification of the costs associated with each activity. (The estimation of
costs when analyzing cases can be particularly difficult for students because
the data can be subsumed within consolidated corporate accounts and/or is
not provided.
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The identification of chose activities that add value to the product and/or
service compared to choose of their competitors. If some activities add less
cost than the equivalent activities of competitors then they may provide a
source of competitive advantage.
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The most significant sources of advantages are chosen that are inimitable in the long
run. A firm that has an advantage has, by definition, some short-term inimitability, and
the key issue is how chis position can be maintained.
Portfolio models, such as the BCG Matrix and the GL Matrix, are useful devices for
examining multi-business organizations. Understanding how the businesses ‘fit’
together is important because it may be necessary, for example, to use money from a
cash-rich company to fund a growing and cash-hungry company.
In addition to analyzing each unit, the corporate level audit needs to analyze the
activities carried out by the center. Ideally a senior management team must itself be
assessed as a resource. This requires three principal types of assessments:
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Although there appears to be little difference between the two methods, the bottom-up
approach may overlook or under-represent the customer, whereas for the top-down
approach it is the starting point. The top-down approach looks at the overall picture and
then seeks to identify the main revenue screams associated with the products or
services that it provides for its markets? The answers to these questions can then be
tested against the three criteria set out by Prahalad and Hamel in Stage 5 of Figure 9.4.
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A more detailed methodology for identifying the resources that underpin competitive
advantage has been put forward by Hall and Andriani (1999). This is also a Top-down
approach because it focuses on the identification and assessment of competitive
advantage from the customers’ point of view. The first stage involves identifying what
customers value. Checklists for ascertaining this in the product and delivery areas are
shown in Figure 9.6.
These attributes are then weighted by importance in Figure 9.7 and it is then possible
to identify the strength of the advantage by comparing the ‘quality’ of the attribute with
the company’s main competitor.
The second stage involves identifying the intangible resources that produce the
weighted sales advantage attributes. Hall and Andriani suggest that you select the
intangible resources from the ‘four capabilities framework’ shown in Figure 9.8 because
it ensures that a full range of resources are considered. The attribute and its linked
resource type are then entered into Figure 9.9.
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The strategic issue of how these intangible resources can be developed for competitive
and market advantage can now be addressed. This involves consideration of how
intangible resources can be protected, sustained, enhanced and exploited. An example
of the types of actions that can be undertaken to protect and develop the key intangible
resources are shown in Figure 9.10.
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By progressively narrowing down and ranking these capabilities we can more clearly
identify a company’s strengths, and this is pivotal for a strategy that seeks to maintain or
expand the market share of a company.
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Bottom-up and top-down techniques for auditing resources have also been discussed.
Top-down techniques are important because they emphasize the primacy of the
customer. The Hall and Andriani approach for making links between resources, product
features, product benefits and competitive advantage was outlined to show how
organizations might go about the task.
To know more information about Top Down and Bottom Up in Decision Making
Please click the link https://www.youtube.com/watch?v=WLDp82vwVkk
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CHAPTER 10 – FINANCIAL PERFORMANCE AND INVESTMENT APPRAISAL
Objectives:
The ability to financially analyze a company is central to any strategic investigation, and
a better understanding of financial performance can be achieved if we apply certain
analytical cools. Indeed, the use of financial performance indicators are a key analytical
cool for many investors and management consultants, especially when the emphasis is
on evaluating past and current performance, and where projections on future
performance are being made.
To support and underpin the data and information that is inputted into
strategic models (e.g. SPACE, Life Cycle Matrix SWOT analysis).
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When ratios are used to compare industries or sectors then it is important that the
companies should be of a similar size and sell similar products or services to similar
markets. Although it is always difficult to project into the future, ratios can be calculated
over several years and then plotted graphically in a time series to highlight changes
over that period, and by extending the trend, potential future performance.
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These factors and situations need to be taken into account, and possibly compensated
for, when comparing companies using ratios. If these types of situations are taken into
account then they can only improve and enhance the insight that financial ratios provide.
Ratio analysis can be divided into five key areas: Profitability, Liquidity, Leverage or
Gearing, Activity analysis, and Stock market valuations.
Profitability Ratio
These ratios indicate the degree of competence with which the company allocates
the resources available to the resulting income generated. The main item used in
profitability analysis is the profit and loss account, and this can give rise to
confusion because two profit figures are given; one after interest and tax and the
other before interest and tax.
In general, using profit before interest and tax is useful because it enables us to
compare the trading performance of similar companies irrespective of borrowings that
may have been used to finance chose activities. Taking profit after interest and tax
charges provides a more thorough analysis of a company’s competitive strength, as
there is a direct relationship to gearing (leverage), and this can be important in
assessing whether the company is financially over-stretched. Profit after interest will
fluctuate in line with variations in interest rates assuming profits before interest remain
constant. The seven most commonly used profitability ratios are shown in Figure 10.1.
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Liquidity Ratios
Liquidity ratios can show whether a company can meet its short-term liabilities, which
usually revolve around the ability of a company to manage its stocks and inventories,
and the flow of cash coming into the company. This can be critically important because
a company that fails to pay its bills (for its stock) is likely to cease to function. If a
company is unable to generate sufficient cash itself, then it should have set up and put
in place the financial facilities to cover its position. Poor liquidity and the inability to
manage cash flow can lead to a loss in confidence from both creditors and financial
providers, and if such problems are not addressed quickly, exposure to cake-over or
company failure may be a reality.
In general, low liquidity ratios are associated with a stable and predictable industry and
sector environment, whilst high ratios can relate to unpredictable.
Companies having high levels of stock may be subject to increased risks, whilst a
downward trend of stock values in relation to sales may indicate improved management
practices (e.g. JIY stock management systems). There are three key liquidity ratios, and
these are shown in Figure 10.3.
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Gearing ratios provide insights into how much of a company’s assets are financed by
external sources of funding. The higher the ratios the greater the risk to the company,
as large borrowings will be prone to interest rate changes that are beyond the control of
management. Funds that are provided by ordinary shareholders can have a reduced
dividend payment when times are difficult, whereas borrowed funds attract a market
rate of interest that cannot be deferred or defaulted upon. Figure 10.3 shows the five
most used gearing ratios.
Activity Ratios: These ratios are useful for comparing individual companies to industry
or sector standards. Figure 10.4 shows five activity ratios, and when used sensible they
can indicate how efficient a company is in managing and generating a return from its
assets.
Stock market Ratios: Stock markets use a myriad of techniques to assess the value
of companies, and the four ratios outlined in Figure 10.5 are used extensively within
such evaluations.
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Ratio analysis can be integrated into, and be a valuable part of, the following strategic
models:
S.W.O.T analysis: Ratios can be used to identify strengths and weaknesses. This can
be integrated into future scenarios by trending the ratios forward.
S.P.A.C.E analysis: The ‘industry strength’ axis can be measured using ratios that
gauge profit potential, financial stability and capital intensity. Likewise, the axis ‘financial
strength’ can be measured using return on investment, gearing (leverage), liquidity,
capital required, cash flow, and inventory turnover ratios. The ‘competitive advantage’
axis can also be inferred from the position of the company’s products within the overall
life cycle (see product life cycle below).
Life Cycle Matrix: A company’s competitive position can be gauged using the five
types of ratios outlined above (i.e. profitability, liquidity, gearing (leverage), activity and
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stock market), whilst the industry stage in the evolutionary life cycle can be estimated by
incorporating estimates of product life cycles (see product life cycle below).
B.C.G Matrix: The industry growth rate and relative market share can be inferred from
profitability, liquidity, gearing (leverage) and stock market ratios, as each of the four
‘ideal’ positions within the matrix can be compared to each other using these ratios.
Capital Budgeting: Assumes that funds are limited and that decision has to be made
between several investment alternatives.
Five most used techniques for evaluating investment projects are outlined in the
following list.
1. Payback.
2. Discounted payback.
3. Average rate of return.
4. Net present value.
5. Internal rate of return and modified internal rate of return.
Payback: The simplest method of calculation, and involves selecting projects on the
basis of repaying the investment amount in the shortest possible time period. The main
disadvantage is that it makes no allowance for taxation or capital allowances. This is
important because different allowances and tax benefits can be attributable to different
types of projects. It also disregards the profit screams from projects once the payback
period is over.
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Internal rate of return: The internal rate of return of an investment project is the
break-even return level that equates to the project’s present value of net cash flows
against the projects initial investment.
Modified internal rate of return: This is a more sophisticated form of IRR and the
calculation takes into account the re-investment of net flows. Two rates are required
for this calculation, a finance rate and a re-investment rate.
Comparison of Internal Rate of Return (IRR) and Net Present Value (NPV)
There is little difference between the two techniques, the IRR method has the
advantage that it provides a better estimate of project risk. It is also preferred by many
businesses because it focuses on the rate of return rather and not NPV values.
The IRR and NPV appraisal methods are both robust, yet neither should be used as a
panacea within investment appraisal, as many other factors and analysis tools can be
used alongside them to make the strategic decision- making more effective.
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CHAPTER 11 – CASE STUDY ANALYSIS
Objectives:
Thinking Strategically
Employed a wide armory of analytical tools and techniques and knew what
the appropriate depth of analysis should be.
Could be unpredictable because they mixed strategic and detailed analysis
in apparently random (creative) ways.
This implies that we understand the inputs to business and infrastructure that delivers
the outputs that current and future customers/markets value.
L=P+Q
In many ways the characteristics of deep learning are those that we would associate
with successfully run organizations. Case studies can also be used to promote deep
learning whilst providing (Johnston et al., 1997, p. 1):
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It also explains why some of the case studies are quite substantive and integrative–they
have to be if we want to fully explore the dynamics of their competitive environment as
they were then and how they are now. Experience also suggests that students require:
A Chess Metaphor
Business strategy is analogous to chess in so far as the pattern of moves on the board
(the nature of the industry structure, its resources and the activity patterns of a
business) is more important than the millions of possible moves that can be made by
individual pieces. The only problem with the chess metaphor in business strategy and
case study analysis is that in a game of chess there are only two competitors whereas
in business there are sometimes many competitors.
The chess metaphor does not breakdown completely however because the game is
divided into three basic phases, and as Figure 12.1 shows, the three phases can be
compared to business strategy and case study analysis.
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You must also remember that the Grand Master in chess, although keen to win a
tournament, wishes one day to become world champion. The tournaments are a means
to an end and not the end in itself: Business organizations do not want to draw or lose;
they are in the game to win and keep on winning. Do not overlook this analogy when
analyzing cases.
Opening Moves
In case study analysis, it is essential to understand the position of the company in its
industry, what its objectives and values are, the type and quality of its competitors, its
relationships with buyers and suppliers, its history and so forth. To understand a case
study company and its environment you obviously have to read the case study, and one
can read a case study or any sec of information and completely misread it, missing the
wood for the trees and getting bogged down in detail at too early a stage.
The objective is to familiarize yourself with the case company and its competitive
environment. During this first reading you ought to make some notes alongside the text or
data (do not just highlight the text as you may forget why you highlighted it!). The second
and subsequent readings should be slower, far more deliberate, revisiting your earlier
notes and making detailed observations.
Case study information can be narrative and data, and both types of information are
equally valuable. Many mistakes are made because too much attention is paid to the
data without considering the narrative (narrative provides the context), or because too
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much emphasis is placed on the narrative with scant consideration of the data.
Data is a snapshot at a particular period in time (e.g. profit and loss account, balance sheet)
and it is important that it is compared with other organizations and industry norms.
Market share data can also be presented as ‘facts’ even though it is an extremely
difficult metric to calculate – it is always an approximation and is frequently arrived ac
from different bases.
The narrative of case studies always contains (to a greater or lesser extent) hyperbole
and/or superlatives and opinions which derive from the case narrator, the case
company managers, or the case company.
The best (or worst) example of hyperbole in any case study is the ‘Mission Statement’,
which has been described by Eileen Shapiro (1997) as ‘a magic talisman hung in public
places to ward off evil spirits’ or Auberon Waugh’s view that it is ‘a statement of the
obvious’. It is therefore important that in the opening moves we try to understand the
business’s objectives (stated or unstated) and that we test them against business strategy
models.
Middle Moves
The purpose of the middle game is to develop and build on the advantages gained in the
opening moves. The middle game is, in case study terms, the detailed analysis of the
patterns on the board. Detailed analysis is the salami slicing of the case study information
and data and, where necessary, comparing it with conceptual business models.
The middle game is also the phase in which you search for contemporary data and
information about the case study company and industry and their supply chains. This is
an important task in all case study analysis, particularly where there is a lack of financial
data. If you have completed this stage adequately you will understand the trigger points of
the business and industry and reduce the probability of the analysis leading to paralysis
(having lots of data that cells you very little).
Hard data is a key feature of middle game analysis, and is likely to include:
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pareto analysis.
searches for trends in the industry and industry sectors – are growths or
declines linear or accelerating.
correlation investigations between seemingly disparate information, e.g. the
links between sales and order volumes, inventory levels and lead times, and
comparison of market share with profitability, etc.
End Game: The end game is sometimes the phase in chess where players with a
commanding lead in the middle game concede a draw or lose the match. Similar
outcomes occur in business, which is why it is important that in case study analysis the
conclusions and recommendations are robust and operational. This is why it is
important to remember:
That even the most poorly run organizations have some strengths or unique
resources (do not overlook them).
That even the most successful organizations have weaknesses which may make
them vulnerable to extended threats.
That the end game should be devoted to synchesis and identifying options
and risks for the case study company (there are no correct solutions to a
business case study, but some are much better than others).
That you can consider more than one business model of strategy during
synthesis.
That conclusions only arise out of your prior analysis and that
recommendations are only derived from your conclusions.
Poorly run organizations can have strengths: Managers and investors sometimes
write off what they perceive to be a failing company without considering all the potential
strengths and resources within the company.
Synthesis: Identifying option (no correct solution): If analysis is all about salami
slicing (disaggregation), then synchesis is concerned with re-aggregation – putting it
back together again. Johnston et al. (1997) argue that synchesis is the most creative
part of case analysis. Synchesis is concerned with identifying options for the case
company.
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Synthesis is not about putting the old sausage back into its skin, it is about re-
configuring alternative sausages that have new ingredients, and then choosing the
tastiest.
Managers rely on a single model when they analyze and synthesize a business or a
business case study, e.g. the 1985 positioning model of Porter. This limits the range
and depth of strategic analysis because there are at least three major approaches to
strategy (Eisenhardt and Sull, 2001). These are:
Positioning strategies.
Resource-based strategies.
Rules or criterion-based strategies.
The strategic logic, the sources of advantage and the performance goals for each
approach are demonstrated in Figure 12.2.
Eisenhardt and Sull argue that positioning and resource-based approaches are most
appropriate in slowly changing/well-structured markets and moderately changing/well-
structured markets (i.e. the old economy). The criterion or simple rules approach, on the
other hand, is more suited to rapidly changing and ambiguous markets (i.e. the new
economy).
A title page with the title of your work (e.g. AB machine cools:
combating industrial decline?). It should also contain your name and
the month and year you produced the report.
A synopsis, executive summary or abstract (not all three).
List of contents with page numbers. You may wish to introduce
separate lists for cables, diagrams and appendices.
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Note: the page numbers for the synopsis and contents should be in Roman numerals.
Introduction - this should be where page 1 starts, and where you can
use the title of ‘Introduction’ or an alternative such as ‘An Overview of
AB Machine Tools and its Problems’.
Analysis and findings - this could be divided into three or four
sections and it does not have to be subtitled ‘Analysis’. It could, for
example, be called ‘Industrial Structure and Supermarkets’.
Conclusions and recommendations.
Bibliography and/or References.
Appendices.
Many of the sections of the report format are self-explanatory, although there are some
do’s and don’ts for each of the following sections:
Synopsis/Executive summary/Abstract.
Introduction.
Analysis.
Conclusions and recommendations.
The Synopsis is usually written after the work is completed. Its purpose is to encourage
the reader to study part or the whole of the report. It should be no longer than 1 ½
pages of A4 and it should be self-contained, unabbreviated and contain no bullet points.
It could cover the following areas:
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Analysis/Findings: This is the major part of the report and it should be broken down
into discreet sections that reflect the objectives/problem(s) discussed in the introduction.
There are some very specific dos and don’ts which should be committed to memory:
Do not regurgitate the case narrative as this does not amount to analysis. In
fact, it is normally an indication that the case has not been analyzed (but you
can directly quote and cite the case to underpin an argument).
Case studies are not just confined to theory. Concepts can be integrated with
practice so that the analysis is theoretically informed (but do not segregate
concept from practice).
Do not make bland or generic statement without substantiation. A typical
example would be ‘it’s a well-known fact’. To which the response is ‘who says
so’ or ‘where’s the proof’.
Try not to use unexplained superlatives such as ‘the supermarkets compete in a
dynamic and aggressive environment .. . ’ unless the constituent parts are
outlined and explained (i.e. the components within the environment, the nature
of the aggression, and an explanation of the dynamics involved).
Do not explore cul de sacs, even when they are interesting, unless they
address your objectives and/or move the analysis forwards.
Do discuss your finding/analysis as you proceed because you may be able to
arrive at interim conclusions.
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Conclusions/Recommendation:
Conclusions can only be drawn on your stated objectives and on the analysis and
findings arrived at in meeting those objectives. You cannot speculate on what has not
been subject to scrutiny. You may, of course, admit that some of the objectives or
problems have not been fully addressed (e.g. through a lack of information) and that
your conclusions are speculative in the sense that they are based on the analysis
carried out.
Recommendations can only be based on the conclusions drawn, and they are an
outcome of the examination of options in the analysis and conclusions. There also needs
to be an underpinning rationale, which again derives from the analysis, for the
recommendations put forward. It is also important to be specific when you analyze a
company and, in the conclusions, and recommendations that are made.
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