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Instructors Manual
Fundamentals of Strategy
First Edition
Gerry Johnson
Kevan Scholes
Richard Whittington
For further instructor material

please visit:
www.pearsoned.co.uk/fos
ISBN: 978-0-273-71311-1
Pearson Education Limited 2009

Lecturers adopting the main text are permitted to download and photocopy the manual as required.
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This edition published 2009
The rights of Gerry Johnson, Kevan Scholes and Richard Whittington to be identified as the
authors of this Work have been asserted by them in accordance with the Copyright, Designs and
Patents Act 1988.
ISBN: 978-0-273-71311-1
All rights reserved. Permission is hereby given for the material in this publication to be
reproduced for OHP transparencies and student handouts, without express permission of the
Publishers, for educational purposes only. In all other cases, no part of this publication may be
reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic,
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Publishers.
Contents
Chapters Pages
Acknowledgements 5
Introduction 6
Using this manual 7
Planning your approach 8
Designing the teaching scheme 10
Fundamentals of strategy website 12
Teachers workshops 13
Case example teaching notes 14
1. Introducing strategy 15
2. The environment 19
3. Strategic capability 24
4. Strategic purpose 31
5. Culture and strategy 35
6. Business-level strategy 38
7. Strategic directions and corporate-level strategy 43
8. International strategy 50
9. Strategy methods and evaluation 55
10. Strategy in action 58
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Johnson, Scholes & Whittington, Fundamentals of Strategy, 1st edition, Instructors Manual
Supporting resources
Visit the Fundamentals of Strategy, Companion Website at www.pearsoned.co.uk/fos
Register to create your own personal account using the access code supplied with the copy
of the book. Access the following teaching and learning resources:
Resources for students

Key concepts: audio downloads, animations and quick tests to reinforce your
understanding.
Chapter audio summaries that you can download or listen to online.
Self assessment questions and a personal gradebook, so that you can test your
learning and track your progress.
Revision flashcards to help you prepare for your exams.
A multi-lingual online glossary to explain key concepts.
Guidance on how to analyse a case study.
Links to relevant sites on the web, so that you can explore more about the organisations
featured in the case examples and case studies.
Also: The student Companion Website with Grade Tracker provides the following features:
Enables students to save their scores from self assessment questions, and lecturers to
monitor the scores of their class.
Search tool to help locate specific items of content.
Online help and support to assist with website usage and troubleshooting.
Resources for instructors

Instructors manual, including extensive teaching notes for cases and suggested
teaching plans.
Media-rich downloadable PowerPoint slides, including animations, video clips and key
exhibits from the book.
Classic cases over 30 case studies from previous editions of the book.
Secure testbank containing over 600 questions.
Also: the following instructor resources are available off-line:

Instructors manual in hard copy, with CD containing PowerPoint slides.
Video resources on DVD.
For more information please contact your local Pearson Education sales representative or
visit www.pearsoned.co.uk/fos
4
Acknowledgements
We are grateful to the following for permission to reproduce copyright material:
Alexa.com for graph on p. 101; Table 1 on p. 220 Reprinted from Business Horizons, 46(6),
Johnson, Homer H., Does it pay to be good? Social responsibility and financial performance,
p. 36 2003 with permission from Elsevier; Michael Hopkins, www.mchinternational.com for
Table 3 on pp. 2245; Exhibits 1 and 2 (pp. 318 and 319) from Jones, C.R. Introduction to
Entrepreneurs and Entrepreneurship, Wolverhampton Business School teaching and lecture
series 2000 to 2006, with permission from Christopher R. Jones; Table on p. 385 from
Cunningham, P. et al. Publin Report No. D12-3 UK Case Study WP4, NHS Direct, An
Innovation in Social Trust, with permission from Paul Cunningham.
We would also like to thank Sarah Dixon of Kingston Business School for her contribution.
In some instances we have been unable to trace the owners of copyright material, and we would
appreciate any information that would enable us to do so.
5
1. Introduction
Fundamentals of Strategy concentrates on the fundamental issues and techniques of strategy. It

is based on the 8th edition of the market-leading Exploring Corporate Strategy, therefore,
readers and tutors can benefit from carefully selected material from Exploring Corporate
Strategy.
The text design and layout to assist readers including chapter learning outcomes, margin
definitions, chapter summaries, additional reading and much more.
Thirty-eight illustrations, each including questions to facilitate their use as mini cases.
Ten end of chapter case examples, each with questions relating to the major learning issues
in the chapter.
The Fundamentals of Strategy website that contains materials for students and tutors that are
added and updated on a regular basis.
For students:
Revision aids (flashcards, key concepts and glossary (six languages)).
Audio summaries of chapters and important concepts.
Multi-choice questions, work assignments and grade book.
Help with case studies (weblinks, FT articles and advice on analysing the cases).
For tutors:
This Instructors Manual.
PowerPoint slides.
Student test banks.
A PowerPoint CD that contains all the exhibits from the book and additional slides. These
can be incorporated directly into your teaching sessions.
Details of tutors workshops led by Gerry Johnson, Kevan Scholes and Richard Whittington
which are held annually. These are practical days concerned with how teachers might gain
most advantage from the book and associated materials. They also act as a forum in which
to meet other strategy teachers.
Details on all of these items, extensive tutors debriefs of work assignments, illustrations and
case studies are included in this manual.
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2. Using this manual
This manual is designed for the assistance of teachers of strategy in planning how to gain
maximum advantage from the text Fundamentals of Strategy and the associated teaching and
learning materials. It should provide help with:
Planning a teaching approach to suit the type of participants, time available, etc.
Deciding on how to use the text, illustrations, and case examples in a teaching scheme.
Choosing additional material to include in a course.
Using the Fundamentals of Strategy website.
The next two sections are intended to be of particular use to teachers who are relatively new to
teaching strategy or are designing new courses. Experienced teachers may wish to pass over
sections 3 and 4.
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3. Planning your approach
This section provides some general guidance on how the design of a strategy course can be
varied to meet the requirements of the participants and the practicalities of the situation. The
factors listed below will also influence the way in which the text, readings, case studies and
videos can be used to best advantage.
3.1 Purpose of the course
Strategy courses using Fundamentals of Strategy can be designed to meet many different needs.
At one extreme the course may mainly be concerned with raising awareness of why
organisations need to change and develop over time and some of the ways in which this occurs.
Alternatively, a course may be designed to improve the skills of participants in the formulation
of strategy. Between these extremes are other purposes for strategy courses. For example,
helping to break down the very narrow operational outlook of many managers, or integrating
material from other parts of a business or management course. The following are some guiding
points on how the use of text and cases might be adapted to these various purposes.
If awareness is the key purpose, the text can be used to provide a basic framework (say
through a lecture series) and devote as much time as possible to illustrative work. The
illustrations in the text should prove valuable and teachers should try to supplement these
with their own topical material (press cuttings, material from company websites, etc.). The
Fundamentals of Strategy website contains topical material on a chapter-by-chapter basis
(see below). Where participants have access to live organisations, use of issues from those
organisations should be encouraged (e.g. by presentations). Guest speakers could also prove
valuable particularly interesting success stories.
If skills development is most important, then the purpose of the text should be to give
participants some concepts and analytical tools which they can apply and practice. Most of
the illustrations and case examples lend themselves to an analytical approach, and
participants should be set tasks that require them to produce detailed and practical solutions.
With some groups, it may be possible to require participants to try out their skills on real,
company-based issues say through a project. For example, students can be asked to
undertake an analysis of a particular industry or company largely from secondary data, to
assess the strategic choices available and propose how issues of implementation would be
managed.
3.2 Level of participant
The purpose of a strategy course is likely to differ with the level of participant. For example,
this could relate to their age, job function or type of course which they are studying (these may
all be interrelated).
For younger people with little full-time work experience, the text should prove useful in
providing a systematic approach and illustrations of strategy in practice. The illustrations in
the text should be used to relate theory to practice. The case examples should be used in
fairly focused ways in order to consolidate that stage in the learning.
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Where participants have some work experience but are nevertheless fairly junior (e.g. final
year sandwich course students and many supervisory-level courses), the same comments are
relevant, except that there are more opportunities to encourage participants to relate to real-
life situations through presentations, in-company projects, etc.
For more experienced managers (e.g. in many part-time programmes) teachers may wish to
reduce their formal inputs of concepts and methods on the grounds that these are clearly laid
out in the text and ought to be read prior to class sessions or as a means of pulling together
the issues discussed in class. It is then possible to devote the majority of time to applied
work (the case examples, projects and presentations etc.).
3.3. Study mode
The mode of study should also influence course design.
For full-time courses, it is usually realistic to expect a good level of preparation of case
study work and a chance for smaller groups to work together on tasks for significant periods
of time (usually prior to a plenary discussion and/or presentation). A tightly organised
package of student work (the case examples, project work and presentations, etc.) is,
therefore, possible as an important way of consolidating the concepts/approaches from the
text. However, the chance of live in-company work may be more limited although projects
based largely on secondary data can be very effective.
In contrast, part-time students are usually more in touch with ongoing management issues
but have less preparation time and find it more difficult to meet in groups. It may be that
some group time needs to be built into the programme.
Increasingly, distance learning elements are being used in business and management
programmes. The structured nature of the text together with the illustrations, case examples,
and website material lends itself to form the backbone of learning modules.
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4. Designing the teaching scheme
4.1 Pre-course work

It should be clear from the above that there are many circumstances where pre-course work
could be essential. The text and case studies are designed to facilitate this. Where pre-course
work is needed, it is suggested that it is prescribed in the following way:
The appropriate chapters of the book with a few suggested issues to bear in mind. For
example, it might prove useful for participants to read Chapter 1 and be expected to discuss
what is meant by strategy.
Preparation of illustrations or case example material. Here, specific guidance can be found
in the teaching notes in section 8.
Any company specific data that they might need. This could be very general. For example,
after reading Chapter 1 they may be asked to reflect on how strategic issues are managed in
their own organisation. In contrast, if participants are to undertake project work, they may
need rather more detail (e.g. company reports, accounts and websites). You may choose to
use the topical material from the Fundamentals of Strategy website.
4.2 Starting the course

The specific requirements of each course may vary but here is some guidance on how courses in
strategy might be started:
A traditional approach would be to run through the issues in Chapter 1 and relate them to
the structure of the course. This is very successful if the course follows the text quite closely
and in chapter sequence.
An alternative approach is to begin the course with a case example or illustration.

Electrolux (the case example in Chapter 1) and Yahoo! (Illustration 1.1 in the text) are
designed for this purpose. This starts with participants talking about the strategic issues
relevant to that company and industry, and gives many pointers to the issues that will be
covered in the course. A similar opening can be achieved by asking one or more participants
to talk about the key strategic issues in their own organisation or in an organisation that is
well known to many participants.
4.3 Balance of the course
The teaching scheme needs to be properly balanced in relation to many of the needs identified in
section 3 in two different ways:
The degree of emphasis given to different topics. This is particularly important in relation
to the proportion of time devoted to the section on strategy into action (Chapter 10) as against
the issues on understanding the strategic position and strategic choices (Chapters 29).
The mixture and sequencing of lectures, seminars, case studies and group work, etc. These
are largely determined by the circumstances for which the programme is designed as
outlined in section 3. It is useful to look at some typical ways in which this mixture of
sequencing can be planned:
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Lectures and illustrative material. Here, the lecture programme may amount to 5070%
of the course with illustrations, case examples and website material being used to
provide practical examples of the issues in the text/lectures.
Lectures and applied work. Here, the formal lecture accounts for perhaps 2030% of the
programme, the remainder being used for applied work case examples, presentations
and projects, etc. The text, case examples, illustrations and website materials are ideal
for providing the backbone of a course of this type. The danger is that students do not
read widely enough and hence, teachers need to provide proper guidance on additional
reading (including those identified at the end of each chapter).
Case study/applied material-based programmes. Here, the applied material is
prepared before the class sessions and forms the basis of a discussion of key concepts
during the session. The case examples, illustrations and website material would form
the basis of such a course. This is only recommended where participants have a good
degree of work experience.
4.4 Assessment
Many courses will require participants to be assessed. The text and support materials provide
opportunities for a wide variety of different assessments. For example:
Formal examinations can be used to test understanding of the key concepts presented in the
text. There are dangers that students give overly theoretical answers to questions. One way
of avoiding this is to use short quotations from case studies, articles or illustrations as the
basis of the issue that requires discussion in the examination question. This could include
requiring answers that are directed at explaining concepts to managers.
Case study examinations are a commonly used method of assessment. The case study is
usually distributed before the examination and students are able to prepare in groups. The
examination is most often open book (with unseen questions) answered on an individual
basis. The biggest danger with this approach is that students overwhelm themselves with
prior analysis and fail to answer the questions posed on the examination paper.
Student presentations are another method of assessment, popular with many strategy
teachers. They can be used to assess students work on illustrations, case examples or in-
company project work that they have undertaken. It is desirable to combine an assessment
of the presentation with a write-up.
Executive reports are used by one of the authors. These are an unannounced 30-minute
write-up of the critical issues in a pre-seen case study or article in the form of an executive
report.
Participants topic where participants are required to present a write-up and/or presentation
on a strategic issue often in the context of a topical situation or their own organisation.
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5. Fundamentals of strategy website
(www.pearsoned.co.uk/fos)
Material for students and tutors is added and updated on a regular basis.
For students:
Learning objectives for each chapter.
Revision aids (flashcards, key concepts and glossary (six languages)).
Audio summaries of chapters and important concepts.
Multi-choice questions, work assignments and gradebook
Help with case examples (weblinks, FT articles and advice on analysing cases).
For tutors:
Extensive downloadable Instructors Manual (with case study teaching notes and work
assignment debriefs).
PowerPoint slides.
Teaching notes.
Secure testbank of over 600 questions.
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6. Teachers Workshops
Each year since 1989 (in England) and 1995 (in Scotland or Continental Europe), the authors
have held one day workshops for teachers who use Exploring Corporate Strategy or are
considering doing so. These workshops are open to users of Fundamentals of Strategy too.
These are practical days concerned with how teachers might gain most advantage from the book
and the associated teaching/learning aids (illustrations, case studies and website materials).
Additionally, these annual workshops have provided a forum to meet with the authors and other
strategy teachers and share experiences of teaching problems and their solutions.
Further, information about forthcoming workshops can be obtained from the publisher, the
website or from the authors:
Email: gerry.johnson@lancaster.ac.uk
kscholes@scholes.u-net.com
richard.whittington@sbs.ox.ac.uk
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7. Case Example Teaching Notes
This section presents the case example teaching notes.
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CHAPTER 1
Introducing strategy
Illustration 1.1
Yahoo!s peanut butter manifesto
The main purpose of this illustration is to introduce students to the range of issues that make up
strategy. If we accept the Manifesto, Yahoo!s difficulties provide plenty of material for
discussion. Of course, it is unrealistic to expect a sophisticated understanding of strategy by the
end of Chapter l, but students should get a sense of the range of the book from this illustration.
Turning to the illustrations two specific questions:
The first question gets students to consider the detailed elements of strategic decisions, as in
Exhibit 1.1. For example, according to the Manifesto, Yahoo! lacks a vision regarding its
long-term strategic direction, its scope is too wide (the butter is too thin), there is a need for
greater accountability to stakeholders (shareholders and employees here) and there is a need
for change (a radical reorganisation).
The second question turns students attention to the elements of the Fundamentals of Strategy
three-circle model (Exhibit 1.3), fundamental to the whole book. For example, under Strategic
Position there is the interesting question of organisational culture; under Strategic Choices there
is the issue of strategic directions with regard to focus; under Strategy in Action, there are of
course issues of change, but also of strategy practice, relating to Brad Garlinghouses own
effectiveness in trying to influence strategy.
The last point about strategy practice underlines the Peanut Butter Manifestos relevance to a
key theme: that strategy is something that people get involved with personally. Strategy is
something people do. Here, Brad Garlinghouse is a middle-to-senior manager trying to
influence his employers failing strategy. So a good question to ask here is: how effective is
Brads strategic intervention likely to be? Thus the illustration should also help students engage
in strategy as not only about organisations, but also about how they personally might have to act
with regard to strategy.
In June 2007, Terry Semel was replaced as Yahoo!s CEO by Jerry Yang, the companys
original founder. The Valleywag site suggested that Brad Garlinghouse was still at Yahoo! in
July 2007, though listed as the companys fifth least-liked executive.
Illustration 1.2
The vocabulary of strategy in different contexts
This illustration shows how some of the key vocabulary of strategy (as in Exhibit 1.2) is used in
practice mission, vision, goals and strategy are all here. With regard to the illustrations first
question, the concepts do broadly fit, though it is interesting to note that use in practice is never
likely to match textbook definitions perfectly. Students should get used to this kind of fuzziness
around the edges early on.
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With regard to the second question, it is also important to highlight how strategy concepts are
used in the two very different contexts a hi-tech multinational and a British university.
Strategy concepts do stretch from the private sector to the public or not-for-profit sector. Thus
both Nokia and Kingston University include statements about mission and vision, for example.
On the other hand, there are some interesting differences: Nokia is apparently more focused on
customers, while Kingston University has a very broad set of stakeholders to satisfy. You might
want to discuss the possible implications of this difference in stakeholders.
The third question asks students to examine their own organisation. This may well surface the
fact that some strategy terms are used more frequently and are more easily understandable than
others. For example, students will probably find more examples of objectives or mission
statements and the discussion of implementation of strategy than a clear statement of strategy
itself.
You might encourage students to discuss the reasons for this. Clear statements of detailed
strategy competitive advantage, business model and so on are rather more difficult to
construct than broad statements about where organisations want to go. Asking students why
they think this is the case should surface issues of the complexity of strategy development.
Case example
Electrolux
This is an introductory case example to illustrate the various elements of strategy as presented
in Chapter 1. It shows how these apply to a particular industry and competitors within the
industry. These are some of the issues to highlight:
Are these issues strategic?
Section 1.1 of the chapter lists various characteristics of strategic decisions. Students can apply
this list to the case example. For example, they do affect:
Long-term direction
Competitive advantage
Scope of activities
Exploitation of core competences
Stakeholder expectations.
Levels of strategy
There are several levels of strategy at Electrolux:
Corporate (company as a whole)
Business Line (e.g. Consumer Durables)
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Business Units (e.g. White Goods Europe)
Operational (departments within business units).
The Strategic position
Some of the main issues are as follows:
Environment
Globalised industry
Competitive mature markets
Power of major retailers
Market entry of Asian producers (LG, Samsung) via contracts with major retailers
Also, developing markets (Eastern Europe, China)
Changing consumer needs (polarisation in the market)
Consolidation of retail outlets.
Capability
Originally, industrial design
Cost efficiency
Geographical coverage
Consumer insights
Brands
Talent management.
Expectations
The need to maintain profitability which has not proved easy in a very competitive
industry
Environmental issues (e.g. CFCs and recycling).
Strategic choices
Encourage students to think about the various strands that make up a strategic choice as
outlined in section 1.3.2 (and, of course, more fully in Chapters 69):
The market is polarising, so there are two possible bases to gain competitive advantage.
Either position 1 on the strategy clock (the low price commodity positioning) or
differentiated (value-added product/service features) positions 4 and 5 on the clock. It is
not easy to run these two different positioning in parallel without clever use of brands.
There are several choices of development direction for Electrolux. Decisions on product
development usually concern new features built on the current platform. Otherwise costs
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are difficult to contain. Market development opportunities exist in developing countries

alongside the trading-up of consumer requirements as economies become more prosperous.
The method of development is also important. Electroluxs recent history has been dominated
by acquisitions.
Strategy into action
These aspects of strategy into action are illustrated in Electrolux:
The company has had to restructure regularly as it grew. Acquisitions also required pruning
and disposals to prevent the company from losing focus. The most recent decision to de-
merge the outdoor products division as a separate company (Husqvarna) reflects a feeling
in many sectors that re-focusing on a core business and core markets is likely to be more
successful than a wider portfolio of activities. Point out to students that this is absolutely the
opposite as to what happened at Electrolux in the 1970s and 1980s where, amongst other
things, they had extended into metal manufacture.
There is not much information about detailed processes, except reference to better product
renewal and improvements in logistics, purchasing and production
Managing change would be a particularly important issue given the possibility of cultural
clash in such a geographically spread organisation. Also, development by acquisitions
increases the cultural difficulties.
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CHAPTER 2
The environment
Illustration 2.1
PESTEL analysis of the airline industry
PESTEL analysis is a useful starting point for environmental analysis, encouraging students to
think wide. Illustration 2.1 provides an initial PESTEL analysis of the airline industry, giving
students the general idea. The first question asks for additional elements in the analysis. For
example, under Political, you might add subsidies for local airports; under Economic, you might
add the rise of Asian economies; and under Legal, you could add the continuing trend towards
airline privatisation.
A key danger to highlight is the long lists of forces or influences that are too unwieldy for
practical action. Therefore, the second question challenges students to assess which of the forces
are likely to be of most significance in driving industry change. Here, students should justify
their views in terms of the evidence from the past and the likely impact in the future of any
particular influence.
The case example at the end of the chapter on the European brewing industry also asks students
to do a PESTEL analysis.
Illustration 2.2
Scenarios for the biosciences in 2020
Scenarios help students think long term and very broadly: here the companies are looking more
than a decade ahead, and thinking about society in general as well as just the market in a narrow
sense. To reinforce the importance of broad thinking, it might be worth asking students why an
IT company like Hewlett Packard thinks it worth participating in a biosciences exercise.
The question is about whether companies have more influence over technology or public
acceptance. It is quite likely that students will say public acceptance. An interesting question to
ask then is what these companies likely budgets for R&D and public relations are: the R&D
budget is probably greater by several times. This also raises issues of corporate social
responsibility, pursued in Chapter 4.
Illustration 2.3
The consolidating steel industry
The steel industry provides a fairly easy-to-understand case of rapid structural change, and one
led by industry actors. Understanding how the leading companies are making an impact helps to
counter a risk of determinism in Porterian analyses, in other words a sense that structures are
given rather than changeable.
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The first question particularly invites a comparative analysis using the radar plot introduced in
Exhibit 2.4. The radar plot might look roughly like the following, with the continuous lines
indicating approximate positions in around 2002 (5 years earlier than the illustration) and the
dotted lines indicating positions in 2007.
Exhibit 2.4 Comparative industry structure analysis
The comparative positions highlight the increasing power of suppliers (negative), the somewhat
decreasing power of buyers in a booming market (positive) and the beginning of decreased
rivalry (positive) as the larger steel companies try to consolidate the industry. It might be said
that the new entry threat has stabilised and even mitigated, though continued investment by
Chinese players may increase rivalry. Overall, comparing the size of the two radar plots over
time does not suggest to this point a very substantial change in favour of the steel producers.
With regard to the second question, the acquisition strategies seem to be driven by the desire to
reduce rivalry by reducing the number of players and even capacity. You might ask students
what is necessary to make this work: here you might highlight the importance for reduced
rivalry of both simultaneous cuts in capacity investments by, for example, the Chinese and
strong barriers to new entry. With regard to the last point, it is worth noting that action on one
force (rivalry) depends on conditions with regard to other forces (e.g. entry barriers) in order to
be effective.
With regard to the third question, success in raising barriers to entry (e.g. through technological
change) and in reducing rivalry (through continued consolidation) would make the industry
more attractive. Vertical integration strategies into sources of supply (e.g. iron ore) would also
help. A potential negative is significant progress with substitute materials. This depends on
technological progress, thereby providing a useful link between the Porters five forces and
PESTEL.
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Illustration 2.4
Strategic groups in Dutch MBA education
Strategic group analysis is an important idea, which students often find more difficult to
undertake than they might expect. This is why the example around education has been chosen.
Students may be able to identify with the different types of providers and how the competition
between them is likely to work out. The question is designed to get students thinking about
mobility barriers and strategic space. So, concentrate the discussion around the exhibits in the
illustration and ask students to put themselves in the place of a particular provider and answer
the following questions:
Are there sufficient opportunities within my strategic group?
How competitive am I within that group?
Could I overcome the barriers against moving into another group? HOW exactly?
What new spaces on the most recent diagram might pose opportunities and threats for my
organisation? How should I respond?
You might find it instructive for different student groups to play different types of provider
so that a picture of how the sector might develop can be built up from the discussion.
Case example
Global forces and the European brewing industry
By comparison with the previous edition, this case has been shortened in line with other end-
chapter cases to focus more on the precise techniques of PESTEL and five forces analysis that
are central to this chapter. Full cases such as the pharmaceutical industry can be used to develop
students skills in seeing trends in industry data and drawing conclusions as to the likely impact
of those trends on particular companies in an industry.
PESTEL
Here it would be helpful to ask the students to draw on wider knowledge or research (you may
have beer drinkers from many countries in your class). Depending on how extensive students
additional research and thinking are, a wide range of issues may be raised. To highlight some
for the purposes of illustration:
Political: government campaigns against drink driving.
Economic: the rise of the Asian economies.
Social: rise of beer consumption in southern Europe.
Technological: few clear in the case, but innovations around products such as ice-cold lager
might be raised.
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Environmental: few clear in the case, but packaging issues are likely to be important.
Legal: few clear in the case, but changes in licensing laws and permitted alcohol limits for
driving are relevant.
PESTELs can often seem somewhat inconclusive; so, it is important to pull out key issues and
conclusions. The increasing hostility to drinking (under P and L) and the rise of Asian
economies and southern Europe (under E and S) seem particularly important trends. One way of
drawing some simple conclusions is to assess the overall balance (positive or negative) under
each of the PESTEL headings: in the case of the European brewing industry, most of the
headings are likely to be negative.
The five forces
There has traditionally been a wide variation of industry structures across Europe. The United
Kingdom is fairly competitive. Denmark, Holland, Italy, Belgium and France, on the other hand,
have been in near monopoly situations. However, with increasing exports and imports and
cross-border acquisitions, national markets are becoming less protected. An interesting issue,
then, is at what level to conduct industry structure analysis. If at a European level, then the
broad issues to consider under each of the five forces are as follows:
Buyers: With more than one-fifth of beer sold through supermarkets, and increasing resort
to own-label, these buyers are increasingly powerful (underline that buyers are not the
ultimate beer consumers).
Suppliers: The pricing power of the packagers suggests that these are becoming increasingly
powerful.
Substitutes: Wine is clearly a dangerous substitute.
New entrants: Internationalisation through M&A and increased trade are introducing new
entrants into previously protected markets. Anheuser-Busch and SABMiller are also
obvious new entrants into Europe. Students might be alerted to the potential threat of Asahi
and Tsing Tao. Although not prominent in the case, there is still the potential of small new
brewers entering using microbreweries or contract brewers (e.g. Cobra).
Rivalry: Falling demand, international entrants and over-capacity obviously increase the
scope for rivalry. However, note that sales values are rising, that innovation and branding
can mitigate price-competition and that leading players are attempting consolidation through
M&A.
As ever, it is important to draw conclusions. On balance, the European brewing industry does
not seem attractive, and is unlikely to become more so until the current round of consolidation is
completed and brewers achieve greater leverage against their buyers and suppliers.
22
Impact on particular brewing companies
The four companies are chosen to represent different types of players.
Heineken is still the biggest purely European player, although it is challenged by the newly
global Inbev. You might want to discuss the pros and cons of its family ownership and
focus on its powerful core brand.
InBev has enjoyed exciting growth due to its policy of acquisition. It now has many
potential scale advantages, but will need to work hard to make the most of them as it
integrates its various new acquisitions and brands.
Grolsch is tiny in comparison to either Heineken or InBev with one key brand; although it
has substantial exports. Its largest market is in the home territory itself.
Scottish & Newcastle (S&N) was rapidly altering its strategy having moved out of the UK
leisure market. The company adopted an international focus with an emphasis on expansion
in the newly emerging markets. Note, however, that S&N had neither the advantages of a
small specialist like Grolsch nor the scale advantages of companies like Heineken or InBev.
S&N was bought by Sunrise Acquisitions Limited (a company jointly owned by Carlsberg
and Heineken) in April 2008.
23
CHAPTER 3
Strategic capability
Illustration 3.1
Strategic capabilities
The questions are designed to require students to consider differences in terms of strategic
capabilities, as explained in section 3.2, and the implications of these. One way of doing this is
to use Exhibit 3.1 or 3.2 and ask students to give examples from the illustration (e.g. instead of
the athletics example). In doing so, they will be faced with having to decide how to categorise
the different capabilities. For example:
Presumably the worlds largest single copper reserve is being claimed by Freeport
McMoRan as a unique tangible resource.
Whirlpool presumably sees the unique toolkit of competences as core competences as does
Societe Generale the links between its IT systems and its people. The same would
presumably be claimed by the Royal Opera house for its unique resources of people and
their skills.
Students may, however, wish to discuss whether the physical IT systems underpinning these
competences of Societe Generale are threshold resources for a company of that sort.
Question 2 then allows students to consider which of these is likely to provide competitive
advantage. They may argue that all of them might. If so, it is useful to push them further and ask
which would be more difficult to imitate and therefore which bases of competitive advantage
are likely to be more sustainable. Is it the physical resources of the mine or the competences of
the people? If it is the latter, how do the different competences stack up against the criteria in
section 3.4.3 with regard to inimitability? They might, for example, argue that the systems of
Whirlpool might be more capable of being imitated than the complex mix of skills and history
of the Royal Opera House.
Illustration 3.2
Strategic capability for Plasco
In addressing the first question, the instructor might ask the students to put themselves in the
position of the supermarket buyer and ask the following questions:
Who would you prefer to buy from?
What would the multinational have to do to win back the business?
It is likely that a large, automated US plastics manufacturer would operate in quite a different way.
It would, perhaps rightly, be much less flexible in its approach, more standardised in the way it
24
dealt with retailers and, quite possibly, unable to respond as fast, especially if it had fairly
centralised policies. So, competing effectively would presumably depend not so much on whether
the competitors could imitate Plasco, but whether they, themselves, had the bases of achieving
some competitive advantage over Plasco. This could, perhaps, take the form of a different basis of
achieving advantage on the basis of service or it might be on the basis of price. So, a third
question, as a buyer, might be:
At what price would you sacrifice the benefit of Plascos greater flexibility and service?
This does, of course, get to the heart of the third question.
The second question raises the issue of the extent to which strategic capability is manageable.
Some capabilities uncovered in the Plasco exercise came as a surprise, especially to some of the
senior managers, especially the reliance on rule bending, personal relationships and relatively
low plant utilisation. Indeed, they had intended strategies that were to do with tightening up
production, more standardisation of procedures, etc. So, the students might be posed with the
following options as to what senior management might do:
Go ahead with the greater formalisation and standardisation: but if they do this, the
possibility is that they will lose the goodwill of the retailers.
Acknowledge the importance of the informal and inefficient bases of their strategic
capability and live with it.
Carefully consider how they could maintain the excellent relationships with retailers, as
well as the initiative taken by junior management, whilst trying to find ways of improving
efficiency and reducing cost so as not to jeopardise the benefits.
Presumably, students would agree that the third option is likely to be the soundest but, quite
likely, the most difficult. But herein may be a lesson about the management of strategic
capability: it is not easy.
Illustration 3.3
A Value chain for Ugandan chilled fish fillet exports
The questions on this illustration are designed to encourage students to undertake a value chain
analysis similar to that shown in the illustration with a view to drawing conclusions and
implications from it.
The illustration shows how analysing a value chain raises the question of what value-creating
activities an organisation should be focusing on and what activities it has which do not create a
value.
Questions 1 and 2 may be pursued by the students following the format in the illustration or by
following the sort of steps outlined in Chapter 2 in Exploring Techniques of Analysis and
Evaluation in Strategic Management (edited by Veronique Ambrosini, Prentice Hall, 1998):
Understanding and Using Capital Value Chain Analysis by Andrew Shepherd or a similar
explanation of value chain analysis. In doing so, it is useful to encourage students to put values
on the elements of the value chain even if they are not exact. The business that is used does
25
not necessarily have to be a complex one: indeed there may be advantages in using something
quite simple. But if a case study is required, a number of the cases or illustrations in the book
might be suitable, for example, easyJet (Illustration 6.2).
In relation to question 3, as Shepherd points out in his chapter (see above), knowing what your
value chain does well is difficult to identify but is most important in the face of rising
competition. Value chain analysis is an excellent means of disentangling the complexities to
reveal what is really going on between a company and its market. Managers may know this
implicitly but the value chain exercise can make this explicit. In turn, this mapping may have
significant implications, as it did in this illustration, by flagging up the value adding capabilities
being missed leading, in effect, to a change in the business model.
Illustration 3.4
SWOT analysis of Pharmcare
SWOT is often cited as the most widely used strategy tool. The questions are designed to
prompt critical thinking about its use:
Question 1 should prompt consideration of scoring methods of analysis. Whilst the high
scores may indicate key strengths or weaknesses, care has to be taken about relying on the
significance of the numbers because of the following reasons:
Items in the analysis are not necessarily equally weighted. Indeed, a single factor could
dominate the whole analysis. Weighting of factors can be used to allow for this.
It must be remembered that the numbers are the result of managerial analysis and
debate, rather than based on objective measurement.
They are also dependent on the extent to which competitors have similar strengths or
weaknesses: scores have to be taken into account in comparison with competitor
strengths and weaknesses.
It does not allow for what is not known. For example, what new entrants yet to appear
on SWOT might bring to the industry.
Given the importance of analysing competitors, Question 2 raises the issue of how readily this
can be achieved. In fact, executives often know a great deal about competitors and, where they
do not, they often have access to people who do (e.g. former employees of competitors now
working within their own company). Indeed, often managers can take a more objective view
about their competitors than they can about their own companies!
There are a number of other benefits and dangers than those identified in the text that might
be surfaced. For example, in terms of benefits:
SWOT provides the possibility of a structured summary drawing together many of the
insights from the sort of analyses outlined in Chapters 2 and 3.
If some sort of scoring mechanism is employed, it forces those undertaking the analysis
to concentrate on the specific sectors of environmental impact and specific strengths
and weaknesses. It forces a specific consideration of issues, rather than overgeneralised
debate and can help avoid the tendency that some have to focus on the issues that they
have personally decided are most significant to the exclusion of others.
26
However, there are some other dangers and problems:

Students and managers often think that an answer will fall out of a SWOT analysis.
That is unlikely.
There is also a danger of spurious accuracy. Because there are numbers on a page,
students can feel that this is some sort of evidence or proof with more value than is
really there. The evidence lies in the logic underpinning the scores, not in the scores
themselves.
Case example
Making eBay1 work
General learning objectives for this case might include the following:
Applying the notion of strategic capabilities to a well-known new economy/dotcom

founded on a novel business model that is ever more corporate.
Appreciating that how you apply the notion of capabilities, and who does the application,
will affect the outcome.
The importance of not stopping at the identification of strategic capabilities, but linking
them to what managers actually do, what is truly unique about eBay (core competences) and
how capabilities might need to be viewed differently when it comes to the future.
Question 1
Analyse eBays strategic capability using an analytical framework(s) from the chapter.
Typically a student would use the competences framework, which compiled would look similar
to the example given below.
Threshold resources Threshold competences

IT server platforms and space account management
offices and facilities all other general managerial skills
appropriate personnel sophisticated ICT skills
customers and suppliers who are
sufficient customers and suppliers!
competent push the envelope
forward
Unique resources Unique competences
the biggest on-line electronic exchange perhaps a unique form of account
platform management that balances central
the eBay brand control versus decentralised
community involvement
first mover advantage and hence cash
1 The eBay teaching note was prepared by its author, Jill Shepherd, Segal Graduate School of
Business, Simon Fraser University, Canada (jills@sfu.ca).
27
an active and vocal community of users leadership in terms of ability to

learning from experience renew the Board and keep a
sense of consistency
electronic platform management
skills
partnering on the internet (deciding
when and how to compete)
web 2.0 management skills
Students might choose activity mapping or value chain analysis to get into the specifics here.
Even if the students cannot get into fine detail, it is likely that they will recognise that it is not
single competences that matter so much as linkages between activities.
Critical reflection on the choice and use of these tools to produce insights might be promoted.
Questions might include the following:
Why did you choose the particular framework you used?
Ask students to think how different people performing the analysis or how different amounts
and types of data inputted into the analysis might change the outcome/insights generated.
A problem is, of course, that if the competences are truly core, such that they cannot be
imitated, arguably it ought not to be possible to identify or understand them explicitly. This
is probably the case above all with Web 2.0 management skills. After all, what does it mean
to manage a company that aims to be managed by its customers and suppliers?
Question 2
What are the capabilities that have provided eBay with competitive advantage and why?
The temptation here is, of course, to list all capabilities rather than to focus on those that are
truly unique and which therefore confer competitive advantage. Performing the analysis in
question 1 goes someway to avoiding this pitfall. As with all analysis it forces a more in-depth
view and by classifying what is unique and not unique ensures that this process of identification
takes place and is in some sense defended. Performing an activity or value chain analysis of
competitors, including a fictional new start-up and overlaying that of eBays might help in this
regard.
Consideration also needs to be paid to the dynamic aspect of capabilities what might be
unique today is unlikely to be so tomorrow. This is especially relevant considering how eBay is
now facing competition especially outside the US. Thus, this question leads into the next where
sustainable competitive advantage is discussed.
Question 3
Using the concepts of sustainability and dynamic capabilities, how would you manage
this capability (create new resources and competences, invest/divest in others, extend
others), given:
(a) New entrants in the marketplace?
(b) The changing nature of eBay?
28
Static analysis in todays hyper competitive world is often useless. Using the analysis to project
forward in time and against a changing competitive arena makes for more difficult but more
worthwhile strategizing. So:
Have any unique resources/competences become threshold over time and if so why?
Are any new aspects of eBay strategic capability driven by what eBay already had that
could be extended or was there a need to create them de novo?
What aspects of eBays strategic capability are easily copied by new entrants and if so
would you copy them and how would you copy them?
Undoubtedly, something like server downtime, once a unique competence, must now have
become threshold. Other ICT concerns such as managing big servers must have become pretty
standard. eBay is probably still at the top of this game just because it is so big. The fact that
eBay does have some successful competition means that its strategic capability has become
less unique. There is a hint in their competitor profile that innovation and perhaps adaptability to
different cultures as they innovate is not core to eBay and something which has been developed
more successfully by others working within their own national culture. Indeed, eBay rules in its
own territory of North America and in Europe. The search capability of eBay also means that
niche players do not really make sense, whereas the consumer trust that comes from being a
big player is worth everything when trading on-line, as is the notion that whatever you want it will
be on eBay because of its size. Thus, the so-called network effects of eBay (the bigger the
company, the more successful it will be) and its first mover advantage that has led to this level
are key to its success.
The extent to which you consider whether any new competences have been created over time
is a function perhaps of how much you buy into their secret being Web 2.0 management. If this
is a key to their success then they have probably just built on web management skills
transforming them as the web develops. If not, you might say that how they manage the board
and senior management renewal is a de novo competence as is partnering or not and with
whom. Equally, time has built the brand value and stock of cash and general financial
reputation.
New entrants are likely to bring their own unique competences. But how unique are they? Might
eBay be able to copy them? Has not copying them caused eBay problems in the new markets?
Instead, how about searching within eBay amongst new staff or new areas of the business for
signs of new unique competences? The changing nature of eBay should provoke a discussion
about how the company now has developed a broader set of competences over time because
there is a competition in the marketplace and the nature of the business has expanded
geographically and in the range of services. Does this mean eBay management must more
overtly manage competences or does the unique nature of core competences mean
management should stay clear of interfering? Does eBays growth through acquisitions, rather
than organic growth, mean new competences are more easily bought than home grown?
It is also worth encouraging the students to do their own search of the press to discover what
has happened to eBay since the case was written. This can be done either before they answer
Question 3 or after to promote discussion of how well their recommendations would have held
up in reality. Students may want to look for the following:
How much growth is organic versus from acquisitions?
How is power in the net distributed between eBay, Google and Yahoo and other auction
sites?
What do any new entrants look like?
29
Have there been any changes in top management?
Interesting blogs include the following:
Pierre Omidyar, the founder of eBay, who continues with ebay philosophies through the
Omiydar network
http://pierre.typepad.com/
http://www.omidyar.net/
or a blog on eBays strategies
http://ebaystrategies.blogs.com/ebay_strategies/.
30
CHAPTER 4
Strategic purpose
Illustration 4.1
The Enron corporate scandal
1. What mechanisms in the governance chain should (or could) have prevented what
happened at Enron?
Suggestions might include:
A vigilant board of directors that kept itself informed about the kind of financial structures being
devised and accounting practices used. Most of Enrons board relied completely on the top
management to present them with any relevant information. Even though they were sometimes
aware of problematic issues, the top management was asked to take care of it.
An independent audit committee that met regularly with the external auditors to understand
the issues facing the firm.
Strong policies and code of ethics that were applied consistently and strictly to all members
of the firms. Exceptions to the policies would have alerted the board to potential problems.
But also outside the governance chain per se, the range of services being provided by a single
accounting firm could be restricted. Arthur Andersen was the firms external auditor and
consultant for several other projects. As a result, the firm became more concerned with the
enormous fees that was at stake rather than its primary responsibility that of devising a
financial statement which reflected the true financial condition of Enron.
2. What changes in corporate governance are required to prevent similar occurrences?
Arguably corporate boards need to take more responsibility in relation to governance. This
might be encouraged by:
Increasing the proportion of independent directors and audit committee members to ensure
the accountability of the top management.
Improved reporting structures between boards, auditors and top management so that the
information available to the members can be verified through alternate sources.
Designing effective corporate policies that comply and keep up with the law, regulation and
standards to ensure that new developments in corporate or professional practices are taken
into account and monitored.
Protecting the privacy and rights of whistleblowers and other employees who may express
concerns.
Increasing the nature and quality of disclosures in the financial statements so that they
contain more detailed information about the firms financial structures and arrangements.
31
Increasing the liability of top management in case of financial fraud (regulatory changes in
the US now require the CEO and CFO to sign off on the financial statements in order to
ensure the credibility of information presented.)
Firms are encouraged to change their external auditors every five years, so as to reduce
the subjectivity involved in making professional decisions.
Restriction on the range of services that can be provided by large accounting firms.
Illustration 4.2
BP, Beyond Petroleum and the Texas City disaster
The BP situation is interesting to discuss for a number of reasons. First, it raises important
questions of social responsibility in itself (not least in terms of the Texas City disaster).
However, it also raises two other important issues related to social responsibility. The first is the
distinction between espoused and actual (in this case) stands on social responsibility. So, in the
case of Question 1, BP has publicly been cited as residing at the right-hand side of the exhibit. If
not a shaper of society then at least an organisation that promotes itself as a forum for
stakeholder interaction. However, students may wish to debate whether this is actually so:
whether the espoused position is echoed in reality, or whether BP is more a case of enlightened
self-interest or perhaps even laissez faire? To get a lively debate going on it might be worth
digging out BPs statements on social responsibility preTexas City disaster and some of the
newspaper coverage cited in this illustration.
The second issue it raises relates to Question 2. If top management seeks to manage social
responsibility, does it do this by statements of strategy, does it do it by setting overall targets, or
perhaps with much more detailed controls; or is it a matter of establishing and cultivating a
culture at local level? Students may argue that it needs to be a mix of these perhaps all of
them. This does of course, in turn, raise issues raised in Chapter 10 of the book relating to
organisational processes of control (section 10.3) and organization culture (Chapter 5).
Illustration 4.3
Stakeholder mapping and assessment of power at Tallman GmbH
This analysis of a further strategy for Tallman GmbH should not only provide a practical
mapping exercise for students, but in doing so should underline the learning points from the
text. Even at the simplest level it should remind students that where stakeholders line up on a
map is entirely dependent on the strategy under consideration.
Illustration 4.4
Mission, vision and values statements
Whilst a general discussion can be had about the usefulness of the statements included in this
illustration, it might be worthwhile to get students to think more systematically about the topic
in terms of the reading, for example, that cited in the key readings by Collins and Porras. In their
32
Chapter 11, they set out quite detailed guidelines as to what makes for a good corporate vision
(within which they include what is in this chapter regarded as mission as well as vision and
values).
Their model asks managers to consider the importance of core ideology (the enduring
characteristics of an organisation its self-identity). This they see as comprising:
Core values (or a small set of timeless guiding principles) that should hold whatever the
circumstances encountered by the organisation;
The core purpose of the organisation; the fundamental reason for beingthat reflects the
importance people attach to the companys work (and) taps their idealistic motivations.
By vision they mean the big hairy audacious goal that will motivate people in particular. This
should be a vivid image that people can carry in their heads about what they would like the firm
to be like in, say, twenty years time.
So, using such a framework, how do the statements in this illustration stack up?
Case example
(PRODUCT) RED and Gap
This case usefully brings together a number of the key themes in the chapter, in particular issues
of social responsibility and of stakeholder expectations and analysis.
Question 1 asks students to identify the different stances taken by the players represented in the
case study. Bono and Shriver are, pretty clearly, shapers of society. They would see businesses
as, quite legitimately, having social as well as commercial purposes. In this sense they would
also be close to Handys perspective as represented in the key debate. Baker, writing in The
Times seems to be at the other extreme: more a laissez faire approach and closer to the
Friedmanite view. But where do students see Henkle and Gap itself? Does the fact that they
have bought into the Red concept mean that they too see themselves as shapers of society? Their
views could, perhaps, equally be represented as enlightened self-interest or a concern for
sustainability that would be represented by those who would see business as a forum for
stakeholder interaction.
The more perceptive students might answer Question 2 with a good deal of qualification, by
sensibly observing that it rather depends on (a) who the shareholder is and (b) the stance taken
by the shareholder. Institutional shareholders are, themselves, increasingly recognising the value
of socially responsible activity of businesses. But they may also see shareholders as individuals
who own shares (including themselves). In this sense there is likely to be a huge diversity of
views about the appropriateness of Red.
This in turn leads to Question 3. What is their personal view about its appropriateness? Ask
them to justify this in terms of taking a personal stance with regard to Exhibit 4.4 or the 3
perspectives in the key debate. Given the perspective they take, how does that relate to their
considered view on Gap and Red?
33
Question 4 invites a stakeholder analysis perspective. Students here might be encouraged to

undertake a stakeholder analysis for an organisation and identify the interests and expectations
of the different stakeholders. In turn they might ask how these different expectations and
interests relate to issues of social responsibility generally and, more specifically, to the sorts of
activities of Product Red. The stakeholder analysis perspective would then suggest that their
role would be to consider how they might move stakeholders supportive of such ideas into
positions of influence the strategy of the organisation.
34
CHAPTER 5
Culture and strategy
Illustration 5.1
Motorola: an analogue history facing a digital revolution

The purpose of suggesting the timeline (Question 1) is to get students to see that (a) most of the
success of Motorola was based on a business model rooted in excellence of technology derived
from its initial success; and (b) that for most of that timeline it was a very successful company
indeed. The problems in Motorola have been relatively recent. It might be useful to ask them to
superimpose the strategic drift model (Exhibit 5.2) on to the time line. Notional as this is, it should
illustrate that the drift itself has been relatively recent over the decades of Motorolas existence.
Moreover, the changes that resulted in their problems did not occur as a total surprise to
Motorola. They knew about digital technology. The purpose of Question 2 is to encourage
consideration as to why such an apparently significant change that they knew about and had
technical competence in should not have changed Motorolas strategy. As the question suggests
this can best be understood by reference to the commentaries (and, in particular, the experience
lens) and to discussions of culture in Chapter 11.
Illustration 5.2
When in China
Question 1 is straightforward. The illustration is itself, a list of Chinese business norms, at least
as they are understood by the interviewee. Students can start by listing these from the article.
However, this could be made a more questioning/investigative exercise by reference to other
published sources or by drawing on the first hand experience of Chinese students if the class has
them. Do they agree that this is an accurate description?
The second question requires readers to think more about how they would understand a culture
for themselves. Here, it might be useful to draw on their personal experiences. Do they do this
by reading about it? By going on a course? Or, through observation? However, if they were
managers with a very large investment overseas would this be enough? How might they develop
an understanding of a different culture sufficient, for example, to decide if such an investment
might work? Presumably this might involve working with local managers and taking expert
advice; perhaps also setting up a network of contacts within the market.
Illustration 5.3
The cultural web of the UK Forestry Commission

The cultural web is a very useful analytic framework and students should be encouraged to tease
out the detailed aspects of a culture. However, they also need to be able to discern the big
messages and the strategic implications.
35
This illustration helps address these two issues. Students should certainly understand different
elements within the web but they should be pressed to extract the strong messages. For example,
this is a culture that combines technical expertise about forestry with an almost military degree
of hierarchy and apparent deference to authority. It is not a culture that places emphasis on the
public or social users of forests which is the emphasis at the heart of the new strategy.
Question 2 also invites consideration of the strategic implications. The main ones are:
trying to introduce the new strategy into this culture is not feasible; there needs to be major
culture change if it is to work;
managing such fundamental strategic change is usually very difficult (see Chapter 10);
is there an argument to adopt a different strategy; that is, one that the existing culture would
readily accommodate (e.g. a continuation of an emphasis on the stewardship of forests;
more high-tech forestry or greener forestry perhaps)?
Case example:
Marks & Spencer (A)
The questions/tasks posed lead students through some of the key issues related to both purposes:
1. Analyse the organisational culture of M&S in the 1990s.
The characteristics of the M&S culture in the 1990s identified through a cultural web exercise
might include the following:
Paradigm. We are the best; we set the standards; we know best; we occupy the middle
ground; we are synonymous with high quality; people respect us and will always shop here.
Power. Very top-heavy with deference to top management; male-dominated.
Organisation. Mechanistic, bureaucratic; top-down; hierarchical.
Control. Top-down control in detail both of the stores and of suppliers; insistence on
conformity.
Rituals and routines. Deference; knowing your place; store layout; family atmosphere.
Stories. History and legacy; Simon Marks; power over suppliers; authoritarian behaviour of
top management; staff welfare benefits.
Symbols. The St. Michael brand; Simon Marks and CEOs as father figures; identical store
appearance.
The picture that emerges is one of tradition, formality, set ways of doing things and huge self-
confidence bordering on arrogance.
36
2. Why was M&S so successful for so long?
Arguably, M&S occupied a sector of the market in which it was historically dominant in its
traditional clothing range; good value for the middle market. In this it was relatively unchallenged
until the 1990s. In the context of this chapter, it also has to be recognised that over decades
M&S developed a whole culture around the way it did things and how it built upon its
competences. It also had consistent and clear direction from the top.
3. Why did it suffer the downturn in the 1990s?
The problem was that the culture that delivered the benefits also worked against it.
Not least it was that culture that drove the appointment of senior personnel in the firm. Up to and
including Greenbury, there had never been a chief executive of M&S who had not been a
member of the family, or who had worked with the firm for the whole of his career. These
strategic leaders came to embody the M&S way of doing things; so it was hardly surprising that
they could see few other ways of doing things, or the threats of competition that were looming.
The internal workings of M&S had also become highly deferential, male-oriented, with layers of
management and considerable bureaucracy. These were all symptoms of an organisation
removing itself from immediate contact with customer need.
In addition the market was changing. Increasingly, customers valued higher levels of service,
and were seeking novelty and difference. At the same time, other retailers were beginning to
target the traditional M&S market, but with more focused fashion ranges. On top of this, lower-
priced clothing retailers began to improve their quality. So M&S found itself in a pincer
movement, where traditional low-priced retailers and higher-priced retailers were entering its
markets.
The highly internalised M&S system, where everyone knew their place and their role, might
have ensured the continued delivery of success, but in the face of threat or downturn it was very
difficult to change and tended to insulate the firm from seeing the problems.
4. Why did the changes made from 1998 to 2001 fail to overcome the problems?
The problems at that time might be understood in relation to:
A. The embeddedness of organisational culture. In this respect it should help students see just
how difficult it is to change a culture so long established that has delivered so much
success.
B. The state of flux that seemed to exist (which M&S exemplifies well from 1998 to 2001). For
employees (and customers) so used to clear leadership and direction, the sheer freneticism
of the period must have proved problematic; with changes in positioning, product ranges,
personnel (not least at board level) and change initiatives
37
CHAPTER 6
Business-level strategy
Illustration 6.1
Competitive strategies on the strategy clock
It is important that students get a grasp of the basis of competitive strategy, and the strategy
clock helps them to do this. However, they should not assume that these strategies are static.
The illustration here helps them understand that basis of competitive strategy may change over
time. Therefore historically, Sainsbury was the most successful grocery retailer occupying a
clearly differentiated position. Moreover, Tesco traded up through routes 2 and 3. However
things have changed. In turn, the questions encourage students to consider how things might
change further.
The first three questions focus around the strong position of Tesco in the UK grocery market
and, in particular, the strength of the hybrid strategy. Students often see this as some sort of
compromise rather than an optimum strategy. Indeed many years ago there was debate as to
whether firms could pursue simultaneous low-price and differentiation strategies. It is now
accepted that they can. Presumably in relation to Question 1, students would agree that Tesco is
in a very strong position and that Sainsbury is the one that seems to be stuck in the middle.
This in turn poses the second question: how to compete against Tesco and question three,
whether it would be possible to do so. It is difficult to do so because of experience curve effects
and also due to the strength of strategic capabilities (not least property resources) that Tesco has.
If they cannot be imitated, then what are the generic strategic options available? Arguably,
broad differentiation is problematic because Tesco have that covered. Focused differentiation
(the strategy Waitrose seems to be following) may be more attractive; but this is not likely to
achieve the volume and market share of Tesco. However, it could be a route for new market
entrants.
Students may argue that a low-price strategy is more a possibility given that, presumably, there
is a price ceiling below which Tesco could not move without jeopardising its perceived quality
standing.
Encouraging students to map other industries using the clock as suggested by question 4 also
raises similar questions about differences in strategy and the extent to which they are capable of
being sustained.
Illustration 6.2
easyJet's no frills strategy
easyJet is a good example of a no frills strategy. The questions require students to consider the
basis of such a strategy and also the extent to which it is imitable. Many of these are laid out in
the illustration. Clearly, the strategy of easyJet is not based on its being lowest cost in the
marketplace if this is dependent on market share in the overall market for air travel. There are
38
obviously other bigger players. The more relevant comparison is by market segment. To what
extent is, the early entry of easyJet into the budget travel segment and its establishing of a
substantial market share sufficient basis, in itself, to achieve lowest cost? Or is it more to do
with its competences in managing costs (see sections 3.3 in Chapter 3 and 6.2.1 in Chapter 6)?
If the latter, are they as cost efficient in easyJet, as say in Ryanair? What would happen if the
two competed head on (to date they have largely avoided this)?
There is also a case to be made that over the years, easyJet has shifted its position somewhat. In
relation to Ryanair, some would argue that easyJet is seeking to differentiate itself. Note the
low cost with care and convenience strap line. Students might ask if this is a viable basis of
competing in this market segment.
Question 2 is about imitation. Could actual and potential competitors, seeing the success of
easyJet, imitate and overtake it in delivering such services? Or does the experience of easyJet in
all this, and its undoubted entrepreneurial culture, provides lasting advantage? Certainly, British
Airways found it uncomfortable to compete with its GO Operation, and decided this was better
sold off. However, other competitors such as Ryanair and BMIBaby had entered the market and
engaged in fierce price competition on some routes. Therefore, the keys to success were skilful
pricing between routes, when people book and fill capicity. And, as above, what if Ryanair or
even the most experienced low-cost operator of all, South West Airlines in the US, decided to
compete against easyJet?
Question 3 is worth considering in generic terms. If a competitor seeks to compete in the sector,
how might this be done? Traditionally this has been done by seeking routes which established
players do not use. In a situation of more head-on competition, presumably the choices are akin
to those on the strategy clock in relation to this sector; even lower prices with even more
rigorous cost control or some basis of differentiation.
Illustration 6.3
The strategy battle in the wine industry: Australia vs. France
This illustration provides the opportunity to consider different perspectives on differentiation:

a customer-based perspective, a market gap perspective and a competence/resource-based
perspective.
Presumably, students would recognise that the French wine industry has for centuries achieved
and maintained a position of differentiation, at least among wine drinkers. Arguably this has
been because of rare resources (the soil and the climate) and the non-imitable AOC structure,
which embraces both unique regional (indeed local) differences as well as a network of
collaboration across wine growers. It is a basis of differentiation truly based on being different.
It is, therefore, interesting to consider why Australian wines (and other new world wines)
became so successful and eroded the French advantage.
The suggestion is that Australian wines became successful because customers are looking for
simplicity and consistency and, as wine became more popular, they found French wine neither
simple to understand nor consistent in quality. Arguably, the traditional approach of French
wine producers has exacerbated the problem and therefore provided a market gap.
This might promote discussion about whether there are any other reasons for the success of
Australian wine. Arguably, there are if a resource-based view is taken a reason for success
39
might be the application of more advanced scientific techniques in the Australian wine industry
as a means of catching up with old world wine producers. The success of this is indicated by the
fact that French producers are now trying to imitate Australian wine-producing techniques. So,
arguably, such technology is capable of being copied or imitated by the French producers.
In turn, it is simplicity which the Chamarre brand is seeking to imitate. Students may argue that
Australian simplicity may be rather easier to imitate than French complexity. So does Chamarre
provide a basis for achieving competitive advantage; or is it mere imitation? Goode may have it
right, that the real capability for such a strategy may be to get the distribution right. Students
may also be asked the question as to whether there is a different competitive strategy for the
French other than to seek to copy the Australians.
Illustration 6.4
Businessuniversity collaboration in the creative and cultural industries
This illustration allows students to test out the issues from section 6.4 and Exhibit 6.4. This uses
the five forces model to classify the various ways in which collaboration might improve
competitiveness. This can be done for each of the stakeholders involved in a collaborative
arrangement. For example, in this illustration the potential benefits of collaboration to an
individual (small) creative sector business are:
Knowledge sharing with other businesses
Knowledge transfer from universities
Infrastructure, services and business know-how support
Funding
Swapping/sharing professional/creative staff
Against this needs to be weighted the risks:
Commercial exclusivity (patents, copyright)
Stifled creative process (perhaps conformity to get money/help?).
Case example
Madonna: still the reigning queen of pop?
This case study was chosen as a way of getting students to explore the principles of both
sustainability and hyper competition. It is useful to focus initially on the question of her sustained
high profile and success as a performer over so many years. However, her recent success is
questionable on some fronts, for example, an ageing image; though not financially. This allows for
a focus on the long-term sustainability of strategies.
40
The main points that might be emphasised are these in terms of the questions asked:
Question 1
Describe and explain the strategy being followed by Madonna in terms of the explanation
of competitive strategy given in Chapter 6.
The strategy pursued by Madonna can be explained both in terms of a generic competitive
strategy and in terms of principles of hypercompetitive strategies.
Clearly she has sought to differentiate herself throughout her career. This has taken
different forms, as the case explains, but there has been an underlying theme of the
independent woman throughout. What has varied, has been, the different personas within
this. Students could debate whether or not these have been pitched at particular market
segments and in this sense represent focused differentiation; or the extent to which they
are simply tactical bases of differentiating herself from imitators and followers.
Another interpretation would fit with explanations of hypercompetitive strategies. Many of

the principles outlined in Chapter 6 seem to apply. Each persona is temporary; each one is
very different from the last; she seems to move on to a different image even while being
successful in her last one; they are not predictable changes; they can be surprising, even
shocking.
The Madonna case therefore illustrates that the idea of hypercompetition is not necessarily
contradictory to the idea of generic basis of competition. It might be possible to be differentiated
in a hypercompetitive way. Think about links to questions 2 and 3 here, that is, the most recent
events allow for the questioning of the long-term sustainability of hypercompetition itself.
Question 2
Why has she experienced sustained success over the past two decades?
This question invites students to consider the basis of sustainability in this context. Students
might wish to ask which principles of sustainability hold. They should see that a number do:
Madonna appears to have capabilities and competences (intangible assets) of innovation

and flexibility.
The pop industry has learned to work with her, and in this sense they have developed a
mutual co-specialised dependence; so, it looks to promote her interests given her track
record.
Certainly it is difficult to predict where she will move next, or how she is successful (causal
ambiguity).
Question 3
What might threaten the sustainability of her success?
This question invites students to question these bases of sustainability. The strategy does not
seem to be vulnerable to others imitating it since it is difficult for them to understand or predict
what they would be imitating. However, students might argue that it is surely a risky strategy as
she seeks to second guess the nature of the market and make so many changes to her image.
41
They are likely to argue that the risk is market acceptance. If so, how would they explain the
continued success, given so many changes over so many years? Has the formula for success
run out of steam? And if so why?
42
CHAPTER 7
Strategic directions and corporate-level strategy
Illustration 7.1
Strategic directions for Axel Springer

With regard to the first question, Dpfner is considering many new strategic directions, and this
itself may be something to comment on: has he any clear sense of direction at all? Under the
main headings of the Ansoff matrix (Exhibit 7.2) are the following:
Market penetration: new print magazine titles in Germany.
Product development: digitalisation of core newspaper and magazine businesses.
Market development: internationalisation, as in Eastern Europe.
Consolidation: acquisition of another large international media company; possible

divestment of ProSiebenSat1.
Diversification: acquisition of a large European TV broadcaster.
You should note as you begin the exercise that the boundaries of the Ansoff boxes are often
hard to define; it is sometimes better to think of the axes as continua, along which initiatives can
be plotted relatively, rather than defining clear-cut and discrete boxes. An illustrative version is
given below:
Markets
Old
Launch new German
magazines
Digitalisation of
existing titles
Acquire an
international
media company
Products/
Services Old Acquire a large New
European TV
Internationalisation company
New
43
With regard to Question 2, the matrix raises a number of options: for example, could more new
products be sold to its existing markets; should Axel Springer internationalise beyond its current
Eastern Europe focus?
Illustration 7.2
Zodiac: inflatable diversifications
Zodiac illustrates a succession of related diversifications, which can lead a company quite far
from its traditional activity, while arguably maintaining an overall logic.
In terms of Question 1:
Zodiac repeatedly used the inflatable products technology as synergy: from airships to
boats, life vests, escape slides, rafts and swimming pools.
Zodiac also used market synergies when it supplied the same customers with different
products: life vests, parachutes, escape slides, seats and equipment for plane manufacturers;
inflatable swimming pools, rigid aboveground pools, modular in-ground pools, pool
cleaners and water purification systems, inflatable beach gear and air mattresses for
swimming pool buyers.
The airbag activity can be considered as a crossover between two strains of evolution:
inflatable technologies (original technological synergy) and electronics (market synergy
derived from aeronautics).
Overall, it is possible to illustrate the evolution of Zodiac:
Building from this portfolio, students might propose other related diversifications, either using a
technological synergy, or using a market synergy or using both: inflatable mattresses, tents
and other outdoor equipment, automobile seats, a new generation of airships etc.
In terms of Question 2, the potential dangers might be the following:
Boats
Life vests
Marine
Airships Slides Rafts Seats Electronics Aeronautics
Pools Filters Pools
Airbags Automobile
Inflatable
technology
44
It may be difficult to maintain an overall consistency of the portfolio in terms of competences.

To put it another way, just how far is it possible to extend relatedness?
How possible is it to check the viability of a targeted marketing in terms of the application
of such competences?
The lesson from the diversification research also seems to be that the sheer complexity of
managing an extended portfolio of related businesses becomes cumbersome and costly
hence the shape of the curve in Exhibit 6.4.
Illustration 7.3
Berkshire Hathaway Inc.
In terms of Question 1, Berkshire Hathaway exhibits a good many characteristics (but not all) of
a portfolio manager (Exhibit 7.5).
Buffet describes the company as a conduit rather than an agent and seems rather less
concerned with institutional investors than with smaller shareholdings. But nonetheless, the
logic of an intermediary expert holds.
A great deal of autonomy at business unit level is allowed, but notably there are constraints.
For example, reinvestment of surpluses is not permitted without reference to the centre. So
what is encouraged is value creation in terms of current and operational strategies rather
than fundamental changes in strategy.
The emphasis seems to be less on acquiring under-valued assets than acquiring mature
businesses with cash flow and profit potential.
Buffet does not seem to regard the portfolio as one in which he rapidly divests or acquires.
He seems to invest in businesses for the long haul.
There is, however, an emphasis on a lean corporate staff just 12 at HQ.
Clear incentivisation for results at business unit level.
In terms of Question 2, students should debate the points made in section 7.4.1. They may have
different views on this. For example:
Buffet would certainly argue that there is a high degree of focus for the company: what is
the nature of this focus? It is presumably much more to do with central parenting
competences than it is to do with products or technologies.
There is, however, arguably a great deal of clarity to do with what the business is about,
both to external stakeholders and to the business units themselves.
There is a debate to be had about the nature of intervention from the centre. The impression
is that Buffet places a great deal of emphasis in getting the right managers in place and
monitoring their performance. There is rather less emphasis, it seems, in intervening in
45
those businesses operationally or strategically, let alone looking for synergies between
them.
In terms of central services and resources, presumably Berkshire Hathaway can act as a
provider or financial resources when necessary, but it does seem that from what Buffet says,
he sees the businesses as a potential resource for the parents reinvestment elsewhere in
terms of building the portfolio.
Students should debate the extent to which the risks identified as value destroying activities
in section 7.4.1 are likely to pertain. There seems little in the way of bureaucratic fog,
central financial resources seem not to be provided as a safety net and the corporate
hierarchy is not offered as a potential route for managers at the business unit level they are
expected to focus on their businesses. What students may wish to debate is the extent to
which the overall corporate rationale of a portfolio manager and the very diverse portfolio
associated with this can truly provide a value creating role. They may argue that its value
creation is rather more at the corporate level than it is at the business unit level.
Illustration 7.4
A sweet deal for Nelson Peltz?
On the first question, the share price shoots upwards by 15 per cent after the news of Peltzs
intervention and the consequent change of strategy. This suggests that there were no net
synergies in the merged drinks and chocolate business and that shareholders anticipate
significantly better total profits as a result of the split. The consolidation of the chocolate
industry, with the possible merger with Hershey, is likely to be seen as particularly attractive. In
place of a second-tier hybrid chocolate-drinks company, there is the prospect of a global leader
in chocolate. Another way of thinking about the share prices jump is that the old strategy,
which included substantial continued investment in the drinks business, was denying
shareholders significant value in other words, it was value destroying.
On the second question, it seems likely that the incumbent management was reluctant to
acknowledge failure at managing synergies between the drinks and chocolate businesses.
Running a large diversified company is likely to be more prestigious than running either half,
and undertaking the split process would raise issues about their competence with regard to the
old strategy. It is noteworthy that Todd Stitzer, the CEO, had played a prominent part in
acquiring the American drinks businesses in 1995 (and he was American himself, so perhaps
personally keen not to confine himself to the predominantly non-American chocolate business).
Students should be aware of personal motives in corporate strategy, especially diversification
and acquisitions.
Note: at the time of writing, July 2007, rising interest rates appeared to be jeopardising the
funding of this deal. Although a failure to pull off the split would not alter the significance of
the markets enthusiasm for it, and the implied verdict of failure on the combined companies, it
would be worth checking the final outcome.
46
Case example
The Virgin Group
The corporate rationale of Virgin Group is not straightforward. Richard Branson has described
the business as a branded venture capital house. This would suggest that the Groups corporate
logic is, essentially, a portfolio manager. However, the Group clearly uses elements of other
corporate logics also. Branson has made it clear that they actively seek out businesses in sectors
that they believe have become institutionalised and need shaking up such as his announcements
of taking on the oil industry.
In identifying such businesses, the corporate centre identifies strategic options that might yield
future options for development. With its powerful brand it could be argued that Virgin therefore
displays the characteristics of a parental developer also, providing a low-cost branding impetus
for small businesses. This role is perhaps even more apparent in its high-profile rail business,
where Virgin has not only added its brand but also invested heavily in the upgrading of rolling
stock in order to turn around the fortunes of the business.
Apart from these plausible, traditional corporate logics, another interpretation might be
considered. That is, the corporate logic of the Group cannot be wholly described by reference to
any combination of these rational logics. Rather, the Virgin Group, and, by implication,
Branson, want to be a shaper of society (see section 4.3 of Chapter 4). With the buying back of
the Group from public ownership, Branson signalled in a very clear way that he was not
interested simply in earning profits for shareholders within the constraints applied by the City.
Plainly, as the floatation of companies like Virgin Blue demonstrates, Branson has no objections
to public ownership, per se. Rather, he seems to see it functionally as a way to raise funds and
appears to have objected to the limitations that the short-term focus on profits have placed upon
his more radical vision of facilitating more widespread economic growth. While the most public
manifestation of this is in the branding and publicity associated with the organisation, more
fundamental is the utilisation and manipulation of assets to facilitate growth something that
Branson acknowledges has been a feature of his business dealings since earliest days.
Relationships between businesses within the portfolio
In terms of the relationships between the businesses within the portfolio, it is difficult to
establish a link in terms of products or markets. It is highly diverse and it is difficult to identify
a basis of synergy. In terms of cross promotion and cross selling, there is some evidence of
horizontal integration (e.g. serving Virgin vodka and cola on a transatlantic flight on Virgin
Atlantic).
If the group is seen as a parental developer, then the links between the businesses need to be
defined in terms of the extent of the opportunity they provide for such parental development. So
the issue comes back again to what the corporate rationale is. Is it a parental developer based on
the provision of finance and brand to businesses? If this is so, then a relationship can be found
between some perhaps many of the businesses within the portfolio.
However, the financial ring fencing of the businesses from each other is important in allowing
risk-taking in businesses, meaning that the collapse of one business does not have repercussions
for the rest of the group, while still facilitating the raising of finance for new group ventures.
Further, the ring fencing appears to have an ethical dimension Branson wants the businesses to
47
stand on their own merits rather than loss, leading on one to promote others. This ring fencing
extends into the market place. Virgin says that it has conducted research that indicates that a
poor consumer experience with one business means that the consumer blames that business, but
is still happy to try other Virgin businesses. So, there appears to be a recognition by Virgin that
there is a possible tension which needs monitoring between an approach to parental
development through brand, and a corporate role as a shaper of society.
How does the corporate parent add value to the business?
What does Virgin see as its corporate competences? Is it:
the provision of finance?
the provision of a low-cost brand?
turnaround skills from the centre?
a preparedness to take risks on ideas with the potential to shake up an institutionalised

market (surely evidence of an intent to shape society)?
a freedom to take a longer term perspective than would be afforded by such a Group were it
operating as a PLC (it is difficult to imagine a PLC having the sort of patience required to
turn around such a nightmare operation as Virgin Trains were)?
some mix of these?
If so, how realistic are these in terms of benefits to the businesses? The tutor might ask students
to draw up a profile of a business that would benefit from being part of Virgin.
What are the main issues facing the Virgin Group and how should they be
tackled?
A lively debate may be generated about the issues facing the Virgin Group. Clearly, some of
these are identified above in terms of
the corporate rationale of the Group;
the extent to which this adds value to the businesses;
the question of succession begins to raise its head: Who will succeed Branson? Is it possible
that anyone could emulate him or indeed are there many who would want to? Perhaps,
Virgin as it currently stands, is a personal project that will have no raison dtre after
Branson, and instead will naturally evolve into a slew of individual companies with little in
common other than their origins.
There are others, however. These include the following:
The public image of Branson versus the image created in the city by the financial structure
of the group. Virgin Group points out, in response to criticisms of opacity, that it lodges the
accounts for all of its businesses in Companies House. However, a core competence of
48
Virgin appears to be how it juggles different banks, and suppliers and creditors in order to
play one off against the other and stay solvent. This is obscured by its current reporting
policy, and indeed as a core competence, so it should be. However, it might be regarded as
being in tension with such a high- profile role and with Virgins non-traditional corporate
logic.
The benefits of private ownership versus public ownership. Many may sympathise with
Bransons wish to take the business back into private ownership to give more latitude in
terms of the way he chooses to run the business. Others might argue that there is little
evidence from the data of a high degree of success from many of the businesses and that the
discipline of public ownership would be beneficial but to whom?
Is the portfolio just too diversified?
Is Bransons ambition becoming a risk to the organisation? It is one thing to try to shake up
the airline business and another to propose making oil obsolete as a fuel for the majority of
transport.
For all of these issues, students should be pressed to say how they will tackle them.
Realistically, they might also be asked to suggest how this might differ within Virgin as it is
currently constituted as a private company and how it might be tackled with a public corporation
more directly (in theory at least) answerable to shareholders.
49
CHAPTER 8
International strategy
Illustration 8.1
Chinese retail: global or local?
You may want to ask any Chinese students in your class for opinions on these questions, but
otherwise:
1. The advantages of Wal-Marts strategy lie in the potential scale economies that will come
from standardisation of purchasing and distribution systems. This will be consistent with its
cost leadership strategy internationally, and make it relatively easier to transfer managers in
and out of China. There are obvious problems with regard to catering to local markets,
however. The advantage of Carrefours strategy, on the other hand, is the ability to adapt to
local needs and not to burden a thinly-spread network of outlets with the costs and
inflexibilities of standardised systems and with high fixed costs (e.g. centralised distribution
centres). In the long-term, however, as both Carrefour and Wal-Mart grow in China, the
fixed costs of standardised systems can be spread across more outlets, so that Wal-Marts
initial investments may begin to pay. Also, Carrefour will have increasing management and
branding problems as a growing presence in China increases the benefits of integration and
standardisation. In the short-term, Carrefours strategy might seem best; in the longer term,
it is possible that Wal-Marts will be most effective, at least in urban concentrations.
2. One obvious danger for a Western retailer staying out of China is simply the missed growth
opportunity of this huge market. But students should recognise at least two more subtle
points. In the first place, retailers with the vast scale of the Chinese market should be able to
achieve purchasing economies that they can transfer to other markets; in other words, the
lower costs obtained through participation in the Chinese market may be leveraged to
enhance competitive advantage elsewhere. Second, referring to the competitive drivers in
Yips model (section 8.2), rivals may use profits from the Chinese market to cross-subsidise
attacks into other markets, and, without a presence in the Chinese market, defending
companies may be limited in their ability to retaliate.
Illustration 8.2
Deutsche Posts increasing international diversity
1. What were the internationalisation drivers associated with DPWNs strategy?
The internationalisation drivers can be analysed in terms of Yips framework in Exhibit 8.2. All
four seem to be in play.
The most important driver seems to be the presence of global customers, such as BMW, but
there is also the benefit of transferable marketing, indicated by the value of the DHL brand.
Changing trade policies have obviously facilitated the rise of international businesses such as
those DPWN is targeting, while government policies are apparently becoming more and more
50
supportive, even in China. There may be scale economies in, for instance, the purchase or
leasing of aircraft. One aspect that might be neglected is competitor drivers: the 1997 German
liberalisation made foreign entry into the home market a prospect, in which case DPWNs
presence overseas would be valuable too. Indeed, following European legislation, Deutsche
Posts exclusive right to deliver letters under 50 grams elapsed on 1 January 2008 and the
Luxembourg-based PIN Group and the Dutch TNT Post were both keen to enter the German
market.
2. Evaluate the pros and cons of both a multi-domestic strategy and a global strategy
for DPWN.
DPWN was moving towards a more global strategy; in terms of Exhibit 8.4, both the START
programme and the One brand policy reinforce this. The advantage clearly would be the ability to
service global customers such as BMW in a seamless fashion around the world. Such
multinationals are likely to be a demanding but lucrative source of business, capable of drawing
DPWN into new markets across the globe. On the other hand, the adoption of a global brand,
especially given a policy of national acquisitions (such as the British Speedmail), is likely to
constrain DPWNs position in national markets, especially for customers with little need of an
international network. Changing local product mixes, processes and sales structures (as indicated
by START) is likely too to be costly and disruptive, and prevent adaptation to national market
needs. A multi-domestic strategy would be more sensitive to different needs around the world.
Illustration 8.3
Boeing global R&D network
1. What reasons might be driving the internationalisation of Boeings R&D activities?
The quote from the annual report in the illustration gives a strong hint as to possible answers.
Key reasons for the internationalisation are likely to include the following points:
The internationalisation of its R&D activities allows Boeing to broaden its scientific and
technological base by utilising the advantages associated with its various locations.
Internationalised research activities allow Boeing to link itself to diverse national research
infrastructures and broaden its ability to develop partnerships with private collaborators and
governmental agencies (including facilitated access to governmental research support).
By embedding itself in a range of economic and political systems (as Boeing puts it in the
2002 annual report, by weaving Boeing into the fabric of the local economy) the firm can
enhance its access to governmental decision makers and governmental markets as well as
allowing Boeing to demonstrate its contribution to the local economy and thereby
strengthening the case for the award of governmental contracts.
The local presence also supports the firm more generally in developing its understanding of
local and international customers and markets and enhances its ability to respond to
changing technological trends and developments.
2. What challenges might Boeing face as it internationalises its R&D activities?
In dispersing its R&D activities internationally, Boeing is creating a complex network of intra- and
interorganisational relationships. This requires the firm to develop more complex coordination and
control mechanisms than would be the case if its activities remained more geographically
concentrated. In particular, Boeing needs to develop its ability to transfer knowledge across
51
organisational units located in different national settings. The process of internationalisation is also
linked to an increasing national and cultural diversity of Boeings R&D staff which may require the
development of nuanced HR practices and attention to issues of cross-cultural communication.
Illustration 8.4
Strategic innovation at Hindustan Lever Ltd
The fundamental issue here is the extent to which global companies such as Unilever can and
should be locally focused.
Question 1 invites students to consider this issue. To take India as an example, if Unilever is
to be truly global, presumably it needs to have a strong presence in such a huge and
populous country. And to do so, it requires locally relevant products. However, Unilever has
identified, as a corporate-level strategic capability, its global brands and its competences in
developing them. There is then a balance to be achieved in maintaining and capitalising on
these if local responsiveness is seen to be important.
This balance is not just about the brands themselves. It is also about where resources (e.g.
marketing personnel and spend; research and development facilities) are to be located, how
much latitude in decision making is to be decentralised, what level and means of control is
to be exercised by the corporate centre. These are issues discussed in section 8.5 and the
earlier discussion of corporate parenting in section 7.4. Ultimately, they raise questions
about the viability and sustainability of corporate-level strategy in terms of both product and
geographic portfolios.
In relation to Question 2, students should be able to think of many companies that face the
same challenges as Unilever. All consumer goods companies do to a greater or lesser extent,
but encourage them to consider other sectors. Further, it is useful to stimulate discussion
about what parts of the value chain are more or less localised by which sorts of
organisations. Also encourage students to consider which companies are able to build global
brands with much less localisation and why?
Question 3 invites students to discuss the ethical dimensions of the issues. Students might
argue that the poor of India probably end up paying a premium for a Lever brand, and may
question if this is justifiable. Others may point out that premium carries with it benefits like
health and hygiene education, careful research and development and a sense of well-being
etc. Is this always so? Can similar justifications be given for powdered milk (Nestl), for
burger bars (McDonalds), for cigarettes (Rothmans)?
Illustration 8.5
The mini-multinational
GNI is an interesting hi-tech born global firm with a wide-ranging network, but still in its early
stages. With regard to the two questions:
1. GNIs value network finds cost advantages in China for testing, sourcing advantages for
genetic materials from Cambridge, unique (or unusual) capabilities due to access to
Japanese supercomputers and, perhaps, a national advantage in the reputation for quality
52
and standards that comes from the Japanese base. In terms of the Porter Diamond, the
Japanese base might also have provided advantageous factor conditions in terms of support
and funding for a start-up like GNI. The San Jose base is likely to be an effective
distribution channel, giving GNI access to the American pharmaceutical companies who are
highly influential in marketing to the largest health market in the world.
2. Savoie claims a simple business model, but there are likely to be two challenges: first, as he
begins to expand into new molecules, he will be adding complexity; second, as he
becomes more successful, he will have to be able to satisfy the demands of very large
pharmaceutical companies, in terms of standards, scale and intensity of attention. With an
internationally distributed organisation such as this, there will be considerable expansion
and integration issues. It will be very important that he is able to meet the requirements of
the pharmaceutical companies in terms of reliability of service and ethical standards.
Case example
Lenovo computers: East meets West
Lenovo computers is an interesting case of an emerging country multinational. More will be

heard of these in the coming years, but prominent ones from China include Haier and
PetroChina as well as Lenovo, while leading Indian multinationals include Tata, Wipro and
Ranbaxy. Turning to the questions:
1. What national sources of competitive advantage might Lenovo draw from its Chinese
base? What disadvantages derive from its Chinese base?
Lenovos national sources of competitive advantage of course include cost, but note that a large
proportion of this advantage can be accessed as well by Western companies undertaking local
assembly. Lenovo cannot be just a cost-play. Other possible sources of advantage may be ease
with non-western character recognition software (important in large parts of the world); the
ability to use its Chinese market dominance to cross-subsidise aggressive strategies in other
parts of the world and possible national champion status (government ownership via the
Chinese Academy of Sciences). This ownership could of course be a disadvantage, hindering
access to security sensitive markets in the US and possibly constraining the raising of new
capital (likely to dilute government ownership) to support further expansion.
2. In the light of the CAGE framework and the MacMillan et al. Competitor Retaliation
framework (Exhibit 8.5), comment on Lenovos entry into the American market.
According to the CAGE framework, the differences between China and the US seem to be very
challenging for Lenovos American strategy, especially as it pertains to the integration of the
IBM PC business:
Cultural: language is a key problem, but also there are clear issues with managerial
behaviours (Americans talking more, being wedded to a strict schedule of meetings, being
late for meetings and not having the same standards of politeness etc.)
Administrative and political: Lenovo is the creation of a Chinese state-owned research

institute based in a communist country; IBM is a private sector commercial enterprise
based in a capitalist country. Lenovos managers and ex-IBMers could hardly be more
different in background assumptions.
53
Geography: the US market is a very long way from Lenovos traditional base, and the time-
zone difference will be very tiring for managers in the two countries.
Economic: on the one hand, IBMs traditional corporate market for its ThinkPad computers
is a very different one to Lenovos market: IBM customers have been willed to pay a
premium for very high standards. On the other hand, it could be that Lenovo, traditionally
focused on less wealthy consumers, could access the large population of poor consumers
in the United States.
As always, it is important to come to a conclusion with regard to these CAGE factors. It could be
judged that most of the CAGE problems are transitional, requiring time to get used to managing.
After all, all multinationals have time-zone problems and cultural differences to reconcile with.
Some support for this lies in the quarterly losses that Lenovo suffered in 2006 to early 2007, but
the recovery seemed to begin from mid-2007.
With regard to the competitor retaliation framework, Lenovo has entered Dells most important
market: Dell is likely to be highly reactive and it has clout. Aggression there might attract fierce
retaliation from Dell. It is remarkable then that Lenovo was not just sitting on its existing IBM
markets, but pursuing quite an aggressive strategy signing up Office Depot, attacking the
small and medium-sized business market and even hiring a senior Dell manager (Amelio). It
might be worth noting that Dell is handicapped by being weak in China, and therefore is not
easily able to retaliate in the market where Lenovo would hurt most. The query for students
might be how should Dell respond? A price-war in its main home market would cost it dear;
perhaps it should turn the heat up on Lenovo by building up its presence in China.
3. Now that Lenovo is international, what type of generic international strategy should it
pursue simple export, multidomestic, complex export or global?
In terms of international strategy, Amelios integration of the old IBM business and Lenovo
within a single structure and the possible entry into India suggests what Lenovos answer might
be, but more systematically.
Simple export: simple export from the low-cost Chinese base is superficially attractive, but
is not likely to be an option, given the expertise and brand-value that sit inside the old IBM
business.
Multi-domestic: this might have been an attractive approach initially, to give time for the two
parts of the business to get to know each other. However, it would not allow Lenovo to
take real advantage of its entry into the US, and, given the time-limit on access to the
ThinkPad brand, would leave Lenovo exposed in the medium-term. A purely multi-domestic
approach would also handicap Lenovo in dealing with any localised retaliation from Dell.
The replacement of Ward by Amelio seems to acknowledge the limitations of this approach.
Complex export: this strategy is very tempting for Lenovo, taking advantage of its cost
advantages in terms of assembly and some kinds of research in China, while ensuring that
its brand-positions are appropriately managed. The question is: are there more advantages
to be won through an even more ambitious global strategy?
Global strategy: this strategy might allow Lenovo to continue its dispersed product
development, allowing it to work closely with leading suppliers and customers in the US, at
the same time as maintaining development activity close to its core, and different, Chinese
market. This approach will become more attractive as the company enters India, another
source of IT expertise. The challenge will be managing the complexity, given Lenovos
limited experience overseas.
54
CHAPTER 9
Strategy methods and evaluation
Illustration 9.1
Ranking options: Churchill Pottery
One of the purposes of these questions is to discourage students from believing that an answer
will emerge from a framework such as ranking. So students need to be able to argue for strategy
4 on a number of grounds. For example:
It fits the circumstances well (most ticks), but in itself that should not justify its selection.
Perhaps what is really needed is something that transforms this conservative family business
(like opening retail outlets)?
The family would support it (but again is this what the business really needs?). But if the
family cannot be persuaded, the strategy will not be adopted.
With regard to Question 2, see the notes on assignment 9.2 below.
Illustration 9.2
A strategic decision tree for a law firm
Decision trees can be useful provided students understand that (looking at this example):
The same eight options would be generated irrespective of sequence of criteria (remember,
of course, that these are not the only eight options available to the firm).
A fourth parameter (internal development or acquisition) will create a total of sixteen

options. The current eight will each create two. For example, number 4 gain market share
would divide into:
(a) gain market share; hire legal assistants
(b) gain market share; acquire competitors
With four parameters, it starts to become clear that these are not independent of each other.
For example, it could be argued that all options requiring acquisition infer the need for high
investment funds. So the acquisition of a direct local competitor should be excluded. In
contrast, the acquisition of a firm specialising in matrimonial law or geographical spread by
acquisition should be kept in the tree. They both appear on the high investment arm of the
tree.
55
Illustration 9.3
Sewerage construction project
The illustration provides the basis for a critique of cost-benefit analysis in terms of both the
factors chosen as benefits and the monetary value assigned to each factor. The following points
should be borne in mind when reviewing the assignment:
Some students may argue that cost benefit is too removed from hard facts. In these cases,
you could invite them to propose alternative methods for assessing projects of this type.
An interesting question that should always be asked about benefits is whether they are
genuinely additional benefits or whether they have simply been displaced from elsewhere.
For example, the multiplier effect on the local economy is likely to be a mixture of these in
the sense that some of the spending by the imported workforce would otherwise have
occurred elsewhere.
An interesting debate may be engendered by the issue of assigning monetary value

particularly to items which are concerned with loss (or gain) of amenity or the changing quality
of life.
Illustration 9.4
Sensitivity analysis
Students find sensitivity analysis a user friendly technique. Illustration 9.4 allows them to see an
analysis and test out how it might be used to inform strategic decisions. Sensitivity analysis is
perhaps most beneficial in unearthing the key factors/assumptions on which the success or
failure of a strategy hangs. It is useful for students to think through conceptually (rather than
analytically) what these factors might be since this should improve their understanding of the
basis of an organisations competitive strategy.
Illustration 9.5
Cash flow analysis: a worked example
The major concern with this analysis is whether the capital investment has been accurately
costed at 13.25 million. Other elements of the analysis are regarded as more accurate.
This is not an uncommon situation and decision makers are advised to give preliminary
approval until firm quotations are obtained.
Another concern might be the impact on the numbers during the period of commissioning
the new stores. Disruption may dent sales and possibly push up short-term working capital
requirements. Forecasting of short-term funding requirements would be a critical
implementation issue.
56
Case example
Tesco conquers the world?

Directions of Development
Tesco (past and present) shows a rich mixture of development directions:
Market share gain (to 30 per cent) in UK grocery market
Entered 12 new countries (and looking at USA)
New product fields (e.g. books, electrical, music etc.)
Related services (e.g. financial, telecom)
New formats (e.g. hypermarkets, supermarkets, convenience stores, internet shopping)
New ranges (e.g. Value and Finest).
The pattern of development is essentially incremental and fairly cautious each development
related to their core business at the time. For example, their target customer base had extended
steadily over a long period as Tescos image transformed from cheap and cheerful to rival and
then overtake the more up-market Sainsbury. Customer loyalty was exploited by extending
product range etc.. But with 30 per cent market share, the attention has shifted to international
developments in two main areas Eastern Europe and Asia (reflecting the companys view
about the readiness for change in these areas. Nonetheless, this incremental development has
led to diversity of retail formats and related business activities. Incrementalism and caution are
not synonymous with conservatism.
Methods of Development
Cautious, focused and incremental development of the type we see in Tesco is usually
characterised by a predominance of internal development. But Tescos dominant position in the
UK also was precluding development by acquisition at a time when the securing of key
development sites was increasingly difficult (for planning reasons). So, competitors (like
Morrisons) were turning to acquisition to expand. Joint ventures had not been used as much in
grocery retailing as in more general retailing. As Tesco extended their range to compete with
specialists in other areas, they needed to have some forms of alliance (e.g. shops-within-shops,
mobile phone partnership etc.). Much of their international development started with
acquisitions or alliances to create a base for subsequent internal expansion. This is a fairly
classic market entry stategy.
Strategy Evaluation
Students should first try to use Exhibit 9.4 to systematically review all the possible development
directions and methods in terms of suitability. The shortlist can then be subjected to a somewhat
more detailed review of acceptability and feasibility (within the confines of the data in the case). If
students have more time, they can be asked to extend their data about the company before
answering Question 4.
57
CHAPTER 10
Strategy in action
Illustration 10.1
Volkswagen: a case of centralisation
As in real life, so often, Volkswagen does not reflect pure organisational types, but mixtures.
So, with regard to the first question, Volkswagen seems to be moving from a very loosely
organised multidivisional structure close to a holding company structure towards a more
centralised and coherently organised multidivisional structure with some strong functional
overlays. It is noticeable that initially the brands (Audi, Seat etc.) probably operated as fairly
autonomous and self-sufficient subdivisions; under the reorganisation, their status is being
substantially downgraded, but with more integration around related groupings (mass and
luxury).
On the second question, the new structure probably allows for economy through centralisation
of key functions (removing duplication) and exchange of learning between the members of the
two groups. These are both forms of synergy. However, as in the text, divisions divide (section
10.2.2) and there is obviously now a danger that experience from luxury cars will not inform the
mass car operations and vice versa (note here that Ford has recently been disposing of its luxury
Premium Automotive Group). Alternatively, if the central functions become too dominant, there
may be a risk that inappropriate lessons and policies are transferred from one grouping to
another (e.g. economy measures that work well for the mass group may be imposed
inappropriately on the luxury group). It is also noteworthy that the CEOs direct involvement in
the Volkswagen group of brands, and his responsibility for R&D, may be in breach of the
multidivisional principle of separating strategy from operations.
Illustration 10.2
Enterprise resource planning (ERP) at Bharat Petroleum
The Bharat Petroleum illustration demonstrates several things. First, how large the benefits of
ERP can be; second, how ERP involves much more than just information systems; third, the
importance of implementation and the scale of resources involved.
The first question about the leadership of the initiative relates to the importance of non-
information systems issues: this involves a reorganisation and, in the formalisation of processes,
a culture change as well.
The second question refers to some possible downsides of ERP, to balance the positive short-
term picture. As the next sections (10.3.3) notion of communities of practice signals, informal
processes can be very valuable as a flexible response to unanticipated problems. ERP may lead
to inflexibility and the suppression of spontaneous learning over the longer term.
58
The third question also raises an intriguing predicament for the agents of change: should they be
dispersed back to former roles and into the labour market, marketed as experienced consultants
externally, or used again for further change projects? It is worth raising with students the
awkward problem of what to do with people (or oneself) at the end of such large-scale episodes
of change.
lllustration 10.3
Leadership styles for managing change
Combining Questions 1 and 2
Lundgren sees clear direction as the pre-eminent requirement of the strategic leader, though
within a context where others are encouraged to participate and he will listen to them. He sees
the advantage of clear direction as being the need for closure on discussion rather than perpetual
noodling that leads to confusion. The problem, of course, might be that, though this is how he
sees it, it may not be how others see it. The result could be that they see strategy as his province
and not theirs.
Laffley seems to approximate the guided control principle that describes an intervention
approach, which he sees going hand in hand with the delegation of responsibility. So the
benefits are not only the retention of degrees of control but also the encouragement of people
taking responsibility for strategy development and a greater ownership of strategy. The problem
here is, not the least, one of coordination. Making sure that there is a coordinated approach to
strategy may mean overriding delegated autonomy in strategy making. Presumably this is what
he means by the moments of truth he has to face.
Leahy, as described here, has a style approximating to participation and education. He is an

analytic manager, and also one who takes pains to consult and listen. Here, the benefit is the
ownership of strategy. The danger is that the organisation could get bogged down in the sort of
analysis and consultation that can plague such a style of management. It is noticeable that in the
case of Leahy and Tesco, this seems to be overcome since they have shown an ability to move
fast and take tough strategic decisions when necessary.
Some may see Brattons interventionist style as quite harsh. He has a strategy and is employing
directive (some may say almost edict like) approaches to get people to follow it. Bratton himself
might, of course, see the style as one of persuasion! He also clearly believes that by facing the
challenges he poses, people will come to own the strategy. This may be a problem. Are people
likely to comply because they have to, or because they own the strategy? And does that matter?
In relation to Question 2, it might be useful to ask students in what circumstances or with whom
the executives might adopt different styles. Would the directive approach of Lundgren be suited
to dealing with institutional shareholders? In what circumstances might Leahy become much
more directive in his approach? How would (or should) Bratton deal with the mayor of New
York or city officials? (In fact, the Harvard Business Review article from which this illustration
is taken gives examples of just that.) And how might he try to ensure that the inhabitants of New
York buy into his strategy?
59
Case example
NHS Direct a Gateway to Health
Structures and processes
The case example can be used to explore the way in which new initiatives can/should be
structured into existing organisations (like the NHS). The best way to do this is by comparing
the pros and cons of different structural arrangements for NHS. For example:-
The current arrangement with NHS direct effectively as a separate division but acting as
an additional access route into mainstream NHS services.
NHS Direct as the compulsory gateway to all NHS services (except, perhaps, accident and
emergency). So a member of the public always starts with NHS Direct and not their GP.
NHS Direct continuing its current gateway role but massively expanding its other services
particularly internet based information and support.
NHS Direct as a service to GPs and hospitals rather than a gateway to members of the
public. Clearly the health information service would be most central here.
Other options could be developed too. For each of these options students should be asked the
following questions:-
What are the advantages of this option?
What are the disadvantages of this option?
How exactly would this work? This requires decisions on the combination of structures and
organisational processes described in sections 10.2 and 10.3.
Managing change
Managing change in large professional service organisation is difficult mainly due to issues of
culture and organisational politics. NHS Direct allows students to move beyond this general
observation to a more detailed assessment as to how NHS Directs development can be assisted
within its much bigger parent the NHS. Here are some issues you should discuss with students:-
Change roles
Will the success or failure of NHS Direct be mainly determined by the actions of senior
leaders in NHS Direct?
Or is it really the efforts of middle managers as the engine by which success or failure will
be determined? This raises the importance of demonstrating success to a variety of
stakeholders as a way of coping with both the political and cultural context (see styles
below).
60
Or are the politics so difficult that outsiders (such as business consultants and/or
politicians) are crucial to the survival and development of NHS Direct?
Styles
The easiest way to look at change styles is to focus students attention on Exhibit 10.6. which
reviews, the choices of change styles available. Make sure that the following points are made:-
Style must suit circumstances so ask students to describe what type of change is
happening at NHS Direct (right hand column) and see how that affects choice of change
style.
Ask them if this type of change will always be dominant or will this change after the early
set-up phase?
There are multiple stakeholders involved in NHS Direct with very different levels of power
and interest (link back to stakeholder mapping Exhibit 4.5). Ask students how this
power/interest issue affects the style you might adopt with different stakeholders (e.g.
medical doctors, the general public, NHE Direct employees and so on).
Ask how the culture of NHS might affect change styles including the personality type of
the leaders.
Levers
If you have time it would be good to seek examples of change levers that might work at NHS
Direct from each of the categories in section 10.4.3. If time is limited concentrate on the section
on change tactics as this will ensure that students consider this as a practical as well as a
theoretical analysis.
61

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Instructors Manual

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This edition published 2009

Pearson Education Limited 2009

Visit the Fundamentals of Strategy, Companion Website at www.pearsoned.co.uk/fos

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Also: the following instructor resources are available off-line:

We are grateful to the following for permission to reproduce copyright material:

Fundamentals of Strategy concentrates on the fundamental issues and techniques of strategy. It

Revision aids (flashcards, key concepts and glossary (six languages)).

Audio summaries of chapters and important concepts.

Multi-choice questions, work assignments and grade book.

This Instructors Manual.

Student test banks.

2. Using this manual

Choosing additional material to include in a course.

Using the Fundamentals of Strategy website.

3. Planning your approach

3.1 Purpose of the course

3.2 Level of participant

3.3. Study mode

The mode of study should also influence course design.

4. Designing the teaching scheme

4.1 Pre-course work

4.2 Starting the course

An alternative approach is to begin the course with a case example or illustration.

4.3 Balance of the course

5. Fundamentals of strategy website

Learning objectives for each chapter.

Revision aids (flashcards, key concepts and glossary (six languages)).

Audio summaries of chapters and important concepts.

Multi-choice questions, work assignments and gradebook

Secure testbank of over 600 questions.

7. Case Example Teaching Notes

This section presents the case example teaching notes.

Yahoo!s peanut butter manifesto

Are these issues strategic?

Exploitation of core competences

There are several levels of strategy at Electrolux:

Corporate (company as a whole)

Business Line (e.g. Consumer Durables)

Business Units (e.g. White Goods Europe)

Operational (departments within business units).

The Strategic position

Some of the main issues are as follows:

are difficult to contain. Market development opportunities exist in developing countries

Strategy into action

These aspects of strategy into action are illustrated in Electrolux:

PESTEL analysis of the airline industry

Scenarios for the biosciences in 2020

The consolidating steel industry

Exhibit 2.4 Comparative industry structure analysis

Are there sufficient opportunities within my strategic group?

How competitive am I within that group?

Global forces and the European brewing industry

Political: government campaigns against drink driving.

Economic: the rise of the Asian economies.

Social: rise of beer consumption in southern Europe.

The five forces

Substitutes: Wine is clearly a dangerous substitute.