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Strategic Management in a Nutshell

Foreword

Since I first got in touch with strategic management principles I thought about writing a book about it. After some first drafts I began asking myself: What do you actually want to say? And why do you want to write this book? How do you write a book that makes a difference? A book that is of value to the readers?

What this book is – and what it is not

The Internet is full of literature on strategic management. However, I rarely found the information available very useful in my daily management. It was either too high-level (that often happens when you simply put some terms and phrases into an online search engine and follow the first results) or much too detailed (why should I read a 200 pages chapter on one specific topic when I already know in the beginning that 80% of what I read is of no use at all). That was the birth of this book. I wanted to write a book that can be used on a daily basis. Every time one thinks about a new problem and is looking for a suitable solution, this book should provide guidance in applying the right principles, thinking into the right direction and not thinking in the wrong direction at all (which is of equal importance). I know, this is quite a burden for a small book like that, but it is a try at least.

This book is not meant to be a bible for strategic management. How can one book claim to be that? It also lays no claim to being exhaustive. Rather, it is to be regarded as a collection of the most important tools that every manager should know.

For whom this book is written

This is a book for rough diamonds that have not yet been concerned with the subject, but have found interest in it. This book gives a brief, yet not too superficial insight into the world of strategic management.

This is a book for students that must deal with the issue of strategic management (or need). It is intended as support to deepen the material taught in lectures and to a good start in their careers. Here, the course is less important: it can only be beneficial in this day and age, when students of any discipline have knowledge of basic principles of strategic management.

This is a book for future leaders that increasingly have to deal with questions on the subject of strategic management itself. It serves as help to approach certain issues targeted to achieve the best possible results. This is precisely what will happen to them as leaders.

This is a book for managers that must make far-reaching decisions every day. This often happens under enormous time pressure, which – let's face it – seems to be growing more and more with time. So this little book serves as a reference to manage work more efficiently and productively.

I trust that you will take the knowledge you gain in this book and use it every once and then in your daily work life. If this little book helps you in increasing your productivity and supports you in thinking out of the box sometimes, it will be a success. Or, in less heroic words, it will be what it is meant to be. If you want to be a successful business leader, you have to know this!

September, 2018

Dr. Tobias Renk, PMP®

Table of Contents

Foreword

Table of Contents

Part I
What is strategy?

1. Introduction

2. What is strategy?

3. The ecosystem of a company

4. Excursus: Fundamentals of Business Economics

5. Strategic orientations

6. Competitive advantage

7. International strategy

Part II
How does strategy work?

8. Basic approach

9. Analysis of the current situation

10. Design of the target situation

11. Strategic implementation

12. Change Management

Bibliography and further reading

Some interesting web sites

About the author

Index

Table of Contents

Foreword

Table of Contents

Part I
What is strategy?

1. Introduction

2. What is strategy?

2.1 Derivation of the strategy concept

2.2 The three strategy levels

2.3 Mintzberg's 5Ps

2.4 The strategic management process

3. The ecosystem of a company

4. Excursus: Fundamentals of Business Economics

4.1 Principle of efficiency

4.2 Profit maximization

4.3 The profit and loss account

4.4 Cash flow

5. Strategic orientations

5.1 Market penetration

5.2 Consolidation

5.3 Product Development

5.4 Market development

5.5 Diversification

6. Competitive advantage

6.1 Strategic Triangle

6.2 Price Based

6.3 Differentiation

6.4 Niche existence

6.5 Innovation

7. International strategy

7.1 Driving forces

7.2 Market selection

7.3 Market entry

Part II
How does strategy work?

8. Basic approach

9. Analysis of the current situation

9.1 Analysis of internal factors

9.1.1 ABC analysis

9.1.2 Life Cycle Analysis

9.1.3 Market growth-market share portfolio analysis (BCG matrix)

9.1.4 Market attractiveness-competitive strengths portfolio analysis (McKinsey matrix)

9.1.5 Strengths and weaknesses analysis

9.1.6 Other tools for analysis of internal factors

9.2 Analysis of external factors

9.2.1 Target group analysis

9.2.2 Competition analysis

9.2.3 Benchmarking

9.2.4 Industry structure analysis

9.2.5 Other tools for analysis of external factors

9.3 Derivation of the SWOT portfolio

10. Design of the target situation

10.1 Positioning

10.1.1 Product-market matrix by Ansoff

10.1.2 Competitive strategies according to Porter

10.1.3 Vision and Values

10.2 Planning

10.2.1 Scenarios analysis

10.2.2 Gap Analysis

10.2.3 Balanced Scorecard

10.2.4 Break-even analysis

11. Strategic implementation

11.1 Methods of strategic growth

11.1.1 Organic growth

11.1.2 Mergers & Acquisitions

11.1.3 Partnerships

11.2 Organization

11.2.1 Organizational structure

11.2.2 Process organization

11.2.3 Authority to issue orders

12. Change Management

12.1 Change curve

12.2 Change management iceberg

12.3 Change Management Models

12.3.1 Model of change by Kurt Lewin

12.3.2 8-step process by John P. Kotter

12.3.3 5 phases by Wilfried Krüger

12.3.4 Top-down and bottom-up models

12.4 Digital Transformation

Bibliography and further reading

Some interesting web sites

About the author

Index

Part I

What is
strategy?

1. Introduction

“I’m as proud of what
we don't do as I am
of what we do.”

Steve Jobs

Strategic management is now more relevant than ever. We are living in a fast paced world. The enormous advances in the field of communication through Internet and mobile devices have made sure that we are constantly and almost always available everywhere – also for business affairs. The increased degree of mobility ensures that managers can make appointments in Boston, Shanghai and Berlin in the same week. This increase in busyness, of course, has long since been transferred to companies. What is good today and generates high sales may be out again tomorrow and bring a business to the edge of disaster. At such times, responsible leadership is important. For companies, this means that clear visions and strategies must be developed to ensure sustained success on rapidly changing markets.

This book provides an introduction to strategic management. It is composed of two parts: Part I – What is strategy? – examines the concept of what strategy is in detail. Where does the term strategy come from? What does it mean? And how does strategy fit into a company? After a brief excursus on important business figures an introduction is given to fundamental strategic orientations such as market penetration, consolidation, product development, market development and diversification. After consideration of various competitive advantages, such as price-based strategy or differentiation, a foray is made into the world of internationalization. Here answers are given to the following questions: What drives a company to venture into new countries? What should be considered in selecting the countries? How can market entry be successful?

Part II – How does strategy work? – outlines how companies should proceed if they want to re-align strategically? First, various tools are presented, based on which the actual situation of the company can be analysed. Here a distinction is made between tools that permit analysis of internal factors, such as a company’s own product portfolio, and tools that allow the analysis of external factors, such as changes in buyer wishes. Both analysis results are finally summarized in a SWOT portfolio that represents the current situation of the company in a comprehensible manner. This is followed by formulation of the target state. Here again, the proper tools are presented which support strategic positioning and strategic planning. Finally, the implementation of corporate strategies is considered. That often far-reaching decisions have to be made, is not in the least surprising. Aspects that are often affected in the implementation of a strategy include the product portfolio, regional spread and the existing structure of the organization processes.

Learning by looking at examples simply is more enjoyable and less dry. So let’s give it a go and start with some introductory case studies.

Introductory case studies

Deutsche Telekom

Deutsche Telekom is a company that has to deal due to its history mainly with organizational change and increasing competition. The German Federal Post Telekom was founded during the postal reform I in 1990. In 1995 it was converted by the postal reform II into Deutsche Telekom AG, where it initially – although now a corporation – was fully owned by the Federal government. In 1996, the transition was made to the stock exchange. Since the abolition of the land line monopoly in 1998 (liberalization of the telecommunications market), Deutsche Telekom is increasingly exposed to stronger competition.

In addition to national competitors that are turning to the newly created market, such as debitel and mobilcom, both of which merged in 2009 and now operate under the common brand mobilcom, foreign companies are discovering the German telecommunications market for themselves. Companies such as France Telecom, BT Group or the Vodafone Group are appearing in the market, increasing competition and ensuring that Deutsche Telekom is losing its market share.

But not only foreign companies are penetrating the German market. Telekom itself is starting to internationalise their business. 1999, the British mobile operator One 2 One was purchased and the French landline provider Siris. Two years later, in 2001, Deutsche Telekom bought the US-based mobile operator Voice-Stream.

By 2004, the business of Deutsche Telekom was split into four main divisions: the fixed network division T-Com, the mobile arm T-Mobile, the online arm, T-Online as well as the system and wholesale business, T-Systems. In 2005 the brands, T-Com and TOnline were branded as T-Com, which from then on was the strategic business segment for broadband/fixed networks. Their intention was to offer private customers a better service, because now phone and Internet could be offered from a single source. A further restructuring of its core business took place in 2007. T-Com and T-Online became T-Home. The T-Online brand still exists as an Internet portal; the Internet access business, however, is not part of T-Online any more. The congstar brand arose out of the existing second brand congster. It is the response of Deutsche Telekom to the variety of low-cost providers of mobile communications, such as BASE or Fonic but is also in direct competition with T-Home and T-Mobile. T-Home and T-Mobile finally merged in 2010 with Telekom Deutschland GmbH. The services of the two brands, which include the areas of mobile, fixed, Internet and IPTV, are thus available from one source. T-Systems, the system and wholesale arm of Deutsche Telekom, remains unaffected by the realignment of the company.

The strong urge for expansion of Deutsche Telekom in the late 1990s and early 2000s was greatly attenuated over the years. In March 2011 it was announced that Deutsche Telekom would sell of its U.S. mobile subsidiary T-Mobile USA for a total of 39 billion U.S. dollars to the American telecommunications company AT & T. However, the agreement was dissolved in late 2011 due to the major resistance of the U.S. competition authorities.

Today, Deutsche Telekom focuses on four strategic areas of activity: "Integrated networks for the gigabit society", "More Innovation through Cooperation", "Secure Cloud Solutions" and "Customer motivation". In addition to the continuing intense competition situation, the organizational structure is still a challenge for the German Telekom. There are still a large number of civil servants.

Amazon

In the mid-1990s Jeff Bezos recognises the developing high growth in online trading. He founded the company in 1994 and put the Amazon.com website online in the following year. The offer from Amazon.com is limited initially only to books. The situation on the traditional book market in the U.S. is permanently altered. Among the established booksellers such as Barnes & Nobles now for the first time an online company is competing.

Just three years after founding the company Jeff Bezos takes Amazon.com to the stock exchange. His concern is how to inform shareholders of the long-term value the company creates for shareholders.

Two main strategies are pursued with regard to the company's growth. Firstly, the offered product range is extended to include CDs, DVDs, videos, toys, electronic equipment, furniture, etc. This happens primarily through the acquisition of other online businesses such as Homegrocer.com and Exchange.com as well as through partnerships with major companies such as ToysRUs.com and Virgin Entertainment Group. Secondly, Amazon.com extends its sales area by expanding into other countries. Amazon opens up in the next six years online shops in Canada, UK, France, Germany, Japan and China.

Amazon.com wants to make shopping as comfortable as possible for its customers. This is achieved through introducing innovative features such as the 1-Click function (purchasing of goods with only a single mouse click), the Search-Inside feature or AmazonPrime. The latter of course requires an efficient logistics network with strategically distributed logistics centres to get the goods as promised to the customer within a short time. These are some selected examples that make Amazon.com one of the most customer-friendly companies in the world.

Amazon is seen as one of the most innovative companies in the world. Amazon Dash Button, for instance, is a device that is connected via WLAN and can be placed somewhere at home. By pressing the button, customers have the possibility to order preferred goods by just one click. This feature is now also available as a virtual dash button on Amazon’s websites. Amazon Go is yet another example that demonstrates Amazon’s innovation pipeline. Amazon Go is a shop concept where customers enter the shop, put products in a basket and then just exit the shop with no checkout required. Amazon’s Just Walk Out Technology uses computer vision, sensor fusion and deep learning technologies – which are also used in self-driving cars – to make this possible. Just Walk Out Technology detects when products are taken from the shelve (or returned) and keeps track of them. The customer “pays” by exiting the shop, i.e., Amazon will charge against the customer’s Amazon account. But Amazon’s activities are not only limited to create a great customer experience while shopping. Amazon Web Services, as an example, is the world’s largest cloud computing provider with a market share of 31% (Microsoft ranks second with a share of 11%) and a growth rate of more than 50 % from 2015 to 2016 (with respect to revenues).

Today, Amazon.com is the largest online company in the world, with worldwide sales of $ 136 billion in 2016. 40% of this is generated outside of North America.

Apple

In 1976 three friends set up a computer in a garage in Palo Alto that would revolutionise the world of consumer electronics years later. Until then, however, it was a long way. The three friends are Steve Jobs, Steve Wozniak and Ronald Wayne. And their computer company they call Apple. The first product, the Apple I, is a commercial failure. It sells only several hundred units. Its successor, the Apple II, is a great success and sells almost two million units. Even at this stage of the company, Apple is characterised by a high degree of innovation. Innovations such as the graphical user interface or the computer mouse help to ensure success. With the introduction of the Macintosh in the mid-1980s, Apple achieved for a time a market share of 50%. The tables are turned as Microsoft a short time later introduces Windows operating system for IBM-compatible PCs. By the mid-1990s, Windows has become the leading operating system for PCs. Apple products are used "only" by customer groups that place high demands on graphics applications and design. However, these are very small in comparison to the customer groups for Microsoft products.

Apple responds to the strong competition from Microsoft in the PC sector through entry into a new market segment – game consoles. However the Apple product Apple Pippin compared to other gaming consoles such as the Sony Playstation is rather inefficient and sells only several thousand units. As the share price in 1997 reaches a 12-year low, the CEO Gil Amelio is dismissed of his duties by the Supervisory Board. Steve Jobs takes over his position. This is the turning point in the history of Apple.

There is a consolidation of the products as well as a realignment of the product portfolio. Apple enters the digital music market and revolutionises it permanently by the introduction of iTunes and the development of the iPod in 2001. The iPod is a great success and sold by the end of 2006 more than 36 million units, although it is comparatively high priced compared to other MP3 players. A further shift of activities is evidenced by the development of the iPhone in 2007. Apple has become increasingly a company of consumer electronics. This diversification is emphasized by the name change from Apple Computer Inc. to Apple Inc.

Two years after the death of the founder and spiritual leader Steve Jobs in 2011, Apple is the most valuable company in the world and has displaced Coca-Cola as the best-known brand in the world.

Wal-Mart in Germany

Wal-Mart in 1997 bought 21 Wertkauf markets and in 1998 74 InterSpar markets in its internationalisation effort. The retail chain Wal-Mart has been extremely successful in the United States. A highly developed system for inventory management and logistics infrastructure and an efficient satellite communications system that allows real-time sales control and even the control of the temperatures in each market contribute to the success of WalMart. In 1999 finally the first superstore based on the American model was opened in Germany. In order to come as close as possible to the U.S. model, for example, the staff was trained in terms of American customer friendliness. Wal-Mart's entry in Germany was accompanied by numerous changes at the management level. Furthermore, there were legal disputes due to illegal pricing strategies in Germany (some favourable loss-makers should attract a high number of returning customers) and store opening times. From the outset, Wal-Mart was exposed to a reputation problem in Germany. Finally, in 2006 after a takeover of Metro AG failed, Wal-Mart sold the German stores to Metro AG and terminated business in Germany.

Mainly four reasons were crucial as to why Wal-Mart's German expedition was unsuccessful. Firstly, the department stores which Wal-Mart had taken over were partially in need of renovation and before the takeover their sales were weak. Furthermore, the high turnover at the managerial prevented stringent management. In addition to that the 1:1 transposition of the American concept in terms of customer orientation in Germany rather met with incomprehension. Finally, legal battles and the refusal of cooperation with German authorities resulted in a loss of reputation.

The Germany adventure was a total loss-making operation for Wal-Mart. Known issues were seemingly ignored and from past mistakes they did not draw the right conclusions until they finally admitted the failure and the German adventure finished.

2. What is strategy?

“If you know the enemy and know yourself,
syou need not fear the result
of a hundred battles."

Sun Tsu

2.1 Derivation of the strategy concept

The term strategy is used today in very diverse ways. Thus one speaks in politics of growth strategies, in the sport of game strategies or in the financial world of investment strategies, to name just a few examples.

The concept of strategy, however, has its origins in the military affairs of antiquity. This is illustrated by the etymological origin of the term. While this is not absolutely clear, however, all translations are derived from the military world. In a wide-spread translation the word strategy is composed from the Greek stratós (army) and ágein (lead) and can be translated as army leadership.

One of the first to use and mould the term strategy in the military environment was the Chinese philosopher, general and military strategist Sun Tzu (from 544 B.C. to about 496 B.C.). He describes in his book "The Art of War" 13 principles for the conduct of war and emphasizes, on the one hand, that all the resources available and, on the other, flexibility are required to attain ambitious goals.

In German-speaking countries mainly the Prussian General, Carl von Clausewitz (1780-1831) has to be mentioned who in the 19th century with his work "On War" (published posthumously 183234) created a standard work, which quickly spread throughout the military field. He describes strategy as "use of the battle for the purpose of the war, so it has to set the whole act of war as a target, which corresponds to the purpose of the same, i.e. it drafted a plan of war, and to this end it links in with the series of acts which amount to the same, i.e. it makes the plans for the individual campaigns and assigns these to the individual battles." Much like Sun Tzu von Clausewitz suggests that a strategy has to undergo constant review and adaptation to changing conditions: "As all these things can usually be determined only by conditions that are not all true, and a lot of other, more detailed broader provisions cannot be foreseen at all, it follows that the strategy has to go to the battlefield itself in order to arrange details on the spot and to make modifications for the entire campaign which are constantly required".

In the business environment, the term was made particularly socially acceptable by Alfred D. Chandler. He describes strategy as "the determination of the basic long-term goals and objectives of an enterprise, and the adoption of courses of action and the resources necessary for carrying out these goals". Also here – quite analogous to the definition in the military field – a means to end thinking is evident whereby the purpose is represented by the company's goals. The new aspect that strategy receives in the definition of the term by Chandler is the resources needed to achieve the objectives. Kenneth R. Andrews extended Chandler's term of strategy by adding the strategy development process to the actual strategy. He defined strategy as "the pattern of major objectives, purposes, or goals and essential policies and plans for achieving those goals, stated in seeking way as to define what business the company is in or is to be in and the kind of the company it is or it is to be". He draws on the concept that a strategy cannot be set in concrete, since uncertainty about future surrounding conditions exist.

This position was supported by Henry Mintzberg and expanded. He refers to the observation that longer-term constant surrounding conditions for companies are decreasing. Therefore, a strategy cannot only be defined in advance. Decisions are often made due to changing surrounding conditions. However, these decisions are not so often in line with the frameworks of the defined strategy. Thus, the view is rejected that a strategy is merely an action plan which is to be implemented. This realization eventually describes why Mintzberg defines strategy as "one of those words that people define in one way and often use in another."

Another field of application, in which the concept of strategy has entered, is game theory. There, the term strategy refers to the planning of a certain sequence of moves. In this case, each move is always depending on one’s own possible moves and those of others.

2.2 The three strategy levels

Since there are different organizational structures within a company, it is also natural to consider the term strategy with regard to these different levels. This also means that strategic decisions can be of varying scope. A distinction is generally made between the following three levels.

• Company level (Corporate Strategy)

• Business area level (Business Strategy)

• Functional level (Functional Strategy)

Here the company level is superordinate to both the business area as well as the functional level. The business area level itself is a superordinate to the function level.

Each of these three levels in turn consists of concrete objectives, a strategy and measures to achieve the objectives. The goals of a lower level are part of the actions of a parent level. Specifically, this means that the objectives of the functional level are part of the activities of the business area level and the objectives of the business area level are part of the measures of the company level (see Illustration 1). This ultimately means nothing else than that the company strategy is the link between the individual business area strategies, just as the respective business area strategy is the link between the individual functional strategies.

Illustration 1: The three strategy levels

2.3 Mintzberg's 5Ps

The consideration of options and their full implementation plan are an important part of corporate governance. However, this is only one side of the coin.

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