Fundamental Concepts of Strategy and Corporate Development

Management is both a universal human activity and a distinct occupation. We all manage in the first sense, as we organize our lives and deal with family and other relationships. As employees and customers we experience management in the second sense, as members of an organization, or as one with which we deal (Boddy, 2020). Nowadays, data is an essential part of the management activity in order to make good decisions, supported by facts and not merely opinions. As the management thinker and influencer Peter Drucker once stated: you can only manage what you can measure.

You can only manage what you can measure.
Peter Drucker

In broad terms, we can say that organizations are composed of two environments: (ii) the internal environment and (ii) the external environment. These two realities are interconnected and it is important to notice that one has always a level of dependence from the other. Together, they form the business environment built from several entities which may be or may be not under the control of an organization.

We will focus on these two important concepts and explore them further as follows. Our approach will always be to explore first the internal environment and then the external environment.

Internal Environment

The internal environment consists of those elements of the organisation or unit within which a manager works, such as its people, culture, structure and technology (Boddy, 2020). This context is the most immediate to the organization and its people. The internal environment is under the control of the organization as it is composed of internal elements and thus managed by the organization. The internal elements greatly influence the organization entirely and any management decision influences the internal environment. An example of the elements composing the internal environment can be found below.

We can see that the elements composing the internal environment are as follows:

Value System: consists of all those components that are a part of regulatory frameworks, such as culture, climate, work processes, management practices and norms of the organization.
- IKEA vision: the IKEA describes its vision as “to create a better everyday life for the many people”.
- IKEA mission: the mission of the company is to “offer a wide range of well-designed, functional home furnishing products at prices so low that as many people as possible will be able to afford them”.
- IKEA objective: as an example, IKEA could have as a strategic objective “to become the largest producer and retailer of home furnishing in the next 5 years”.
Organizational Structure: the structure of the organization determines the way in which activities are directed in the organization so as to reach the ultimate goal. This is simple known as the hierarchy within the organization and its form (e.g.: functional, divisional, matrix, agile). It is crucial to have a well defined structure and hierarchical command.
Corporate Culture: corporate culture or organizational culture refers to the values, beliefs and behavior of the organization that ascertains the way in which employees and management communicate and manage the external affairs.
Human Resources: human resources refers to the people that work for a given organization and that can constitute a crucial resource and a differentiated factor.
Physical Resources and Technological Capabilities: physical resources refers to the tangible assets (e.g.: assets that are physical such as a computer or a building) of the organization and the technological capabilities imply the technical know-how of the organization.

Cirque du Soleil: internal environment

Cirque du Soleil is an international company which operates almost globally. It differentiated itself from its competitors due to the innovative characteristics of its business. In the following video, we take a look at its internal environment such as: hierarchy (management and employees), human resources (who works for the company), physical resources and technological capabilities (costumes and technology involved in the show), corporate culture (unconventional organization with an innovative spirit).

External Environment

It is important to acknowledge that organizations face not only the internal environment (elements within the organization), but also the external environment or context which comprises elements beyond the organization. These elements are mostly out of the organizations’ control which leads to the fact that it must be adaptable to them. External environments might be more or less volatile and competitive. However, change is constant in the external environment. Therefore, the organization must be prepared in order to thrive. Innovation and differentiation also play an important role concerning organizations’ survival and success.

Certain sectors might be more competitive than others as there are more competitors on the market, the products are largely undifferentiated or the incumbents battle to offer lower prices which will endanger the organizations’ profits. The blue ocean strategy (Kim & Mauborgne, 2004) alludes to these facts and distinguishes two main markets: red and blue ocean. In a red ocean market must compete in an existing market, beat its competition and pursue a lower cost strategy or differentiation. In a blue ocean market, an organization is competing alone or with few contestants. In this case, the company has been able to produce a completely differentiated product for which there is a demand willing to pay higher prices. Some examples could be:

A small café selling exactly the same products as the competition in the same neighborhood (red ocean) or a croissanterieoffering differentiated products at a higher price (blue ocean);
A normal circus offering the same kind of show as the competition (red ocean) or Cirque du Soleil which is a circus with a completely differentiated show charging premium prices.

Cirque du Soleil: external environment

We should now take a look at the differentiated offer that Cirque du Soleil offers and how is it different from the competition. With this offer, the company was able to captivate more and more public worldwide. This is a pure blue ocean strategy because Cirque du Soleil reinvented the business and created a unique show at the time and each season, having virtually no competitors on their premium market.

Link between Internal and External Environments

The figure below summarizes the internal and external environments and their interconnections. The inner circle represents the internal environment and the elements within the organization’s control. The other circles represent the external environment, which can be divided into micro and macro environment.

The micro environment represents the most direct interactions of the organization, namely, its suppliers, costumers, existent and possible new competitors and substitute products. The analysis of this environment was analyzed by Porter with the 5 forces model, which will be tackled during this book.

The macro environment concerns factors (mostly) completely out of the organization’s control. This factors concern mainly macro factors which influence the economy entirely and most likely not only a specific sector. However, there are sectors which can be affected by certain changes contrarily to others. For example, if a specific legislation regulates the oil industry it will affect only that specific sector. Nevertheless, if this legislation is likely to increase fuel production costs, it is also likely that other sectors are affected, for example, the food production sector and consequently food retailers.

Internal and external environments. Respectfully borrowed from Boddy.

Car dealers and the interactions between internal and external factors

In order to better understand these interactions, we will analyze the car dealers’ market in the USA. The car industry was affected by the COVID-19 pandemic due to a global shortage of important inputs, such as microchips which are produced mainly in Asia. There was also an economic backlash during this time which became even worst with the war in Europe right after the pandemic situation stabilized. Besides, new legislation was made in order to control the prices. These are clearly elements of the macro environment.

On the other hand, there are a fierce competition between car sellers and different business approaches. This competition increased also due to the increasing car prices subsequent to input shortage. The global supply chain revealed resilient, but the inputs production shrank which caused car prices to rise and output production to shrank too at the suppliers’ level. It is also mentioned that several acquisitions took place within this market. These are clearly elements of the micro environment.

The elements within the companies are harder to identify in this case. However, we can identify clear objectives to increase the deals made by the main competitors. The human resources of these companies are under pressure to increase deals at a time of uncertainty and increasing demand and prices, but reducing output production. The elements concerning company’s culture are identified when some car producers, such as Tesla, prefer to sell directly to the costumer and not through retailers.

What is Strategy?

Strategy may seem a complex concept at the first sight. However, each one of us should have defined a strategy at some point in life and having one is important o achieve certain objectives. For example, very successful and self-made people have almost certainly defined a strategy for their career path. As Grant, 2018 puts it: what is common to Lady Gaga and Queen Elizabeth II? They both have very successful and stable careers but their jobs, objectives and outcomes are completely different. They have achieved a successful career, in their own ways, because they pursued a good strategy. Important elements of a good strategy are the following:

Goals that are consistent and long term: it is important to stay focused and committed to our goals;
Profound understanding of the competitive environment: we should always correctly interpret our external environment and be aware of political, economic, social, technological or legal changes;
Objective appraisal of resources: on the other hand, we should also pay particular attention to our internal resources and make wise use of them. We should focus on specific resources that make us unique;
Effective implementation: without effective implementation, the best-laid strategies are of little use. We should be able to implement the route we have designed in an effective way.

Concerning a pure definition of strategy, we can highlight three:

Pattern of decisions determining and revealing the firm’s objectives, purposes, or goals (Andrews, 1971);
Is the choice of defensive or offensive moves in the Marketplace (Porter, 1980);
Creating and sustaining competitive advantages through the uses of organizational resources and capabilities (Barney, 1992).

In a straightforward way, strategy is the means by which individuals or organizations achieve their objectives (Grant, 2018) and the main objective should be to create value for the stakeholders (costumers, employees, suppliers, shareholders). Basically, strategy concerns a well defined plan to achieve certain goals. Strategy concerns also the main direction of the organization (purpose, objectives and goals) and also the position in the marketplace. In order to create a competitive advantage (perform better than the competitors in the same environment) the organization must consider its internal factors and the external environment as we have already seen.

Competitiveness and competitive advantage

At this stage it is important to state the difference between competitiveness and competitive advantage. According with Bredrup, 1995 we can define competitiveness as follows:

“Competitiveness is decided by the relative attractiveness toward the different stakeholders. Customers are in an exceptional position among the stakeholders because the only source for payment or benefit to the other stakeholders is the customers.”

Most of the times the concept is applied to countries as the economy becomes more competitive but the concept makes also perfect sense when applied to organizations. According with the definition above, competitiveness is related with the attractiveness of a company in relation to stakeholders, mainly clients. This attractiveness can be achieved by producing similar products/services as competitors but at lower prices. This price competitiveness may attract more clients but it may be not sustainable nor competitive in the long term. Eventually, the competitiveness on the price can be imitated by competitors and may be a source of conflict within the market segment, leading to overall profit reduction.

The term competitive advantage was coined by Porter, 1985. It can be summarized as follows:

“Competitive advantage grows out of the value that a firm is able to create for its buyers that exceed the firm’s cost of creating it. Value is what buyers are willing to pay, and superior value stems from offering lower price than competitors for equivalent benefits or providing unique benefits that more than offset a higher price. There are two basic types of competitive advantage: cost leadership and differentiation.”

Thus, competitive advantage is related with the final price that a company can charge for its final products in comparison with the competitors. If a firm can attract more costumers and charge higher prices (or have higher margins, for example, a company can have much lower production costs than the competitors) offering virtually the same products as the competition, this company has a competitive advantage. The price of the products is intimately related with the value perceived by the buyers. If the buyers assume a high value of a product, they are willing to pay more for it. This does not mean that the product must be of high quality, it can simple be useful solving a complex problem for the buyer.

Porter assumes that the sources of competitive advantage come only from the external environment. This assumption has been updated because competitive advantage may arise from the internal environment. The source can be an important resource (e.g.: human capital) or an activity along the value chain (e.g.: an unique marketing capable of attracting costumers).

The competitive advantage of a firm is very hard to sustain as others will try to imitate it. Therefore, in order to be sustainable, the company must undergo a constant and integrated effort within the whole organization.

Therefore, there is a clear distinction between competitiveness and competitive advantage. The first concerns the capacity of a firm to attract stakeholders, the most important being the clients, and the second definition concerns the existence of an internal or external factor which allows the company to produce a product/service of perceived high value for the buyers and that can be sold at a higher price than the competitors offer.

Strategic management process

“The strategic management process is a sequential set of analyses and choices that can increase the likelihood that a firm will choose a good strategy; that is, a strategy that generates competitive advantages.”
Barney et al., 2019

In sum, it is easy to make mistakes and lose track of the main purpose of an organization. In order to reduce the likelihood of mistakes and define a correct strategy and subsequent implementation which will lead to a competitive advantage, an organization should follow the strategic management process.

Mission: “a firm’s mission is its long-term purpose. Missions define both what a firm aspires to be in the long run and what it wants to avoid in the meantime”. It is important to select a meaningful mission as it can be a source of inspiration but also affect firms’ performance, for example, if the mission is full of commonsense ideas it will not have an impact but if it is visionary it may affect firms’ performance as it will lead to outstanding objectives.
Objectives: “objectives are specific measurable targets a firm can use to evaluate the extent to which it is realizing its mission. High-quality objectives are tightly connected to elements of a firm’s mission and are relatively easy to measure and track over time. Lowquality objectives either do not exist or are not connected to elements of a firm’s mission, are not quantitative, or are difficult to measure or difficult to track over time.”
External and Internal Analysis: “by conducting an external analysis, a firm identifies the critical threats and opportunities in its competitive environment. It also examines how competition in this environment is likely to evolve and what implications that evolution has for the threats and opportunities a firm is facing.” On the other hand, “internal analysis helps a firm identify its organizational strengths and weaknesses. It also helps a firm understand which of its resources and capabilities are likely to be sources of competitive advantage and which are less likely to be sources of such advantages. Finally, internal analysis can be used by firms to identify those areas of its organization that require improvement and change.”
Strategic Choice: “Corporate level strategies are actions firms take to gain competitive advantages by operating in multiple markets or industries simultaneously” and “business level strategies are actions firms take to gain competitive advantages in a single market or industry”. Examples of the first might be vertical integration, diversification, strategic alliance, and merger and acquisition strategies. Examples of the second might be cost leadership or product differentiation. Generically speaking, there are two main strategy levels:
- corporate strategy.
- business strategy.
Strategy Implementation: “strategy implementation occurs when a firm adopts organizational policies and practices that are consistent with its strategy. Three specific organizational policies and practices are particularly important in implementing a strategy:
- a firm’s formal organizational structure;
- its formal and informal management control systems;
- its employee compensation policies.
Competitive Advantage: the concept was already explored and basically a “firm has a competitive advantage when it can create more economic value than rival firms.” This should be the result of a perfectly implemented strategy following the strategic management process.

Strategy levels

One can define three main levels of strategy within an organization. These levels differ in their objectives and scope. The strategy levels are the following:

Corporate strategy: is a high-level strategy for which the top-level managers are responsible. It concerns the main direction of the firm, for example, in which businesses should the organization operate or to which markets should it expand. Corporate strategy coordinates the different business in which the organization operates and integrates them into the corporate portfolio. This strategy becomes crucial when a company operates in different business with different business strategies which needs to be aligned internally. Corporate strategies can be vertical integration, outsourcing, diversification, alliances and internationalization.
Business strategy: this strategy level is interconnected with the internal and external environment of the firm and mainly concerns the topic of obtaining a sustainable competitive advantage. Therefore, at this level the internal and external environments must be evaluated using unbiased data and provide useful outcomes. These outcomes must be then presented to the top-management. Several instruments can be used at this level, for instance, VRIO Model and the Value Chain Analysis for the internal environment and the Porter’s 5 forces and a PESTEL Analysis for the external environment. Business strategies can be low-cost leadership, differentiation and focus.
Functional strategy: concerns the support of corporate and business strategies through functional departments (marketing, finance or human resources). This strategy mainly concerns improving the effectiveness of a company’s operations within departments. The functional strategy must be aligned with the corporate and business strategies as much as possible. For example, if the corporate strategy has decided to launch a given product and the business strategy defined the target as students and young adults, the marketing department should act accordingly.

Strategy levels. Respectfully borrowed from Business-to-You.com

Example of strategy levels

Let’s take the example of a company which produces different products, for instance, Samsung. It produces smartphones but it also produces televisions, home appliances or cameras. Each business has its own characteristics and target populations. Therefore, they need to have separate business strategies each one supported by departments with functional strategies. At the corporate strategy level fundamental matters must be addressed: should the company be competing in the home appliances market, or should it be only focused on smartphones? Should the company expand to a certain regional market or compete only locally? Should the company acquire a competitor?

In sum, the corporate strategy is decided at the highest level and is unique to the entire company, whereas business strategies are dedicated to each business unit (e.g.: market or product) and although they must be aligned, they also differ.

Strategy hierarchy example. Respectfully borrowed from Business-to-You.com

What is value?

We have seen that the concept of value is crucial, for example, to define strategy or competitive advantage. The fundamental question of “what is value?” is still not totally clear. As follows, we will explore how the concept of value is perceived by the costumers.

We can simply say that value is the monetary worth of a product or asset. Therefore, the purpose of a company is to create value for the costumers increasing their willingness to pay for that the products/services offered by the company. As higher the costumer willingness to pay, the more a company can charge for its product/service (Grant, 2018). The company should charge a price that allows for a profit. If the price charged for a product is lower than the costumers’ willingness to pay, the costumer has a surplus. The objective of the company should be to charge as much as possible to reduce this surplus and still remain attractive.

Value creation. Respectfully borrowed from Grant, 2018.

Value is what distinguishes oneself from its competitors. Value can be provided through various elements such as newness, performance, customization, “getting the job done”, design, brand/status, price, cost reduction, risk reduction, accessibility, and convenience/usability.

Value Proposition Canvas (VPC)

Value Proposition Canvas. Respectfully borrowed from Strategyzer.com

The Value Proposition Canvas (VPC) is a tool which helps identify the value of a product/service perceived by the client. This is especially important when launching a new product. The VPC has two main parts: the costumer profile and the value map. The costumer profile is sub-divided into three parts:

Jobs to be done: the jobs that the costumer wants the product to solve. The jobs can be functional (function of the product), social (status) or emotional (emotional state like gaining peace of mind).
Pains: the pains that affect costumers who need a certain job done. These are negative outcomes that costumer wish to avoid related with current available products or solutions.
Gains: positive outcomes concerning what costumers gain by getting the job done.

The value map is sub-divided as follows:

Products and services: which are the products and services the value proposition is built on?
Pain relievers: how are these products and services pain relievers? Describe how the solution provided can mitigate pain suffered by the costumers.
Gain creators: how do these products increase or maximize outcomes that costumers desire?

The final objective is to connect both parts of the value map by linking gain creators with gains and pain relievers with pains. Therefore, a product or a service must create value for the client in order to be successful, in other words, it must solve a costumer’s problem (pain reliever – pains) and create a gain (gain creators – gains).

The example of Amazon

Amazon who creates value for its costumers by linking costumers pains and gains with pain relievers and gain creators, respectively. For instance, for someone who enjoys reading it is a pain to find certain books at a local bookstore. Besides, that costumer might want to have a book in a certain language and not translated which makes the task even harder. Furthermore, the costumer will need to physically go to the local store to purchase an item which do not require a local visit and might even not be available. Amazon solves these issues by having an enormous network of suppliers and one of the best logistics strategy which takes the products to the costumers’ homes in a record time without the need for a physical visit to the store. Amazon innovated and solved further pains with the creation of the assistant Alexa or the Amazon Prime service (which further expanded to TV streaming services). You can check an interesting news coverage here.

The concepts of up-selling and cross-selling

Companies usually pursue up-selling and cross-selling strategies to increase their revenue. A cross-selling strategy identifies the selling of complementary products, for example, a smartphone and a case. In Amazon’s case, identify complementary products at the check-out. An up-selling strategy concerns selling higher-end and more expensive products to the client, for example, encourage clients to purchase the latest model of a smartphone. In Amazon’s case, the creation of Amazon Prime service.

Resources and References

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Grant, R. (2018). Contemporary Strategy Analysis. 10th Edition. Wiley.

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