Chapter 5 - Swanston PDF

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Summary

Chapter 5Diamond E- Framework● basic steps involved in ○ Creating ○ Revising ○ Evaluating strategies● This will help us identify and relate broad forces that must be considered in building and testing strategies● High level road map for strategic analysis● Key variables that need to be considered in...

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Chapter 5 Diamond E- Framework ● basic steps involved in ○ Creating ○ Revising ○ Evaluating strategies ● This will help us identify and relate broad forces that must be considered in building and testing strategies ● High level road map for strategic analysis ● Key variables that need to be considered in the analysis and it structures the critical relationships among them ● Strategy tells you what opportunities the business is pursuing in the environment and, by inference, what resources, organizational capabilities, and management preferences are required for effective execution.

● The double headed arrows in the diagram indicate that any of the variables can either drive strategy (Ex. environment change can force a strategy change or that a new strategic initiative is launched to exploit a unique resource) or constrain it (when resources are insufficient to support a contemplated strategic change). ● Each variable related directly or indirectly to each other

● Management preferences directly influence strategic choices and organizational factors ● Hence, influencing resource development ● Change in one will likely affect all others.

The criterion of consistency ● The principle logic of the diamond e framework ○ Is consistency ○ Coherence ○ Alignment ● HIgh internal consistency among the component variables will lead to successful performance, while conflict or inconsistencies will lead to poor performance ● Coherence means that the D-E Framework is complete in and of itself as well as being internally logical and consistent ○ A viable strategy needs to be in alignment with the opportunities and challenges of the environment on the one hand and with the internal capabilities, drives and constraints of the business on the other hand. ● As one of our students remarked, ○

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If you took apart a pound of diamond and a pound of graphite, you would be left with identical piles of carbon atoms. There are simply more and better bonds between the carbon atoms in diamonds. Likewise, the Diamond-E can be either a shining example of cogence, or a brittle substance relegated to the interior of pencils. It all comes down to the strength of the linkage This does not mean that strategy is static The strategy needs to be nimble Dramatic changes in resources that dictate strategic change The DEF and criterion of consistency may seem simple The problem is ○ The strategy must please both the external and internal situations at the same time. ○ For example, a strategic initiative that addresses a major challenge or opportu-nity will be doomed to failure if it makes unrealistic demands on resources, management preferences, or the organization.

● Consider the situation facing A.G. Lafley when he took over as CEO of Procter & Gamble (P&G) in 2000. His predecessor, Durk Jager, had resigned suddenly after a 17-month tenure in which he had pressed the company into a near frenzy of new prod-uct and brand launches. In the abstract, the strategy seemed appealing; but a few years later P&G had lost its growth momentum in the face of tougher brand and private label competition. Jager’s aggressive, all-fronts, forced march assault proved to be too much, even for P&G’s vaunted development and marketing capabilities. Failures mounted, costs escalated, and morale tumbled. Enter Lafley with a simple, powerful, “back to the basics'' recovery plan. P&G refocused on its core brands, sold off marginal products, pulled out of product launches, and cut overheads. Lafley brought P&G back to what it could effectively execute on. Under his leadership, P&G changed its growth strategy to focus on three main areas. The first was on its core and largest brands that provided access to the largest and strongest retailers and allowed P&G to win in the most important markets. The second was to shift focus to beauty and personal care products. Finally, it focused on extending the affordability of its products to low-income consum-ers in emerging markets. This three-pronged, focused strategy leveraged P&G’s internal resources and aligned its capabilities to the changing external environment and paid off. Over the next several years P&G delivered a 12 percent annual growth in its core earnings per share; its market capitalization more than doubled; and its stock price handily outperformed the S&P 500. ○ This example illustrates a further catch in the simple balances of the Dia-E. ○ Linkages must be developed and sustained over time even if circumstances change. ● A strategy that is in alignment for some time will eventually fall into inconsistency if it, and all the other internal variables in the business, are not kept up to date. ● In reality, total consistency, coherence, and perfect alignment are elusive. The variables in play are too complex and too dynamic to expect this. The principle of alignment remains the driving concern in strategic analysis, however, and it becomes a matter of management judgment to decide which inconsistencies the firm can live with, which can be resolved or mitigated within the existing strategic approach, and which are so significant and difficult to address that major strategic changes are required.

Consistency, opportunity, and risk ● Virtually every strategy will be associated with some current and future inconsistencies

● Critical aspect of strategic analysis ○ To identify these inconsistencies and to assess the degree of risks associated with them ○ The risks can then be weighed against the opportunity that the initiative offers. ● A broad classification of the risks arising from inconsistencies are here

Environmental risks ● Environmental risks arise from potential inconsistencies between strategy and environment ● Usually its one of miscalculating timing, or potential, or competitive reaction ● You may think that a strategic intiative will work but there is a chance that you may be misreading the situation ● Canon’s early, heavy investment in digital pho-tography, for example, was a risky move in light of the uncertainties around the speed of market development for this innovation, but it proved to be a sound one. ● In the long run, the risk is usually one of missing or underestimating environment changes: you think you are okay, but your perceptions are biased by past success and present ambiguity. ● Kodak, for example, procrastinated for years before deciding to go after digital photography in a big way and is now having to play catch up in an industry in which it was once the unques-tioned leader. ● By 2010, Kodak had regained a strong position in a number of its markets, but it was far from being the unquestioned leader. ● To address the viability of your strategy, or core business

● Its important to take a close look at customers to determine where your product stands in terms of ○ Profitability ○ Market share ○ Retention share ○ Loyalty ○ And share of wallet ● With respect to competition you can look at ○ Relative cost position ○ Degree of differentiation ○ Emerging business models of competitors ● The environmental risks will amnifest themselbes in industry profits so it is important to keep an eye on the growth in the ○ Industry ○ Associated costs and revenues ○ Aand the way in which the value is ■ created ■ Captured ■ Distributed

Capability Risks ● Capability risks arise from inconsistencies between strategy and the resource/capabilities and drives within the firm. ● In the short run, a new strategy may simply demand too much from a business unit’s resources and capabilities. We saw that in the earlier P&G example. ● In the long run, resources and capabilities may not develop adequately to support a consistent but continuously more demanding strategy. ● In many firms it's usually a slow and an insidious process ● The demands of the strategy notch up as the environment evolves, but internal capabilities actually erode as complacency sets in and takes its toll on innovation and costs.

● Chris Zook suggests looking at the core capabilities and also the organization and its associated culture to determine any stress points arising from

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Undesired attrition Energy Motivation Or bottlenecks to growth

● Otherwise, the business will slide slowly from positive operating performance and organizational health to a negative situation ● Risk is unavoidable—so we caution against trapping yourself in a fruitless quest for a risk-free strategy. Be conscious of risks, certainly, but be sure to weigh them against needs and opportunities. Opportunities may lie in untapped insights into customers, an unexploited capability, or a strategy that is not tightly aligned. ● Zook points out that Apple exploited its capability in user friendly design and imaginative marketing to build a business that accounts for 50% of its revenues and 40% of its profits. ● Strategies that intelligently stretch what is possible in the market and what is possible to implement are those most likely to provide high returns and competitive advantage

Strategy, Strategic Proposals and Strategic analysis ● Business strategy can be described in terms of four related components ○ Goals ○ Product market focus ○ Value proposition ○ Core activities ● As you describe and evaluate strategy in these terms, its important to remember that you are usually dealing with the result of an evolutionary process ● Quite unusual for a strategy to be an end point of some grand plan. ○ It is more likely to be the product of a series of important but limited strategic decision-- Each made on the basis of what made sense at the time ● Example (Walmart) Walmart strategy , for example, was not the end result of a master plan that Sam Walton had in his mind when he started into the business, but rather was the result of a series of smart moves that he made over the years to exploit insights and opportunities as they occurred ● What does this mean for strategic analysis?

○ As you move from diagnosis to the consideration of new ideas you will be working for the most part with one or more strategic proposals. ●

Strategic proposals are discrete ideas or action plans that will have significant implications for one or more of the components of strategy and thus for the strategy of the business as a whole.

● A new product initiative, such as Rogers Communications’ consideration of entry into the voice over internet phone (VoIP) business, or an acquisition, such as Encana’s bid for Tom Brown, are examples of strategic proposals. ● A decision on the desirability of such proposals must therefore consider ○ (1) their implications for the ongoing strategy of the business, ○ (2) consistency with the other variables in the Diamond-E framework, and, ultimately, ○ (3) their promise of profitability. This is a big job but at least we are not trying to reinvent the whole strategy.

● Some strategic proposals, such as those that involve new product launches or acquisitions are easily identified. ● Others are less obvious and may even be disguised, either deliberately or inadvertently. ● A division manager may, for example, push for the selection of a larger plant sire, leaving submerged the questions of whether the corporation should expand, or even be in the business. ● Management may appraise a new compensation scheme on the basis of its equity, technical and tax merits, but not fully explore its potential impact on the goals of the organization. ● The implication, again, is that you must take a broad approach to strategic analysis, remaining sensitive to the strategic implications of what may seem to be everyday decisions.

Using the Diamond-E Framework

● The Diamond-E Analysis: a systematic review of each of the key linkages in the Diamond-E framework - a strategy concerning the environment, resources, management preferences and organization. ● The objective of the analysis is to help: ○ Assess the appropriateness of the firm’s current strategy ○ Generate new ideas and strategic proposals ○ Evaluate strategic proposals

The Strategy - Environment Linkage ● In a typical analysis using Diamond-E, the First task is to deal with the strategy - Environmental Linkage.

● This requires a careful assessment of the forces at work in the environment and the translation of these observations into their implications for the business in terms of specific strategic opportunities and challenges.

● With these opportunities and challenges in hand, you can proceed to check the existing strategy of the business for consistency, to evaluate a proposal that has been put forward for analysis or work at generating new strategic proposals.

● A final step in working through the strategy environment linkage is to put together a performance forecast for the proposal(s) under study based on the assumption that it could be successfully implemented.

● We suggest a thorough analysis using PEST analysis (political, economic, social, and technological analysis), Porter’s Five Forces model, and industry value chain analysis.

● These tools allow you to assess trends, threats, and opportunities so that you can determine which business unit strategy best negates threats and takes advantage of opportunities.

● If none are helpful with the strategy then you have found a very important inconsistency that will have to be addressed.

The Strategy - Resources Linkage ● The first step in checking the strategy–resources linkage is to identify the resource requirements for the current strategy or new strategic proposal.

● This is followed by a comparison of the required resources with those available to the business and with this the identification of resource gaps.

● A judgement follows on the probabilities of being able to close the resource gaps, the consequences of failing to do so, and ultimately the wisdom of proceeding with the strategy under study

● In the meantime a great deal has been learned about the resources of the business and this can be woven into the process through the creation of new proposals

● This last point, the idea of coming up with new search engine proposals while in the middle of a process aimed at examining established ones is a critical aspect of the Diamond E analysis. ● Emphasizes that we're not proposing align your clothes system of logic but an open system of announces that should recycle to incorporate learning and insides as it proceeds ● Since the diamond e involves much more trial and error and iterative logic than May first be assumed

The Strategy - Management Preference Linkage ● Most models for strategic planning and Analysis focus on the alignment of strategy, environment, resources, and organization. ● These models are fine as far as they go but we believe that they are seriously flawed by not including the Strategic preferences of the key leaders in the business. ● These leaders are the authors and implementers of strategy. Their preferences constitute strategic drives and constraints just as surely as do resources and organizational capabilities. ● The analysis of the strategy–management preferences linkage starts with the identification of preferences that would be consistent with the successful execution of the strategy. ● These are then compared with the preferences of the business managers who are critical to the execution process. ● If these required and observed preferences are consistent, the analysis can move on. ● But there are two kinds of problems that might arise. ● First, you may find that the preferences of the various managers are quite similar, but at odds with the strategic proposal .

● The Proposal may call for a significantly more aggressive attitude toward Innovation and risk, for example, than is currently prevalent in the management ranks. ● Such a situation will call for a judgment on whether the preferences can reasonably be modified by organizational action, or whether this is just asking for too much. ● If the latter is the case, you may have to abandon the proposal. ● This would be a painful move, because any proposal that has come this far has passed the consistency checks with environment and resources .

● Second, you may find that differences and individual strategic preferences are causing conflict among the managers as well as with the strategy. This is actually quite common, since managers in different roles such as marketing, manufacturing, research and development, and so on will quite naturally reflect different orientations to strategic content, timing, and risk. ● One of the Prime functions of strategy is to get these different managers working toward the same goals and vision. ● As you begin to understand the nature of these conflicts you can determine the best steps to bring up preferences into alignment, and the time and risk factors involved in doing so.

The Strategy - Organization Linkage

● Assessment of the strategy organization linkage is usually the last step in the diamond analysis.

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if a proposed strategy has made it this far through the analysis you are usually reasonably happy with it and want to determine whether the organization will implement it effectively.

● If you find problems in the strategy organization linkage your first response will be to try to change the organization to develop new capabilities. ● Only if this does not appear feasible should you consider changing the strategy. ● You should start the strategy-organization analysis by identifying the organizational capabilities required to implement the strategy. ● as deduced directly by the strategy and indirectly from the gaps identified in the resource and preference analysis. ● The next step is to check the Consistency between the required capabilities and those evident in the organization. ● If these are consistent you can move on to forecast performance, make choices, and work on execution. If there are gaps, however, you will need to determine the nature and feasibility of the changes to develop the missing capabilities. ● Four major variables have a major impact on your organization’s capabilities. These are: ○ Leadership ○ Structure ○ Management process ○ culture ● Having completed an assessment of the consistency of the strategy organizational linkage and at least one tour around the diamond it is time to return to the conditional performance forecast coming out of the earlier strategy environment analysis. ● Does the forecast stand up in the light of implementation issues? If so, the strategy and its promise can be carried forward to further comparisons and decision. If not, either the performance forecast will have to be revised to

reflect the implementation issues, or the strategy itself will have to be modified and the analysis recycled.

Strategic Tension ● It suggests that there is no perfect strategic choice and firms will always face some stretch and tension

● ● Firms must manage the tension between what they ‘need’ to do given the competitive environment, what they ‘can’ do given their organization, resources and capabilities, and what they ‘want’ to do given management preference. ● In trying to satisfy a market "need" , a strategy May stretch what a firm “can” deliver. ●

Alternatively a firm may satisfy key stakeholder interests at the expense of not delivering exactly what the market needs as found in many entrepreneurial firms who are Guided by what an entrepreneur “wants” to do.

The Process of Strategic Analysis

● Diamond framework is the focal point of a more comprehensive process of strategic analysis as described in figure 4. ● This is a full strategic review that works from an assessment of the current performance and strategy of the business, through creation and assessment of strategic options, decision and execution. ●

such full and formal analysis are appropriate: ○ 1. Periodically, that is once a year, as decided by the senior management ○ 2. In the light of the current or anticipated poor p...